Eur Bus Org Rev (2016) 17:555–576 DOI 10.1007/s40804-016-0052-0

ARTICLE

The Business Rule in Lithuania

1,2 1,3 Virginijus Bite_ • Gintare_ Gumuliauskiene_

Published online: 16 November 2016 Ó T.M.C. Asser Press 2016

Abstract Any involvement in business is associated with the risk which a business decision may bring in terms of both gains and losses. Economic activities have business cycles and fluctuations, so neither a constant and stable profit nor deals that are always beneficial can be guaranteed. If directors were personally responsible for every loss-making decision, this would ruin their initiative and entrepreneurship and limit their discretion in situations requiring prompt and decisive action. However, if directors were not subject to legal liability for damages incurred due to their decisions, this would increase the risk of directors adopting unlawful decisions. Therefore, it is important to find the golden mean between liability and freedom to adopt decisions. This article aims to present the rules applied in the Lithuanian legal system in liability cases against directors in the evaluation of risky business deci- sions. The research has shown that there is no explicit legal rule in Lithuanian which provides for a , since the Lithuanian legal system, like most legal systems in other countries with a tradition, does not recognise the judicial abstention doctrine, which emphasises a ’s right not to consider ex post criticism of directors’ decisions. In Lithuania, there is no tradition of litigation proceedings and rules formulated in judicial decisions that

Virginijus Bite:_ Professor of Law and Director of the Institute of . Gintare_ Gumuliauskiene:_ Associate Professor of Law at the Institute of Private Law.

& Virginijus Bite_ [email protected] Gintare_ Gumuliauskiene_ [email protected]

1 Faculty of Law, Mykolas Romeris University, Vilnius, Lithuania 2 Law Office Bite and Caikovski ADJUTO, Vilnius, Lithuania 3 Law Office Gintare_ Gumuliauskiene,_ Vilnius, Lithuania 123 556 V. Bite,_ G. Gumuliauskiene_ allow directors to be aware of the decision-making rules ex ante, so that their decisions cannot be assessed as illegal ex post.

Keywords Business judgment rule Á Civil liability Á Company director Á Duty of care Á Directors’ duties Á Risky business decision

1 Introduction

Each company1 is led by its primary goal – gaining profit – that usually encourages its directors to make certain risky business decisions. On the one hand, such decisions might be deemed reasonable with a view to the company’s further business development and be considered as a necessary tool to maximise its shareholders’ gains.2 Lithuanian law supports, though indirectly,3 an enlightened shareholder value approach4 and stipulates that the main goal of the company director, in performing management duties, shall be aimed at maximising the company’s value. Thus, when analysing each business decision taken by the company director, it must be assessed whether it complies with the main goal of maximising the shareholder gains (and the company’s value respectively). However, on the other hand, business decisions that are too risky might unavoidably lead to a higher risk of possible loss, followed by a decrease in the company’s value, which subsequently might lay the basis for future disputes between the company’s shareholders and its director regarding compensation of incurred damage as a result of the risky business decision. Therefore, within the context of risky business decision-making, issues that may arise relate to the protection of rights and

