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04 July 2005
Article 754 of the Swiss Code of Obligations provides that the members of the board of directors and all persons engaged in the management or liquidation of a company are liable not only to the company but also to each shareholder and to the company's creditors for damage caused by an intentional or negligent violation of their duties.
On the other hand, Swiss legal opinion is unanimous in considering that a director or officer cannot be held liable for damage caused by an incorrect business decision. In a liability case, the court must therefore decide where to draw the line between a violation of duty and a decision which proved to be incorrect. In addition, Swiss legal authors demand that, in a liability case, the court must bear in mind certain qualifying considerations or reservations when judging the business decisions taken by the directors and officers:
In some cases it can be hard to distinguish between a violation of duty and an incorrect business decision. It is easy to identify a violation of duty according to Article 754 if the conduct of the director or officer is against the provisions of the law (eg, the directors not calling and preparing the general meeting of shareholders as required in Article 699 of the Code of Obligations). But can violation of duty be said to have occured when a company is deprived of its assets without adequate reward? If so, what does 'adequate' mean in a particular case?
Some Swiss legal authors see the answer to the problem in the implementation of what is known as the business judgement rule. According to this concept, a business judgement is protected by the rule if:
If a judgement is protected by the rule, the court will not review a director's
decision further unless the plaintiff rebuts the general assumption that the
director made the decision in good faith and with reasonable care and diligence.
To do so, the plaintiff must show proof of:
Introducing the business judgement rule into Swiss law would result in a two-stage examination procedure for rulings on directors' liability claims. In the first stage, the court would evaluate the conduct of the director according to the rule as mentioned above. If the court concluded that the facts met the requirements of the rule, it would have to refrain from further investigation into the director's conduct. It would be able to decide directly that no violation of duty was committed under Article 754 and could therefore dismiss the liability claim at once.
If one or more requirements of the rule were not met, the court's right to
examination would be extended. It could go on to examine the director's liability
by asking what a diligent and reasonable person would have done under the circumstances, and what could have been expected of a person in his or her capacity as a member of the board of a company. In this second stage, the court is allowed to question
the rightness and adequacy of business decisions.
Applied to Swiss law, the rule could serve as an accurately defined procedure for judicial control over companies' management decisions. It would further clarify the requirement for courts to evaluate business decisions with an element of reservation. However, the introduction of the rule could also have some negative effects. It could incline a board of directors not to try to make the best decision possible, but rather to ensure that they have the documentation required to protect themselves under the rule in case of a possible future liability claim.
A look at the published court rulings in Switzerland over the past decades shows that no court has so far applied the rule when evaluating a directors' liability claim. It remains to be seen whether the courts will follow the proposal and start applying the rule.
For further information on this topic please contact Markus Dörig at Badertscher Dörig Poledna by telephone (+41 1 266 20 66) or by fax (+41 1 266 60 70) or by email (firstname.lastname@example.org). The Badertscher Dörig Poledna website can be accessed at www.bdp.ch.
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