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The Regulation of Discharge from Liability

in Swedish Company Law

Nummer 44 i Centrets skriftserie

The Regulation of

Bostadsrätten i initial-

Discharge from Liability in

och övergångsskeden

Swedish Company Law

Origin, Guidance and Outlook

HÅKAN JULIUS, JORI MUNUKKA

OCH HAYMANOT BAHERU

STINA BRATT

1.Stockholm Centre for Commercial Laws. 7

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Content

Preface 9

List of Abbreviations 11

General Introduction 13

The Regulation of Discharge from Liability 13

The Purpose and Scope of the Study 14

Sources and Method 16

Outline 19

The Company Law Framework 21

Introduction 21

The Models of Corporate Governance 21

The Purposes and Key Features of Discharge 24

Rules Protecting Minority Shareholders 26

Discharge and the Disclosure of Information 29

Summary 30

The Development of the Discharge Regulation 31

From the Early Modern Period to the First

Companies Act in Sweden 31

The Late 19 Century and the Emergence of a

Capital Market 33

The Early 20 Century and Legal Developments

in the Nordic Countries 34

Developments after the Financial Crisis of the

1930s 38

1.5s. 2026

Nordic Legislative Cooperation after 1950s and

the CA 1975 41

The 21 Century and the Challenges of

Globalisation 42

Summary 43

A Comparative Overview – Resolutions on Discharge 45

Introduction 45

Discharge that is Not Legally Binding 46

Discharge that Affects Board Liability 47

Summary 51

Procedural Aspects 53

Introduction 53

The Company’s Claim for Damages – Competence

and Legal Standing 54

Protection of Minority Shareholders and Discharge 55

Minority Actions 57

Summary 64

The Liability of the Board of Directors 67

Introduction 67

Duties and Due Diligence Standards 70

Standards of Care – a Comparative

Perspective 70

Starting Points for Assessing Liability 74

Specific Duties and Due Diligence Standards 75

Business Risks and Business Judgments 79

Responsibilities in Fulfilment of the Assignment 85

Compensable Damages 86

Proximate Causation and Protected Interests 87

Summary 87

Limitations of Board Liability 89

Introduction 89

Starting Points for Ex-ante Limitations of Board

Liability 90

1.6s. 2027

The (Often) Mandatory Nature of Board

Liability 90

Contractual Limitations and Exclusion

from Liability 95

Indemnification Agreements 97

Shareholder Consent and Instructions from

the General Meeting 99

Ex-post Waiver of Claims and Settlements 106

Adjustment of Damages 107

Limitation Period 111

Liability Insurance (D&O Insurance) 112

Summary 114

The Scope and Effects of Discharge Resolutions 117

Introduction 117

Subjects of Discharge Resolutions 118

The Scope and Application of the Discharge

Resolution 120

Introduction 120

What Claims and Grounds are Covered by

Discharge? 120

Recourse Claims 123

Discharge for Future Events 126

Exceptions from Granted Discharge 127

Introduction 127

Materially Incorrect or Incomplete

Information 128

Criminal Conduct 132

Bankruptcy 132

Effects of Not Granting Discharge 134

Possibility to Change or Revoke Discharge

Resolutions 135

Summary 136

Majority Requirements and Minority Protection 139

Introduction 139

Historical Background 141

Comparative Analysis 144

1.7s. 2028

Developments in Case Law 147

The Minority’s Discharge Refusal and

Consequences for the Board 150

Summary 154

Summary and Conclusions 157

The Origin of Discharge and Path Dependence 157

Legal Tools Limiting Liability of the Board 158

Protection of Minority Shareholders or Abuse of

Minority Rights? 161

Rules Promoting Disclosure of Information 162

Final Remarks 164

Sources 167

Literature 167

Table of Cases 174

Official Documents 175

Index 179

Previous publications in the series of the Centre 181

1.8s. 2029

Preface

1.This book is the result of a one-year post-doctoral research project in company law that has been made possible through the Sven Unger Company Law Scholarship funded by the law firm Mannheimer Swartling. The research has been conducted in cooperation with the Swedish Corporate Governance Institute at Stockholm Centre for Commercial Law, Stockholm University.s. 2030

2.I would like to thank the scholarship award committee for serving as a reference group for the research project, which consisted of Supreme Court Justice Svante O. Johansson (chair), Professor Rolf Skog (University of Gothenburg), Professor Niklas Arvidsson (Lund University), Senior Adviser Eva Hägg (Mannheimer Swartling), Partner Patrik Marcelius (Mannheimer Swartling) and Senior Adviser André Andersson (Mannheimer Swartling). Thank you all for your contributions and providing invaluable comments on my work. I would also like to express my gratitude to Associate Professor Erik Lidman (Swedish Corporate Governance Institute), for providing enlightening guidance and support throughout this project. Special thanks are also due to Partner and Adjunct Professor Carl Svernlöv (Baker McKenzie and Stockholm University) who has provided very helpful comments and suggestions on the manuscript. Thank you also to Emil Heijnes stiftelse för rättsvetenskaplig forskning for funding the printing of the book.s. 2030

3.Stockholms. 2030

4.December 2024s. 2030

5.Stina Bratt 9s. 2030

List of Abbreviations

1.ACA Annual Accounts Act (årsredovisningslag, ÅRL, 1995:1554) AEA Act on Economic Associations AGM Annual general meeting AktG Aktiengesetz BCCA Belgian Code for Companies and Associations BJR Business judgment rule CA (Swedish) Companies Act (aktiebolagslag, ABL, 2005:551) CA 2006 Companies Act 2006 (United Kingdom) CEO Chief Executive Officer Ch. chapter CO (Swiss) Code of Obligations DCA Danish Companies Act (selskabsloven, LBKG 2023-09-01) DCC Dutch Company Code ET Erhvervsretslig tidsskrift EU European Union FCA Finnish Companies Act (Aktiebolagslag, 21.7.2006/624) FSA (Swedish) Financial Supervisory Authority (Sw. Finansinspek-s. 2032

2.tionen, ‘FI’) GmbH Gesellschaft mit beschränkter Haftung GmbHG Gesetz betreffend die Gesellschaften mit beschränkter Haftung LSC Spanish Companies Act NCA Norwegian Companies Act(s) (Lov om allmennaksjeselskaper,s. 2032

3.LOV-1997-06-13-45) (Lov om aksjeselskaper, LOV-1997-06-s. 2032

4.13-44) No. Norwegian Nft Nordisk Försäkringstidskrift NTS Nordisk Tidsskrift for Selskabsret p. page para. paragraph 11s. 2032

5.sec. section, §s. 2033

6.Sw. Swedishs. 2033

7.UK United Kingdoms. 2033

8.US United Statess. 2033

9.12s. 2033

General Introduction

The Regulation of Discharge from Liability

1.A special feature in Swedish company law is the obligation of the annual general meeting (AGM) of shareholders to resolve on discharge from liability for the members of the board and the chief executive officer (CEO). Such discharge relates to each person individually to the effect that the management of the company is approved and that no claims for damages may be brought against the individual – unless an exception applies. Thus, the discharge limits the liability of the board towards the company.s. 2034

2.Major shareholders typically participate in the AGM, whereas many institutional investors are represented by proxies. The discharge regulation in Swedish company law is topical considering the new benchmark policy from the Institutional Shareholder Services (ISS), one of the leading proxy advisory firms. In the 2023 ISS benchmark proxy voting policies of 1 December 2022, it is recommended that shareholders vote against discharge from liability in companies with shares with unequal voting rights. This has raised the issue of minority protection in regulation and the potential abuse of minority rights. 13s. 2034

3.Recent developments in case law in several Nordic countries show thats. 1

4.board liability has gained increased topicality, and that limitation of liabil-s. 1

5.ity is an issue of great practical importance. In Denmark and Norway, thes. 1

6.supreme courts have ruled on several large cases concerning director liabilitys. 1

7.and there are many cases from lower instance courts. In Denmark espe-s. 1

8.cially, studies show that the insurance premium costs for liability insurances. 1

9.have increased. This has resulted in some large companies changing theirs. 1

10.approach to the protection of company directors against liability by others. 1

11.means, for example through discharge resolutions at the AGM, even thoughs. 1

12.it is not mandatory for the AGM to resolve on the matter. In Norway, it hass. 1

13.been concluded that board responsibilities have increased over the last 20s. 1

14.years, leading to a more strict liability for individual board members.s. 1

15.The afore-mentioned developments are of significance to the discussions. 1

16.of board liability and have called into question the effects of a discharges. 1

17.resolution in Swedish law. Hence, it is of interest to further investigate thes. 1

18.regulation of discharge, to contribute to a better understanding of the effectss. 1

19.of a discharge resolution on the liability of company directors.s. 1

The Purpose and Scope of the Study

1.The overall objectives of this study are to increase the understanding of thes. 1

2.origin of the discharge regulation, to provide knowledge that serves as guid-s. 1

3.ance in connection with its application, and to give an outlook on how thes. 1

4.rules may and should change in the future.s. 1

5.The research takes as its starting point the question of how the discharges. 1

6.regulation in Swedish company law has evolved. The legal historical study ofs. 1

7.the origin and development of the concept of discharge in Swedish law aimss. 1

8.to create a better understanding of the current legal approach to the particu-s. 1

9.14 lar features of the regulation, and the basic arguments used for its justification. This focuses primarily on the development of Swedish law but to some extent also considers the development in the other Nordic countries, which in this study includes Denmark, Norway and Finland. The study focuses on the regulation of Swedish public limited companies and their equivalents in other Nordic jurisdictions.s. 1

10.The project further examines the scope of a discharge resolution and how it affects the liability of board members towards a company. In this respect, the regulation on discharge from liability is examined from a general civil liability perspective, which means considering rules whose function is to limit the liability of a board in relation to its company. In doing so, certain aspects of the Swedish regulation on discharge are specifically analysed, such as the protection of rights of minority shareholders in connection with discharge and rules promoting disclosure of information to the company and its shareholders. In viewing these different features of the regulation, as described within the company law framework as well as general rules on civil liability, the aim is to assess whether the rules on discharge are appropriate for these purposes and, if necessary, to make proposals for amendments.s. 2

11.Comparisons are made with other legal systems and the rules that provide limitations on board liability towards the company. This comparative analysis is focused on Nordic and European legal systems containing regulations on discharge from liability similar to the Swedish regulation. However, the purpose of the comparative analysis is also to compare rules with similar functions to the Swedish regulation on discharge. This means that not only legal systems with regulations on resolutions on discharge from liability are examined, but also other regulations that concern other possible limitations of the liability of a board of directors, for example in the UK and the US. The comparative study does not provide a complete comparison of the liability of directors in different legal systems. Nor does it analyse the rules on limitation of liability in the company law context fully and comprehensively. 15s. 2

12.Only key features will be highlighted, to give a more complete picture of thes. 1

13.possibilities of limiting the liability of directors across different legal systems.s. 1

Sources and Method

1.A wide range of sources are used in the study. The study has Swedish com-s. 1

2.pany law as its core subject matter and encompasses legal materials relevants. 1

3.for this, such as statutory regulations, case law and preparatory works relatings. 1

4.to limited companies. The legal framework of the Swedish corporate gov-s. 1

5.ernance model is based on a range of norms. The regulation of damages ins. 1

6.the Companies Act (CA) is central to the study, but several liability issues ares. 1

7.not explicitly dealt with in the CA. They include, for example, the divisions. 1

8.of responsibilities within the company management, the significance of thes. 1

9.board’s internal division of labour and the significance of the general meet-s. 1

10.ing’s consent to measures causing damage. Therefore, some comparisons ares. 1

11.made with legislation and case law concerning other types of associations,s. 1

12.where there are solutions aimed at serving the same or similar functions. Ins. 1

13.addition, official regulations, primarily from the Swedish Financial Supervi-s. 1

14.sory Authority (FSA), which focus on the public law regulation of companiess. 1

15.and corporate governance, are considered. Legal literature is also used as as. 1

16.source of analysis, where the regulation of discharge from liability and thes. 1

17.liability matter as such have been examined by Swedish legal scholars.s. 1

18.The inclusion of legal history means that earlier legislation, preparatorys. 1

19.works, case law and literature have been used to paint a picture of how thes. 1

20.16 law has changed over time and describe the origin of the discharge regulation. At this level, mainly Swedish legal sources have been used, but also to some extent historical sources from other Nordic countries. This is the case because Swedish regulation is the focus of the study and detailed explanations of Nordic law are not necessary to fulfil this purpose. However, at the level of abstract ideas, there are clear influences from German law throughout Nordic law, and there is reason to deal with these theoretical similarities in the legal history section, albeit still emphasising the national characteristics by clearly distinguishing between the different Nordic countries.s. 1

21.The comparative method used is based mainly on a functionalist comparative approach. This approach aims to find rules or institutions that fulfil a certain function in society or solve a certain problem. It is based on a comparison of the function of different rules, and how different legal systems solve problems, without being limited to the design of the rules or conceptual differences. Because of the purpose of the study, this method is combined with a structural comparative approach. A structural approach means that the reasons that support a particular solution are considered to constitute a ‘legal formant’, shaping the legal system. The legal structuralist approach improves the understanding of a system or framework and its inherent elements by observing the relationship between the elements themselves. This also means that legal systems where the same result is achieved but justified differently cannot be perceived as ‘identical’. Rather than comparing a particular function of different rules or examining how different legal systems solve a particular problem, the approach aims to examine how legal actors think about a particular problem and how this is expressed in the legal culture of both individual rules and parts of a whole system.s. 2

22.The selection of jurisdictions varies depending on the purpose of comparison, as will be shown in the respective sections. With regard to the company law framework in Chapter 2, this account has not been based on a choice of different jurisdictions, but rather on the abstraction of different corporate governance models, where the legal systems using a given model are not necessarily identical in detail. The functionalist approach used with regard to the rules on liability has also necessarily been limited to certain legal systems where specific aspects have been highlighted; regulation that is uniform is not described in detail. For example, major jurisdictions in Europe such as 17s. 2

23.Germany, the UK, France and Spain are covered, and to some extent alsos. 1

24.smaller jurisdictions. Although the German and Austrian rules are very sim-s. 1

25.ilar, particular features and differences are sometimes mentioned. The aims. 1

26.has not been to make an equally comprehensive comparative study in alls. 1

27.respects but to provide insights into different solutions to similar problems.s. 1

28.To some extent, the US is covered, with a primary focus on the general gov-s. 1

29.ernance model and some comparisons with the regulation in Delaware. Thes. 1

30.reason this state is used as the subject of a comparative analysis is that mosts. 1

31.US public limited companies have, since the early 20 century, been incor-s. 1

32.porated in Delaware. Comparisons are made regarding the liability of thes. 1

33.board – including management and supervisory boards, regardless of boards. 1

34.structure – in both one-tier and two-tier systems. It has not been possible tos. 1

35.take into account the historical development of all the jurisdictions analysed,s. 1

36.but comparisons with these legal systems have been made on the basis of thes. 1

37.legal situation discussed herein.s. 1

38.The comparative material is also used to provide inspiration for the argu-s. 1

39.mentation in various liability issues in Swedish law and to show alternatives. 1

40.regulations. This is particularly the case with regard to the Nordic jurisdic-s. 1

41.tions. The Nordic source material has not been treated in a technically uni-s. 1

42.form manner in the study, but – as will be shown – there are no conditionss. 1

43.for analysing a uniform Nordic line of development. However, the condi-s. 1

44.tions for using the Nordic material to analyse the scope of discharge and tos. 1

45.provide guidance on how to interpret the rules are met, to the extent thats. 1

46.its operation corresponds to that of other Nordic rules. The comparisons ares. 1

47.based on legislation, case law and legal literature. A major advantage of usings. 1

48.material from Nordic jurisdictions is that there is a great deal of legal similar-s. 1

49.ity in the Nordics. Thus, the material from other Nordic can contribute to as. 1

50.better understanding of the Swedish regulations.s. 1

51.18s. 1

52.Other legal systems in Europe that contain discharge regulations have been considered in this respect, to show varying legal solutions and, above all, to highlight the arguments that form the basis of the legal regulation.s. 2

53.As regards the comparison between jurisdictions which also contain specific regulations on discharge, the intention has not been to provide an exhaustive examination of these but to exemplify the existence of such regulations in other legal systems, with the aim to place the Swedish regulation in an ‘international context’. The Nordic countries have been the primary objects of comparison, which is linked to the Nordic legal similarity described above and – as will be detailed in Chapter 2 – the Nordic model of corporate governance.s. 2

Outline

1.The study is structured in a way that reflects its aim and methodology. Following this General Introduction, Chapter 2 provides a brief account of the Swedish company law framework insofar as it is relevant to the discharge regulation in Swedish law. This is followed by Chapter 3, which traces the origin of discharge from liability in Swedish company law and discusses the line of development in Swedish, and to some extent also Nordic, law. The purpose of the chapter is to show how discharge worked as a legal mechanism and its functions from a historical perspective. The aim is also to aid understanding of the meaning of the current regulation. Chapter 4 provides a brief overview of jurisdictions that contain rules on discharge in some form, both those that release the board of directors from liability and those where discharge is not perceived to have any direct legal effect.s. 2

2.Chapter 5 deals with discharge in relation to procedural aspects of a company’s action for damages against its board, and the significance of a decision to refuse or grant discharge for the right to bring an action, both for the company and for individual shareholders. Chapters 6 and 7 then deal with the form of the board’s liability and the possibilities of limiting this liability, notwithstanding the possibility to resolve on discharge. The conditions for 19s. 2

3.liability and the possibilities for limiting such liability are dealt with in sep-s. 1

4.arate chapters, although the fundamental issue in both is the extent of thes. 1

5.directors’ liability. The purpose of this division is to provide the reader withs. 1

6.a clear structure for the assessment of liability and to highlight the differents. 1

7.elements for further analysis. In this part, the study contains comparatives. 1

8.analyses with regard to the nature and limits of liability but sticks to the cur-s. 1

9.rent law in force in other legal systems, without looking back at legal history.s. 1

10.Chapter 8 deals with the scope and effects of a discharge decision. Its. 1

11.addresses the issues of who is covered by the discharge and the applicables. 1

12.exceptions. The comparative analyses in this part are made only with legals. 1

13.systems that allow for decisions such as discharge, which links back to thes. 1

14.comparative overview in Chapter 4. Chapter 9 deals with the majoritys. 1

15.requirements for a discharge decision and specific rules on minority protec-s. 1

16.tion, where the historical background helps to explain the view in currents. 1

17.law. This view is contrasted with those in other Nordic countries, as well ass. 1

18.developments in case law and the discussion that has arisen regarding deci-s. 1

19.sion-making on this point.s. 1

20.Lastly, Chapter 10 provides a summary and concluding remarks on thes. 1

21.origin and meaning of the rules. In addition, suggestions are made as to hows. 1

22.the rules could be amended to achieve greater harmonisation on this matter.s. 1

23.20s. 1

The Company Law Framework

Introduction

1.The company law framework can be understood as the system by which companies are directed and controlled. The purpose often ascribed to this framework is that it should facilitate the raising of capital by strengthening confidence in the company among shareholders, the capital market and other stakeholders, and thus contribute to the long-term success of companies. Rules on the board’s responsibility and possible liability are elements of this framework. In the following section, the Swedish model of corporate governance will be presented and discussed briefly in comparison with other models of corporate governance. This forms the foundation for a discussion on the purpose of discharge from liability from a company law perspective. The aim is to provide insight into the regulation of discharge and aid an understanding of the justifications for the discharge regulation within this framework.s. 2

The Models of Corporate Governance

1.According to the CA, a Swedish limited company (‘AB’) must have three decision-making bodies, which have a hierarchical relationship to one another: the shareholders’ meeting, the board of directors and the chief executive officer. There must also be a control body, the statutory auditor, appointed by the shareholders’ meeting. A long tradition of legal collaboration and harmonisation has created a Nordic model of corporate governance. This corporate governance model is roughly uniform, although some details and features are not entirely identical. As there is a common ground in legislation 21s. 2

2.and regulation in the field of company law, these jurisdictions form a com-s. 2

3.mon Nordic corporate governance model and can be described together.s. 2

4.One observation that has been made is that ‘the Nordic corporate gov-s. 2

5.ernance model allows the shareholder majority to effectively control and takes. 2

6.long-term responsibility for the company that they own’. Thus, the models. 2

7.can be understood as containing strong (majority) shareholders and is some-s. 2

8.times referred to as an ownership model of corporate governance. Dominants. 2

9.shareholders exercise control over the company, which is balanced by minor-s. 2

10.ity protection rules. This is the case because strong shareholder influences. 2

11.based on the majority principle entails a risk of abuse of power by the major-s. 2

12.ity, which is dealt with through rules on minority protection under companys. 2

13.law. An ever-present question is therefore how to optimise regulation fors. 2

14.the majority, which is controlling and taking long-term responsibility for thes. 2

15.company, while at the same time protecting the minority from the majority’ss. 2

16.potential abuse of power.s. 2

17.A comparison can be made with corporate governance models in others. 2

18.jurisdictions. These models can be distinguished from the Nordic model ins. 2

19.several different ways. With regard to the issue of board liability, a specials. 2

20.feature in the German corporate governance model is the division of labours. 2

21.between two separate organs. Under German law, the Aktiengesellschafts. 2

22.(AG) is the only company form with shares that can be traded on stocks. 2

23.exchanges. In Germany, a division is made between the management boards. 2

24.(Vorstand) and the supervisory board (Aufsichtsrat); thus the AG has a two-s. 2

25.tier system governance, with the management function in the managements. 2

26.22 board and the control function with the supervisory board. The shareholders, through the general meeting (Hauptversammlung), decide on the fundamental goals and course of the company, with the management board responsible for putting these objectives into action.s. 2

27.In comparison to the Nordic corporate governance model, which in general follows a one-tier system of corporate governance, the shareholders in Germany have less influence over the management of the company. The Nordic model gives greater scope for shareholders to decide on the management of the company. The general meeting is the supreme body, whose instructions the board of directors must obey – although this obligation is not without exceptions.s. 3

28.In French law, a public limited company (Société anonyme, SA) can be managed by a board of directors with a chairman or by a supervisory board with an administrative director. In the Netherlands, the NV (Naamloze Vennootschap) is equivalent to the public limited company. The Dutch corporate governance model is based on a two-tier board structure and only relatively recently (2013) was a legal basis for the one-tier system introduced.s. 3

29.According to the English Companies Act 2006, the one-tier board can comprise executive and non-executive directors. All directors, whether executive or non-executive, have the same general duties to the company, as set out in the Act. Non-executive directors participate in directors’ meetings on the same basis as executive directors and do not constitute a separate board or body of the company. Unlike in certain continental jurisdictions, two-tier board structures are not recognised in the UK.s. 3

30.In the US, the organisation of a public limited company forms a triangle, with the shareholders at the base, officers at the top and the board of directors 23s. 3

31.in the middle. The US organisation of corporate board is based on a one-tiers. 2

32.system. The shareholders own the business, elect the board of directors ands. 2

33.have exclusive competence on deciding on certain matters, whereas officerss. 2

34.execute policies from the board and derive their authority from the board.s. 2

35.The board of directors is the primary direct stakeholder influencing corpo-s. 2

36.rate governance. Directors are elected by shareholders or appointed by others. 2

37.board members and charged with representing the interests of the company’ss. 2

38.shareholders. Thus the US has a ‘shareholder model’, which is designed sos. 2

39.that the board of directors and shareholders are in control.s. 2

The Purposes and Key Features of Discharge

1.It has been argued that discharge resolutions are ‘not compatible with goods. 2

2.corporate governance’ because they mean that shareholders lose their pro-s. 2

3.tection against the harmful actions of the board. In this view, ‘the manage-s. 2

4.ment’ is considered an agent of the shareholders, the principal. In economics. 2

5.theory, this situation can be referred to as the principal-agent problem. Agencys. 2

6.problems can arise in relationships involving several actors, both between thes. 2

7.board and the shareholders as a whole and between shareholders.s. 2

8.The agency problem creates costs for the principal, as it requires controls. 2

9.mechanisms to monitor the agent’s performance of its duties. These costss. 2

10.can be reduced by, for example, rules imposing obligations on the agent tos. 2

11.inform the principal or imposing penalties and sanctions on the agent in cases. 2

12.of a breach of the duty to act in the principal’s interest. Legal strategies tos. 2

13.reduce agency costs can be categorised as regulatory strategies or govern-s. 2

14.ance strategies. Regulatory strategies are normative; they specify substantives. 2

15.requirements that govern the contents of the principal-agent relationship.s. 2

16.These strategies tend to limit the agent’s behaviour directly. Governances. 2

17.strategies instead attempt to promote or facilitate the principal’s control overs. 2

18.24 the agent’s behaviour. This section will discuss the discharge regulation as a strategy to promote control over the agent’s behaviour and the purpose, functionality and potential effects of the regulation of discharge from liability, in relation to the purpose of mitigating these problems.s. 2

19.In light of these agency problems, it is necessary to explain the purpose of the regulation of discharge. Several purposes have been put forward. These include promoting efficient determination of the liability issue (efficiency purpose), openness and information to the shareholders (information purpose) and reducing litigation costs (litigation cost purpose). These relate to the different features of the Swedish regulation.s. 3

20.The information purpose relates to the exception in the CA from a resolution of discharge when the AGM has not received correct information. This is aimed at giving the board of directors and CEO incentives to disclose all information relevant to the resolution on discharge. The litigation cost purpose is aimed at speeding up the processing of compensation issues in the company. The efficiency purpose relates to the interest of both the company and the directors of fast-working and effective rules on liability.s. 3

21.The fact that the liability issue is kept ‘open’ is said to have negative effects on the management of the company, especially with regard to its operational initiatives and activity. The question of discharge from liability is therefore of practical importance, as denial of discharge means that the company (through the board) needs to investigate if the company should file a lawsuit against the board of directors. Such a claim must be made within a year from the presentation of the annual report and the auditor’s report at the general 25s. 3

22.meeting. Thus, it is connected to the limitation period. This promotes clo-s. 2