1 In the context of this article, the term ‘company’ includes limited liability entities, the share capital of which is divided into parts called ‘shares’, i.e., where the share capital of the corporation is separated from the personal assets of the respective participants therein. 2 As a matter of terminology, this article focuses on the maximisation of shareholder gains (benefits) in order to escape confusion between ‘shareholder assets’ and ‘company assets’. As we know, shareholder assets can be quantitatively defined as shareholders’ owned number of shares multiplied by the nominal value per share. Therefore, the main goal of the company director in performing management duties shall be directed to maximisation of the company’s value, which can be assessed on the basis of the market price of its shares (enlightened shareholder value approach). The higher the market share value of the company, the larger the benefit (or assets) gained by its shareholders. 3 This conclusion is confirmed by Art. 19(8) of the Law on Companies of the Republic of Lithuania, which explicitly provides that the company’s management bodies must act for the benefit of the company and its shareholders, as well as by, not directly, Lithuanian (for example, Resolution of the Supreme Court of Lithuania of 20 November 2009 adopted in civil case BUAB ‘Optimalu¯s finansai’ v. G. P. (Case No. 3K-7-444/2009), Resolution of the Supreme Court of Lithuania of 1 February 2012 adopted in civil case UAB ‘Panevez_ ˇio spaustuve’_ v. R. Sˇ., A. B. and A. G. (Case No. 3K-3-19/2012)). 4 The enlightened shareholder value approach is based on the idea that the company works to create value for shareholders. The opposite approach – the so-called ‘stakeholders approach’ or ‘pluralist approach’ – adheres to the idea that the company works towards the creation of value for all stakeholders (shareholders, customers, suppliers, creditors, employees, local and national governments, local communities). For a summary of the shareholder and stakeholder approaches, see Keay (2011), at pp. 3–7. 123 The Business Judgment Rule in Lithuania 557 legitimate interests of both parties: the company’s director and shareholders,5 and these issues will be particularly important in companies where ownership and managerial roles are not just formally but also practically separated.6 Consequently, the main purpose of directors’ duties7 existing in all modern legal systems is to protect the aforementioned persons (in particular shareholders8) from possible unlawful business decisions adopted by directors, as well as to impose relevant personal liability for loss-making decisions upon the directors responsible. However, the establishment of particularly strict standards with respect to the company director’s liability for adopted decisions may ruin the entrepreneurship efficiency of those decisions as well as create obstacles to expected business development, as directors would avoid initiatives and not put efforts into investing and assuming subsequent risk. At the same time, if directors were not subject to legal liability for damages incurred due to their risky business decisions, this would increase the risk of them adopting unlawful decisions. Therefore, it is particularly important to establish that ‘golden balance’ between liability and freedom in business decision-making by directors. Since criteria regarding separation of the aforementioned legal concepts have not yet been explicitly established, neither by Lithuanian law nor in Lithuanian judicial practice, the main aim of this article is to analyse relevant rules that are being applied in relation to business decision-making and of such business decisions under the Lithuanian legal system, so as to discover whether the business judgment rule commonly found in the legal systems of Anglo-Saxon countries is also being applied in Lithuania. To this end, this article analyses the applicable regulating business decision-making in conjunction with existing judicial practices regarding the imposition of civil liability against company directors. Moreover, with reference to good foreign practice, this article also suggests and recommends possible means and methods that may contribute to solving existing problems. It should also be emphasised that the above issues have never been the subject of scientific research in Lithuania, although authors such as Greicˇius, when analysing the content of the duty of reasonableness imposed on the company director,9 Cˇ erka, when

5 The issue of protection of the rights and legitimate interests of the company’s creditors often arises in the event of the company’s insolvency or bankruptcy proceedings. The majority of scientists support the approach that, as long as the company remains solvent, its management bodies have fiduciary duties towards the company itself, but at the moment it becomes insolvent, their fiduciary duties also extend to the company’s creditors. See Kraakman et al. (2009), at pp. 88–89; Gevurtz (2000), at pp. 304–313; the Supreme Court of Lithuania also takes this position (for example, Resolution of the Supreme Court of Lithuania of 25 March 2011 adopted in civil case UAB ‘Limantra’ v. N. G. (Case No. 3K-3-130/2011)). 6 See Bratton (2001), at pp. 759–760; Kirsˇiene_ and Tikniu¯te(_ 2004), at pp. 71–72. 7 Art. 2.87 of the Lithuanian Civil Code stipulates that such duties of the members of a legal entity’s management body members involve acting in good faith, being prudent, being loyal, and avoiding conflict of interests. 8 Beside the director’s duties, the following rights protecting shareholders can be distinguished: (1) the right to vote at the general meeting of shareholders, when the members of the supervisory board, the members of the management board and the company director are to be appointed, as well as when other issues stipulated in the Law on Companies of the Republic of Lithuania are to be settled; (2) the right to receive dividends; (3) the right to sell shares of the company. 9 Greicˇius (2007), at pp. 139–147. 123 558 V. Bite,_ G. Gumuliauskiene_ assessing standards and principles attributed to the duty of care,10 and Gumuli- auskiene_ (previous surname Jakuntavicˇiu¯te),_ when analysing particularities of civil liability that is imposed on the members of management bodies of a legal entity,11 briefly discussed the nature of the business judgment rule widely developed in Anglo- Saxon countries. Additionally, some foreign authors such as Janelyn,12 Gold,13 Giraldo,14 Ponta, Catana15 and others have also analysed certain practical and theoretical aspects of the business judgment rule. However, none of these authors have analysed how this rule is or should be applied in the Lithuanian legal system. Therefore, through scientific research methods such as logical, systemic, comparative and historical analysis and other relevant methods, this article will broadly discuss the nature of the business judgment rule and its application issues, which gained particular importance in the face of the financial crisis that is considered the biggest global crisis since the US Great Depression. This fact was also acknowledged by the European Commission in its Green Paper ‘The EU Corporate Governance Frame- work’,16 published in 2011, which stated that ‘[i]n each case, it is indispensable to define clearly the roles and responsibilities of all parties involved in the risk management process: the board, the management and all operational staff working in the risk function’. Therefore, the findings in this article may be important not only locally but also internationally, in particular considering the current time frame, when companies’ business activities are subject to constant growth and expansion beyond national borders. Furthermore, company directors, acting within extremely competitive conditions, are always searching for the right way of managing the company, so as to guarantee its financial vitality and competiveness, and of striking a balance between freedom to take business decisions and personal liability for loss incurred in consequence thereof. Finally, it should be noted that in the Lithuanian legal system risky business decisions taken by directors are always evaluated on the basis of appropriate performance standards, but these standards do not have an uniform purport and are unclear. Lithuanian judicial practice applies criteria that are of an evaluative nature and these criteria are applied on a case-by-case basis. The Supreme Court of Lithuania recognises that the director will not be liable if his decision complies with legal requirements, does not exceed normal economic risk, and is not obviously loss making for the company.17 However, it does not provide the necessary clarification

