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21 August 2006
Pursuant to Article 754 of the Swiss Code of Obligations, the members of a board of directors and all persons engaged in the management of a company are liable to the company for damage caused by the intentional or negligent violation of their duties. However, it is a general principle of contract and tort law that a person cannot be held liable for a violation - contractual or otherwise - if the person suffering damage consents to it. This principle applies to company law, including the liability of directors and officers under Article 754.
Directors cannot be held liable for violation of duty if they can prove that they acted with the consent of the company which suffered damage. If sued by the company, a director may refer to this principle in his or her defence if he or she acted with the explicit or implicit consent of all shareholders, or executed a resolution of the general meeting which was lawfully passed and not challenged in court by a shareholder. The issue of liability does not arise if the company or its sole shareholder is fully aware of the circumstances and accepts actions on the part of the director that would otherwise give grounds for liability according to Article 754.
As valid consent to a violation of duty by a director can be given only with the assent of all shareholders or through a legitimate resolution of the general meeting, such consent is most likely to be given if the company has only one shareholder. In other circumstances it is extremely unlikely that every shareholder would approve the director's actions, especially if such actions are considered to be a violation of his or her duties.
The legal basis for the position of a sole shareholder representing that of the company can be found in Article 55 of the Swiss Civil Code, which requires that the administrative bodies of a legal entity express the will of the entity. In Swiss company law a majority shareholder is considered to be a body of an entity if he or she is involved in the administration of the company's business. The actions of a sole shareholder are therefore considered to correspond to the will of the company.
In two decisions the Supreme Court confirmed the principle that directors cannot be held liable if the company or its sole shareholder consents to a violation of duty.
In Decision BGE 4C 397/1998, delivered on July 15 1999, a trustee was instructed by R to found a company and be its sole shareholder on a trust basis. The trustee elected three directors. The company subsequently filed a lawsuit against the directors, claiming liability based on Article 754. The plaintiff claimed that the defendants had initiated unjustified payments to third parties. The court found that the defendants could not be held liable, as the payments were made with the approval of the sole shareholder.
In Decision BGE 4C 79/2005, delivered on August 19 2005, company X had leased parking space to company W. As the revenues from the leasing contract amounted to less than half the revenues company W generated from the parking meters on the premises, the plaintiffs, the heirs of the former sole shareholder of company X, argued that the leasing of parking space to company W at considerably below the market price was not only a hidden distribution of profits, but also a violation of duty on the part of the directors. The court again ruled that, as at the time the sole shareholder of the company had approved the arguably unfavourable leasing contract, the directors could not be held liable.
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