23.sure on behalf of both the company and its directors on the matter of boards. 2

24.liability. Hence, the regulation protects both the company and the board ofs. 2

25.directors from costs. Another argument in favour of the view that discharges. 2

26.is not necessarily bad for the company is that limiting the personal liabilitys. 2

27.of the board makes it easier to attract competent directors, who are willings. 2

28.to take a certain amount of risk in order to create value to the company.s. 2

29.Although these purposes are correct in the sense that they serve as possi-s. 2

30.ble justifications for the key features of discharge, it should be emphasiseds. 2

31.that the immediate function of the regulation is to release the board froms. 2

32.liability. From a functional perspective, therefore, the discharge rules coulds. 2

33.be replaced by other mechanisms. In this study, I have chosen to analyse twos. 2

34.of the special features in the Swedish regulation on discharge: the protections. 2

35.of the rights of minority shareholders in connection with discharge and thes. 2

36.rules promoting disclosure of information to the company and its sharehold-s. 2

37.ers. Though the protection of minority rights is not described as an overalls. 2

38.objective of discharge, there are certain components in the regulation thats. 2

39.provide such protection. In the following sections, the two features will bes. 2

40.discussed from a general company law perspective.s. 2

Rules Protecting Minority Shareholders

1.As the ownership model implies that strong shareholders have the powers. 2

2.to decide over the company, there is a need for protection against poten-s. 2

3.tial abuse. The possibilities of abuse of power can be described as a prin-s. 2

4.cipal-agent problem that can be dealt with through rules protecting thes. 2

5.minority shareholders. Hence, rules protecting the minority are put in places. 2

6.to balance the interests of different shareholders and to prevent the abuses. 2

7.of power on the part of the majority shareholders. In Swedish law, theres. 2

8.are several different types of minority protection rules and not all of thems. 2

9.26 are addressed in this study. As an example, rules protecting minority rights include the general clause in Ch. 7 § 47 CA, describing general restrictions on the right of decision-making at a general meeting. According to Ch. 7 § 47 CA, a resolution may not be passed at a general meeting if it is likely to give an ‘undue advantage’ to a shareholder or other person, to the detriment of the company or another shareholder.s. 2

10.The rules protecting the minority can be divided into special rules that limit the decision-making power of the majority or give the minority certain rights, and general rules that prohibit the majority from abusing its power in combination with rights for the minority – or a single shareholder – to take legal action by challenging a resolution or to make a claim for damages against the company or the company body or shareholder. The special rules thus give the minority shareholders a possibility to take action against a company body or assign certain powers to the minority shareholders in the decision-making process. The general rules impose duties on other company bodies, including to balance the interests of majority and minority shareholders, in combination with a right of the minority of enforcement either by challenging a resolution or by for example making a claim for damages for the harms caused by a resolution.s. 3

11.Another way of describing the minority protection rules is to divide them into protection rules and minority right rules. The purpose of protection rules is to protect minority shareholders from abuse by the majority, without any action being required on the part of the minority. The rules on rights can instead be utilised by a minority shareholder if they so wish, i.e., they are put ‘into play’ by the minority’s actions. The rights are available to different minority shareholders or groups of minority shareholders and may depend on the size of their holdings. The purpose of the minority protection rules, 27s. 3

12.limiting the control of the majority, can be explained as rational from thes. 2

13.point of view of raising capital – protection of minority shareholders is nots. 2

14.primarily a question of fairness. A related matter is how to prevent abuse ofs. 2

15.minority rights. This problem occurs mainly in the case of minority rights. 2

16.rules, since it is up to the minority shareholders to decide whether the ruless. 2

17.should be utilised.s. 2

18.Company law contains special minority protection rules in connection tos. 2

19.resolutions on discharge. According to Ch. 29 § 7 CA, an action for damagess. 2

20.for the company may be brought if the majority or a minority comprisings. 2

21.owners of at least one-tenth of all shares in the company has voted againsts. 2

22.a resolution on discharge from liability. The minority protection in the dis-s. 2

23.charge regulation is designed as a rights-based regulation, i.e., it is possibles. 2

24.for minority shareholders to choose whether or not to apply the rules. Thes. 2

25.rules require the minority to hold a certain minimum number of shares, ats. 2

26.least one tenth of the shares in the company. The minority’s right to prevents. 2

27.discharge and sue the board on behalf of the company is considered to be ones. 2

28.of the ‘proper’ minority rights. Pursuant to Ch. 29 § 9 CA, if at least tens. 2

29.percent of the shareholders have voted against a proposal for discharge froms. 2

30.liability, they may bring an action against the board in their own name buts. 2

31.on behalf of the company (actio pro socio).s. 2

32.As the shareholders’ invested capital is managed inside the company, ands. 2

33.the claim for damages against the board of directors is on the part of the com-s. 2

34.pany, the question of whether the board of directors should be discharged ofs. 2

35.liability is considered a matter for the general meeting. The Swedish model ofs. 2

36.directors’ liability means that shareholders have little opportunity of claim-s. 2

37.ing damages from the board directly. Instead, they are required to asserts. 2

38.the company’s claims. This implies that conflicts between individual share-s. 2

39.28 holders and the board are primarily dealt with within the framework of the company’s rights against the board. Therefore, it is necessary to have rules that protect the minority from the abuses of the majority, including rules on the possibilities of limiting the liability of the board of directors towards the company. A later chapter of this study discusses how the Swedish regulation fulfils this purpose of protecting minority shareholders in connection with the resolution on discharge.s. 2

Discharge and the Disclosure of Information

1.A fundamental problem in the context of corporate governance and the relationship between the company and the board is that shareholders typically have little insight into how the company is managed. As the decision-making concerning company matters lies with the board of directors, the principal-agent problem can arise due to the existence of ‘misaligned incentives. As presented above, the Swedish model is based on the notion that the shareholders should have a controlling influence over the company. This influence is expressed through the general meeting, see Ch. 7 § 1 CA.s. 3

2.The resolution on discharge from liability fulfils a function in the context of corporate governance by regulating the relationship between the company and its management. It aims to eliminate the possibility for the company to claim damages against the board in relation to the preceding financial year. The discharge regime also contains components that incentivise the board of directors to provide information to the general meeting on how the management has been conducted, to enable the general meeting to take informed decisions in the context of corporate governance. There is an exception from discharge if the board has provided materially incorrect information.s. 3

3.Thus, by exempting the case when information of material importance that has been omitted or is incorrect, the discharge decision creates an incen 29s. 3

4.tive for the board of directors to provide information to the general meetings. 2

5.on business decisions that have been detrimental to the company. The pro-s. 2

6.vision of such information is essential for the shareholders’ resolutions at thes. 2

7.general meeting about the company’s continued operation. The linking ofs. 2

8.the discharge from liability to the information presented at the general meet-s. 2

9.ing thus gives the board of directors an incentive to present information thats. 2

10.may show that the board has negligently caused damages to the company.s. 2

Summary

1.The above presentation has shown that the Swedish model of corporate gov-s. 2

2.ernance, which is part of the Nordic model, has certain distinctive features.s. 2

3.These are mainly based on a strong influence of the owners in the company,s. 2

4.resulting in the term ‘the ownership model’. In this model, the general meet-s. 2

5.ing is the highest decision-making body. Unlike the ‘continental model’,s. 2

6.the Nordic model is primarily based on a one-tier system. The continentals. 2

7.model means that the influence of shareholders is reduced in favour of thes. 2

8.two boards. This is distinct from the models in the UK and US. The conflictss. 2

9.of interest identified are managed through different legal strategies in thes. 2

10.different models.s. 2

11.Hence, it should be noted that the design of the legal strategies to solves. 2

12.these problems should be appropriate for the relevant model of corporates. 2

13.governance. This chapter has discussed the place of discharge in the Swedishs. 2

14.company law framework, in particular in the context of protecting minoritys. 2

15.shareholders and providing information to shareholders. The view that thes. 2

16.discharge has these very specific purposes, in addition to limiting the liabilitys. 2

17.of the board of directors towards the company, can be seen in the light ofs. 2

18.the development of the Nordic corporate governance model. This relates tos. 2

19.the question of why Swedish company law contains the possibility for thes. 2

20.general meeting to decide on discharge from liability, which will be discusseds. 2

21.in greater detail in the next chapter.s. 2

22.30s. 2

The Development of the

Discharge Regulation

From the Early Modern Period to the First

Companies Act in Sweden

1.In the 16 century, during the so-called early modern period, what can be defined as the first limited companies were formed in Sweden. These were private organisations that managed capital independently of the owners, i.e., capital associations. The charters of the oldest trading and industrial companies, from the 18 century, contained provisions on discharge from liability. In an early account of the development of Swedish company law, it is mentioned that one of the letters of privilege relating to the (Swedish) East India Company from 1746 stated that the executive board, i.e., the board of directors, was to be elected among the major shareholders. These shareholders, the principal partners, were to audit the accounts for each expedition through delegates and, if there were no objections, the delegates could grant discharge to the management (commonly referred to as décharge). Similar rules existed for other trading companies during this period. In all these cases, it was the larger owners that had control over the discharge issue, e.g., by appointing auditors authorised to discharge the management. The legal technique of the rule, i.e., ex-post relieving the management of liability, probably originated in the French civil service, whose model very likely influenced the public liability regime in several other countries at the time. 31s. 3

2.The first legislation on limited companies in Sweden was enacted in 1848;s. 3

3.the Ordinance of 6 October 1848 on the Law on Limited Companies (CAs. 3

4.1848). The act, which consisted of only 15 sections, was strongly influ-s. 3

5.enced by French legislation. It clarified the registration procedure for thes. 3

6.formation of companies and contained certain regulations for the conducts. 3

7.of business, to avoid personal liability of shareholders. The act did not con-s. 3

8.tain rules on for example general meetings or shareholders’ decision-makings. 3

9.powers. The CA 1848 contained certain provisions concerning the boards. 3

10.of directors and only to some extent personal liability of the directors. Thes. 3

11.directors of the board were considered to have obligations towards the com-s. 3

12.pany in their capacity as agents, according to Ch. 18 Commercial Code.s. 3

13.Discharge was not regulated in CA 1848, but the legal literature from thes. 3

14.19 century suggests that directors could be released from liability towardss. 3

15.the company through contractual solutions. According to this view, alls. 3

16.shareholders were bound by a discharge resolution, regardless of whethers. 3

17.they voted in favour of or against such a proposal, and thus the majoritys. 3

18.principle applied. However, it was considered possible to leave open in thes. 3

19.articles of association the possibility for individual shareholders to makes. 3

20.claims for damages against the board. In addition, it was considered possibles. 3

21.to bring action against the board of directors if the company went bankrupt.s. 3

22.The right to damages accrued only to the company, not to individual share-s. 3

23.holders. The legislation stated that shareholders were free from personal lia-s. 3

24.bility, but it was possible to regulate the company’s internal affairs in generals. 3

25.through contracts. There were few formal requirements for corporate bodiess. 3

26.and, as mentioned, the relationship between the company and the board wass. 3

27.not regulated in detail.s. 3

28.The regulation of discharge developed from the earliest company statutess. 3

29.and was later enshrined in legislation as a means of limiting the liability ofs. 3

30.company directors. One possible explanation for the use of discharge wass. 3

31.that the association was a new and complex legal construct. It is possible thats. 3

32.ex-post discharge was based on the perception of the difficulties for the part-s. 3

33.ners to jointly agree in advance to limit the liability of the board of directorss. 3

34.32 and the management of the company, as the owners could not legally bind new partners by contract. Since it was in practice necessary for the association to appoint a board of directors for the management of day-to-day business, but in order that neither the owners nor the representatives of the company would be personally liable for the company’s obligations, there was a need for a legal mechanism to relieve them of liability.s. 3

35.In the earlier parts of the 19 century, theories on the association as a legal entity or legal person were developed. However, in Sweden it was still uncertain during this period to what extent a limited company could be held responsible for non-contractual liability if the company caused damages to other parties due to the conduct by persons in the management (or ‘company bodies’). The rights and obligations of the company under various rules thus developed over time. This was also the case in the development of rules relating to the ‘internal’ matters of the company and the legal discourse soon came to focus on the decision-making in the company. During the same period, the majority principle emerged in company law, which presumably made the governance of the company considerably easier. The fact that the company could decide to release the board of directors from any liability for the previous year – provided that the board had fulfilled its duties to the company – contributed to effective governance though still maintaining the older approach that release from liability through discharge should only occur after an assignment had been performed.s. 4

The Late 19 Century and the Emergence of

a Capital Market

1.The CA 1848 soon came to be criticised from several quarters, in particular due to the system of authorisation for the formation of companies. In 1895 new legislation – the Companies Act of 28 June 1895 (CA 1895) – was introduced. The main aim of the legislation was to introduce a different system 33s. 4

2.for creating companies, influenced by the German normative system. Thes. 3

3.CA 1895 was also more detailed than the previous law.s. 3

4.The CA 1895 contained, among other things, provisions that the boards. 3

5.should present a management report and balance sheet at the AGM. A fur-s. 3

6.ther innovation was the statutory auditor function. In § 65 of the CA 1895,s. 3

7.there were provisions on the liability of directors towards the company.s. 3

8.According to the provision, the board would be liable for damage causeds. 3

9.by violations of the law or articles of association. The CA 1895 contained as. 3

10.provision regarding discharge from liability, and in § 49 it was stated that thes. 3

11.question of discharge from liability was a mandatory item at the AGM. Fors. 3

12.decisions at the AGM, the act stated that the opinion receiving the majoritys. 3

13.of the votes cast would prevail, i.e., the majority principle applied. However,s. 3

14.shareholders were not allowed to participate in decisions for themselves or ass. 3

15.proxies for others in matters affecting them personally or, if a shareholder wass. 3

16.a member of the board of directors, to participate in decisions on discharges. 3

17.from liability for management actions.s. 3

18.If no action concerning the management of the board of directors durings. 3

19.the period covered by the management report was brought within one year ofs. 3

20.the presentation of the report to the general meeting, discharge was deemeds. 3

21.to have been granted. There was no possibility for minority shareholders tos. 3

22.oppose a discharge decision, but shareholders with a total shareholding of ats. 3

23.least one tenth of the share capital could obtain a two-month postponements. 3

24.of the discharge. There was an exception to the discharge if the action con-s. 3

25.cerned a member of the board who, against their better judgment, had mades. 3

26.a false statement in the management report or balance sheet, if the statements. 3

27.could be assumed to have affected the decision on discharge.s. 3

The Early 20 Century and Legal Developments

in the Nordic Countries

1.Sweden was the first Nordic country with legislation on limited companies,s. 3

2.first introduced in 1848, and was at the turn of the century already on itss. 3

3.second law, the CA 1895. In the latter part of the 19 century, the legislations. 3

4.came to be criticised for not adequately addressing issues such as minoritys. 3

5.34 protection and the position of shareholders. Soon, therefore, the CA 1895 was amended again, by a new CA in 1910 (CA 1910). The background to the rapid amendment was, among others, dissatisfaction with previous regulations regarding control over the formation of limited companies, control over the board’s management and protection of the minority shareholders against possible majority abuse. The reasons given included that the legislation was intended to provide the public with stronger protection against ‘unsound companies’ and to give shareholders greater security against the board’s mismanagement of the company’s affairs, as well as protection for minority shareholders. The rules were also influenced by the new German legislation on limited companies, which had been enacted in 1897 to protect against abuse and fraud of various kinds.s. 3

6.The CA 1910 still contained provisions on discharge from liability but was altered in connection with minority rights regarding discharge. Around this time, theories on the distinction between procedural and substantive legal relations were developed, especially in German jurisprudence. This may have influenced the wording of rules on minority protection. In the CA 1910, the minority was given facility for a ‘minority action’, if shareholders holding at least one fifth of the shares had voted against discharge. Discharge has since then been perceived as a procedural prerequisite, i.e., a decision to deny discharge to the management is a prerequisite for a court to hear a claim for damages by the company against the board.s. 4

7.Two exceptions to discharge were included in the CA 1910. One was the provision in § 86(4), that an action based on a criminal offence could be brought against a board member unless the discharge from liability expressly covered that offence. The second exception was the bankruptcy exception, which according to § 90 CA 1910 applied to bankruptcy that had begun within two years of the presentation of the management report at the general meeting. The exception in § 49 CA 1895, which meant that an action could be brought within two years of the presentation of the management report against a board member who had intentionally provided incorrect information, was thus removed from the CA 1910. The reason was that the act of a board member providing false information in the balance sheet or the management report against their better judgment was a criminal offence. Retaining the general exception in the CA 1895 would therefore have had 35s. 4

8.the paradoxical effect that if the incorrect information affected the discharges. 3

9.decision, the two-year limitation rule would apply, whereas in the opposites. 3

10.case the company’s claim would be subject to the general ten-year limitations. 3

11.rule.s. 3

12.Around the same time, legislation was put into place in other Nordics. 3

13.countries. In Finland, legislation had been introduced in 1895. In 1910,s. 3

14.the same year that the new Swedish legislation, Norway introduced its firsts. 3

15.legislation on limited companies (NCA 1910). Although the country hads. 3

16.been in a union with Sweden since 1814, there had been no common legis-s. 3

17.lation on limited companies. The Swedish-Norwegian union was dissolveds. 3

18.in 1905. The NCA 1910 was similar to both Swedish and German legisla-s. 3

19.tion. Towards the end of the First World War, corresponding legislation wass. 3

20.introduced in Denmark, in the DCA 1917. Although the legislations in thes. 3

21.Scandinavian countries were introduced close together in time, this was nots. 3

22.a pan-Nordic legislative project.s. 3

23.The Finnish Companies Act of 1895 was similar to the Swedish legis-s. 3

24.lation of the same year. The duties of the board towards the company weres. 3

25.regulated in § 41, but the issue of discharge was not explicitly regulated.s. 3

26.However, the general meeting had to decide on ‘measures’ due to the board’ss. 3

27.36 management and the reporting thereof. This was considered a possibility to resolve on discharge for the board, although it was not explicitly stated. The Act did not contain any rules on shareholders’ disqualification in certain matters. There was no specific minority protection provision in the discharge regulation. A discharge decision was not considered to affect the company’s right to bring an action against the board of directors for criminal offences. Moreover, a decision on discharge was considered to relate only to management actions of which the company had been able to obtain knowledge through the board’s report and the auditor’s review.s. 3

28.According to the Norwegian Act from 1910, it was for the general meeting (No. generalforsamlingen) to resolve on discharge. The majority principle applied to resolutions on discharge. The Norwegian Act did not explicitly regulate the liability of directors and others. Such liability was based on general principles of civil liability, and it was therefore not considered necessary to lay down rules in legislation. A resolution on discharge meant that a member of the board of directors was released from liability. Under this approach, the question of liability could not be reopened except in the event of a minority action regulated in the same provision. In 1921, a provision was introduced to make discharge a mandatory item at the AGM. The provision was introduced to prevent companies from having provisions in the articles of associations stating that the management could resolve on discharge concerning the annual accounts. It was understood to be within the exclusive competence of the general meeting to resolve on the matter of discharge. 37s. 4

29.In the Danish Companies Act from 1917, the issue of discharge from lia-s. 3

30.bility was not expicitly regulated, but in the legal literature it was considereds. 3

31.that, according to § 32(3), the question of discharge was to be decided bys. 3

32.the general meeting. The DCA 1917 did not contain any explicit disquali-s. 3

33.fication rules and shareholders who were also members of the board could,s. 3

34.among other things, vote in favour of discharge for themselves. However, as. 3

35.decision on discharge required that correct information concerning potentials. 3

36.harmful conduct was given to the general meeting.s. 3

Developments after the Financial Crisis of the 1930s

1.The previous section described that the company laws in the Nordic coun-s. 3

2.tries at the beginning of the 20 century were based on similar models,s. 3

3.even though the regulations were not the result of any formal legislatives. 3

4.cooperation. On Sweden’s initiative, more formalised Nordic cooperations. 3

5.on company law was initiated in 1934. The legislative collaboration had tos. 3

6.be put on hold because of World War II, and Sweden continued the works. 3

7.on its own. In 1941, a proposal was presented by the legislative draftings. 3

8.committee. The CA 1944 came into force on 1 January 1948.s. 3

9.The CA 1944 contained twice as many sections as the CA 1910 ands. 3

10.aimed at financial consolidation of the limited company, including changess. 3

11.to the rules on dividends and a more detailed regulation of annual reports.s. 3

12.The law committee’s directive called for particular attention to be paid to thes. 3

13.emergence of groups of companies, which led, among other things, to ruless. 3

14.on consolidated accounts. Auditing was also dealt with in greater detail.s. 3

15.The CA 1944 contained a regulation on liability for damages, which meants. 3

16.that the board of directors and the managing director, in the fulfilment ofs. 3

17.their duties, were obliged to compensate the company for any damage causeds. 3

18.to it.s. 3

19.38s. 3

20.The question of discharge from liability was regulated in § 128 CA 1944. Pursuant to § 128(1) CA 1944, discharge from liability was not deemed to have been granted if shareholders holding a total of at least one tenth of the entire share capital voted against it. Hence, the CA 1944 reduced the proportion of the share capital needed to have the right to prevent discharge, compared with the CA 1910. In other respects, § 128(3) CA 1944 corresponded to the law previously in force. The limitation period for bringing an action of six months after the presentation of the accounting documents and the auditor’s report at the general meeting was retained.s. 4

21.Under § 128(4) CA 1944, there were two exceptions to granted discharge. If discharge had been granted, an action could still be brought if the board of directors, a member of the board of directors or the managing director had deliberately or negligently provided materially incorrect or incomplete information in the accounting documents or otherwise to the general meeting or to the shareholders in accordance with § 127(3) or also through the accounts or otherwise to the auditors. In other words, there was an exception for incorrect or missing information, but this only applied in the case of intent or negligence. In addition, there was a separate exception from discharge in the case of criminal offences, unless the discharge clearly related to the criminal act.s. 4

22.Furthermore, the ‘bankruptcy exception’ in § 131 CA 1944 was essentially unchanged compared with in the CA 1910. The time within which an action had to be brought was set at six months from the first meeting of creditors. Unlike the special two-year limitation rule in § 49(4) CA 1895, the provision in § 128 CA 1944 contained no specific time limitation. Thus, an action under that provision could be brought only subject to the general limitation of claims. 39s. 4

23.As mentioned above, the Swedish legislation was a result of the works. 3

24.that began in the 1930s when a joint legislative project materialised in thes. 3

25.Nordic countries. However, during this period, there was a lack of commons. 3

26.legislation in the Nordic region. Norway kept its 1910 law until 1957. Somes. 3

27.provisions were added in 1930, including rules on minority auditors. Fin-s. 3

28.land retained its law from 1895, but several changes were made over time,s. 3

29.including the introduction of new provisions on discharge from liability ins. 3

30.the 1930s. A new Danish law on limited companies was introduced in 1930,s. 3

31.but Denmark was nevertheless part of the initial Nordic cooperation.s. 3

32.Despite the lack of unified legislation, the development of the law up tos. 3

33.that time had been fairly uniform. However, the Nordic legislative cooper-s. 3

34.ation did not result in a uniform set of rules on company law, even thoughs. 3

35.the basic elements were the same. The legislation that resulted from thiss. 3

36.cooperation was enacted in different years in the different Nordic countries.s. 3

37.Attitudes to discharge from liability differed at this time, and it can be seens. 3

38.here that the different views led to a division on the matter.s. 3

39.In some of the other Nordic countries, the necessity of discharge resolu-s. 3

40.tions began to be called into question. The attitude towards the obligations. 3

41.for the general meeting to decide annually on the discharge of the board ofs. 3

42.directors had changed significantly. In some Nordic countries discharge ass. 3

43.a legal concept was viewed with great scepticism. Under the Norwegian Acts. 3

44.of 1957 (NCA 1957), resolutions of discharge were not mandatory. In thes. 3

45.preparatory works to the NCA 1957, it was stated that one objective was tos. 3

46.reduce the use of resolutions on discharge. The background to this wass. 3

47.that discharge (called decharge) was used as a resolution to both approve thes. 3

48.annual accounts and discharge the board from liability – one resolution wass. 3

49.made for both matters. Such resolutions, concerning the ‘decharge of thes. 3

50.accounts’, were seen as inappropriate, as their legal consequences were uncer-s. 3

51.tain. Hence, discharge as a mandatory item at the AGM was removed froms. 3

52.the legislation.s. 3

53.40s. 3

Nordic Legislative Cooperation after 1950s

and the CA 1975

1.The CA 1944 was soon criticised for being an overly detailed and complicated regulatory framework. Attempts at Nordic legislative cooperation began already in the 1950s and continued during the 1960s and 1970s resulting in joint legislative proposals. There was a major push for joint Nordic legislation with the aim of arriving at uniform Nordic company law. In the end, it did not lead to a uniform ‘pan-Nordic’ legislation on limited companies. The Danish and Finnish proposals were presented in 1969. The Norwegian proposal was finalised in 1970 and the Swedish proposal in 1971. The Swedish CA 1975 came into force on 1 January 1977.s. 1975

2.The justifications for the existence of discharge in the CA 1975 were similar to those found in the CA 1944. This had to do with the view that discharge was of importance, as otherwise the matter of liability would be active for a long time and could disrupt the company’s operations. Hence, the provisions on discharge from liability in the CA 1944 were transferred to the CA 1975 largely unchanged. In the 1971 report, it was proposed that the provision on the mandatory item at the general meeting should be made a default rule, i.e., that the articles of association could provide that the question of discharge need not be decided at the ordinary general meeting. However, this was criticised during the consultation process of the draft, and the legislator did not put forward the proposal of making it possible to ‘opt out’ of resolutions on discharge at the AGM. 41s. 1975

3.Some changes concerning the exceptions from granted discharge weres. 3

4.made. The CA 1944 required intentional or reckless omission of information.s. 3

5.This requirement was removed from the CA 1975. The other exception,s. 3

6.i.e., that an action on the basis of a criminal offence could be brought despites. 3

7.discharge being granted, unless the discharge clearly covered this act, wass. 3