10 Cˇ erka (2002). 11 Jakuntavicˇiu¯te(_ 2012), at pp. 119–122. 12 Janelyn (2007–2008). 13 Gold (2007). 14 Giraldo (2006). 15 Ponta and Catana (2015). 16 European Commission Green Paper (2015) ‘The EU Corporate Governance Framework’, COM/2011/ 164, 5 April 2011, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0164: FIN:EN:PDF. Last accessed 17/08/2015. 17 See Resolution of the Supreme Court of Lithuania of 26 July 2013 adopted in civil case BUAB ‘Stagena‘v. SEB bankas and G. S. (Case No. 3K-3-420/2013). 123 The Business Judgment Rule in Lithuania 559 ex ante, because at the time business decisions are adopted directors do not know how they will be assessed by the ex post. In order to solve this problem the Supreme Court of Lithuania started using the uniform term ‘business judgment rule’. The first time the Supreme Court used it was in its Resolution of 9 January 2014,18 which stated that such a rule presuming directors’ bona fide actions in the best interests of the company should be applied to protect them against claims arising from loss-making decisions ex post. The Supreme Court also emphasised that the purpose of this presumption was to protect company directors against the imposition of personal civil liability for bona fide decisions taken when acting in compliance with the reasonable duty of care. Therefore, any person seeking recovery of damage suffered due to such an action or decision must not only prove the fact that such damage has been suffered, but also provide sufficient that the director acted in breach of his duties (such as the duty of loyalty, fairness, reasonableness, etc.), exceeded reasonable business risk limits, committed obvious negligence, or otherwise misused his powers. Therefore, since 9 January 2014, the uniform term ‘business judgment rule’ is explicitly used in Lithuanian court practice and has been unambiguously understood and applied as certain presumption with regard to the scope of civil liability that can be assumed by directors. However, there is still the question of whether this rule that has already been established and used in Lithuanian judicial practice can be compared to its counterpart established by the US Delaware courts. Nor is it clear how and based on what rules courts examined business decisions adopted by directors before 9 January 2014 and whether such previously applied rules are still applicable. The responses to these questions and other relevant findings are provided below.

