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11 March 2015
In the 1990s Swissair parent SAirGroup pursued an aggressive strategy of acquiring minority stakes in European airlines. The Zurich Commercial Court dealt with one of these acquisitions in a recent judgment.
On September 11 1998 the board of directors of SAirGroup decided to buy 49.9% of the shares in French air carrier Air Littoral. The board members approved a Fr270 million purchase price and further agreed to extend restructuring loans to Air Littoral to the same amount.
The loans were never repaid and the interest in Air Littoral became worthless. In 2003 Air Littoral was declared bankrupt.
SAirGroup itself went into debt restructuring liquidation in 2003.
On July 9 2012 the liquidator of SAirGroup lodged a responsibility claim with the Zurich Commercial Court. He argued that SAirGroup's former board members, chief executive officer and chief financial officer had breached their duties by agreeing to and implementing the acquisition of the shareholding in Air Littoral without creating a corresponding equivalent value. The liquidator claimed that SAirGroup had incurred a loss of around Sfr124 million.
On January 26 2015(1) the Zurich Commercial Court dismissed the liquidator's claim.
The court considered that Article 754 of the Code of Obligations provides that members of the board of directors and all persons engaged in the management of a company are liable for damage caused by the intentional or negligent violation of their duties.
To establish liability, the liquidator had to show that SAirGroup had sustained damages. The court was not convinced that there had been a loss in the amount of the purchase price of the shareholding in Air Littoral, because SAirGroup passed the shareholding to its subsidiary SAirLines in exchange for loans of approximately the same amount. SAirGroup offset these loans against claims it had towards SAirLines and thereby received adequate compensation for the shareholding. The court accepted that SAirGroup had incurred a loss only to the amount of the unpaid loans it had extended to Air Littoral.
The court then turned to the core issue of whether the defendants had violated their duty of care towards SAirGroup. While the court considered that the duty of care requires a director or officer to act in the same way as a diligent and competent director or officer would have acted when placed in the same circumstances, the court was not inclined to second guess the September 11 1998 decision. For the court, the key consideration was not whether SAirGroup executives had made the right business decision, but whether the process leading to that decision was reasonable and professional. The court made explicit reference to the so-called 'business judgement rule', which essentially provides that the court defers to a business judgement if the executives:
According to the court, the SAirGroup board of directors took the decision to acquire Air Littoral following an orderly process, free of any conflicts of interest and after having duly considered the transaction's risks and benefits. The acquisition was made in a challenging market environment with the laudable intention of long-term stabilisation of SAirGroup. Since the decision appeared reasonable at the time it was made, the court rejected the claim that the defendants had breached their duty of care towards SAirGroup.
In hindsight, the Air Littoral acquisition was ill advised. But after the event, even a fool is wise. The Zurich Commercial Court decision confirms that Swiss courts will usually defer to business decisions made by a company's board of directors, provided that such decisions were made as a result of a process in which the directors considered all relevant factors.
For further information on this topic please contact Andreas Fankhauser at Baumgartner Mächler by telephone (+41 44 215 4477) or email (firstname.lastname@example.org). The Baumgartner Mächler website can be accessed at www.bmlaw.ch.
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