8.removed. In the explanatory memorandum, it was stated that the exceptions. 3

9.was clear from the wording of the provision, and that no special rule on thiss. 3

10.was needed.s. 3

The 21 Century and the Challenges of Globalisation

1.During the 1990s, in connection with Sweden joining the European Com-s. 3

2.munity (now the EU), several aspects of company law were adjusted to adapts. 3

3.the rules to the European Community company law directives. The overalls. 3

4.aim was to facilitate the right of establishment across Member States bys. 3

5.harmonising various aspects of company law. The need for adaptations tos. 3

6.EU company law, as well as economic and societal developments in general,s. 3

7.led to several government inquiries during the 1990s. Despite the fact thats. 3

8.the major adaptations to EU legislation had already been made, a completelys. 3

9.new CA was deemed necessary. Certain matters were also left out of the EUs. 3

10.rules, including the liability of the board. The Swedish rules on liability fors. 3

11.damages were thus transferred virtually unchanged from the CA 1975 to thes. 3

12.CA 2005.s. 3

13.Since the introduction of the CA 2005, there have been several changes ins. 3

14.the legislation. In connection with the proposal to remove the managements. 3

15.audit, the issue of discharge was also investigated. This study put forwards. 3

16.similar arguments in favour of retaining the discharge regulation in Swed-s. 3

17.ish company law. The conclusion, unsurprisingly, was that it should not bes. 3

18.42 removed. In the proposal, it was emphasised that the purpose of the discharge is to give the management of the company, already at an early stage, a binding decision as to whether the company intends to bring an action for damages in respect of the management of the company by the board during the financial year. The criticism levelled at the regulation has in recent years often been linked to unfamiliarity with the meaning of the rules, but is also based on different perceptions of the meaning of minority protection and the opinion that the so-called ‘information exception’ does not provide the board with sufficient protection against liability. However, the concept of discharge has survived, and the criticism has not been considered sufficient to materially change or remove it. A push for possible harmonisation on the matter has not gained traction in the EU.s. 3

Summary

1.Discharge originated in the early days of company law and was closely linked to the emergence of the limited company. The above account shows that the introduction of limited companies and the first Swedish company law regulation was influenced by other countries’ solutions to the problem of how to limit the liability of company management. There is early evidence that the discharge from liability served this function in the Swedish East India companies. Although there was no legislation on limited companies in the early modern period, some organisations made use of the possibility for partners to approve the management’s administration of the business and reporting of their duties afterwards, which was later regulated in the statutes of these companies.s. 4

2.There were probably several factors that led to the possibility of limiting the liability of the management towards the company through ex-post authorisation. Provisions on discharge from liability were probably developed against the background of uncertainty about the status of the limited company as a legal entity, where several interests, i.e., owners, were clustered within the framework of the limited company as a legal construct. This probably meant that it was perceived as difficult to construct rules limiting 43s. 4

3.the liability of the board of directors in relation to future owners of the lim-s. 3

4.ited company. In addition, the decision-making principles, particularly thes. 3

5.majority principle, had the possible consequence that a majority of share-s. 3

6.holders would use their power at the expense of minority shareholders. Thiss. 3

7.problem led to the need for rules to protect minority shareholders in termss. 3

8.of management liability, introduced at the beginning of the 20 century.s. 3

9.The exceptions to discharge have evolved over time and are often criti-s. 3

10.cised for making it very difficult for the board to be ‘properly’ released froms. 3

11.liability by discharge. This is especially the case with the ‘information excep-s. 3

12.tion’, which requires disclosure to the general meeting on all informations. 3

13.relevant to a possible claim. Although discharge is often described as more ofs. 3

14.a social norm, or a rule without any ‘real’ legal meaning, the regulation hass. 3

15.survived. The fact that the discharge from liability has been the subject ofs. 3

16.such widespread criticism has not been seen as a sufficient reason to removes. 3

17.it altogether. Furthermore, as will be shown in the following chapter, Swedens. 3

18.is not alone in having the concept of discharge in company law.s. 3

19.44s. 3

A Comparative Overview – Resolutions

on Discharge

Introduction

1.In the following section, I will examine some of the details of discharge resolutions in jurisdictions where such resolutions are common or subject to legislation. Resolutions on discharge from liability and discharge proposals occur in several European countries. However, the legal bases of discharge decisions and their implications for shareholders differ between countries.s. 4

2.In some countries, resolutions on discharge from liability are not binding and cannot shield directors from claims for damages. This is the case in several major European jurisdictions such as Germany, Austria, France and Spain. In other countries, a discharge resolution is binding, in the sense that it can hinder a company’s claim for damages against the board of directors. This is the case in the Nordic countries, Belgium, Greece, Luxembourg, the Netherlands, Portugal and Switzerland. As noted above, the legislation 45s. 4

3.of other major jurisdictions, such as the UK and the US, does not contains. 4

4.regulations on discharge resolutions.s. 4

Discharge that is Not Legally Binding

1.In Germany, discharge (Entlastung) from liability is a mandatory decisions. 4

2.of the AGM in an Aktiengesellschaft. However, a decision to discharge thes. 4

3.board from liability does not mean that the board is released from its lia-s. 4

4.bility for damages. The discharge decision has no legal effect. It is merelys. 4

5.a statement by the general meeting that the board has done a good job – as. 4

6.statement of confidence. In practice, decisions on discharge often refer tos. 4

7.so-called total discharge, meaning that the entire management board is dis-s. 4

8.charged from liability in a single resolution. However, it is possible to resolves. 4

9.upon discharge in relation to each individual member. As the discharge froms. 4

10.liability has no direct consequences, it is still possible for the company tos. 4

11.bring action for damages against the board. However, refusal to grant dis-s. 4

12.charge may often constitute a withdrawal of confidence, which can be thes. 4

13.starting point for extraordinary dismissal of the management board.s. 4

14.In Austria, much like in Germany, discharge from liability of the man-s. 4

15.agement board and supervisory board is a regular item on the agenda of thes. 4

16.AGM. However, a resolution on discharge is only an expression of trust; its. 4

17.does not release the board members from personal liability.s. 4

18.In France, the general meeting cannot resolve to exonerate directors froms. 4

19.liability for a negligent act committed in the performance of their duties.s. 4

20.Hence, resolutions on discharge (Fr. quitus) are possible, but cannot releases. 4

21.46 the board from liability. Although discharge from liability has no legal effect in French law, it is nonetheless common at shareholder meetings.s. 4

22.In Spain, resolutions on discharge are possible, but do not exonerate the board from liability, and Art. 134(3) of the Spanish Companies Act (LSC) explicitly states that approval of the annual accounts will not prevent or hinder liability for the directors. If a company proposes to discharge directors from liability for acts during the past financial year, the matter is often resolved upon together with proposals for approval of the annual report and accounts. Approval will neither hinder or annul any proceeding that may already have been agreed or implemented.s. 5

Discharge that Affects Board Liability

1.As mentioned above, the Nordic corporate governance model is based on strong shareholder influence and protection of minority shareholders, and the legal challenges associated with this are similar. As noted in the previous chapter on the development of discharge, Nordic legal unity has been significant in this area as well. However, the regulations in the various Nordic countries have gradually come to diverge in their details.s. 5

2.In Finland, much like in Sweden, it is mandatory to decide on the discharge of liability at the AGM. In both Denmark and Norway, meanwhile, a resolution on discharge is not a mandatory item at the AGM. However, resolutions on discharge from liability are subject to regulation within the framework of the provisions on the company’s ability to bring an action for damages against the board. Resolutions on discharge are for example possible if it is stipulated in the articles of association or otherwise proposed at the general meeting. Although not mandatory, resolutions on discharge are sometimes used in Danish public limited companies. There are no studies on their use in Norwegian law, but they are said to be very rare. 47s. 5

3.In recent years, a few large cases in Denmark concerning the liability ofs. 4

4.bank directors have garnered attention. This has called into question thes. 4

5.role of insurance and discharge resolutions. One view in the Danish legals. 4

6.literature is that discharge from liability creates a false sense of security thats. 4

7.no longer serves its original purpose, namely that the management can puts. 4

8.the previous financial year behind them. Due to recent developments ins. 4

9.connection with board liability, discussions about the different forms of lim-s. 4

10.itations of liability have grown more common. One reason companies decides. 4

11.to discharge directors from liability is that liability insurance has becomes. 4

12.much more expensive for some companies. As mentioned in Chapter 3 ons. 4

13.the development of the discharge regulation, the aversion to discharge ins. 4

14.other Nordic countries meant that it was removed as mandatory item ats. 4

15.AGMs. Although they have great similarities with other Nordic countriess. 4

16.regarding the design of the discharge regulation, Swedish and Finnish laws. 4

17.have retained this as a mandatory point.s. 4

18.If the general meeting resolves to discharge the relevant persons froms. 4

19.liability, the company unilaterally waives its right to claim damages froms. 4

20.the persons subject to such decision. The regulations on discharge are, ins. 4

21.all Nordic jurisdictions, designed as exceptions, and describe the situationss. 4

22.where the discharge from liability does not affect the company’s, or individuals. 4

23.shareholders’, ability to bring a claim for damages. Hence, the extent of thes. 4

24.discharge from liability is not explicitly stated but appears from an analysiss. 4

25.of the exceptions in certain matters. The implications of discharge resolutions. 4

26.are closely related to the perception of how wide these exceptions are.s. 4

27.Discharge resolutions limit board liability towards the company in severals. 4

28.other European jurisdictions.s. 4

29.In Belgium, company law provides that the AGM of shareholders shoulds. 4

30.decide whether to discharge directors from liability for their actions or omis-s. 4

31.48 sions in the past financial year. Such discharge only results in a release of liability towards the company. If discharge has been validly granted, only the shareholders not voting in favour of the discharge may claim damages from the directors. In some circumstances, however, the validity of the discharge given can be challenged and the directors’ responsibility reinstated retrospectively. The prevailing opinion in the legal literature is that discharge is possible at any time, not only after the approval of the annual accounts at the annual shareholders’ meeting.s. 4

32.In the Netherlands, discharge (décharge or kwijting) resolutions are possible and will release the directors from liability towards the company. A discharge resolution limits the company’s possibility to sue its directors. Discharge is not regulated in statutory company law. Despite this, several articles in the legislation mention the concept of discharge. Discharge from liability may cover liability for mismanagement of the company based on 2:9 of the Dutch Company Code (DCC) and may cover liability based on 2:216 DCC regarding distributions to shareholders. In general, discharge is granted at either the AGM in which the annual accounts for a financial year are adopted or at the end of the director’s term as a member of the board by way of a shareholders’ resolution as part of an exit agreement. Discharge can be granted only for management conducted in the period prior to the resolution granting discharge, i.e., discharge cannot be forward-looking. In Dutch law, it was formerly customary to automatically grant discharge when adopting or approving the financial statements. This often followed from a statutory provision. This ‘implicit’ granting of discharge was removed 49s. 5

33.in 2001, and the DCC now explicitly stipulates that adoption of the finan-s. 4

34.cial statements does not discharge a director from liability.s. 4

35.In Switzerland, the general meeting can decide to discharge the memberss. 4

36.of the board of directors from actions for liability in company law unders. 4

37.to Art. 698 § 2 para. 5 CO. The board members can be released froms. 4

38.liability for either a specific period, such as the previous business year, ors. 4

39.for a particular business transaction. The discharge is granted to individ-s. 4

40.ual members, not to the board as a whole. The discharge from liability ofs. 4

41.the members of the board is viewed as one of the inalienable powers of thes. 4

42.general meeting under Swiss company law. Discharge may hinder claimss. 4

43.against directors even when such claims pertain to wilful misconduct, frauds. 4

44.or criminal offence, but does not eliminate liability towards third parties ors. 4

45.under other bodies of law, such as criminal law.s. 4

46.In Greece, discharge is possible and provides a release from liability fors. 4

47.activities during the previous year, which means that the company can nos. 4

48.longer claim damages from the board. The company is through the generals. 4

49.meeting empowered to discharge the directors from liability. A discharges. 4

50.decision is binding for all shareholders of the company. In Luxembourg,s. 4

51.discharge can be granted to directors at the AGM. The same is the cases. 4

52.in Portugal, where resolutions on discharge from liability are possible.s. 4

53.According to Art. 74 of the Portuguese Commercial Companies Codes. 4

54.(PCCC), the discharge has the effect of a waiver of the company’s right tos. 4

55.compensation only if the shareholders were expressly informed of the factss. 4

56.related to liability before the approval was granted. A special feature of thes. 4

57.Portuguese regulation is that the effect of discharge as a waiver of claims iss. 4

58.50 null if a minority of shareholders representing at least ten percent of the share capital vote against it.s. 4

Summary

1.In summary, discharge resolutions exist in all Nordic countries and in several European countries. In some jurisdictions, a discharge decision limits the company’s ability to take legal action against its management. In other European countries, discharge does not have a similar legal effect, but is nevertheless used as a way of confirming that the board has performed acceptably or to signal disapproval of the board’s performance over the past year. The basic features of the discharge are that it is a matter that requires a decision by the general meeting, that it only addresses the liability of the board vis-à-vis the company and that the discharge is only retroactive, i.e., it only concerns the board’s behaviour in the past.s. 5

2.The scope of discharge and the conditions for decision-making by the general meeting on these issues vary between jurisdictions and it has not been possible to analyse these differences and similarities in detail for all jurisdictions. The material scope of the discharge also differs between jurisdictions, and this issue will be addressed in greater detail in Chapter 8. However, the presentation shows clear support for the existence of discharge from liability in countries other than Sweden and indicates that the regulations of this issue have many similar features. The rights of minority shareholders are regulated differently in relation to discharge, in terms of both the requirements of a resolution and which shareholders are bound by the discharge. The existence and form of minority protection thus takes different forms in different legal systems. 51s. 5

Procedural Aspects

Introduction

1.In Swedish law, the rules on discharge are closely linked to the company’s ability to bring an action against the board of directors. The effects of the outcome of a resolution on discharge are reflected in the rules in the CA concerning the possibility for the company – and in some cases the shareholders – to bring an action for damages. This raises certain procedural issues in the context of discharge.s. 7

2.If the general meeting decides to grant discharge from liability, this means that no action may be brought against the person in question, see Ch. 29 § 7 CA. This also means that an action for damages cannot be brought and must instead be dismissed from the courts. Hence, a resolution on discharge from liability entails a procedural obstacle or hindrance.s. 7

3.If the general meeting has decided not to grant discharge, or owners of at least ten percent of the shares have voted against the proposal, an action may be brought against the person in question for damages to the company within one year of the presentation of the annual report and auditor’s report, see Ch. 29 § 10 CA. This will be discussed below in connection with minority action. Thus, a decision to sue for damages or to deny discharge is a procedural prerequisite, which is expressed in Ch. 29 § 7 CA. The procedural prerequisite is such that it must be considered by the court ex officio, and the court must issue an injunction to the plaintiff before dismissing a dispute. 53s. 7

4.The above implies that the resolution on discharge is of procedural signifi-s. 5

5.cance, meaning that procedural aspects need to be taken into account whens. 5

6.assessing the impact of a discharge decision on the liability of the board ofs. 5

7.directors, as well as those elements of the regulation that aim to ensure a rights. 5

8.of action for others. The latter refers to the treatment of the company’s actions. 5

9.as well as the rules that recognise the right of certain shareholders (in Swedishs. 5

10.law, a minority of shareholders holding a certain amount of the shares, eithers. 5

11.as a group or individually) to bring an action towards the board. These issuess. 5

12.will be dealt with below and are related to the company’s and the sharehold-s. 5

13.ers’ actions against the board.s. 5

The Company’s Claim for Damages – Competence

and Legal Standing

1.In Sweden, the general meeting decides on the matter of the company’s claims. 5

2.for damages towards the board. This is also the case in Norway ands. 5

3.Denmark. In Finland, decision-making concerning a claim for damages iss. 5

4.regulated in Ch. 22 § 6 FCA. Decisions on matters concerning the right tos. 5

5.damages are made by the board of directors under this provision. However,s. 5

6.decisions on such matters can be made by the general meeting.s. 5

7.Hence, in the Nordic countries, the claim for damages towards the com-s. 5

8.pany is made by consent from the general meeting. This is also the cases. 5

9.in most European countries. For example, in Germany, in public limiteds. 5

10.companies, § 147 AktG allows the company to bring an action for damagess. 5

11.against a member of the Aufsichtsrat (supervisory board) or Vorstand (man-s. 5

12.agement board) following a resolution of the general meeting adopted by as. 5

13.simple majority. In Austria, the rules on limited companies are similar; as. 5

14.54 resolution of the shareholders approving a lawsuit against a company body is required.s. 5

15.Only some systems allow minority shareholders, as a group or individually, to bring actions in their own name but on behalf of the company (a so-called minority action or derivative claim). In the Netherlands, claims for damages can be made by the company itself and derivative claims are not possible. Damages caused to shareholders to the extent that the share value is diminished, i.e., derivative damage (afgeleide schade), are not honoured by the court, unless a shareholder can prove a violation of the relevant standard of care. Such a claim, which is not derivative (i.e., not based on the company’s damage), could be based on either Art. 2:9 DCC or tort rules in Art. 6:162 DCC. For the claim to be successful under the DCC, it is required that the shareholder can demonstrate a violation of a specific statutory provision that protects the interest of the shareholder that has been violated.s. 6

Protection of Minority Shareholders and Discharge

1.The above presentation on the origin of the Swedish regulation on discharge shows that when this legal concept was introduced, no distinction was made between the procedural and substantial implications of a resolution on discharge. For example, in the 19 century, the Swedish scholar Hagströmer explained that any shareholder could claim compensation from the board of directors after the dissolution of the company, but that the discharge granted would limit the possibility of such a claim, i.e., it had a substantive meaning.s. 6

2.The perception of granted discharge as a procedural hindrance, or as a matter of ‘legal standing’, came about when the minority action was put into place. This meant that a resolution to deny discharge would be seen 55s. 6

3.as a procedural prerequisite for the company to make a claim for damagess. 5

4.towards the board. The procedural concept of legal standing means the rights. 5

5.to be a party to proceedings concerning the matter in question. Lack ofs. 5

6.standing has the legal consequence that the action is dismissed ex officios. 5

7.under Ch. 34(1)(2) of the Code of Judicial Procedure. There are no generals. 5

8.provisions on standing in the Code of Judicial Procedure, but this followss. 5

9.from rules in other legislation, such as the CA.s. 5

10.When the CA 1910 was introduced, certain provisions on minority pro-s. 5

11.tection were designed with a basis in two components: an influence on thes. 5

12.substantive issue of liability and a right of action for the minority. This wass. 5

13.at a time when legal standing as a procedural prerequisite was being devel-s. 5

14.oped in legal doctrine, and the possibility of bringing an action on behalf ofs. 5

15.someone else (as a form of agent) was separated from the question of hows. 5

16.the company should proceed in the actual decision-making (the questions. 5

17.of competence). Presumably, the new ‘right of action’ (i.e., the minoritys. 5

18.action) meant that discharge could no longer be considered a substantives. 5

19.issue, as the company then would not be able to obtain damages ‘via’ thes. 5

20.minority action. When creating a right of action for the minority, the sub-s. 5

21.stantive issue of liability also had to be left ‘open’ to the company; discharges. 5

22.therefore became a ‘procedural prerequisite’ for both the company and thes. 5

23.minority.s. 5

24.In the next section, the possibility for minority shareholders to bring as. 5

25.claim towards the board (minority action) will be discussed in connections. 5

26.with discharge. A comparison will also be made with legal systems regardings. 5

27.the issue of legal standing and protection of minority shareholders in proce-s. 5

28.dural aspects. This will reveal the link between the discharge regulation ands. 5

29.56 rules on minority protection providing a minority action. However, as will be explained below, minority actions and shareholders’ ‘derivative claims’ exist in jurisdictions that do not allow discharge. This raises the question of whether a regulation on discharge is necessary to contribute to sound minority protection.s. 5

Minority Actions

1.According to Ch. 29 § 9 para. 1 CA, shareholders representing at least one tenth of all shares in the company in total may bring an action for damages against the company in their own name but on behalf of the company. Such a minority action for damages is called actio pro socio, referring to a kind of ‘procedural commission’. If a shareholder abandons the action after it has been brought, the remaining shareholders may nevertheless pursue it. Further, the minority that brings the action does not have to be the same as the one that voted against a discharge decision. Minority actions can be brought by several groups separately, and even if the board is bringing an action on behalf of the majority. This solution is considered ‘necessary to ensure that neither the majority nor different minority groups are able to prevent each other from acting in a way that each group considers appropriate’. Pursuant to Ch. 29 § 9 para. 2 of the CA, the shareholder bringing the action is responsible for the costs of the proceedings but is entitled to compensation from the company for costs covered by what has benefited the company through the proceedings. 57s. 6

2.A particular question is whether the actio pro socio requires that ownerss. 5

3.of at least ten percent of the shares in the company have voted against as. 5

4.proposal for discharge from liability, or whether a minority action unders. 5

5.Ch. 29 § 9 CA is possible even if discharge is granted. In the preparatorys. 5

6.works to the CA 1975 and in the legal literature, the view is that the ruless. 5

7.are only applicable in situations where at least ten percent have voted againsts. 5

8.discharge from liability. In other words, a minority action is conditional ons. 5

9.the general meeting having taken a position on a proposal for discharge. Its. 5

10.can be said that the minority of shareholders thus prevents a ‘fully effective’s. 5

11.decision on discharge from liability through a minority action. Althoughs. 5

12.the wording in Ch. 29 § 9 CA does not state that a minority action requiress. 5

13.that a minority consisting of at least ten percent of the shareholders hass. 5

14.voted against a proposal for discharge from liability, a prerequisite for suchs. 5

15.an action is that the question of damages or, in the case of a board members. 5

16.and the CEO, the question of discharge from liability, has been dealt withs. 5

17.at a general meeting. However, the preparatory works to the CA 1975s. 5

18.state that the exception from granted discharge in the event of incorrect ors. 5

19.omitted information does not require a decision by the general meeting if thes. 5

20.minority wishes to bring an action for damages.s. 5

21.The Swedish regulation on minority protection in connection withs. 5

22.minority claims is similar to the regulation in other Nordic jurisdictions.s. 5

23.However, there are some differences in connection with the proportion ofs. 5

24.shareholders needed to make a claim for damages towards the board ands. 5

25.the requirements for such a claim in relation to a claim being made by thes. 5

26.company itself.s. 5

27.In Denmark, an action is possible under § 364(3) DCA. If shareholderss. 5

28.representing at least ten percent of the shareholders oppose a decision tos. 5

29.discharge the board from liability or to waive the right to bring an action,s. 5

30.any shareholder may bring an action requiring the liable party or parties tos. 5

31.pay damages to the company. According to the second sentence of the sames. 5

32.provision, shareholders are liable for the costs of such an action but may bes. 5

33.58 indemnified by the company to the extent that the costs are covered by the amount awarded to the company in the action.s. 5

34.In Norway, § 17-4 (1) NCA contains rules on claims on behalf of the company. According to the first sentence, if the general meeting has resolved to discharge the board from liability or to reject a claim for compensation under the NCA, shareholders representing at least one tenth of the share capital may make a claim for damages on behalf of the company and in the name of the company. In addition, according to the second sentence, if the company has 100 or more shareholders, the claim may also be brought by shareholders representing at least ten percent of the total number. If an action for damages has been brought, it can continue even if individual shareholders withdraw their action or dispose of their shares.s. 6

35.Thus, in Norwegian law, there is a special form of minority action, namely that in certain cases a minority can bring an action on behalf of the company and in the name of the company. However, the shareholder bears the costs of the litigation according to § 17-4(3) NCA, but with the possibility of being reimbursed by the company for what has benefited the company in the process. There is one exception to the possibility of bringing an action in § 17-4(4) of the NCA, which states that the provision does not apply when the decision mentioned (on discharge from liability) has been taken by ‘a majority as for amendment of the articles of association’. The same applies if a settlement has been reached. The minority’s right of action is subsidiary to that of the company and presupposes that the company has decided not to bring proceedings or has decided to grant discharge.s. 6

36.In Finland, shareholders have the right to bring an action in their own name on behalf of the company pursuant to Ch. 22 FCA (actio pro socio). This is regulated in Ch. 22 § 7, which states that this right is valid if, at the time the action is filed, it is likely that the company will not ensure that the claim for damages is pursued, and if 1) the plaintiffs then hold at least one tenth of all shares, or 2) it is shown that failure to pursue the claim for damages would be contrary to the principle of equality under Ch. 1 § 7 FCA. The same provision, Ch. 22 § 7 FCA, states that the company shall, unless it is clearly unnecessary, be given the opportunity to be heard in the matter. The shareholders bringing the action are themselves responsible for the costs 59s. 6

37.of the proceedings but are entitled to have them reimbursed by the companys. 5

38.if the funds obtained by the company through the proceedings are sufficient.s. 5

39.Furthermore, Ch. 22 § 7 FCA states that if the person liable for compen-s. 5

40.sation has been discharged from liability by a decision of the general meet-s. 5

41.ing, an action shall be brought within three months of the decision of thes. 5

42.general meeting. If at the same general meeting, as provided for in Ch. 7 § 7,s. 5

43.a motion for a special audit has been presented and supported at the sames. 5

44.general meeting, the action may always be brought within three months ofs. 5

45.the presentation of the audit report to the general meeting or the rejection ofs. 5

46.the application for the appointment of an auditor.s. 5

47.Although it is not mandatory to address the issue of discharge in Den-s. 5

48.mark or Norway, a decision on the matter is an alternative prerequisite fors. 5

49.the minority to bring an action for damages against the board. The prerequi-s. 5

50.sites for such an action differ as to the possibilities of combining a minoritys. 5

51.action with an action by the majority. Even though discharge is perceiveds. 5

52.to be of less importance in Danish and Norwegian law, the concept has as. 5

53.special status in both countries, which also complicates the picture of thes. 5

54.implications of discharge.s. 5

55.Several of the other European jurisdictions covered by this study contains. 5

56.minority actions but the requirements for such actions differ. The minoritys. 5