2 Conditions of Civil Liability for Loss-Making Risky Business Decisions

In Lithuania, directors are granted quite broad discretion in acting on behalf of the company and adopting business decisions of different levels that at times can seem too risky for the company. The explicit limits regarding such discretion and related powers are laid down by the applicable and in internal corporate documents. For instance, Article 19(6) of the Law on Companies of the Republic of Lithuania (hereinafter referred to as ‘the Law on Companies’) provides that the company director has exclusive power to represent the company in its relations with third parties, to organise the company’s daily operations and to conclude any relevant transactions in the name of the company, unless the company’s articles of association stipulate quantitative representation. Under the terms of the Law on Companies, the collegial

18 Resolution of the Supreme Court of Lithuania of 9 January 2014 adopted in civil case UAB ‘Mitnija’ and UAB ‘MG Baltic Investment’ v. V. G. and E. R. (Case No. 3K-7-124/2014). 123 560 V. Bite,_ G. Gumuliauskiene_ management body19 (board of directors) shall be authorised to approve the business strategy of the company, take decisions on the investment, transfer, lease, pledge or mortgage of any long-term assets of the company, etc. [Article 34(4) of the Law on Companies]. It must be noted that if the company has not established a board of directors, the company director (chief executive officer) shall be authorised to unilaterally take important business decisions, such as approving the company’s business strategy, founding or participating in another legal entity, incorporating subsidiaries, establishing representative offices, taking decisions on the investment, transfer, lease or mortgage of any long-term company’s assets and/or making any other decisions that come within the competence of a board of directors [Article 37(10) of the Law on Companies]. The power to appoint members of the board or the chief executive officer (when there is no board) lies with the supervisory council, which is also authorised to dismiss directors from their post and, when the company’s performance is unsatisfactory, must also decide whether the board members (or chief executive officer) are still eligible to hold their positions. Such decisions on appointing the members of the company’s management body are also considered risky since failure to select and appoint qualified directors might cause damage to the company. Even though company directors can enjoy quite broad discretion in the decision-making process, such discretion is not absolute as there are still certain limits established by the applicable laws. Limits might also be set under the company’s internal corporate documents (including but not limited to the articles of association, internal , resolutions of the company’s management bodies, shareholders’ agreements, etc.) or civil with the directors. Directors, in implementing their right to take risky business decisions, are obliged to act within such limits of discretion granted. If they fail to do so, certain business decisions or actions might be established as unlawful. In summary, under Lithuanian law, civil liability of directors may arise as a result of: (i) failure to fulfil, or improper fulfilment of, obligations provided for in the laws of the Republic of Lithuania; (ii) failure to fulfil, or improper fulfilment of, obligations provided for in the company’s internal documents (e.g., articles of association, decisions of the shareholders’ meeting, etc.); or (iii) violation of the general duty to behave in good faith and in a reasonable manner. The company and

19 Please note that in accordance with the Law on Companies, Lithuanian companies may have a four- tier management structure (general meeting of shareholders, supervisory council, board of directors and chief executive officer). It is not obligatory to establish a supervisory council and/or board of directors in a company, except in the case of public companies, where establishment of one of these two collegial management bodies is compulsory. Supervisory councils are rarely established at private companies, but boards are created quite often, particularly at larger private companies. Therefore, the articles of association of a company should regulate: (i) whether a supervisory council and/or board of directors shall be formed; (ii) the number of members of the supervisory council and/or board of directors (the minimum number is 3, the maximum number 15); (iii) the term of the supervisory council and/or board (the maximum term is 4 years); (iv) the rules of representation of the company (collective representation of the company, if any). If neither a supervisory council nor a board is established, a chief executive officer (CEO) shall be elected. 123 The Business Judgment Rule in Lithuania 561 the directors are bound by a fiduciary relationship.20 The Civil Code of the Republic of Lithuania (Article 2.87) (hereinafter referred to as the Civil Code) sets forth the specific fiduciary duties of directors: (i) to act prudently21 and bona fide in respect of the company; (ii) to be loyal to the company and its shareholders; (iii) to act solely in the interest of the company and its shareholders; (iv) to keep information and commercial secrets of the company confidential; (v) to avoid situations in which their personal interests may run contrary to those of the company. If such a situation emerges, directors must inform other bodies of the company or the shareholders accordingly; and (vi) not to mix the property of the company with their own property or, without consent of the shareholders, use the company’s property or information for their personal or a third party’s benefit. However, in order to establish the civil liability of a director, the following must be established:22 (i) unlawful action; (ii) damage; (iii) causal link between unlawful action and damage sustained; and (iv) fault. In summary, civil liability of a director arises when he wilfully or negligently (element of fault) fails to properly perform his functions and to fulfil his obligations (including when he does not take necessary actions – element of unlawful action) and the damage caused (element of damage) is a direct consequence of the director’s actions or failure to act (element of causal link). Therefore, in Lithuania, individuals who are entitled to submit claims in their own name or in the name of the company regarding compensation of damages incurred due to misuse of powers when business decisions have been taken have to submit sufficient evidence that the respective director, when adopting, refraining from adoption or implementing risky business decisions,23 has acted unlawfully and that due to such illegitimate action damage has been incurred (causation), and they have to justify the amount of loss (the actual damage suffered) for which compensation is claimed.24 However, the director’s fault need not be proven as in its judicial practice the Lithuanian Supreme Court has explicitly determined that such fault shall be presumed once all other conditions of civil liability have been

20 This was noted in many Lithuanian Supreme Court Resolutions, for example, Resolution of the Supreme Court of Lithuania of 25 March 2011 adopted in civil case BUAB ‘Limantra’ v. N. G. (Case No. 3K-3-130/2011). 21 It should be noted that everywhere except in the US the duty of care is not fiduciary in nature and is regulated by the general law of negligence (see Flannigan (2006), at p. 231). Meanwhile, in Lithuanian case law and doctrine, the duty of care is often ranged under fiduciary duties. However, we believe this to be the result of a lack of profound understanding of the nature of fiduciary duties. 22 For example, Resolution of the Supreme Court of Lithuania of 20 November 2009 adopted in civil case BUAB ‘Optimalu¯s finansai’ v. G. P. (Case No. 3K-7-444/2009); Resolution of the Supreme Court of Lithuania of 1 February 2012 adopted in civil case UAB ‘Panevez_ ˇio spaustuve’_ v. R. Sˇ., A. B. and A. G. (Case No. 3K-3-19/2012). 23 The Lithuanian Supreme Court has emphasised that civil liability of the members of the legal entity’s management body may also arise for failure to act and failure to take required decisions. Resolution of the Supreme Court of Lithuania of 12 June 2007 adopted in civil case UAB ‘Liunete’_ v. 91-oji gyvenamu˛ju˛ namu˛ statybos bendrija, R. B., A. G., V. P., P. R., V. S. and A. K. (Case No. 3K-3-233/2007). 24 For example, Resolution of the Supreme Court of Lithuania of 1 February 2012 adopted in civil case UAB ‘Panevez_ ˇio spaustuve’_ v. R. Sˇ., A. B. and A. G. (Case No. 3 K-3-19/2012). 123 562 V. Bite,_ G. Gumuliauskiene_ proven.25 In legal doctrine, such presumption can be explained on the basis of the bona fide concept. According to Norku¯nas, when a person’s conduct is being evaluated on the basis of the bona fide (good faith) concept, his illegitimate actions can be considered as objective dishonesty and as his fault – i.e., as subjective dishonesty.26 When proving objective dishonesty, it must be presumed that subjective dishonesty is proven as well. Therefore, a director who wants to avoid civil liability must challenge such presumption by submitting sufficient lawful proof. In view of the above, the said inseparable bona fide components will be examined jointly below when further analysing unlawful actions, faults of directors and conditions for imposing civil liability for adopted loss-making risky business decisions.

3 Unlawful Actions and Faults of Directors in Risky Decision-Making

The limits of directors’ right to take risky business decisions are set in the context of directors’ duties provided for in the applicable laws, corporate documents of the company and any other relevant internal documents. These duties must be complied with in all decision-making procedures, which, in principle, comprise the following three stages: (1) gathering of information, determination of required decision content, and assessment of possible risk; (2) adoption of relevant business decisions; and (3) implementation of those business decisions.27 In the course of such procedures, the director shall determine the possible risks of the adopted business decisions and take any reasonable measures to limit and reduce any such risks as well as to continuously monitor and control the situation.28 Of course, in order to be able to perform the said actions, the director must have the relevant qualifications, and, when necessary, will at all times be entitled to consult with internal or external competent experts and specialists on relevant matters. The relevant laws of the Republic of Lithuania establish general obligations for management body members, obliging these persons to always act within the extent of their powers when performing any management duty. Firstly, as already mentioned above, directors must perform the duties laid down in the Civil Code (Article 2.87), i.e., to act in good faith and in a reasonable manner, to remain loyal to the company, to respect confidentiality and to avoid any conflict of interests. Secondly, directors, in carrying out activities, must comply with the requirements of applicable laws and any other statutory regulations as well as the company’s internal documents. For instance, Article 37(7) of the Law on Companies provides that, in performing his duties, the director is obliged to comply with the law, the articles of association of the company, decisions of shareholders’ meetings, resolutions of the board of directors and supervisory council, as well as the company’s terms of reference. Finally, directors have a common duty of care (Article 6.246(1) Civil