57.action must usually be brought by a shareholder or group of shareholderss. 5

58.holding a certain proportion of the shares or acting within a certain periods. 5

59.of time in connection with a resolution on discharge. There may also bes. 5

60.substantial requirements on the claim itself, for the minority to be able to act.s. 5

61.Even in jurisdictions where a decision on discharge is not binding ons. 5

62.the company, there are rules on minority actions. For example, in Germany,s. 5

63.there is a possibility for minority actions in public companies, under certains. 5

64.circumstances. A court may, at the request of shareholders holding at leasts. 5

65.ten percent of the share capital or shares with a nominal value of at least EURs. 5

66.1 million, grant them authorisation to participate in the action for damagess. 5

67.through a representative. In addition, a minority shareholder holding ats. 5

68.least one percent of the shares in the company or shares with a nominals. 5

69.value of at least EUR 100.000 may also apply to the court to bring an actions. 5

70.against a member of the executive body for damages to the company. Thes. 5

71.action is brought in the shareholder’ name but any proceeds earned are tos. 5

72.60 be paid to the company. This rule is described in the legal literature as the offspring of the US derivative suit.s. 5

73.However, the German regulation requires that the shareholders making such a request have acquired the shares before becoming aware of the breach of duty in question. Furthermore, they must have informed the company of their plans, so that the company has had an opportunity to pursue an action. In addition, shareholders must present proof showing it likely that the member of the corporate body failed to fulfil their duties under the law or the articles of association. The shareholder must also show that the company had the opportunity to pursue an action. Lastly, the shareholder must show that the person who caused the damage acted with gross negligence in breach of the law or the articles of association and that the claim for damages is not manifestly contrary to the interests of the company. Hence, in order to pursue an action, there are several prerequisites that must be met, in addition to there being a shareholder with a certain proportion of shares.s. 6

74.In Austria, minority shareholders of a private limited company are entitled to raise a claim themselves if a majority of shareholders have refused to approve a claim. If a minority claim is made, the minority shareholders act in their own name, on behalf of the company, which means that damages are paid to the company. No such minority claim is possible in public limited companies, but minority shareholders may demand that a claim shall be raised by the company on the condition that the claims are not obviously without merit.s. 6

75.In France, any breach of director duties which causes damage to the company can result in liability to the company, which can be asserted by the 61s. 6

76.company itself or, if the company does not act, by one or more shareholderss. 5

77.on its behalf. They may act either individually or, if they represent a mini-s. 5

78.mum percentage of its capital, as a group (a ut singuli claim). A shareholders. 5

79.can on their own behalf assert liability against board members or executives. 5

80.officers only to the extent that the shareholder suffered damages separates. 5

81.from the damages suffered by the company. This means that the possibility ofs. 5

82.asserting liability against board members is similar to that of third parties ins. 5

83.general, i.e., it has to concern acts committed outside the context of officials. 5

84.duties. As discharge from liability does not affect the company’s possibilitiess. 5

85.to sue the board, the minority action in French law is not connected to res-s. 5

86.olutions on discharge.s. 5

87.In Spain, the principles on director liability can give rise to corporate actions. 5

88.for damages (Art. 238 LSC) and individual action for liability (Art. 241 LSC),s. 5

89.which allows claims for the direct damage caused by the unlawful conduct ofs. 5

90.the directors towards third parties. The main rule is that a resolution by thes. 5

91.general meeting is required in order to bring an action for liability against thes. 5

92.directors, but minority claims are possible (see Art. 239.1 LSC). In summary,s. 5

93.in jurisdictions where discharge is possible but not binding upon the company,s. 5

94.the possibilities of minority actions vary.s. 5

95.By contrast, minority actions are not always regulated in connection withs. 5

96.discharge, even if discharge has the legal effect of restraining a company’ss. 5

97.ability to take action against its board. Thus, in the Netherlands, discharges. 5

98.is binding but there are no minority protection rules in connection withs. 5

99.discharge resolutions. Neither is there a possibility for derivative action fors. 5

100.minority shareholders in Dutch law. Shareholders can sue directors ands. 5

101.members of the supervisory board on their own behalf on the basis of torts. 5

102.(external liability). As discharge is limited to a director’s contractual inter-s. 5

103.nal liability towards the company, it cannot prevent the external liability tos. 5

104.third parties. This applies also to shareholders, which means that a share-s. 5

105.holder can (under certain circumstances) sue a director with a basis in tort.s. 5

106.However, another way of ‘impairing’ the discharge decision is if the discharges. 5

107.resolution itself is challenged. As this is a resolution at the general meeting, its. 5

108.62 can be challenged by shareholders. In Dutch law, it could be possible to challenge the discharge resolution due to violation of reasonableness and fairness (see Art. 2:8 DCC). Hence, a discharge resolution is voidable pursuant to Art. 2:15 (1)(b) DCC if the interests of the minority shareholders or other persons involved, who fall within the scope of Art. 2:8 DCC, have been disproportionately harmed. This may be the case if the discharge decision was made with abuse of majority power, for example.s. 5

109.In Switzerland, discharge is effective only towards the company and the shareholders consenting to the resolution or later acquiring shares, with knowledge of the resolution. According to Swiss law, the company, shareholders or creditors are entitled to file suits for performance to the company, and the consent of the general meeting is necessary if a lawsuit is directed against the board or management. Shareholders that did not approve of discharge resolution have to file an action within six months after the resolution was adopted. Hence, all shareholders that did not consent to the resolution on discharge have a possibility to take action regardless of the decision of the majority at the general meeting. This provides a strong protection for the minority shareholders, although there is a short limitation period for such a claim.s. 6

110.As already mentioned, the possibilities of minority actions and shareholders derivative claims are not necessarily connected to there being a regulation on discharge. This is especially clear in view of the possibilities of such claims in the UK and the US. In the UK, only the company can sue a director for negligence, default, breach of duty or breach of trust. UK law provides some possibilities for minority shareholders to bring actions on behalf of the company. Under § 260 of the Companies Act 2006, it is possible for an individual shareholder to bring a derivative action. Such an action can be brought against a director who has negligently failed to fulfil their duties to 63s. 6

111.the company, if the criteria in §§ 263 or 268 are satisfied. If the shareholders. 5

112.is successful, the compensation or remedy will be of benefit to the company,s. 5

113.rather than the shareholders themselves.s. 5

114.In the US, the derivative suit (or a derivative claim) is an action broughts. 5

115.by a shareholder on behalf of a company, which is technically an action tos. 5

116.compel the company to sue. Initially, the company controls the decision tos. 5

117.make a claim and the shareholder must make a demand to the board, whichs. 5

118.will initiate the litigation. A shareholder may allege ‘demand futility’ ands. 5

119.thereby prevent directors or controlling shareholders from blocking deriva-s. 5

120.tive suits that implicate them. There are substantial requirements of such as. 5

121.suit: the shareholder must show that demand would be futile or unavailings. 5

122.for the suit to go forward.s. 5

123.In summary, the differences regarding both the decision-making in con-s. 5

124.nection with the company’s claim for damages and the varying possibilitiess. 5

125.for shareholders to make claims on behalf of the company show that dis-s. 5

126.charge is in some situations linked to the possibilities of company claims ass. 5

127.well as shareholders claims for damages. However, this is not necessarily thes. 5

128.case. The US derivate action shows this most clearly. In this context, it cans. 5

129.be emphasised that the shareholders’ right of action against the companys. 5

130.is regarded as a way of inducing the company to act in the interests of thes. 5

131.shareholders, which means that the time of their exercise of power is shifteds. 5

132.in comparison with legal systems where the general meeting can decide ons. 5

133.discharge from liability.s. 5

Summary

1.As can be seen from the above, the discharge from liability in Swedish laws. 5

2.is perceived as a procedural rule; discharging the board from liability meanss. 5

3.that an action for damages must be dismissed by the court. This means thats. 5

4.the court does not need to conduct a full examination of the validity of as. 5

5.claim for damages against the company’s management in substance, whichs. 5

6.contributes to a brief court process.s. 5

7.Discharge from liability as a procedural rule is probably linked to thes. 5

8.development of a right of action for the company and its minority sharehold-s. 5

9.ers and, based on the above, has probably been developed in light of the facts. 5

10.64 that the legislator in Swedish law wanted to ensure that the minority had its own right of action and the right to bring action against the company if it opposed discharge. To avoid the majority shareholders using – or abusing – their power over the minority in this respect, the minority action was added as a means of protection. Hence, the minority protection also has a bearing on the decision of the general meeting to grant discharge.s. 5

11.The comparative analysis shows that the question of the company’s standing to bring a claim for damages is often linked to the decision of the general meeting to bring such an action, which is the case in Swedish law. In the case of a decision by the general meeting, there is generally a requirement that a majority of shareholders has voted in favour of such a decision. In addition, it is shown above that protection of minority shareholders is often provided for in the rules on discharge from liability, which has the same effect by enabling a minority action.s. 6

12.As discussed above, there are differences in the possibilities for minority actions, including requirements for a certain proportion of minority shareholders to bring an action. In some cases, even individual shareholders can do so. In jurisdictions where discharge does not affect the liability of the board, there are in some cases rules allowing minority shareholders to bring action against the management of the company.s. 6

13.To conclude, the possibility of a minority action should therefore be seen separately from the company’s ability to discharge the board of directors, although it should be noted that the Swedish regulation of discharge from liability contains a component that makes a minority action possible. The fact that it is possible to decide on discharge is thus not necessary to recognise a right of action or minority protection for the minority. Nor is the reverse true, i.e., there does not have to be a right of action to protect the minority, even if there is a possibility of discharge. For example, it may be considerers as sufficient minority protection that the minority has the possibility to challenge certain decisions. 65s. 6

The Liability of the Board of Directors

Introduction

1.The matter of board liability has become increasingly controversial in recent years. This study deals with the liability of the board of directors towards the company, and the link to the Swedish discharge regulation. Therefore, it is of importance to analyse the liability of the board of directors in Sweden. In Swedish company law, the provisions on the liability of the board, CEO and auditor were transferred largely unchanged from the CA 1975 to the current CA. These provisions were in turn based on the former legislation – the rules on directors’ liability can be traced back to the CA 1895. The fact that the board can be liable to the company was historically based on the view that the relationship between the shareholders and the board is like that between an assignee and an assigner – the board should be liable for damages if it exceeds its authorisation or negligently causes damage to the company.s. 8

2.A board member or CEO may be liable for damages caused negligently during the performance of his or her duties under Ch. 29 § 1 CA. The regulation of discharge from liability is connected to the rules on liability for damages caused by directors and officers vis-à-vis the company. The liability is based on a general duty of care towards the company, but also entails 67s. 8

3.several duties explicitly defined in the CA or other regulations. So-calleds. 6

4.internal liability refers to the board’s liability towards the company.s. 6

5.The damages provision is aimed at damage incurred to the company ins. 6

6.the fulfilment of the directors’ duties and is based on the culpa principles. 6

7.(negligence). Under Swedish law, several other prerequisites must be mets. 6

8.for a company to be able to claim damages. According to Ch. 29 § 1 CA, thes. 6

9.damage must have occurred during the fulfilment of an assignment, a facts. 6

10.that is discussed below. In addition, the breach of duty must have caused as. 6

11.legally relevant damage, and there needs to be an adequate causal link betweens. 6

12.the conduct and the damage. It is important to note that the regulations ons. 6

13.liability for the board describe a balance of interests and risks between thes. 6

14.company and the board of directors. Hence, the possibility of claiming dam-s. 6

15.ages is limited through the regulation in the CA. If liability is established,s. 6

16.there is a possibility to adjust the damages, according to Ch. 29 § 5 CA.s. 6

17.Adjustment of liability, as a tool for limitation, is discussed in Chapter 7.s. 6

18.To some extent, the board may have an external liability, which refers tos. 6

19.the liability towards shareholders and other third parties. For this to apply,s. 6

20.the damage must be caused by a breach of the CA, the Annual Accounts Acts. 6

21.(ACA) or the articles of association. Hence, the Swedish regulation makess. 6

22.it more difficult to establish liability directly against individual shareholderss. 6

23.and external parties. In general, company law can be viewed as a regulations. 6

24.aimed at protecting a nexus of interests. Thus, company law contains ruless. 6

25.aimed at protecting the interest of the company as well as the interest of others. 6

26.parties, such as shareholders and company creditors. Although the concepts. 6

27.of the company’s interest might be debated, it is clear that the provisionss. 6

28.on liability to a great extent channel losses through the company, and thuss. 6

29.indirectly provide protection for other stakeholders.s. 6

30.68s. 6

31.Similarly, in several other European jurisdictions, the difference between internal and external liability is evident from the fact that there are typically stricter requirements for external parties to claim damages directly from the board, either for themselves or on behalf of the company. For example, in Germany, as far as shareholders’ private property is concerned, § 93 (2) AktG is based on the principle of concentration of liability (Haftungskon zentration). This means that breach of duty by a director triggers liability only towards the company, not towards third parties, including shareholders. This is based on the idea that the damages bring compensation to the company; the shareholders or creditors suffer no loss. Thus, it is not necessary to compensate third parties in addition to the company itself. Directors may become liable towards third parties under general liability rules outside of company law, such as general contractual liability and tortious liability, but this is rare.s. 7

32.In other legal systems, the distinction between internal and external liability is not as clear, at least not from the wording of the statutes. In some jurisdictions, the liability rules are similar regardless of which party is claiming damages from the board. However, the liability situations differ, depending on whether liability relates to obligations arising from the duties of a director or other tortious behaviour. For example, in Spain, liability under the general principles of company law is attributed to directors for negligence or wilful misconduct towards the company, its shareholders and creditors for the damage caused by violation of the law, the articles of association or the duties inherent to their position. At first sight, therefore, liability appears to be the same irrespective of which entity is claiming damages, although the perception in Spanish law is that the standards of liability differ depending on if the liability relates to the company or third parties, such as shareholders.s. 7

33.In Swedish law, the assessment of negligence is done individually for each member of the board, even though the board makes decisions collectively. Individual liability means that courts, in assessing culpability, consider the 69s. 7

34.actual division of labour between the members of the board. This is thes. 6

35.case in many other European jurisdictions as well. In the US, it is unclears. 6

36.whether fiduciary liability should be assessed individually or collectively.s. 6

37.If the board members are jointly and severally liable for damages, theys. 6

38.have a right to recourse according to rules in general law of obligations. Thiss. 6

39.would apply to other parties as well, such as auditors, who are liable for dam-s. 6

40.ages against the company. However, it is not possible for those responsible tos. 6

41.base a claim on rules regarding damages in Ch. 29 of the CA.s. 6

Duties and Due Diligence Standards

Standards of Care – a Comparative Perspective

1.The Swedish rules on the board’s liability towards the company are similars. 6

2.to those in the other Nordic countries. In Finland, the liability of the boards. 6

3.towards the company is governed by Ch. 22 § 1 of the FCA, which states thats. 6

4.a member of the board of directors, supervisory board and the CEO shalls. 6

5.compensate the company for damage which they have caused intention-s. 6

6.ally or negligently in their duties, contrary to the duty of care prescribed ins. 6

7.Ch. 1 § 8. This refers only to liability towards the company. External liabilitys. 6

8.towards third parties exists only if the board has acted in breach of the FCAs. 6

9.or the articles of association.s. 6

10.Although the basic criteria in the FCA for internal liability are similars. 6

11.to those in the CA, there are some differences in details. The wording ins. 6

12.the FCA on a presumption of negligence differs from that in the Swedishs. 6

13.regulation. In the event of certain breaches of the FCA or a breach of thes. 6

14.provisions of the articles of association, the damage is deemed to have beens. 6

15.70 caused by negligence, unless the person responsible for the conduct proves that he or she has acted diligently. Hence, under the FCA, the burden of proof concerning the question of negligence is more favourable for the injured party in certain cases. As the assessment of negligence is made in light of the circumstances in the individual case, it may lead to the same result in Swedish law in terms of liability. However, this shows that the designs of the laws are not identical.s. 6

16.In Denmark, founders and ‘members of the management’ are liable towards the company for damage incurred in the performance of their duties, if the damage is caused intentionally or through negligence. According to the wording of the Danish legislation, an equally extensive external liability applies, i.e., liability towards shareholders or third parties. In Norway, the internal and external liability are governed by the same provision. The provision means that the company, shareholders or others can claim damages from the CEO, board members, members of the management or shareholders for damages caused intentionally or negligently.s. 7

17.Thus, the wording implies a more far-reaching external liability in both Denmark and Norway, meaning that it is easier for third parties, such as shareholders, to make claims towards the board in these jurisdictions than it is in Sweden and Finland. This is to some extent connected to the regulation on damages for pure economic loss in general civil liability (tort liability), where Swedish law for historical reasons has been more restrictive. Although the issue of external liability will not be addressed in detail, given the purpose of the study, there is reason to return to the Norwegian regula 71s. 7

18.tion in particular when discussing the possibilities of limiting the liability ofs. 6

19.the board in various ways.s. 6

20.A comparison can be made with the liability of the board in other legals. 6

21.systems. For example, in Germany, members of the management board ares. 6

22.liable to the company if they fail to comply with their duties and the com-s. 6

23.pany suffers damage because of these actions. This liability differs froms. 6

24.general civil liability in two ways: the standard of care and the burden ofs. 6

25.proof – the latter meaning that the burden of proof is reversed, and breachs. 6

26.of duty is presumed. In Austria, the burden of proof falls on the directorss. 6

27.and members of the supervisory board. Board members may be released froms. 6

28.liability if they can prove that they have taken the care necessary. However, its. 6

29.is uncertain how this evidence rule should be interpreted and if and to whats. 6

30.extent it deviates from general principles of civil liability. Similar require-s. 6

31.ments concerning the scope of duties are applied in Switzerland, where thes. 6

32.liability is based on a wilful or negligent breach of duties and an objectifieds. 6

33.standard of fault is assumed.s. 6

34.Similarly, in Spain, negligence is presumed if an act is contrary to the laws. 6

35.or the articles of association, which means that the director needs to prove thats. 6

36.he or she was not negligent, which implies that the directors’ liability regimes. 6

37.is stricter than the general liability regime. The standard of care is similar tos. 6

38.that in general civil liability, in both contract and tort. However, it is adjusteds. 6

39.to the professional status of the director (or standard of an ‘orderly businessper-s. 6

40.son’), which means that it refers to the reasonable average professional.s. 6

41.Thus, many of the jurisdictions mentioned provide support for thes. 6

42.notion of a general presumption of negligence, albeit not concerning all harm-s. 6

43.ful conduct of the board, only breach of specific duties. On the other hand,s. 6

44.many jurisdictions express a more lenient assessment of the board’s actionss. 6

45.with regard to at least some harmful measures taken by the board. For exam-s. 6

46.ple, in relation to the standards of care previously described in connections. 6

47.with Spanish law, it can be noted that the LSC establishes two general dutiess. 6

48.for directors: ‘duty of good management’ (Art. 235 LSC) and ‘duty of loy-s. 6

49.72 alty’ (Art. 227 LSC). However, in 2014, the legislator introduced a rule that meant that the board was given more room for discretion in making business decisions. Further, under Art. 236 LSC, the director is not forced to guarantee the results of his or her management, but is instead under a so-called ‘obligation of means’. According to Art. 226 LSC, if the director is acting in good faith, with no personal interest in the matter, with sufficient information and according to appropriate decision-making procedure, the conduct falls under the rule and does not give rise to liability. Basically, this is understood as a business judgment rule and means that those who make such decisions are only under an obligation to do so with due care.s. 6

50.Similar approaches to the need for discretion and leniency in the culpability assessment are found in other European jurisdictions. In the Netherlands, liability due to mismanagement can only be established if the director is severely held to blame, taking all relevant circumstances into consideration. This means that directors have discretion when it comes to risky business decisions. Hence, the threshold for liability is raised. The diligence standards have developed through case law, taking several circumstances into account, and are objective standards for determining liability. If a director acts in breach of statutory provisions or the articles of association, it presumably gives rise to improper management and severe blame. If this is the case, in order to avoid liability, the director has to prove that the conduct did not harm the interests of the company. However, if the claim is based on mismanagement by the director, the conduct must still be severely blameable.s. 7

51.In the UK, general duties of the board are set out in §§ 171–177 of the Companies Act (CA) 2006 and are a codification of the duties owed by a director under common law. These include the duty to exercise reasonable care, skill and diligence of a reasonably diligent person (§ 174), which is a 73s. 7

52.measure containing both an objective and subjective test for diligence. Theres. 6

53.are also duties to promote the success of the company (§ 172) and to avoids. 6

54.conflicts of interest (§ 175); fiduciary duties considered to be concerned withs. 6

55.the directors’ loyalty towards the company.s. 6

56.Similarly, in the US, the directors have a fiduciary relationship with thes. 6

57.company and the shareholders of the company. This means that they musts. 6

58.exercise good faith in carrying out their work and deal honestly and fairly withs. 6

59.the company and on its behalf. This duty is primarily towards the company,s. 6

60.and a director can be liable for failure to act as well as acting improperly. Ins. 6

61.US law, the burden of proof is reversed if a claimant argues that a director hass. 6

62.violated his or her fiduciary duty, which means that the fiduciary must estab-s. 6

63.lish that he or she acted properly. However, if the board acts in accordances. 6

64.with the interest of the company, a bad business decisions cannot be revieweds. 6

65.by the courts, and liability cannot be imposed on the board of directors, ins. 6

66.accordance with the ‘business judgment rule’ (BJR).s. 6

67.In conclusion, the liability in several of the jurisdictions compared iss. 6

68.defined as a presumption of negligence for breaches of certain duties. There iss. 6

69.at the same time a tendency in many jurisdictions to define the role of thes. 6

70.board as based on a duty to act in the interest of the company, which to somes. 6

71.extent may imply a more lenient assessment of board liability. This is prob-s. 6

72.ably influenced by the US ‘business judgment rule’. As this study focusess. 6

73.on the regulation of discharge, it will not be possible to delve deeply intos. 6

74.the details and differences in European adoption of the business judgments. 6

75.rule. The following sections in connection with the duties and due diligences. 6

76.standards will only to a minor extent deal with this matter, and then in par-s. 6

77.ticular from a Swedish perspective.s. 6

Starting Points for Assessing Liability

1.The liability of the board towards the company under Ch. 29 § 1 CA is baseds. 6

2.on the notion of negligence. When assessing negligence, or culpa, a compari-s. 6

3.74 son is made with how the board should have acted in a particular case. The starting point for assessing the board’s liability to the company is the care and loyalty required of a trustee or contractor in general. Applicable standards include the CA, the ACA and the articles of association. In addition, other regulations under which the board has obligations to the company are to be considered in this assessment. The ‘subjective’ side of negligence assessment usually focuses on personal circumstances. However, it does not refer to the insights of individuals in a particular case. Rather, it is an objectified judgment of how a person in the situation at hand should have acted. In general, lack of knowledge is not considered an excuse for liability, but division of labour may affect the liability of individual board members.s. 6

4.The duty of the board towards the company encompasses a duty to actively work to ensure that the company’s purpose is fulfilled. This implies that the board can be held accountable not only when it actively overrides the company’s interest, but also if it is passive or does not do enough to ensure the protection of the company’s interest. The board is obliged to take protective measures against risks, not only refrain from actively causing harm.s. 7

Specific Duties and Due Diligence Standards

1.A fundamental question in connection with the assessment of liability is whether there are specific duties to act in relation to the company and how this affects the due diligence standard. The duties of the ‘company management’ towards the company are expressed in a variety of ways and apply to the members of the board and the CEO to different extents. In the following, the duties of the board will be in focus.s. 7

2.The main duties of the board are described in Ch. 8 § 4 CA: to safeguard the company’s organisation and the management of its affairs. The board is responsible for continuously assessing the company’s financial situation and ensuring that the organisation is designed so that accounting, asset manage 75s. 7

3.ment and the company’s financial circumstances are reviewed in a satisfac-s. 6

4.tory manner. The board is responsible for reporting its management and thes. 6

5.company’s position, i.e., provide information through the annual report withs. 6

6.income statement, balance sheet and management report. In addition, thes. 6

7.board has a duty to monitor, or supervise, the company’s operations.s. 6

8.Some of the duties of the board are aimed at protecting the shareholderss. 6

9.or the public, if the shares are listed. If a specific duty is aimed at protectings. 6

10.both the company and external parties, a breach of this duty may still give rises. 6

11.to a claim for damages on the part of the company. For example, the generals. 6

12.clause in Ch. 8 § 41 CA prohibits undue decisions or undue favouritism to thes. 6

13.detriment of the company. This can be explained as a rule regulating conflictss. 6

14.of interest, meaning that it is prohibited to put one’s other interests before thoses. 6

15.of the company. This also expresses the principle of equal treatment of share-s. 6

16.holders. In the event of a breach of the general clauses, for example, both thes. 6

17.company and individual shareholders may suffer damage. It is thus sometimess. 6

18.difficult in practice to distinguish the company’s damage from the sharehold-s. 6

19.er’s damage, and both may be considered to have a claim for damages in as. 6

20.particular case. The difficulty with multiple damages is that the assessment ofs. 6

21.culpability differs depending on which party is bringing the action. However, its. 6

22.is likely that the board has different duties towards different actors in situationss. 6

23.where a damaging event affects several parties at the same time.s. 6

24.Thus, the legislation – e.g., the CA but also other statutory provisionss. 6

25.– may contain specific duties for the board. Specific duties to act, such ass. 6

26.keeping accounting records in order and organising operations in an efficients. 6

27.manner through operating procedures, must have the purpose of protectings. 6

28.the damaged interest, in order for damages to potentially be awarded. In cases. 6

29.of breach of such specific duties, negligence can more easily be considered, ass. 6

30.there is a specific duty to act in a certain way, making the assessment of whats. 6

31.the board should have done easier. This means that specific duties to act serves. 6

32.as a standard of comparison for what behaviour is diligent. This is oftens. 6

33.understood as a presumption of negligence if specific duties are breached,s. 6

34.though it requires that the interest harmed is intended to be protected by thes. 6

35.specific duty breached. If, for example, a duty to organise procedures for thes. 6

36.work of the board of directors is aimed at creating a well-functioning stocks. 6

37.76 market in general, there is hardly a possibility for the company to claim damages on the basis that the board had duties of care towards the company.s. 6

38.As will be discussed further in Section 7.2.4, the board is, in Swedish law, obliged to comply with the instructions given by the general meeting. However, the board must make an independent assessment of whether these decisions are compatible with legislation and articles of association. From a historical perspective, this was explained with the fact that the ‘principals’ of the board are the shareholders, not the general meeting, and the general instruction is contained in the articles of association. As that is the case, the general meeting cannot ‘organise a measure’ contrary to it. Hence, the board of directors is not entitled to ‘blindly follow the instructions of the general meeting’. If the decision of the general meeting is contrary to the articles of association, the board of directors is obliged to ‘refuse to participate’. Although the basic assumption was, and still is, that it is the shareholders who ultimately decide on the company’s activities, the rules nevertheless help to maintain a dichotomy between the interests of the shareholders and those of the company, giving precedence to legal rules and the articles of association in the governance of the company.s. 7

39.There may be internal instructions in connection with specific measures, defining how the board should act. If this is the case, not all deviations result in liability, but measures that are contrary to or outside the business purpose give rise to liability. Thus, the general duty to exercise care concerns the company purpose, and the interest of the company to make a profit. This is in the interest of the company, as stipulated in Ch. 3 § 3 CA, but also in 77s. 7

40.the interest of the shareholders. The obligation of the board members tos. 6

41.exercise care in relation to the profit interest means that any act or failure tos. 6

42.act which was not motivated by this purpose is forbidden.s. 6

43.What has just been said makes it possible to understand the rules ass. 6

44.meaning that the board has a duty of loyalty to the company, which meanss. 6

45.that the board must act in the interest of the company. This duty of loy-s. 6

46.alty may be divided into several more specific duties for the board towardss. 6

47.the company. For example, a member of the board is prohibited from car-s. 6

48.rying out competing business activities. Rules on disqualification due tos. 6

49.conflicts of interest are stipulated in Ch. 8 § 23 CA. They entail, amongs. 6

50.other things, that a board member is prevented from handling contractss. 6

51.between the member and the company or contracts between the companys. 6

52.and another company in which the member has a potential interest. Thes. 6

53.duty of loyalty also entails a duty of confidentiality. In light of what hass. 6

54.been said above about the way in which breaches of such specific duties ares. 6

55.assessed in Swedish law, i.e., that it is easier to establish negligence and thuss. 6

56.impose liability, the function of the duty of loyalty can therefore be describeds. 6

57.as increasing liability in Swedish law. This is not necessarily different froms. 6

58.the result reached in other situations, but it means that the assessment ofs. 6

59.liability is made from a slightly different starting point.s. 6

60.A comparison can be made with German law, where members of thes. 6

61.board have a duty of loyalty towards the company. This includes for examples. 6

62.the prohibition of competition between board members and the companys. 6

63.and a duty of confidentiality. According to § 93(1) AktG, members ofs. 6

64.the board are bound to apply the care of a diligent and conscientious busi-s. 6

65.nessperson in managing the company. The duty to apply care is measured bys. 6

66.objective criteria. However, the board enjoys a broad discretion regardings. 6

67.the management and administration of the company, including the power tos. 6

68.take on serious risk, which is understood as a German equivalent to the USs. 6

69.78 business judgment rule. According to this, directors cannot be held liable if three conditions are met: 1) the relevant action was a business decision, 2) the decision was made on a sufficient informational basis and 3) the decision was made in the interest of the company. The rule is supposed to reflect the developments in case law as well as the application of the business judgment rule in the US and the UK.s. 6

70.The business judgment rule has also evolved in other European jurisdictions. In Austria, it was incorporated into legislation through an amendment in 2015. Before that, similar principles had already been adopted in case law. The rule means that if a director acted in good faith in a reasonable way, based on an informed and disinterested judgment, the duty of care is deemed not to be violated. The rule only applies to business decisions, not to mandatory legal rules, such as prohibition of repayments or the allocation of competences. In Austria, members of the board are obliged to apply the standard of care and diligence of a prudent businessman in their management of the company. This is identified as an objective standard of care, as opposed to the subjective standard of care often used in tortious and contractual liability, based on individual responsibility, which is usually understood as a ‘high standard of care’. The incorporation of the business judgment rule implies that the high standard of care for directors and the supervisory board is lowered when it comes to business decisions. The need for the company bodies to use their discretionary judgment thus affects the standard of care in these cases, and this is related to the duty to act in good faith or in the interest of the company. In the following section, the development of a Swedish equivalent to the business judgment rule will be discussed.s. 7

Business Risks and Business Judgments

1.Running a business involves risk-taking and the limited company provides a vehicle for taking risks. This may be argued to place particularly high 79s. 7

2.demands on decision-makers. In addition, it sometimes creates a need fors. 6

3.specific mechanisms to protect decision-makers from disproportionate lia-s. 6

4.bility. A particular question is whether there is an equivalent to the US busi-s. 6

5.ness judgment rule in Swedish law, and if so, what significance it has for thes. 6

6.liability concerning either individual business decisions or the general man-s. 6

7.agement of the company’s affairs. The question relates mainly to the extents. 6

8.to which poor business judgments are a basis for liability and, above all, hows. 6

9.a duty of care can be imposed on the board for business decisions that turns. 6

10.out to be unfavourable for the company.s. 6

11.In the US, the directors’ duties are generally defined as the duties of cares. 6

12.and loyalty. The duty of care requires directors to perform their functionss. 6

13.with a minimum standard of care. Directors may not act negligently, mis-s. 6

14.manage the company or intentionally decide to commit unlawful acts.s. 6

15.Directors are generally protected from liability by the business judgment rule,s. 6

16.which is a standard of judicial review for their decisions to the extent thats. 6

17.these were independent, informed, made with due care and in the honests. 6

18.belief that the actions taken were in the company’s best interest. Hence, thes. 6

19.rule presupposes that the directors have satisfied their duty of loyalty to thes. 6

20.company and restricts the operation of the duty of care. In the absence ofs. 6

21.evidence to the contrary, the board’s decision will be upheld, unless it cannots. 6

22.be attributed to any rational business purpose.s. 6

23.There are differences of opinion among Swedish legal scholars as to thes. 6

24.existence of a Swedish equivalent to the business judgment rule. The rules. 6

25.is not stated in the CA, nor has this concept been further developed in cases. 6

26.law. The business judgment rule is sometimes defined as a kind of reverses. 6

27.presumption of fault or culpa, i.e., a presumption against culpa. In fact, its. 6

28.80 intends to define a higher threshold for liability in particular situations. In evaluation of the business judgment of individual members of the board, there is a need to take into consideration the large measure of discretion of the board in the decision-making process. The rule has been described as meaning that actions in the company’s ‘normal operations’ that prove to cause damage do not result in liability for a member of the company management.s. 6

29.Another definition is that it is based on a general principle of verifiability, and that this principle in the company setting would mean that the board is not liable if it has acted in good faith, with the care of a reasonable person and in the best interests of the company. The main support for this view is the case NJA 2012 p. 858 (Trollhotellen), which concerned the application of the capital deficiency rules under Ch. 25 CA and the liability for board members who had taken office during the period of responsibility. According to the capital deficiency rules, a board member can avoid co-liability by showing that he or she has not been negligent. The Supreme Court stated that an assessment of negligence in connection with the question of the deficiency rules should be based on an overall assessment of all conditions, whereby, 81s. 7

30.e.g., competence and division of labour between the board members may bes. 6

31.important, in addition to the history in the company.s. 6

32.In the Trollhotellen case, the Supreme Court stated that the assessments. 6

33.of negligence focuses on the question of whether the board member has,s. 6

34.overall, acted justifiably in the situation that the company was in. Thes. 6

35.difficult decisions that a board member in a company in crisis often has tos. 6

36.make, justify a court’s or other examiner’s a relatively generous and sympa-s. 6

37.thetic retrospective view of what should have been done and not done. Ins. 6

38.addition, the Supreme Court stated that as long as the board member hass. 6

39.fulfilled reasonable requirements in terms of ‘staying informed and makings. 6

40.a serious evaluation of the situation’, there is rarely reason to question thes. 6

41.conclusions that the board member arrived at. Thus, the assessment ofs. 6

42.negligence is concerned with the basis of the decision and the investigationss. 6

43.and measures to obtain information when the decision was made, rathers. 6

44.than the ‘result after the fact’, even if it turns out that it was an unfavourables. 6

45.decision for the company.s. 6

46.If the director has fulfilled reasonable requirements for keeping him- ors. 6

47.herself informed and making a serious evaluation of the situation, there iss. 6

48.rarely any reason to question the positions taken. In the case, the Supremes. 6

49.Court stated that after the board members had joined the company’s board,s. 6

50.and within the time that could be requested, they took the adequate meas-s. 6

51.ures that could be demanded with regard to the capital shortfall in question.s. 6

52.They had therefore not, in this respect, been negligent in their roles as boards. 6

53.members in the company.s. 6

54.Thus, liability for damages in the case of business judgments would relates. 6

55.to the basis for the decision in question, rather than its outcome. Hence, thes. 6

56.assessment of negligence is not related to the possible harmful result, buts. 6

57.rather to the conduct leading up to it. The goal of such a liability require-s. 6

58.ment is that the person will act with due care in the performance of his ors. 6

59.her duties, not that he or she should be responsible for the achievement ofs. 6

60.the intended result. In this respect, the liability for business judgments iss. 6

61.no different from other duties of care, such as in the context of legal advices. 6

62.82 where a lawyer advises a client to carry out certain transactions or an agent carrying out a transaction with the client’s authorisation and acting directly on behalf of the principal.s. 6

63.However, liability for poor business decisions and risk-taking at the company’s expense does not apply to breaches of all obligations to the company. If behaviour in breach of the general clauses causes damage to the company or shareholders, the assessment of negligence is different. If a business decision involves an undue favouring of someone at the company’s expense, there is reason to place higher demands on the board’s diligence regarding the measure in question. In such cases, it is relevant to look at the person’s behaviour in terms of preventing the undue advantage and the damage to the company. Although the ability of the board to prevent that harm – for example by putting into place checks of potential conflicts of interest and the effects of such decisions – constitutes a form of duty of care, the breach of the rules itself can serve as a starting point for the assessment of culpability. Here, there is a clear standard of behaviour for the board and breaches of that standard should give rise to liability for when harming the interest protected by the standard.s. 7

64.NJA 2016 p. 962 concerned the liability of the board members of an economic association for having decided to exclude several members from the association, even though there was no basis in the law of associations for that decision. The issue on which the exclusion decision was based was considered legally complex and legal expertise had been involved. The board members were not considered to have been negligent. The Supreme Court stated that several circumstances are to be considered when assessing negligence. One such circumstance is the care that the board takes to produce an adequate basis for decision. If the exclusion issue is complicated and could have major repercussions for the member, more detailed considerations and special expertise may be required. As the case concerned the external liability of the board towards the members of the association, it is uncertain if the same assessment would have been made if damages had been sought by the company. However, as the board took reasonable measures to prevent the damage by relying on expert advice, the assessment can be explained as an equivalent to the business judgment rule in this respect. Although the negligence standard is therefore seen as less strict, the Court in this case was not applying a ‘presumption against liability’ by assuming that there was 83s. 7

65.adequate basis for the decision. Neither are there arguments related to thes. 6

66.duty of loyalty or the interest of the association, since the case concerned thes. 6

67.external liability towards the members.s. 6

68.In conclusion the perception of the responsibilities of the board of direc-s. 6

69.tors towards the company varies considerably between different legal sys-s. 6

70.tems. It has not been possible to examine these issues in detail above, but ins. 6

71.view of the questioning of the discharge regulation, there is reason to places. 6

72.the regulation in the broader context of the liability of the board. Seen ins. 6

73.combination with rules on discharge from liability, which exist in Swedishs. 6

74.law, for example, but not in the UK or the US, the perception of its impor-s. 6

75.tance may reflect a national preconception of the content of the basic liabilitys. 6

76.rules. In the context of the question of the right to damages to sanction mis-s. 6

77.behaviour on the part of the board (as a separate legal consequence alongside,s. 6

78.for example, termination of office, repayment, non-receipt of severance pay),s. 6

79.there are also several differences in comparison with other jurisdictions. Ins. 6

80.this respect, the directors’ liability in different legal systems differs, as Swed-s. 6

81.ish law contains rules on the directors’ repayment obligation and liabilitys. 6

82.towards the company, other than rules on damages.s. 6

83.A starting point for all legal systems discussed herein is that the board,s. 6

84.within the scope of its mandate, acts at the risk of the company, which meanss. 6

85.that the board deals with the company’s affairs and assets. In the case ofs. 6

86.commercially favourable decisions and prudent behaviour, it follows thats. 6

87.the board is therefore free from liability. The threshold for shifting the costs. 6

88.of the damage to the board of directors varies depending on the nature ofs. 6

89.the action and the liability situation at hand. Although the developments ins. 6

90.other European jurisdictions create a more complex picture of the businesss. 6

91.judgment rule and its possible implementation in Swedish law, it is uncertains. 6

92.whether the current assessment of board liability provides a greater protec-s. 6

93.tion from liability according to the BJR than is the case in current Swedishs. 6

94.law. To my knowledge, the rule has been explicitly referred to only on a fews. 6

95.occasions in lower instance courts and its application has not been developeds. 6

96.further. As stated above, precedents from the Supreme Court show that thes. 6

97.assessment of liability is not necessarily specific to the company law context;s. 6

98.although some cases concern other forms of liability in similar circumstances.s. 6

99.The analysis presented above shows that even though the starting points. 6

100.for the liability assessment differs, several components of the business judg-s. 6

101.84 ment rule are found in Swedish law. On the other hand, there is no clear ‘presumption against liability’, in that the board’s actions are assumed to be in the company’s interest. In comparison to discharge from liability, where the company gives notice in advance on the issue of liability, there is also the element that the business judgment rule is applied only if an action for damages is being brought, which clearly indicates that the issue of the board’s duties is decoupled from the owners’ decision-making powers. In other words, influence, or control, may be shifted from decisions at the general meeting to court control and liability actions putting pressure on the board. These differences are important for proper understanding of the consequences and meaning of the discharge regulation in Swedish law. This will be discussed in further detail below in Chapter 8.s. 6

Responsibilities in Fulfilment of the Assignment

1.The requirement that the damage must have arisen in the fulfilment of the assignment means that the liability must be based on obligations arising from one’s capacity as a board member or CEO. A common example of a situation where no liability is attributed according to the legislation is if there is some other kind of contract between an individual member and the company, e.g., a contract for the sale of goods. In such a case, the liability rules in the CA are not applicable. Instead, the liability is based on the rules of contract law that apply to the contract in question.s. 7

2.The fact that the damage must have arisen during the fulfilment of the assignment means that actions outside the assignment do not necessarily give a right to compensation, at least not according to the CA. The assignment as a member of the board (or CEO) thus sets the framework for liability, meaning that actions outside the assignment are subject to other liability rules. Regarding damage arising outside the assignment, it may be noted that the general liability for pure economic loss is typically limited to certain 85s. 7

3.qualified cases. In addition, the assignment as board member can give rises. 6

4.to liability which in certain cases may go beyond the liability under companys. 6

5.law, as illustrated above by the situation where there is another contract, e.g.,s. 6

6.for the sale of goods, between a board member and the company.s. 6

7.The fact that the damage must have been caused within the frameworks. 6

8.of the assignment does not mean that actions outside the assignment excludes. 6

9.liability. On the contrary, actions outside the competence of the board ofs. 6

10.directors and the CEO may entail liability to the company if they result ins. 6

11.damage. Often, however, actions outside the mandate can lead to for exam-s. 6

12.ple invalidity of a contract entered on behalf of the company. In such cases,s. 6

13.the company is not bound by any legal action taken. However, if there iss. 6

14.an abuse of authority, for example in decision-making, and the decision iss. 6

15.implemented without the approval of the competent body, the damage mays. 6

16.already have been done. In such cases, it is likely that liability for damagess. 6

17.exists under Ch. 29 § 1 CA. This is probably also a common damage situa-s. 6

18.tion in practice, making of great importance to the company that liabilitys. 6

19.can be claimed from the board member in such cases. Other rules may applys. 6

20.in the case of, for example, a contract for the sale of goods, where the con-s. 6

21.tract stipulates that a board member may be liable according to legislatives. 6

22.provisions specific to the sale of goods, for instance regarding payment ands. 6

23.liability for defects.s. 6

Compensable Damages

1.In Sweden, there is no general definition of the concept of a ‘damage’. Thes. 6

2.question of whether a loss constitutes a legally relevant damage is determineds. 6

3.on a case-by-case basis when liability is asserted, depending on the nature ofs. 6

4.the injury or loss at hand. In the context of company law, a damage usuallys. 6

5.refers to pure economic loss, such as increased cost, loss of earnings or losss. 6

6.of value of a certain property. The injured party has the burden of proofs. 6

7.concerning the existence of a loss as well as its extent.s. 6

8.86s. 6

9.A damage has occurred if the loss is a fact. However, in cases of losses that consist of the company having received a claim against it, it is probably sufficient that the claim against the company has been made and that it is not obviously without legal basis.s. 7

Proximate Causation and Protected Interests

1.To succeed with a claim for damages, the company must prove that there is a causal link between the conduct of the board and the damage incurred. Also, there must be proximate causation between the damage and the board’s conduct. The board’s conduct need not be the sole cause of the damage; it is sufficient that the board has contributed to the damage. In some instances, strict liability for certain conduct is a consequence of a breach of a certain duty. In Swedish tort law, liability for breaches of specific duties is strict in the sense that no negligent behaviour needs to be proven. Thus, the limit of liability is connected to the question of whether the norm that the injurer has breached is aimed at protecting the economic interests of the injured party. This so-called norm protection rule or ‘protective purpose doctrine’ further delimits the scope of liability and compensatory damages and is also applicable in the company law context. Norm protection is intended to clarify the limits of the damage that can be compensated in the event of a breach of one or more norms of conduct. It thus serves as a complement to the doctrine of proximate causation.s. 7

Summary

1.This chapter contains an analysis of the liability of a board towards its company in Sweden, in comparison with other jurisdictions. Most jurisdictions provide for a limited liability of the management, with the board’s functions as an executive and decision-making body determining the framework of liability. Depending on the corporate governance model used and the organ 87s. 7

2.isation of the board, the division of responsibilities takes different forms.s. 6

3.Influenced by the US approach of the duty of care and the duty of loyalty, ins. 6

4.some other jurisdictions an area has developed in which mismanagement bys. 6

5.the board does not give rise to liability, as long as the board performs its basics. 6

6.duty of loyalty by using reasonable endeavours, being sufficiently informeds. 6

7.and acts in the interests of the company. The liability assessment in suchs. 6

8.situations therefore tends to be viewed as more lenient.s. 6

9.It has been discussed above whether there is a Swedish equivalent to thes. 6

10.business judgment rule. As stated above, the cases from the Swedish Supremes. 6

11.Court on this matter concern not only questions of board liability. Impos-s. 6

12.ing a more lenient assessment in connection to decision-making would nots. 6

13.necessarily constitute a specific rule in connection with ‘business’ judgments.s. 6

14.Instead, the cases can be understood as providing general rules covering judg-s. 6

15.ments made by, for example, legal advisors whose duties to their clients ares. 6

16.based on a duty of best efforts, not a duty to achieve a specific result. Thiss. 6

17.assessment may be in line with the business judgment rule, but it remainss. 6

18.uncertain if specific parameters may further mitigate the liability solelys. 6

19.because it relates to a director’s liability towards the company.s. 6

20.Under Swedish law, the board of directors may be exempt from liabil-s. 6

21.ity, even if it later turns out that a decision was bad for the company. If its. 6

22.facilitates the understanding of the board liability in Swedish company laws. 6

23.to characterise this as a business judgment rule, then this is fully legitimate.s. 6

24.The point of such a rule is that the court should not review the commerci-s. 6

25.ality of decisions made, as these sometimes necessarily involve high risk-tak-s. 6

26.ing. Contrary to a general negligence assessment, it would mean that highs. 6

27.risks do not lead to requirements for high damage prevention measures. Ins. 6

28.comparison, the discharge from liability has provided a practical solutions. 6

29.for settling the liability issue at an early stage in many of these cases. Thiss. 6

30.is because there is no need for the company to further investigate the issues. 6

31.of liability if discharge has been granted – and the only way to bring abouts. 6

32.such an examination is if there are circumstances that could form the basiss. 6

33.for applying one of the exceptions to the discharge. The following chapters. 6

34.deals with the possible limitations and exclusions of the liability of the board.s. 6

35.88s. 6

Limitations of Board Liability

Introduction

1.A resolution to grant discharge is considered to release the board from liability towards the company, unless a specific exception is applicable. This means that the discharge is part of a comprehensive regulation concerning limitations of board liability. Because this is how discharge is perceived, there is reason to examine how the discharge from liability relates to other possibilities of limiting board liability. This is done in the following by comparing it to other legal strategies to limit board liability in Swedish law and in other jurisdictions. There are several legal strategies to limit liability. They can be considered to be either ex-ante or ex-post limitations, meaning that the limitation of liability takes place either before or after the damage has occurred. In some instances, the company’s actions, for example a resolution in connection with a measure taken by the board, will take place at the same time as the damage. Thus, the ex-ante and ex-post distinction is not clear-cut, but it is used to simplify for the reader.s. 7

2.The structure of the following presentation first deals with the possibilities of ex-ante limitations of liability through different measures. The ex-ante limitations concern both what can be defined as contractual solutions, in specific agreements and in the articles of association, and questions relating to shareholders’ consent and the company’s own risk-taking in particular matters. Also, the possibility of contracts to indemnify the board will be analysed in comparison with the approaches to the matter in other legal systems. Further, the possibility of ex-post limitations – that is: the possibility of a waiver of claims and settlements between the company and the board – will be discussed, as well as rules on mitigation and adjustment of damages. Other matters that will be discussed are the limitation period for claims and the possibilities of liability insurance.s. 7

3.A particular matter in relation to the liability of the board is whether grounds for exemption from liability under general tort law can be invoked, 89s. 7

4.e.g., rules excluding liability based on the injured party’s consent to the dam-s. 7

5.age or rules on the adjustment of damages. This matter will be discusseds. 7

6.in the following in connection with the question of consent. Other issuess. 7

7.relating to the application of general civil liability will not be considereds. 7

8.in detail. The implications for limitations of board liability will be com-s. 7

9.pared with possible limitations of general civil liability. The focus will be ons. 7

10.exemption or limitation from liability for the future and the duties of thes. 7

11.injured party, for example duty of diligence, duty to mitigate damages ands. 7

12.time limits for liability, all of which are mechanisms that can be used to limits. 7

13.the liability of the board.s. 7

Starting Points for Ex-ante Limitations of

Board Liability

The (Often) Mandatory Nature of Board Liability

1.In Sweden, the prevailing view is that it is not possible to change the scopes. 7

2.and duties of the board or to ex-ante limit the board’s liability towards thes. 7

3.company. However, as will be discussed in the following, shareholder con-s. 7

4.sent may in some cases affect the liability of the board. Although consent iss. 7

5.possible in some respects, it is not possible, for example, to limit liability bys. 7

6.contract – this is true even though the law does not directly state it. In others. 7

7.words, the liability rules according to Ch. 29 § 1 CA are mandatory.s. 7

8.In most jurisdictions covered by this study, the possibility to alter thes. 7

9.standard of care and scope of duties is restricted. However, the nature ands. 7

10.90 scope of the possibilities of limiting the statutory liability of the board show large differences in these opportunities in terms of the detail of the rules. For example, in German law, directors’ liability for damage cannot be limited or excluded. The board’s duties are of mandatory nature and cannot be derogated by contract. However, as the law does not specify the content of these duties, they can be defined in more detail in the employment contracts of the individual directors. This is also the prevailing view in Austrian law, and the duties may not be altered, at least not to the detriment of the company, by the articles of association, a shareholders’ resolution or an individual contract between the company and the directors. This includes adopting a standard of care expected of the board and its members or reducing the due diligence standard.s. 7

11.In French law, limitations of the directors’ liability through the articles of association are prohibited. Most scholars of Spanish law are of the opinion that the general conditions for liability of the board are mandatory. The reasons for this is not only related to private law, but also the wish to improve corporate governance and protect the interests of the creditors. The liability regulation cannot be altered by the articles of associations or other instruments, such as internal regulations, management contracts or resolutions by the general meeting.s. 8

12.A special feature in Belgian law is that the Belgian Code for Companies and Associations (BCCA) has introduced caps on director’s liability. The caps apply per fact or set of facts that can give rise to the liability and are independent of the number of claimants or defendants. The caps apply towards both the company and third parties, for contractual liability, tort liability, liability in case of wrongful continued trading and any other liability under the BCCA or any other laws and regulations. They do not cover all errors, for example fraud, intent to harm or the liability for unpaid corporate 91s. 8

13.income tax. The liability of directors cannot be limited in advance beyonds. 7

14.the liability caps included in law. Further, there is a prohibition on all mech-s. 7

15.anisms pursuant to which a company in advance exempts or exonerates itss. 7

16.directors from liability towards both the company and/or third parties; suchs. 7

17.provisions are null and void.s. 7

18.In the Netherlands, the general duties of the directors can be changeds. 7

19.pursuant to the articles of association, and may be either limited or extended,s. 7

20.though within a certain scope. Exemptions or limitations of liability, fors. 7

21.example by altering the standard of care expected of the board, are not pos-s. 7

22.sible. In Switzerland, the possibilities of modifying the standard of care iss. 7

23.subject to discussion and the matter is not settled. It is certain that the boards. 7

24.of directors can delegate management tasks to one or several board memberss. 7

25.(managing directors) or to third persons (executive officers), which limits thes. 7

26.liability of the delegating board.s. 7

27.In the UK, it is not possible for the company to alter the scope and con-s. 7

28.tents of the duties under §§ 171–177 CA 2006 by contract or through thes. 7

29.company’s articles of association. According to § 232(1) of the CA 2006,s. 7

30.any provision that purports to exempt or limit the liability of a director thats. 7

31.would otherwise be attributed to him or her in connection with negligence,s. 7

32.default, breach of duty or breach of trust in relation to the company is void.s. 7

33.In the US, it is not possible to change or alter the content and scope ofs. 7

34.the board’s duties. In some cases, it is possible to alter the consequences ofs. 7

35.breach of duty, for example including provisions that reduce or eliminates. 7

36.92 monetary damages resulting from a breach, although this does not affect the duty of care itself. The duty of loyalty and the consequences of breaches of this cannot be changed. In Delaware, there is also a regulation on exculpation of officers, which will be discussed below in Section 7.2.2. In the US, the possibility of limiting or excluding liability can be defined based on three different tools. These are exculpation clauses, shareholder agreements and indemnification. A shareholder agreement will only limit the liability in special circumstances and is only possible for a company whose shares are not publicly traded. Furthermore, the use of the business judgment rule also has the function of limiting the scope of liability for the directors within its application, thus reducing the due diligence standard.s. 7

37.A commonly used argument against ex-ante limitations of the board’s liability is the protection of minority shareholders and creditors. In Sweden, Nial was one of the early critics of ex-ante limitations of liability through agreements or majority resolutions by the general meeting. He argued that such limitations (or ‘prior discharge’ as he called it) should not be allowed without ‘the review which lies in the auditor examination and in allowing a certain period of time to elapse, during which the meaning and consequences of the act often becomes clearer’. He referred here to § 92 in the Swedish CA 1944, in the light of suggestions made by Danish scholar Kobbernagel concerning the possibility of ‘prior discharge’ in Danish law.s. 8

38.According to the mentioned provision, the board of directors and other representatives could not comply with a decision by the general meeting manifestly contrary to the interests of the company. This rule, explained Nial, ‘protects the minority of shareholders or individual shareholders against actions and decisions of the board; if the board acts with the consent of all the shareholders (and there is no violation of creditor protection rules), the board is not liable for damages’. Hence, ex-ante limitations should only be valid with all shareholders’ consent. According to Nial, the fact that the minority shareholders, in Danish law, could not prevent discharge or make a minority claim, did not constitute a sufficient reason to equate approval by a majority of shareholders at the general meeting with approval by all the company’s shareholders. He considered this to be the case ‘especially as a majority decision may be made by shareholders representing only a small proportion of 93s. 8

39.the company’s total number of shares’. He was also critical of the idea thats. 7

40.the management’s liability for fault could be limited by contract betweens. 7

41.the company and the board (or by a clause in the articles of association).s. 7

42.The fact that it is not possible to limit the liability of the board of direc-s. 7

43.tors towards the company beforehand (ex-ante) was, and still is, justifieds. 7

44.by the aim to protect not only the company, but also external third partiess. 7

45.(such as shareholders), from the company taking on more risk in relation tos. 7

46.the board of directors than what is prescribed by law. Hence, the interestss. 7

47.of third parties are protected by the lack of possibility for the company tos. 7

48.voluntarily assume all of the company’s losses.s. 7

49.Therefore, it is also interesting to compare the approaches to contractuals. 7

50.limitations and prior consent in Swedish law with the Norwegian solution.s. 7

51.In Norway it is possible for the company to agree upon limitations of liabilitys. 7

52.ex-ante. Under § 17-3 of the NCA, the general meeting (generalforsamlingen)s. 7

53.has the competence to decide whether an action for damages shall be broughts. 7

54.on behalf of the company against the liable parties and also if the companys. 7

55.shall enter into a contract which regulates or limits the liability of a partys. 7

56.under the NCA. The provision in § 17-3(2) was introduced in 1997 ands. 7

57.deals with ex-ante limitations of liability by contract. The wording hass. 7

58.given rise to questions of interpretation regarding the scope of applications. 7

59.of other rules in Ch. 17 concerning board liability. For example, it is uncer-s. 7

60.tain whether the minority action in § 17-4 and the exceptions from dis-s. 7

61.charge due to wrong or omitted information in § 17-5 are applicable to suchs. 7

62.contracts. The purpose of the legislation was to ensure that the generals. 7

63.meeting has full control over the liability issue. Before the introduction ofs. 7

64.the provision in 1997, it was possible to enter into a contract limiting thes. 7

65.liability of the board, but the legislator wanted to clarify that making suchs. 7

66.contracts was exclusively within the competence of the general meeting.s. 7

67.94s. 7

68.In conclusion, although the basic conditions are often similar as regards the possibilities of modifying the liability of the board, the above shows that the approach to the matter of ex-ante limitations of board liability does not follow the same model. This is shown particularly by the comparison to the Norwegian regulation on contractual limitations. In the following section, these different possibilities of ex-ante regulation of board liability through various measures will be discussed in greater detail.s. 8

Contractual Limitations and Exclusion from Liability

1.From a contractual perspective, the possibility of limiting a contracting party’s liability is an expression of the risk regulation in the contract. In general, limitations or exemptions from liability are allowed under Swedish contract law, unless they are contrary to mandatory rules or general principles, or if a contract is unfair, leading to adjustment under § 36 of the Contracts Act. This may for example be the case if the contracting party has acted with gross negligence, which may result in adjustment of terms limiting or excluding the party from liability.s. 8

2.In general, a possible consequence of ex-ante limitations of liability by contract is negative impact on the deterrent effect of liability for damages. However, there are arguments in favour of ex-ante limitations. For example, it can be argued that the liability should balance the interest of the company and the board in such a way that the board’s freedom of action is not necessarily restricted. If the board feels that there is a high risk of being liable for damages, this can reduce the board’s risk-taking. The possibility to limit the liability of the board may restore the balance.s. 8

3.Less flexibility in this sense, i.e., by not allowing a company to alter liability contractually, may also by extension be detrimental to the company’s operations, because the board does not take the business-related risks that it might otherwise have taken. From a general contractual perspective, con 95s. 8

4.tractual limitations of liability for other professionals, such as lawyers ands. 7

5.advisors, are common in both standard contracts and individually negoti-s. 7

6.ated contracts, although the threshold for liability is often based on profes-s. 7

7.sional negligence in performance of a task. It can also be added that generals. 7

8.exceptions to contractual limitations, such as possibilities to adjust limitations. 7

9.clauses due to gross negligence or under § 36 of the Contracts Act, mean thats. 7

10.the risk of undermining the purpose of the compensation rules decreases.s. 7

11.However, the contractual perspective on this issue centres around thes. 7

12.scope and applicability of limitations of liability and does not deal with issuess. 7

13.concerning the joint decision-making process for those affected by the con-s. 7

14.tract, i.e., related to the fact that the company is considered an aggregates. 7

15.of the interests of all shareholders. Another feature of the company contexts. 7

16.that has a bearing on the company’s ability to contract with the board is thats. 7

17.company law aims at protecting other interests. This implies that the use ofs. 7

18.contractual solutions needs to consider the company law context.s. 7

19.Another way of balancing the interests of the company and the board iss. 7

20.to design the liability prerequisites so that the board’s business risk-taking iss. 7

21.not prevented. It should also be noted that the possibilities for external par-s. 7

22.ties, such as shareholders and creditors, to obtain compensation for damagess. 7

23.directly from the board may vary between different jurisdictions. This meanss. 7

24.that the possibilities of contractual limitations vis-à-vis the company are nots. 7

25.decisive for the possibility of shareholders to be compensated for their losses.s. 7

26.This might be the case in Norwegian law, for example.s. 7

27.In the US, the Delaware state rules contain provisions on exculpations. 7

28.of directors. The provision states that companies may have a clause ons. 7

29.limitations of liability for board members in the articles of incorporations. 7

30.(or association). Since 2022, these rules also apply to the exculpation ofs. 7

31.officers, i.e., exculpation for other than the board of directors, in the event ofs. 7

32.a breach of fiduciary duties of care. This means that the company can exempts. 7

33.persons in the company from liability in advance, though this requires ans. 7

34.amendment to the articles of incorporation. Such amendments have beens. 7

35.made to a number of companies in Delaware. It has also raised issuess. 7

36.of minority protection and voting rules, in particular regarding shares withs. 7

37.voting differences. To summarise, it is clear from the foregoing that there iss. 7

38.96 typically little scope for ex-ante limitation of liability in Swedish law, even in comparison with other legal systems, and that similar problems arise even for legal systems that do provide for such possibilities.s. 7

Indemnification Agreements

1.Beyond using contractual limitations or exclusions from liability, the company may sometimes want to protect the board from liability through indemnifications. Indemnification means that the company has an obligation to reimburse any damages that the board member or CEO has been ordered to pay an injured party. From a Swedish perspective, such indemnifications can be said to undermine the mandatory nature of the liability rules based on the arguments presented above and would therefore not be valid. However, an indemnification in connection with liability towards third parties would be possible.s. 8

2.The question of corporate indemnification has recently been discussed in Denmark, due to an increase in insurance premiums for liability (D&O) insurance. According to a statement of the Danish Business Authority in April 2023, it is possible to make a resolution regarding indemnification of the board of directors. This statement drew attention among legal practitioners, as it puts forward solutions concerning ex-ante limitation of liability. This possibility does not apply to the company’s own claims against the board, i.e., internal liability, and the Danish Business Authority stated that damage directly affecting the company is not covered. In Norway, indemni 97s. 8

3.fication agreements for damages caused to third parties are possible, but nots. 7

4.regulated in the NCA.s. 7

5.The possibilities to indemnify the board varies in the European jurisdic-s. 7

6.tions covered in this study, but the matter does not necessarily relate to thes. 7

7.approach to discharge. For example, in German law – where discharge doess. 7

8.not affect the liability of the board – an indemnification agreement to protects. 7

9.the directors against claims from the company is not valid because of thes. 7

10.mandatory nature of the liability rules. The legislative purpose behind thiss. 7

11.is to deter directors from breaching their duties towards the company. Ins. 7

12.Austria, the reasoning is similar. In the UK, where discharge is not allowed,s. 7

13.it is not possible for a director to be protected by the company, directly ors. 7

14.indirectly, through an indemnity.s. 7

15.In jurisdictions where discharge affects the board’s liability towards thes. 7

16.company, there are often limitations concerning the possibilities of indemni-s. 7

17.fications. For example, in the Netherlands, a company may indemnify direc-s. 7

18.tors against personal liability and claims invoked by third parties. However,s. 7

19.such claims must be related to the performance of the duties as a director. Its. 7

20.is not possible for the company to indemnify the director against liabilitiess. 7

21.based on breach of statutory duties towards the company itself.s. 7

22.In Switzerland, there are different opinions in the legal literature regard-s. 7

23.ing the possibility of modification of the standard of care. However, thes. 7

24.leading opinion supports the view that indemnification agreements betweens. 7

25.the company and the board are valid only in relation to negligent breaches ofs. 7

26.duty, and only if the company is not in a state of bankruptcy. If the agree-s. 7

27.ment violates mandatory provisions, it is void. Hence, only minor negligents. 7

28.breaches of duty can be excluded in advance.s. 7

29.In the US, apart from the exculpation provisions, indemnifications ares. 7

30.also possible to some extent. According to Delaware Corporate Code § 145,s. 7

31.indemnification of officers and other persons is possible, although suchs. 7

32.indemnification cannot result in relieving the person of liability towards thes. 7

33.98 company or for improperly receiving a personal benefit if this was done wilfully or intentionally. Nor can the company indemnify a director who has breached the duty of loyalty.s. 7

34.In conclusion, based on the above account of indemnification agreements and similar provisions in the articles of association, it appears that such clauses are permitted in several European jurisdictions, at least in respect of claims by third parties against the board of directors. However, it is also clear that the possibilities of such agreements are greater than the corresponding possibilities to completely exempt the board of directors from liability, i.e., to ex-ante limit liability in general, either by contract or by provisions in the articles of association. In several of the jurisdictions where discharge is not possible, including the US, there is instead a possibility of indemnification agreements between the board and the company.s. 8

Shareholder Consent and Instructions from the

1.General Meeting As previously mentioned in connection with the discussions of the mandatory nature of board liability, there are some possibilities in Swedish law to influence board responsibilities through ‘shareholder consent’. This is based on the view that the general meeting is the supreme decision-making body of the company, that the board of directors has an obligation to follow instructions from the general meeting, and that the general meeting is in principle able to decide on the vast majority of the company’s affairs. A distinction may be drawn between shareholder consent in relation to individual actions by the board which are harmful to the company, and consent to measures taken in general. The contractual limitations, if allowed, may prescribe general limitations or exemptions from liability. Prior shareholder consent, on the other hand, must relate to a specific measure taken or decision made by the board.s. 8

2.In general, the board can avoid liability by obtaining the general meeting’s consent for a particular measure. The principle of consent is also recognised in Swedish general civil liability; if an injured party has consented to the damage, liability may generally be reduced or eliminated. This is also 99s. 8

3.the case if the injured party is deliberately taking a risk or is aware of the risks. 7

4.but acts in a way that triggers the risk or allows someone else to act in suchs. 7

5.a way. However, certain decisions that may be contrary to rules protectings. 7

6.individual shareholders or others, such as creditors, cannot be approved by as. 7

7.majority of shareholders at the general meeting with this effect.s. 7

8.If the general meeting has decided on a certain measure it does not means. 7

9.that the board of directors is exempt from liability if the measure is imple-s. 7

10.mented and subsequently proves to be detrimental to the company. Thes. 7

11.fact that the shareholders’ meeting decided on the harmful measure is nots. 7

12.always enough to avoid liability. Thus, the principle of consent means thats. 7

13.all shareholders, or equivalent members of any other association, must con-s. 7

14.sent to decisions that are incompatible with ownership or membership pro-s. 7

15.tection standards. The principle of consent also means that the consent ofs. 7

16.all makes it impossible to claim damages for the decision made. In Swedishs. 7

17.company law, the principle is sometimes referred to as the ‘SAS principle’.s. 7

18.The principle of consent is dealt with, inter alia, in the case NJA 2013s. 7

19.p. 117 (Kamelian). The case concerned claims for damages against boards. 7

20.members of an association of tenant owners, controlled by a property devel-s. 7

21.oper, which is sometimes called a ‘builder’s association of tenant owners’.s. 7

22.Although the case did not concern a limited company, it provides guidances. 7

23.for the general application of the principle. The case concerned a decisions. 7

24.by the board, made with consent from all then-current members of the asso-s. 7

25.ciation, agreeing to an amendment to an existing works contract for thes. 7

26.construction of garages without requesting any adjustment to the price ofs. 7

27.the works. The amendment was unfavourable to the association and, whens. 7

28.its subsequent members (buyers of the flats) learned about the agreement,s. 7

29.the association claimed damages corresponding to a price reduction in thes. 7

30.construction contract. At the time of contracting, the association had beens. 7

31.represented by three board members, who were interim members of thes. 7

32.association and also the owners of the construction company. The Supremes. 7

33.100 Court stated that the consent of all members of the association at the time the decision was made, meant that there was no liability for the members of the board, even if the decision was unfavourable to the association. Therefore, the claim was dismissed.s. 7

34.The principle of consent thus means that it is possible for a company to consent to certain conduct by the board, and limit the liability of the board for breaches of certain duties. In the case, the Supreme Court stated that rules that aim to protect the members of an association against practices by the board or individual board members that are unfair either to the association or to individual members can be set aside if all members consent to the behaviour in question. For example, minority protection rules may, given the purpose of the rules, be set aside. However, if a decision is contrary to a rule other than the rules for the protection of shareholders, consent does not mean that the decision by the board is authorised. The consent of all shareholders to a decision is limited to shareholder protection standards. This means that a decision can be unauthorised under company law, even if all shareholders agree, and thus the company’s (or other’s) right to damages is preserved. In other words, shareholders cannot at all times dispose of the association’s right to damages.s. 8

35.It may also be added that the rules aimed at protecting the members of the association – or shareholders of a company – apply to current members as well as former members who may have a right under member protection standards even though they are no longer represented at the general meeting. However, in the Kamelian case, the Supreme Court stated that the 101s. 8

36.consent of current members is binding upon subsequent members of thes. 7

37.association. This means that the consent to a decision that is unfavourables. 7

38.to the association will provide a possibility of ex-ante limitations of liabilitys. 7

39.(from the subsequent shareholders’ perspective).s. 7

40.The question of whether the members may, by consent, dispose of thes. 7

41.association’s right to damages requires an assessment of how the interest ofs. 7

42.the association is constructed under the applicable law. Hence, sharehold-s. 7

43.ers cannot dispose of the association’s right to damages, because a distinc-s. 7

44.tion can be made between the individual and the corporate interests of thes. 7

45.shareholders. On the other hand, it is conceivable that the aggregate of thes. 7

46.interests of individual members or shareholders can correspond entirely tos. 7

47.the interest of the association.s. 7

48.A related matter is whether it would be possible for all shareholders tos. 7

49.agree to ex-ante discharge or limitation of liability, and if they thus can dis-s. 7

50.pose of the company’s right to damages. With regard to the time of consent,s. 7

51.it seems as if this would be possible. However, the consent must, as men-s. 7

52.tioned above, relate to individually determined (‘particularised’) decisions.s. 7

53.This means that consent cannot relate to the board’s decision-making ins. 7

54.general, e.g., the entire financial year or overall conduct of the board. Thiss. 7

55.means that if the general meeting were to consent to modifications of thes. 7

56.standard of care, the lack of individuality and connection to a certain deci-s. 7

57.sion would cause the consent to be rejected and the measure to be considereds. 7

58.unauthorised.s. 7

59.In comparison to the discharge regulation, which is a procedural rule, thes. 7

60.issue of consent is assessed as a matter of substantive law. It can also be noteds. 7

61.that in NJA 2013 p. 117 (Kamelian), the board had been granted discharges. 7

62.and the impact of that decision had also been called into question in the firsts. 7

63.instance court. The first instance court stated that the claim for damagess. 7

64.could be brought even though discharge had been granted. Hence, thes. 7

65.102 consent principle can provide a stronger protection from board liability than discharge in a particular case, although this requires a unanimous decision.s. 7

66.In Norway, much like in Swedish law, a majority of shareholders can give prior consent to a harmful act in a way that does not make the board liable for damages. However, there are different views on the interpretation of the effects of the ‘prior consent’ when it comes to the minority shareholders’ possibility to claim damages. According to the Swedish scholar Dotevall, even given the consent of the general meeting (by a majority), a minority of the shareholders holding at least one tenth of the shares can still claim compensation on behalf of the company against the board.s. 8

67.The Norwegian scholar Normann is of the opinion that (at least in Norwegian law) minority claims on behalf of the company are not possible where there is prior consent from a majority of shareholders. She argues that the rules on retrospective approval (i.e., discharge from liability) and the ten percent rule do not allow the minority to bring an action against the company in the case of prior consent. This is because the rules in the corresponding Norwegian regulation are procedural, i.e., rules on the right of minority action. They concern who can bring a claim on behalf of the company and thus apply to the company’s loss, not the shareholders’ loss. With the prior consent of the general meeting, the board’s actions are deemed to be lawful against the company; there is therefore no basis for liability on part of the board. From a Swedish perspective, it could therefore be argued that the substantive effect of prior consent is only given if all shareholders consent, and that this is based on the fact that the rules on minority protection in connection with discharge would otherwise be ineffective. It also means that the design of the discharge regime, and the ‘ex-post authorisation’ it implies, has a bearing on the question of prior consent. 103s. 8

68.In Finland, Ch. 22 § 9 FCA states that the provisions of the FCA are tos. 7

69.some extent mandatory. According to Ch. 22 § 9(1), the articles of associa-s. 7

70.tion may not limit the company’s right to damages under the same chapter,s. 7

71.if the damage has been caused by either 1) a violation of provisions froms. 7

72.which deviations may not be made through the articles of association, ors. 7

73.if the damage 2) has otherwise been caused wilfully or by gross negligence.s. 7

74.Furthermore, under Ch. 22 § 9(2), the company’s right to damages can onlys. 7

75.be limited by the articles of association with the consent of all shareholders. Ins. 7

76.Ch. 22 § 9(3), it is stated that the articles of association may not limit thes. 7

77.right to damages or the right of action that a shareholder or other persons. 7

78.has under the same chapter (or Ch. 10 § 9 of the Auditing Act). Much likes. 7

79.in the Swedish regulation, limitations of the board liability therefore requires. 7

80.the consent of all shareholders and cannot be based on a majority decision.s. 7

81.On the other hand, this consent can relate to general limitations of the boards. 7

82.liability and does not require consent from all shareholders in connections. 7

83.with specific conduct or activities and decisions of the board, as long as theres. 7

84.is no violation of the provisions in the articles of association, or the damages. 7

85.is caused wilfully or by gross negligence.s. 7

86.The discussion thus far has centred on the decision-making process in thes. 7

87.case of consent, which shareholders are bound by and which standards thes. 7

88.shareholders can consent to a breach of with exonerating effect for the board.s. 7

89.Another issue is the content of the shareholders’ consent. This relates to thes. 7

90.requirements on the content of a decision to consent to a certain action.s. 7

91.The question is whether it is necessary for the general meeting to explicitlys. 7

92.instruct the board to take action or if it is sufficient that the shareholders haves. 7

93.knowledge about a particular measure or decision by the board. It would bes. 7

94.going too far to discuss all these issues in this context. In general, it can bes. 7

95.assumed that consent to a particular measure presupposes informed deci-s. 7

96.sion-making, where the general meeting has taken a concrete and clear posi-s. 7

97.tion on a particular issue. The mere information by the board that a decisions. 7

98.has been made, without the meeting taking a clear position on the matter,s. 7

99.cannot be considered sufficient, even if all shareholders were present at thes. 7

100.meeting or if it can be shown that all shareholders received the information.s. 7

101.However, in such cases, as will be shown in Section 8.4.2, a decision to grants. 7

102.discharge based on information provided may be a procedural hindrance fors. 7

103.the company to bring an action for damages against the board. This is thes. 7

104.case because information of the measures taken can be considered to haves. 7

105.104 been provided to the general meeting and the so-called information exception cannot be applied.s. 7

106.In this context, a comparison can also be made with how the issue is treated in other legal systems. In Germany, it is possible for the general meeting to authorise the conduct of the management board, through a resolution. However, if the supervisory board has authorised an apparently disadvantageous transaction, this does not exclude the director’s obligation to pay compensation for damage to the company. Neither the shareholders’ meeting nor the supervisory board is authorised to issue binding instructions to the management board.s. 8

107.In Austria, it is also possible for the company to authorise conduct in a particular case. This can be done by ratification, meaning that shareholders can ratify conduct by a director through a majority resolution. Such a resolution would require that the votes of the directors concerned or connected persons are excluded. Ratification only absolves the directors from liability towards the company, not third parties. In Austrian law, there is no obligation to pay compensation to the company if a course of action is based on a lawful resolution by the general meeting. A director can never be held liable for not adopting an illegal instruction, for example if an instruction from the general meeting is in violation of the law.s. 8

108.In the UK, even though it is not possible to alter a director’s liability through contract or provisions in the articles of association, it is possible for the company – via a simple majority vote of the shareholders – to pass a resolution under § 239 CA 2006, to ratify a director’s breach and relieve that director of any liability for breach of duty. In such case, the company can no longer bring legal proceedings against the director. The same applies to instructions to the board to implement certain management decisions, except in situations where the company is insolvent or insolvency is imminent.s. 8

109.In Swedish law, it is also a generally accepted view that the general meeting’s superior position over company management affects the board’s respon 105s. 8

110.sibility. As the board has an obligation to follow instructions from the gen-s. 7

111.eral meeting, this means that, as a starting point, the general meeting cans. 7

112.reduce the board’s room for manoeuvre through its instructions. However,s. 7

113.an instruction given to the board of directors does not have to be followed ifs. 7

114.it would be detrimental to the company. This means that difficult questionss. 7

115.of judgment may arise for the board when it is confronted with instructionss. 7

116.from the general meeting that are harmful to the company. In the light ofs. 7

117.what has been presented above concerning the competence of the generals. 7

118.meeting to limit the board’s liability for damages through the behaviour ofs. 7

119.all shareholders, clear instructions on a specific issue can limit the board’ss. 7

120.liability, if it follows said instructions.s. 7

Ex-post Waiver of Claims and Settlements

1.A waiver of claims can be defined as a promise not to file liability claimss. 7

2.against company directors. This can be done in a contract before the issue ofs. 7

3.liability has arisen (ex-ante). However, in this section, the matter will be dis-s. 7

4.cussed as an ex-post waiver of claims similar to a settlement. This can also bes. 7

5.described as an indemnification, although the resolution on the matter musts. 7

6.take place after the event. According to Ch. 29 § 8 CA, a settlement regard-s. 7

7.ing liability for damages to the company may be reached only by the generals. 7

8.meeting and only on condition that holders of at least one tenth of all sharess. 7

9.in the company do not vote against the proposal for settlement. Thus, thes. 7

10.provision is similar to the minority protection in the regulation of discharge.s. 7

11.In German law, the company may waive its right to claim damages froms. 7

12.the management board after a delay of three years from when the claims. 7

13.arose. The supervisory board has to represent the company in connec-s. 7

14.tion with such an agreement, but the waiver is only effective if the generals. 7

15.meeting has approved it and only if no objection is raised in the minutes bys. 7

16.a minority whose shares together amount to at least one tenth of the shares. 7

17.capital. The rules on waiver of claims thus mean that claims arising lesss. 7

18.than three years prior to the agreement are not affected by a settlement ors. 7

19.waiver. As earlier explained, future claims can never be waived, due to thes. 7

20.mandatory nature of the liability.s. 7

21.106s. 7

22.According to Austrian law, it is to some extent possible for a company to indemnify the directors against certain liabilities incurred to third parties. Such an indemnification can only be made between the company and the respective director ex-post, i.e., after a fine has been imposed or liability was confirmed by court and a waiver of claims against a member of the management or supervisory board of a company is permissible only in very limited circumstances. Waivers and settlement agreements may only be concluded five years after the respective claim came into existence, and only if they are not blocked by a minority of shareholders, who hold at least twenty percent of the company’s capital. The five-year-restriction does not apply if all the shareholders give their consent.s. 8

23.Hence, the waiver of claims regulations in Germany and Austria shows similarities with the regulation of discharge, as it provides the opportunity to relieve the board from liability. However, in comparison to the Swedish discharge regulation, the requirements of such a resolution are very strict as regards both timing and the majority requirements.s. 8

Adjustment of Damages

1.If the board has acted in a way that gives rise to liability and the other requirements for liability are met, there may still be a possibility to adjust the damages. An adjustment means that the liability is reduced or completely cancelled. In Swedish company law, damages can be adjusted under Ch. 29 § 5 CA. According to this provision, the damages may be adjusted as is reasonable in view of the nature of the act, the size of the damage and the circumstances in general. Similar rules on adjustment of damages are found in Ch. 6 § 2 Tort Liability Act. The rule on adjustment of damages is, according to the Supreme Court, applicable only as a ‘last resort’. This means that it is only in exceptional cases that the liability for damages can be adjusted and that the requirements for this to happen are high.s. 8

2.Adjustment of damages in view of the nature of the act is possible for example if a small degree of negligence leads to a great loss. Also, the size of 107s. 8

3.the damage in relation to the nature of the act may lead to an adjustment ofs. 7

4.the damages. Other circumstances in favour of adjusting the damages are ifs. 7

5.the injurer has no means to pay a large claim. In this assessment, it is also rel-s. 7

6.evant whether the injurer has or should have had liability insurance coverings. 7

7.the damage in question. If there is an insurance that covers the damage, thiss. 7

8.speaks against an adjustment and the possibility to adjust the damages is verys. 7

9.limited, as the burden of paying the damages cannot be seen as unreasonable.s. 7

10.However, if the insurance only covers damages up to a certain amount, its. 7

11.could be possible to adjust the damages to that level. Only in cases where its. 7

12.would not be possible to insure liability at fair terms would this impossibilitys. 7

13.be taken into account.s. 7

14.The economic situation of the injured party may also be taken intos. 7

15.account. For example, if damages are of great importance to the injureds. 7

16.party’s livelihood or economy, this is an argument against adjustment. Thes. 7

17.possibility for the injured party, i.e., the company, to take out insurance is ofs. 7

18.no relevance. A related matter is the relationship between the provisionss. 7

19.on adjustment in the CA and adjustment of damages under general civils. 7

20.liability. The application of general civil liability rules is uncertain. In thes. 7

21.preparatory works to the CA 1975, it is stated that the rules on adjustments. 7

22.shall be applied exclusively. It is uncertain exactly how much of this state-s. 7

23.ment can be upheld, and this view is not maintained as far as the externals. 7

24.liability of the company bodies is concerned.s. 7

25.Under rules on general civil liability, it is possible to adjust damages dues. 7

26.to contributory negligence on the part of the injured party. This could bes. 7

27.the case if a third party causes damage to the company and the company iss. 7

28.negligent in connection with the occurrence of the damage. In general, con-s. 7

29.tributory negligence can also arise from the conduct of a person other thans. 7

30.the injured party, by identifying or attributing the party with the actionss. 7

31.108 of that other person. This is sometimes called passive identification. The question in this situation is whether contributory negligence can be applied to the internal liability situation, and, if so, which company body should then be assessed as contributorily negligent in a manner attributable to the company. Similar provisions on adjustment of damages exist in the other Nordic countries.s. 7

32.In matters relating to third party liability towards the company, actions of the board may be attributed to the company. However, it is uncertain if this principle is applicable and how it should be interpreted in the relationship between the company and the board of directors. In the case NJA 2006 p. 136, an auditor in a limited company caused damage to the company during the fulfilment of the auditing assignment. The question was raised whether the damages could be adjusted due to contributory negligence on the part of the company. According to the Supreme Court, no adjustment due to contributory negligence should be made. Hence, the contributory negligence is most likely not applicable in a situation where only the company and the board are involved and the damage to the company has been 109s. 8

33.caused by the board or a member of the board. In such situations, it doess. 7

34.not make a difference if several members of the board or management ares. 7

35.involved in the occurrence of the damage. If two or more members of thes. 7

36.board cause damage to the company in the fulfilment of their assignment,s. 7

37.it is instead the rules on adjustment in Ch. 29 § 5 CA that are applicable.s. 7

38.In assessment of this, it is possible to consider the duties of each individuals. 7

39.board member towards the company because of his or her position in thes. 7

40.company and the degree and nature of their involvement.s. 7

41.The discussion in Section 7.2.4 on the company’s consent to certain meas-s. 7

42.ures or decisions by the board shows that there are similarities to general civils. 7

43.liability rules on assumption of risk or contributory negligence. However, its. 7

44.is clear from the discussion concerning ratification that the consent from thes. 7

45.shareholders at the general meeting must be concrete and relate to a specifics. 7

46.measure. Further, to relieve the board from liability, consent is required froms. 7

47.all shareholders. Not even consent from all shareholders can release the boards. 7

48.for breaches of all duties. This also suggests that implied consent, indicatings. 7

49.‘risk acceptance’ from shareholders is not sufficient for liability to be adjusteds. 7

50.according to Ch. 29 § 5 CA.s. 7

51.Another general civil liability rule that limits the scope of damages is thes. 7

52.duty to mitigate losses. This means that the injured party has a duty to mitigates. 7

53.the effects or financial loss of any damage suffered, at least to a certain degree.s. 7

54.Although there may be such an obligation for the company, the extent ofs. 7

55.such a duty is uncertain.s. 7

56.In conclusion, company law regulations on the adjustment of liabilitys. 7

57.for damages in Sweden are based on the same basic conditions and contains. 7

58.a similar discretionary assessment as is prescribed in the general law of civils. 7

59.110 liability. However, the scope to further delimit liability in the internal relationship between the company and the board in the light of general rules on damages, including rules on contributory negligence, is uncertain. It can be concluded that there are fewer possibilities for adjusting the damages in the company context. This also means that the question of the company’s possible own risk-taking, consent and obligations to limit the damage seems to be inappropriate in this context. There is a lack of guiding case law in these issues and it is difficult to assess the importance of the rules of adjustment of damages as a way of limiting the board’s responsibility and protecting the board from liability, but it can be reiterated that the adjustment of liability is only used as a last resort.s. 7

Limitation Period

1.The liability of the board is subject to certain time limits under the CA. According to Ch. 29 § 10 CA, a claim for damages must be filed against the board within one year, starting from the time when the annual report and the auditor’s report for the financial year were presented at the AGM. The rules on limitation periods are substantive, i.e., a time limit expiring is not a procedural hindrance in a legal proceeding. The discharge resolution and the limitation period in the CA thus constitute two separate forms of time limitations of liability, providing protection from liability either from the time of the resolution on discharge or one year from the presentation of the reports to the AGM.s. 8

2.The limitation period in the CA is similar to the one prescribed in Ch. 18 § 9 of the Swedish Commercial Code, which stipulates a one-year limitation period starting from the final accounting of the assignment. This regulation deviates from the general limitation period in Swedish law, which is ten years from the origin of the claim. The historical origins of the regulation of discharge in Swedish company law show that it is not based on the limitation rule in Ch. 18 § 9 Commercial Code. However, the two regulations are based on similar considerations. The justifications for the limitation rule are, inter alia, that the parties’ dealings should be settled within a short period of time and that the assignee should be able to feel safe from 111s. 8

3.unexpected claims arising from the assignment. Similar justifications fors. 7

4.the need for time limits on liability have been put forward regarding dis-s. 7

5.charge, including that the discharge rules bring the question of liability to as. 7

6.‘swift and clear decision’.s. 7

7.The limitation period also has a legislative connection with discharge ins. 7

8.Ch. 29 § 11 CA, which stipulates an exception in case of failure to provides. 7

9.materially correct and complete information. Furthermore, the same excep-s. 7

10.tion for criminal conduct in Ch. 29 § 12 CA applies to both the time limit ins. 7

11.Ch. 29 § 10 and a discharge resolution. Hence, the two provisions share sim-s. 7

12.ilar justifications, though discharge takes effect immediately when the deci-s. 7

13.sion is made. Another major difference is that discharge is a matter for thes. 7

14.general meeting to decide, and the limitation period is only relevant in casess. 7

15.where the general meeting has decided not to grant discharge. Regardless ofs. 7

16.if the exceptions from the time limitation are applicable, there are absolutes. 7

17.time limits in Ch. 29 § 13 CA. These vary depending on several factors, fors. 7

18.example the legal basis of the claim and who a claim is directed at. For actionss. 7

19.against the board or the CEO, the limitation period is five years from the ends. 7

20.of the financial year in which the decision or measures on which the claim iss. 7

21.based were made or taken, according to Ch. 29 § 13 item 3 CA.s. 7

22.In conclusion, discharge has an impact on the time limits for enforcings. 7

23.liability and is connected to the limitation period regulation in the CA. Sim-s. 7

24.ilar effects of limiting liability could be achieved by prior limitations, but as. 7

25.contractual time limitation other than the statutory regulation is not possibles. 7

26.in Sweden. The above also shows that if the discharge regulation were to bes. 7

27.removed, the board would be protected from claims by the one-year limi-s. 7

28.tation period, which is a significant deviation from general limitation rules.s. 7

Liability Insurance ( D&O Insurance)

1.In Swedish law, D&O liability insurance can be taken out to provide covers. 7

2.for the liability that the management may incur, including liability towardss. 7

3.the company. There is no prohibition in Swedish law against taking outs. 7

4.112 liability insurance for the board or CEO. The matter is not regulated in the CA. D&O insurance is not mandatory for the board or CEO. If insurance is taken out, the company is usually the policyholder, and the board and CEO are insured. This means that the policyholder can in some cases make a claim against the insured party.s. 7

5.D&O liability insurance is possible in all the Nordic countries. However, there are different opinions in Danish legal literature concerning if insurance can be taken out by the board of directors or if the general meeting has exclusive competence on the matter of taking out liability insurance on behalf of the board.s. 8

6.In other European jurisdictions, as well as in the US, insurance is allowed and there are no specific rules relating to D&O insurance in most of these countries. In some jurisdictions, insurance matters are regulated, at least 113s. 8

7.to some extent. In Germany, where insurance is possible, § 93(2)(3) AktG,s. 7

8.prescribes a deductible on insurance compensation. If a company takes outs. 7

9.insurance to cover a management board member against risks arising froms. 7

10.the professional activities for the company, a deductible of at least ten percents. 7

11.of the loss up to at least one and a half times the fixed annual remunerations. 7

12.of the member must be provided. There is no legal obligation for a companys. 7

13.to take out D&O insurance. However, a board member is allowed to takes. 7

14.out personal insurance in the amount of the deductible.s. 7

15.Considering that insurance of board liability is allowed and commonlys. 7

16.used in most jurisdictions, it can be concluded that this is viewed as a tools. 7

17.for limiting the liability for the board towards the company. However, it iss. 7

18.uncertain what implications insurance – if viewed in that light – has in rela-s. 7

19.tion to corporate governance when the company is the policyholder. It can bes. 7

20.noted that questions regarding the scope of D&O insurance are influenceds. 7

21.by the fact that several parties are involved, and that this can create con-s. 7

22.flicts of interests of relevance to rights and obligations under the insurances. 7

23.contract. How these conflicts are resolved is a matter of insurance contracts. 7

24.law and is primarily decided by the insurance policies. The details of theses. 7

25.policies cannot be discussed further here.s. 7

Summary

1.This section has dealt with the possibilities for limiting the liability of thes. 7

2.board, by means other than discharge, in Swedish law. These limitations haves. 7

3.been compared to the possible limitations of liability in other legal systems. Its. 7

4.has been shown that the rules governing the liability of the board of directorss. 7

5.towards the company are often mandatory in the sense that it is not possibles. 7

6.to change or modify the scope of the duties of the board in advance. Thiss. 7

7.means that the company cannot reduce the directors’ liability towards thes. 7

8.company through a contract or provisions in the articles of association. Thes. 7

9.purpose of this is to protect both the company, its shareholders and others. 7

10.114 stakeholders from being deprived of the possibility to claim liability against the board. Restrictions on the ability of shareholders to make commitments refer to ex-ante limitations of the board’s liability. In this respect, the rules are not uniform; there are differences also between the Nordic countries, whose corporate governance models are otherwise so similar that they are regarded as a common Nordic model. An example was presented in the differences between Swedish and Norwegian law.s. 7

11.Several jurisdictions provide a possibility for the company to agree to limit the liability of the board ex-post, e.g., by settling or waiving a claim. This may be provided in statutory regulations, which in that case often contain protection mechanisms for other parties, such as minority shareholders. As stated above, the mandatory nature of the liability for the directors towards the company is therefore also about protecting the company’s counterparties and external parties, such as creditors and shareholders, from the company bearing too much the company’s losses because of the board’s risk-taking on behalf of the company. Thus, not all of the company’s losses should be ‘internalised’ to the company. In Swedish law, the consent of all shareholders to a specific measure may lead to the dissolution of a claim for damages, at least for certain breaches against the CA. From the afore-mentioned principle of all shareholders’ consent, it follows that decisions under company law that violate shareholder protection norms – i.e., norms that are exclusively intended to protect the shareholders – are permitted.s. 8

12.A further possibility is indemnification agreements, whereby the company undertakes to indemnify the board against any liability. This concept is not particularly developed in Swedish law, and the possibilities for such provisions are uncertain. The discussion in Danish law, where such provisions have been introduced with regard to claims from third parties, means that if such a possibility exists, it can hardly be considered to cover the company’s claims for damages.s. 8

13.The analysis also shows that general civil liability rules can only to some extent be transferred to the company law setting. In Swedish law, rules on the adjustment of liability for damages are only relevant in exceptional cases. However, the prevailing practice in Swedish companies, which involves insurance protecting the board from liability also towards the company, seems to contradict the view that it is not possible to limit the liability of the board, as the effects of a liability insurance is normally that the injurer does not have to bear the cost of the damage. However, it is uncertain to what extent the 115s. 8

14.compensation for company losses through insurance is of importance for thes. 7

15.board’s incentives and whether it has any effect that is of significance in thes. 7

16.governance of the company.s. 7

17.116s. 7

The Scope and Effects of Discharge

Resolutions

Introduction

1.In this chapter the Swedish regulation of discharge is discussed in greater detail, with regard to its content, scope and the legal effects on the liability of the board of directors towards the company. The presentation begins with a brief discussion of the legal entities that can be exempted from liability through discharge and who is bound by a discharge resolution. It subsequently deals with the damaging acts against the company that the general meeting can decide on and the potential exceptions to the discharge granted. The regulation is compared with what has emerged above, on the conditions and limits of the directors’ liability to the company. Suggestions are made regarding how to characterise the significance of the discharge resolution. This is done in light of the question of whether it is to be regarded as a ‘complete discharge’ from liability or merely a time limit on liability or if it is similar to limitations, exemptions and waivers.s. 8

2.The consequences of not granting discharge and the implications of discharge in practice are also discussed, as well as the possibilities of changing or revoking a discharge resolution. Comparisons are made with other jurisdictions that contain provisions on discharge by resolution of the general meeting, irrespective of whether or not the issue of discharge is a mandatory item on the agenda of the AGM. The purpose of the comparison is to highlight similarities and differences in the content of the discharge and, in the light of the comparison, identify any need for harmonisation in this area. 117s. 8

Subjects of Discharge Resolutions

1.In Swedish law, the mandatory item of discharge at the AGM concerns lia-s. 8

2.bility towards the company for the board members and the CEO. Thus,s. 8

3.the starting point is that only these persons are discharged from liability.s. 8

4.In jurisdictions where a dual board structure is used, the discharge relates tos. 8

5.both the board of directors and the management board. Discharge deci-s. 8

6.sions are individual, i.e., they relate to each individual board member ands. 8

7.CEO. However, it is common to vote on discharge for all members of thes. 8

8.board through a single resolution.s. 8

9.As other persons may also be liable for damages to the company unders. 8

10.the rules of the CA, as well as general civil liability rules, the question mays. 8

11.arise whether discharge can be granted to, for example, resigned directorss. 8

12.or incorrectly appointed directors. In addition, the question may arises. 8

13.whether discharge can be granted to persons who have actual influence ins. 8

14.a company without having been formally appointed as board members ors. 8

15.similar. A discharge decision is valid only as regards the persons expresslys. 8

16.covered by the decision. However, the fact that other persons are not cov-s. 8

17.ered by such decisions does not mean that discharge can never be granted tos. 8

18.them. The general meeting may decide to discharge them, but the questions. 8

19.of their discharge is not mandatory at the general meeting.s. 8

20.A resolution concerning discharge from liability is to be taken at thes. 8

21.AGM in accordance with Ch. 7 § 11 para. 1 item 3 CA. The resolution iss. 8

22.118 binding for the company, but not for third parties. This means that the company cannot claim damages for losses that would otherwise be compensable under Ch. 29 § 1 CA. This is the case in all jurisdictions where discharge has the effect of approving the activities of the board and thus releasing the board from liability. As stated above, discharge does not release board members from liability towards the company in Germany, Austria, France and Spain.s. 8

23.In all the Nordic countries, there are rules protecting shareholders that have opposed a discharge decision. This is also the case in several other European jurisdiction, which means that discharge from liability has no effect on minority claims. However, there are differences regarding the possibilities of individual shareholders or a group of shareholders to make a claim for damages on behalf of the company in situations where the board has been granted discharge. This is related to rules protecting both individual shareholders and groups of shareholders. For example, in Belgian law, discharge means that the company and shareholders voting in favour can no longer claim damages. Shareholders voting against discharge, may still bring a claim. In Switzerland, shareholders voting in favour of discharge and those buying shares with knowledge of approval of discharge are barred from bringing claims for negligent and intentional violation of directors’ duties. In other jurisdictions, there is no differentiation between the company’s action and the effects on shareholders, i.e., a derivative suit. For example, in the Netherlands where no minority action is allowed, minority shareholders would only be protected by raising a claim on their own towards the company directors. 119s. 9

The Scope and Application of the

Discharge Resolution

Introduction

1.As indicated above, the rules on discharge from liability in Swedish law haves. 8

2.developed in parallel with the emergence of the limited company as a legals. 8

3.phenomenon. The question of liability for the management of the companys. 8

4.has been linked to the submission of the annual reports to the general meet-s. 8

5.ing and the general meeting’s decision to approve this account. The discharges. 8

6.thus aims to close the past year and for the board to be informed of the gen-s. 8

7.eral meeting’s attitude to its management. It can therefore be assumed thats. 8

8.the discharge originally had the effect of relieving the board from liabilitys. 8

9.by providing a passing of risk from the board to the company regarding thes. 8

10.management of the company. This ensured a particularly important compo-s. 8

11.nent in the development of the limited company, namely a limited liabilitys. 8

12.of the management for the business risks that should burden only the limiteds. 8

13.company as a legal entity.s. 8

14.Current Swedish company law has evolved with regard to the board’ss. 8

15.responsibility for the management of the company’s affairs, obligations tos. 8

16.accommodate interests other than those of the majority shareholders, ands. 8

17.provisions aimed at other objectives than the protection of the majority ofs. 8

18.shareholders with a controlling interest in the company. Discharge regula-s. 8

19.tion is also linked to the examination and approval of the accounts. A furthers. 8

20.explanation for the rules is that the requirement for a discharge decisions. 8

21.implies that shareholders are obliged to scrutinise also the behaviour of thes. 8

22.board in the context of its duties. The following section discusses the currents. 8

23.legal situation regarding the potentially harmful conduct that can be covereds. 8

24.by the discharge and its temporal scope. The aim is to show how liability ins. 8

25.this respect can be limited and also to help clarify what discharge does nots. 8

26.cover. The presentation is rather brief, as these issues have already been dealts. 8

27.with in detail in other literature.s. 8

What Claims and Grounds are Covered by Discharge?

1.First, only claims for damages based on the rules in Ch. 29 § 1 CA ares. 8

2.covered by a resolution on discharge from liability. If the obligations of thes. 8

3.board have been performed in such a way that, for example, an agreed bonuss. 8

4.120 is forfeited, a discharge decision does not affect this situation. The starting point is that discharge decision covers all damaging acts that the person causes within the framework of their assignment for the company. If the claim is based on another ground, e.g., liability for damages under a contract for the sale of goods between the company and a member of board, the claim is not covered by the discharge resolution, which means that the company can bring an action without prejudice to a discharge decision.s. 8

5.Claims for compensation other than damages are not covered by a discharge resolution. Claims not covered are, for example, obligations concerning refund of unlawful dividend and, in connection to this, the deficiency liability in Ch. 17 §§ 6–7 CA. A decision to discharge the board from liability does not affect the company’s ability to enforce such a liability for repayment or deficiency against the person discharged. This is the case even though the assessment of the deficiency liability is to some extent similar to the assessment of damages under Ch. 29 § 1 CA. Furthermore, discharge does not affect liability due to legal acts performed before the company’s registration under Ch. 2 § 26 CA. Liability may also arise under Ch. 25 § 121s. 9

6.18 CA, for failure to act in case of capital deficiency in the company. Suchs. 8

7.failure may result in personal liability for the company’s debts. There iss. 8

8.also liability for prohibited loans under Ch. 21 CA. Claims based on others. 8

9.legislation are not covered by discharge resolutions.s. 8

10.However, it is uncertain whether there are possible exceptions from dis-s. 8

11.charge with regard to breach of specific duties of the board that may give rises. 8

12.to damages towards the company. A particular issue is whether the discharges. 8

13.covers damage resulting from behaviour in breach of the principle of equals. 8

14.treatment of shareholders, the general clauses and the provisions prohibitings. 8

15.disguised transfers of value. A breach of any of these may result in damages. 8

16.to both the company and external parties.s. 8

17.As regards the company’s claims, there is probably no reason to distin-s. 8

18.guish between breaches of different obligations under company law, if theys. 8

19.result in damage to the company. However, breaches of the principle ofs. 8

20.equal treatment of shareholders, for instance, typically result in individuals. 8

21.shareholders being disadvantaged at the expense of others, which may causes. 8

22.damage to the disadvantaged shareholder. In such cases, the discharge resolu-s. 8

23.tion does not affect the liability towards the shareholder, as it is only bindings. 8

24.upon the company. In the case of a limitation of liability corresponding tos. 8

25.the BJR, which then does not apply, a similar effect is achieved, as an actions. 8

26.for damages is possible in both cases. However, as Swedish law restricts thes. 8

27.possibility of claims from the individual shareholder or creditor, this meanss. 8

28.that a claim for damages is usually sought by the company. If this is the case,s. 8

29.the valid discharge will be a procedural hindrance of such a claim. Therefore,s. 8

30.122 there are exceptions to the given discharge concerning both minority actions and in cases where the company goes bankrupt.s. 8

Recourse Claims

1.Another matter in relation to the scope and application of the discharge decision is whether the decision has effect on recourse claims between board members. As the board members are jointly and severally liable for damages, the board member that has compensated the company may bring a recourse claim against other board members. If the company could dispose of the recourse claim it would mean that the creditor (the company) would, through its discharge decision, have the power to decide which of two jointly liable parties should ultimately bear the cost of the damages. The division of responsibility between jointly liable debtors would then depend on the creditor (the company). If the discharge is considered in isolation as a procedural rule – meaning that the discharge affects the company’s right of action – this cannot be perceived as a limitation of a possible recourse claim. The substantive law question, i.e., to what extent the discharge also limits the liability (and recourse) of any co-debtors, therefore remains. Such questions are settled with regard to the general rules of the law of obligations. In this respect, it may be possible to interpret a discharge decision as also relieving someone other than the person directly covered from liability. However, the 123s. 9

2.starting point is that it should not discharge anyone other than the persons. 8

3.explicitly covered. Therefore, the right of recourse is not affected.s. 8

4.A different matter is whether the company’s recourse claim against thes. 8

5.board is covered by the discharge decision. A recourse claim may arise, fors. 8

6.example, if the company has become liable for damages to a third party dues. 8

7.to the behaviour of the board, i.e., through attribution of the conduct of thes. 8

8.board. In this respect, a distinction can be made between cases where thes. 8

9.board is independently liable to third parties and cases where the board iss. 8

10.liable only to the company. If both the company and the board are jointlys. 8

11.and severally liable to third parties, the apportionment of liability for thes. 8

12.co-debtors is based on different standards, depending on the nature of thes. 8

13.joint and several liability. For example, under general civil liability (torts. 8

14.law), the apportionment may be based on a proportionate allocation (pros. 8

15.rata), the degree of culpability of each debtor or reasonableness. The inter-s. 8

16.nal distribution of liability can also be determined by contract between thes. 8

17.co-debtors.s. 8

18.An example can illustrate this. In NJA 2019 p. 94 (Gamla vägen), a ten-s. 8

19.ant-owners’ association was held liable to an acquirer of a tenant-owneds. 8

20.apartment for damage caused by the association in providing incorrect infor-s. 8

21.mation about pledging in an extract from the apartment list. In this case, thes. 8

22.Supreme Court held that Ch. 9 § 8 of the Swedish Tenants-Owners’ Rightss. 8

23.Act states that it is the association’s board of directors that is responsibles. 8

24.for the membership and apartment lists. Although this responsibility liess. 8

25.with the board, the association as such was considered to have the ultimates. 8

26.responsibility for keeping the lists and ensuring that extracts were correct.s. 8

27.Therefore, the Supreme Court held that the association was required to com-s. 8

28.pensate for the damage caused by deficiencies in the extracts from the listss. 8

29.that could be attributed to the negligence of the association’s representativess. 8

30.and employees.s. 8

31.It would also be possible for the board to be liable to the tenant-own-s. 8

32.ers’ association for damages. In addition, the Tenant-Owners’ Rights Acts. 8

33.124 contains criminal law provisions which mean that a person who, intentionally or negligently, does not keep a list of apartments or provides incorrect or misleading information in an extract must pay a fine. The board may therefore be liable for damages towards both third parties, i.e., purchasers of an apartment, and the association, in the event of incorrect information on pledging in the list of apartments.s. 8

34.A similar liability may arise for the board of directors of a limited company for damage caused to third parties because of negligence in the performance of their duties. It can therefore be assumed that the company could have claimed ‘recourse’ against the board in such a situation. The question is if the company has a right to recourse even though discharge has been granted to the board, or some of its members. If the company’s recourse claim against the board constitutes a claim for damages, i.e., it relates to compensation paid that is regarded as damage and falls within the scope of Ch. 29 § 1 CA, the discharge decision also affects this claim. If, however, the recourse claim relates to compensation aimed at the internal distribution in the case of joint and several liability towards third parties, the question is whether the discharge decision precludes an action against the board. As it is not strictly speaking a claim for damages, but a claim that arises without harmful behaviour towards the company, it could be argued that it falls outside the scope of the discharge decision. It would also be more consistent with other recourse claims, e.g., between several jointly liable board members, as discharge for one of them does not affect the right to recourse of the other party.s. 9

35.On the other hand, it can be argued that in situations where liability for damages exists at the same time as a recourse claim can be asserted, the company could avoid the effects of a discharge decision by formulating its action as a recourse claim. However, the existence of a right of recourse due to joint and several liability also presupposes that the board is directly liable towards the third party. If such a recourse claim were to be affected by the discharge decision, it would mean that the company is worse off in situations where the company’s liability against third parties is also viewed as a damage for the company. If the company’s own recourse claim is not covered by the discharge decision, it would mean that many situations where the board is responsible for the company’s losses are not covered by the discharge decision, simply because of the wording (‘damage’) in Ch. 29 § 1 CA. Therefore, it is more expedient to consider that such a recourse claim, which can also 125s. 9

36.be understood as being based on the board having breached an obligation tos. 8

37.the company by the company becoming liable for damages to a third party,s. 8

38.is covered by a granted discharge.s. 8

Discharge for Future Events

1.The prevailing opinion in Swedish legal literature, as well as other jurisdic-s. 8

2.tions containing discharge regulations, is that discharge cannot be granteds. 8

3.for future events. It is argued, among other things, that discharge may nots. 8

4.be granted on any basis other than duly prepared annual accounts. Hence,s. 8

5.granting discharge for future events is considered to be in direct conflict withs. 8

6.the information objective of the regulation, as granting discharge for thes. 8

7.future entails a cessation of the board’s incentive to provide information tos. 8

8.the general meeting about decisions or measures covered by the decision thats. 8

9.give rise to liability. This in turn raises ‘serious doubts’ to allowing ex-antes. 8

10.discharge. However, the efficiency purpose of discharge would be realiseds. 8

11.if discharge were granted in advance, and economy of process would also bes. 8

12.achieved if discharge could be granted for future events.s. 8

13.Based on the above accounts of the development of discharge, and thes. 8

14.corresponding regulations in other countries described in Chapters 3 ands. 8

15.4 of this study, it is clear that decisions on discharge from liability are nots. 8

16.intended to being retroactive. However, as also presented above, there ares. 8

17.certain possibilities to limit the board’s liability to the company in advance.s. 8

18.The advantages and disadvantages of such limitations are also analyseds. 8

19.above, and the position of Swedish law is that such agreements or provisionss. 8

20.in the articles of association are not possible. It can therefore be said thats. 8

21.the question of whether discharge can be granted for future events shoulds. 8

22.obviously be answered in the negative. Admittedly, there may be questionss. 8

23.of detail and certain aspects that may be of practical importance, e.g., withs. 8

24.regard to the timing of the decision during the financial year and questionss. 8

25.relating to how the matter should be dealt with at a continued general meet-s. 8

26.126 ing. However, in light of the above, it is clear that other tools for limiting the liability of the board of directors must be used if this is to be done ex-ante, i.e., before a harmful act.s. 8

27.Several components of the discharge regulation in Swedish company law contribute to this view. Examples include the protection of minority shareholders in connection with discharge and the previously mentioned information exception. Further, the same arguments apply concerning the possibilities for the board to avoid liability for damages under Ch. 29 § 1 CA for administrative measures on the ground that the general meeting has decided to approve the measures. In this regard, reference can be made to Ch. 8 § 41 CA, according to which the board of directors may not undertake a legal act or other measure that is unduly favourable to a shareholder or anyone else to the detriment of the company or any other shareholder. Nor may the board follow an instruction from the general meeting if it is contrary to the CA, the applicable law on annual accounts or the articles of association, i.e., the general clause.s. 9

Exceptions from Granted Discharge

Introduction

1.In addition to the discharge being constrained to the directors’ liability towards the company in certain respects, there are also explicit exceptions to the discharge granted under the CA. These exceptions are relevant if the conduct of the board during normal circumstances would be covered by the discharge decision. An action for damages can be brought under Ch. 29 § 11 CA if the general meeting has not been provided with essentially correct and complete information about the decision or measure on which the action is based. An action can also be brought if the claim for damages is based on a criminal offence, in accordance with Ch. 29 § 12 CA. In addition, the discharge does not affect the action for damages if the company has gone bankrupt, in accordance with Ch. 29 § 14 CA. These exceptions will be discussed in the following but given the scope of the study it will not be possible to go into every detail. 127s. 9

Materially Incorrect or Incomplete Information

1.According to Ch 29 § 11 CA, resolutions on discharge do not prevent thes. 8

2.company from bringing actions against the board of directors if materiallys. 8

3.incorrect or incomplete information has been given to the general meeting.s. 8

4.Hence, if the board gives a report that is based on ‘in material respects’s. 8

5.incorrect or incomplete information, a claim for damages is possible even ifs. 8

6.discharge granted, if the period for doing so has not passed. There is thuss. 8

7.an exception to the discharge, the ‘information exception’.s. 8

8.Similar exceptions exist in the Nordic countries (Denmark, Norway ands. 8

9.Finland), as well as in other European jurisdictions where resolutions ons. 8

10.discharge affect the liability of the board. The exception relates to infor-s. 8

11.mation that could have been provided to the general meeting through thes. 8

12.annual report, the auditor’s report or in any other way, concerning the deci-s. 8

13.sion or measure on which the action is based. Although the auditor hass. 8

14.access to all business documents and must make a recommendation on thes. 8

15.matter of discharge based on the investigation of various business decisions,s. 8

16.it is not sufficient that the information is provided to the auditor; informa-s. 8

17.tion must be provided to the general meeting.s. 8

18.128s. 8

19.It does not matter if the decision or conduct in question would normally be presented in the annual report or audit report. Nor does it matter if the incorrect information was due to intent, negligence, or circumstances for which the board of directors or the CEO cannot be held responsible. The provision in Ch. 29 § 11 ABL is not an independent basis for liability, but merely an exception to discharge from liability.s. 9

20.Due to the information exception, it has been said that a decision of discharge is a gesture without decisive legal meaning. However, this critique depends on the interpretation of the exception, meaning that if there is a more extensive duty of disclosure, the exception will more often be applicable, and the company may sue the board despite the discharge. Crucial to this question is the meaning of the materiality of the information and the level of detail of the information required in connection with the board’s harmful measures.s. 9

21.In Swedish law, there is a lack of legal precedents relating to these matters. However, there are some lower court cases that can illustrate how this exception is interpreted. Comparisons can also be made with other Nordic countries, although the extent of the exception may vary due to differences in the wording of the legislation. For example, in the Danish Supreme Court case U 2019.1907 (Capinordic Bank), it was held that the discharge decision concerned those particular business decisions mentioned in the annual reports. In the case, there were no grounds for assuming that other circumstances had been presented at the general meeting. The annual reports did not entail information about single business events and the resolutions on discharge were made on a general basis. Therefore, the general resolutions 129s. 9

22.on discharge could not be invoked concerning damages caused by singles. 8

23.business events.s. 8

24.In the Norwegian Act, the wording differs only slightly from that in thes. 8

25.Swedish regulation, but ‘materiality’ is interpreted as relating to the materi-s. 8

26.ality of the harmful conduct of the board, not the materiality of the infor-s. 8

27.mation provided. The conclusion of the Norwegian scholar Reiersen iss. 8

28.that the exception does not undermine the resolution of discharge. Shes. 8

29.argues that the rule implies that a decision on discharge does not entail as. 8

30.loss of rights for damages other than those over which the general meetings. 8

31.had oversight. She also states that the legal situation reflects a compromises. 8

32.solution between the company’s and the board’s need to clarify the matters. 8

33.of liability and the protection of the shareholders’ interests in being able tos. 8

34.take a position on the issue of liability with full information. Therefore,s. 8

35.she argues, resolutions on discharge will have a role to play in Norwegians. 8

36.company law in the future. First, the duty of disclosure will give the generals. 8

37.meeting certainty for making the resolution on a fully informed basis, ands. 8

38.second, the disclosure will have a positive effect on the information provideds. 8

39.to the AGM, and hence be an incentive to openness between the board ands. 8

40.the shareholders.s. 8

41.Concerning the Swedish regulation, Svernlöv has drawn the conclusions. 8

42.that the disclosure requirement is quite strict. In principle, an action may bes. 8

43.brought despite discharge being granted, in respect of any decision or actions. 8

44.about which the general meeting has not received substantially accurate ands. 8

45.complete information, ‘however small or insignificant it may appear’.s. 8

46.However, the information exception is also criticised by Svernlöv due tos. 8

47.the fact that the management of larger companies cannot possibly accounts. 8

48.130 in sufficient detail for every single decision and action that could give rise to a claim for damages. It would also be difficult to assess what information should be provided to the general meeting and the costs for producing this information could be very high. The information exception can be difficult to deal with in practice due to the board’s duties of confidentiality. Further, it cannot be assumed that the board will in general act more diligently towards the company due to the information exception.s. 8

49.The information exception is justified by reasoning that it should not be possible to give consent to an action if the consenting party is unaware of the circumstances and consequences of the consent, i.e., ‘informed consent’ is needed. As discussed above, in Section 7.2.4, in order for the shareholders to be considered to have informed consent in relieving the board from liability, the consent must be expressed and linked to a specific measure taken by the board or a specific board decision. Unlike the consent cases, the discharge resolution does not require the explicit acceptance of individual board measures. Hence, in terms of the resolution, discharge is granted more easily than consent pertaining to specific measures, where the board wants to avoid liability. However, if the information was not sufficiently clear, the information exception applies. The objective criterion of information therefore constitutes a significant exception to the discharge granted. Although this is the case, failure to provide information only means that the company is not bound by the resolution on discharge from liability – it may still be possible to release the board from liability according to other rules. For example, the same measure, i.e., the same facts on which the action for damages is based, may lead to the exclusion of liability based on the principle of all shareholders consent. 131s. 9

Criminal Conduct

1.If a member of the board has committed a crime, the company can make as. 8

2.claim for damages based on the criminal offence regardless of a resolution tos. 8

3.grant discharge in accordance with Ch. 29 § 12 CA. Furthermore, crim-s. 8

4.inal conduct leads to a different time limitation for claims. This is thes. 8

5.case in many other jurisdictions, but the scope of the exception may vary.s. 8

6.For example, there may be differences in determining the scope for certains. 8

7.wrongful acts, such as wilful misconduct or gross negligence that are nots. 8

8.necessarily criminal conduct. These situations may sometimes coincide withs. 8

9.the application of the information exception. In the CA, exceptions due tos. 8

10.wilful misconduct are not expressly prescribed. The demarcation betweens. 8

11.liability due to acts during the fulfilment of the assignment and liabilitys. 8

12.based on the CA or other regulations may create difficulties in drawing as. 8

13.clear line on what conduct is not covered. As it can be assumed that the infor-s. 8

14.mation exception will often apply in these cases, it is likely that an actions. 8

15.can be brought already on that basis. However, since the granted discharge iss. 8

16.a procedural hindrance and an action is to be dismissed by the court, it cans. 8

17.be argued that its scope should be interpreted restrictively. In other words,s. 8

18.it would imply a broader application of the exception in the case of criminals. 8

19.offences and would perhaps also include wilful misconduct.s. 8

Bankruptcy

1.Another exception is related to the protection of creditors. According to Ch.s. 8

2.29 § 14 CA, the bankruptcy estate can sue the board of directors regardless ofs. 8

3.a decision of discharge from liability. The bankruptcy estate therefore is nots. 8

4.bound by the discharge decision and the estate can claim damages on behalfs. 8

5.of the creditor group. Though this is the case, the legal basis for a claim fors. 8

6.damages rests on the damages caused to the company. The bankruptcy estates. 8

7.can use the ‘internal norms’ of liability to claim damages for the company,s. 8

8.i.e., liability towards the company.s. 8

9.132s. 8

10.This exception shows that creditors are protected from damage caused by directors to the company, although creditor protection is accomplished indirectly through the liability norms towards the company. However, in the legal literature, it has been argued that rules aimed at protecting the company’s creditors are less relevant in connection with discharge than rules protecting minority shareholders because the rules on discharge mainly concern the relationship between the board and the company. Although discharge resolutions are irrelevant for creditors – in the sense that granted discharge does not affect creditors in the case of bankruptcy – this exception also shows that the regulation takes into account the interest of the company’s creditors, as the general meeting cannot at all times dispose of the company’s claim to the detriment of creditors.s. 9

11.Therefore, a more accurate description of discharge considers the fact that these rules include protective measures in the interest of creditors and minority shareholders. Difficulties may lie in other areas of assessing liability, for example if shareholders consent to preclude a right for the bankruptcy estate to make a claim for damages. Nonetheless, the ‘creditor interest’ is considered, providing an opportunity for creditors to make claims for damages (through the estate). Hence, the interest of creditor protection is not satisfied by the discharge regulation as such, in the same way as the protection of minority shareholders, but is expressed in the discharge regulation and constitutes an important exception to the possibilities of limiting the liability of the board.s. 9

12.If discharge is viewed as a matter of competence, it also becomes clear that the regulation does not fit well with the perception of the bankruptcy estate as a separate legal entity. The same applies in general to bankruptcy estates and the legal effects of discharge. If the bankruptcy estate is an independent legal entity, it should not be bound by the discharge decision – on that basis alone. It is difficult to reconcile the ‘internal’ competence requirements in liability matters with the fact that the bankruptcy estate is an independent legal entity. If we assume that this is a substantive (competence) issue, then 133s. 9

13.the ‘bankruptcy exception’ means that the interests of creditors are relevants. 8

14.to the extent that they affect the discharge.s. 8

Effects of Not Granting Discharge

1.If discharge from liability is denied, it means only that the company retainss. 8

2.its ability to claim damages against the board, which is a procedural prereq-s. 8

3.uisite in an action for damages. Denial of discharge does not automaticallys. 8

4.mean that the members of the board are considered liable for damages or thats. 8

5.an action for damages will be brought. The question of liability for damagess. 8

6.is instead determined through subsequent legal proceedings. Hence, denials. 8

7.of discharge is sometimes viewed as merely an expression of mistrust or as as. 8

8.way of showing disapproval of the board’s conduct.s. 8

9.Even though the refusal of discharge does not have any direct legal effectss. 8

10.regarding the company’s claims for damages – other than keeping the ques-s. 8

11.tion of damages open – such a decision may have other consequences for thes. 8

12.members of the board. In companies that are subject to the supervision ofs. 8

13.the Swedish FSA, a management review is done prior to the appointment ofs. 8

14.members of the executive management and an ownership assessment in con-s. 8

15.nection with certain acquisitions in financial companies. This assessments. 8

16.also considers whether the person has been denied discharge from liabilitys. 8

17.in the past five years.s. 8

18.Hence, the discharge resolution lacks a direct legal consequence for thes. 8

19.board other than the retained opportunity for the company to make a claims. 8

20.for damages against the board. However, non-discharge puts the reputations. 8

21.of board members at risk and has an impact on the suitability assessments. 8

22.of the board members, if such an assessment is to be made. Therefore, thes. 8

23.134 refusal to discharge the board from liability may in some cases have relevant social and economic consequences for individual board members.s. 8

24.Another question is whether the company (through the board) has a duty to act, for example by making further investigations in relation to harmful conduct of members of the board if discharge is denied. If a majority of shareholders has voted against discharge, it is most likely that the board at the same time has been replaced by a new board, or at least that one or more new board members are appointed. Following the instructions of the general meeting, the board would then be obliged to further investigate the conduct of the (former) board or individual board members. In these situations, the duties of the board follow from instructions issued by the general meeting. If a minority of shareholders has denied discharge, the interpretation of the minority protection rule is crucial to determining the duties of the board. Hence, the answer depends on the majority requirement in connection to discharge resolution, i.e., whether a qualified minority (holding over ten percent the shares) can refuse discharge or if the instructions from the majority of shareholders are to be obeyed.s. 9

Possibility to Change or Revoke Discharge

Resolutions

1.In Swedish law, it is not possible to change or revoke granted discharge from liability. This means that the AGM cannot decide to make a claim for damages relating to matters that are covered by granted discharge. Nor is it possible for a later general meeting to revoke the discharge granted. In comparison, this issue has been discussed in Norway, where it has been debated whether it is possible to revoke the discharge resolution. The question put forward is if the resolution should be interpreted as a promise to the board, meaning that the board members have a right in relation to the company that the company cannot revoke. Similarly, in the Netherlands, there are different opinions in the matter of revocation of a discharge decision. Some believe that discharge decisions cannot be revoked due to their direct external effect on directors’ liability, but others regard it as possible for the discharging body (the general meeting) to revoke such a resolution. Reasons of expedi 135s. 9

2.ency indicate that the board of directors should be able to rely on a discharges. 8

3.decision if it has come to their knowledge, and that it should not be possibles. 8

4.for the general meeting to revoke such a decision.s. 8

Summary

1.In the above, the scope of resolutions on discharge has been examined, withs. 8

2.regard to the subjects of the discharge, what claims and grounds for liabilitys. 8

3.that are covered and the exceptions to the discharge provided for in the Swed-s. 8

4.ish regulation. In summary, the discharge primarily concerns the memberss. 8

5.of the board and the CEO, but to a certain extent it may also be possible tos. 8

6.decide on discharge relating to other persons. Granted discharge releases thes. 8

7.persons subject to the resolution only from liability towards the company,s. 8

8.and the starting point is that it has no bearing on the allocation of liabilitys. 8

9.between several liable parties. In Swedish law, the discharge only relates tos. 8

10.liability based on company law rules on damages and does not apply to others. 8

11.legal remedies. Several of the remedies against acts of the board, includings. 8

12.unauthorised transfer of assets, prohibited loans and deficiency liability, ares. 8

13.not covered by the rules and it is not possible for the general meeting tos. 8

14.relieve the board of directors from liability for such acts.s. 8

15.As regards the exceptions, the rules on discharge are similar to those ins. 8

16.other Nordic countries as well as those European jurisdictions studied thats. 8

17.contain regulations on discharge. Most jurisdictions base their regulation ons. 8

18.the premise that an effective decision requires that the general meeting hass. 8

19.received complete and correct information from the board on the circum-s. 8

20.stances that may give rise to liability. This regime is based on the view thats. 8

21.the general meeting should only be able to grant discharge in respect of whats. 8

22.is known to the shareholders, so the decision is made by those fully informed.s. 8

23.Although it is not clear from the drafting of the legislation, it could also bes. 8

24.based on the assumption that the board will in general act more diligentlys. 8

25.towards the company if there is a duty to disclose measures taken by thes. 8

26.board that may give rise to a claim for damages.s. 8

27.In other jurisdictions, where discharge does not have a similar effect ors. 8

28.where decisions of this kind are not allowed at all, other types of limitationss. 8

29.of liability are present instead. The reasons underlying these different ruless. 8

30.limiting the liability of the board are often similar. However, the discharges. 8

31.does not affect the content of the directors’ duties towards the company,s. 8

32.except that it provides the directors with an incentive to disclose all necessarys. 8

33.136 information about actions that could give rise to liability. Thus, the assessment of negligence is not affected, although the discharge constitutes a total disclaimer of liability. The effect is similar to a time limit on liability but can also be seen as a way of passing the risk of potentially damaging management by the board during the past year to the company, to the extent that the management is fully disclosed to the general meeting.s. 8

34.In comparison to the other ways of protecting the board from liability, for example through the American BJR mentioned in Chapter 7 above, the discharge means that the board’s specific conduct, for example a breach of the duty to act in the company’s interest, is not examined by the courts. Instead, the action is to be dismissed if there is a valid decision to grant discharge. This differs from in the BJR, which provides protection from liability in connection with the assessment of negligence. The assessment of the validity of discharge is more binary, although as stated earlier in this Chapter, there are several exceptions in its application.s. 9

35.Considering the American BJR and the Swedish discharge regulation, these tools fulfil slightly different functions due to the differences in the company law frameworks. In Swedish law, the corporate governance model is to a greater extent based on shareholders having direct influence over the company’s affairs, including the matter of liability of the board. The US model is based on the duty of loyalty to the company, where the shareholders’ influence is exercised by bringing a liability action for breach of this duty. This means that discharge, which brings the issue of liability to the AGM, creates opportunities for shareholders to decide on the issue of liability and guides the board’s behaviour in a different way than the BJR. The focal point of discharge is for shareholders to gain knowledge about the management and be able to decide on the matter of liability themselves – with some limitations regarding other interests, such as minority or creditor protection. What characterises the American BJR is that it is a rule of conduct directed at the board of directors, which is relevant in any subsequent assessment of the board’s liability towards the company.s. 9

36.Discharge from liability is sometimes perceived as a complete release from liability. This is not accurate. It has also been criticised for being too weak a protection for the board against liability claims, mainly due to the information exception. The above has shown that the discharge, due to this exception, has the function of ensuring that shareholders are aware of the board’s behaviour, rather than limiting the liability of the board, as the information provided by the board to the general meeting does not confer a right for 137s. 9

37.the board to be discharged from liability. Although the regulation therefores. 8

38.may affect the conduct of the board, making them act more diligently bys. 8

39.being aware that the facts related to liability must be disclosed in order fors. 8

40.discharge to be granted, it is uncertain whether it has any actual effect ins. 8

41.preventing harm.s. 8

42.Given that denial of discharge may also have consequences for the boards. 8

43.of directors, e.g., by affecting the fit and proper assessment carried out fors. 8

44.certain financial companies and the social effects that denial of discharges. 8

45.may have for an individual director, it cannot be said that discharge is ‘ofs. 8

46.no significance’. However, in the absence of relevant case law on many ofs. 8

47.these issues, not all uncertainties regarding its effects can be fully clarified.s. 8

48.As there are no other possibilities in Swedish law for limiting liability, such ass. 8

49.through contractual solutions, it also seems necessary to retain the discharges. 8

50.regulation or to meet the need for the board’s protection from liability ins. 8

51.some other way, for example through a more lenient assessment of liability.s. 8

52.In the next chapter, the specific issue of the discharge resolution ands. 8

53.minority protection will be elucidated in greater detail. Thus, the histori-s. 8

54.cal anchoring of the discharge regulation in Swedish law will become evens. 8

55.clearer.s. 8

56.138s. 8

Majority Requirements and

Minority Protection

Introduction

1.The CA does not explicitly state the majority requirements for a resolution on discharge from liability. According to Ch. 29 § 7 CA, an ‘action for damages against the company according to §§ 1–3 may be brought, if the majority or a minority consisting of owners of at least one tenth of all shares in the company, at the general meeting, has supported a proposal to bring an action for damages or, in the case of a board member or the managing director, has voted against a proposal for discharge’. The majority requirement for discharge can thus be interpreted in different ways. Generally, resolutions at the general meeting require simple majority if no special quorum requirements apply, see Ch. 7 § 40. The wording of Ch. 29 § 7 CA has therefore given rise to a debate among legal scholars concerning the majority requirement for resolutions on discharge in Swedish company law.s. 9

2.There are mainly two different views on this. According to the first view, discharge is denied if the minority shareholders having at least ten percent of the shares in the company vote against it. As discharge is not granted, the company (through the board) can make a claim of damages against the board. Thus, shareholders with at least 10 percent of the shares in the company may prevent discharge from liability being granted for the board of directors or the CEO by the AGM. This interpretation implies that Ch. 29 § 7 of the 139s. 9

3.CA is not only a procedural rule that gives a minority of shareholders a rights. 9

4.to bring actions for damages in their own name but on behalf of the com-s. 9

5.pany. The interpretation also suggests that discharge from liability should bes. 9

6.referred to only as the situation in which the board of directors and/or the CEOs. 9

7.are not at risk of being sued, unless exceptions from discharge are applicables. 9

8.according to Ch. 29 §§ 11 and 12 of the CA.s. 9

9.The second view is that discharge is granted if more than half of the votess. 9

10.cast are in favour of discharge (with the chairman’s vote being decisive in thes. 9

11.event of a tie). If shareholders with at least 10 percent of the shares in thes. 9

12.company have voted against discharge, the right to bring action against thes. 9

13.board of directors or CEO remains (according to Ch. 29 § 7 CA), but thes. 9

14.majority ruling is to be interpreted as an instruction to the board not tos. 9

15.make a claim for damages, and thus means that discharge is to be regardeds. 9

16.as granted. According to the second interpretation, discharge is granted bys. 9

17.simple majority, though the minority can make a minority claim (actio pros. 9

18.socio) in their own name but on behalf of the company.s. 9

19.The CA does not contain clear provisions regarding the interpretation ofs. 9

20.the majority requirements in connection with resolutions of discharge froms. 9

21.liability. A textual analysis of the specific provisions shows that the wordings. 9

22.of the legislation supports both views. The rules are discussed in the prepara-s. 9

23.tory works for the current legislation, but the statements are not entirely clears. 9

24.on the matter. There are only a few examples of cases relating to the issues. 9

25.and no Supreme Court precedents that clarify it.s. 9

26.In the legal literature, both views are represented, but most legal scholarss. 9

27.are of the opinion that a minority of ten percent of the shareholders votings. 9

28.against discharge means that the board is denied discharge from liability.s. 9