25 For example, Resolution of the Supreme Court of Lithuania of 5 May 2011 adopted in civil case BUAB ‘Vajalio medienos gaminiai’ v. R. K., N. K. (Case No. 3 K-3-228/2011). 26 Norku¯nas (2002), at p. 114. 27 See Blake (2008), at p. 73. 28 Kancerevycˇius (2009), at p. 82. 123 The Business Judgment Rule in Lithuania 563

Code) and decisions may not contravene the respective principles of reasonableness and good faith and/or the entitlements and legitimate interests of the company’s creditors (Article 2.82(4) Civil Code), standard business practice and any other requirements of fair business performance.29 As can be seen, the legislation lays down only general duties which must be performed by the directors when executing their assignments. However, there are no explicit rules or criteria that have to be complied with in risky decision-making procedures, and clarification of the above elements is subject to the broad discretion of the court. It should be emphasised, though, that the wording of the Law on Companies of 1994 already stipulated certain requirements in respect of adopting business decisions. Article 18(6) provided that all business decisions should comply with the following rules: (1) such decisions should not violate the company’s articles of association or otherwise contravene the company’s business goals; (2) they should not clearly go beyond the normal risk of commercial practices; (3) they should not be obviously unprofitable or otherwise have no real economic benefit for the company. Similar wording was used in Article 35(14) of the Law on Companies of 2000. However, the present wording of the Law on Companies no longer contains any such clause. Hence, the current law does not provide any explicit rules that must be applied in risky decision-making. Therefore, in this regard, the reasonable question arises: what are the criteria for assessing such actions of directors? Does the court, in establishing the existence of unauthorised, illegitimate actions undertaken by the company director, have discretion to assess the content of his business decisions? In order to find answers to these questions, the article will discuss below the respective criteria which apply in the Lithuanian legal system regarding the assessment of the content of business decisions, as well as the relevant procedures in this context. These decision-making procedures become particularly relevant when assessing the overall legitimacy of actions taken by directors.

3.1 Assessment of the Content of Business Decisions

In legal doctrine, there is a wide range of different approaches regarding the ’s discretion and right to examine the content of business decisions adopted by directors. Some authors30 are of the opinion that , when settling cases regarding liability of directors, should not be authorised to assess the content of business decisions as judges themselves are not entrepreneurs and therefore are not really qualified to assess the reasonableness and prudence of such decisions. However, other authors31 state the contrary, namely that courts must have such discretion but only under circumstances where the existence of elements proving that the director is in breach of his duties has been established, and, in particular, where there is a sufficient proof evidencing that a business decision has been adopted in bad faith, in violation of the duty to avoid conflict of interests or that the

29 Resolution of the Supreme Court of Lithuania of 25 May 2006 adopted in civil case K. J. J. v. J. B. and V. K. (Case No. 3K-7-226/2006). 30 See Dietrich (2002), at pp. 7–10. 31 See Giraldo (2006). 123 564 V. Bite,_ G. Gumuliauskiene_ director was not sufficiently informed of all the circumstances and possible consequences of the business decision.32 This article supports the second approach, because the assessment of the purport of a business decision, once bad faith or imprudent action on the part of directors is proven, should help to duly implement , aimed at ensuring that the company director assumes civil liability for his business decisions. In Lithuanian judicial practice, a similar approach has developed, emphasising that reasonableness and profitability of each business decision may be examined and individually assessed.33 Also, according to Lithuanian case law, transactions (which are single business decisions) that under certain circumstances may appear not to be particularly beneficial (for instance, conclusion of a agreeing a higher than normal interest rate or termination of a contract with another party agreeing certain economic consequences that are disadvantageous for the company or otherwise granting another party a position that is too beneficial, etc.) are not per se illegitimate actions. The Supreme Court has also emphasised that there are always cycles and fluctuations in the course of commercial activity, and therefore no one can ever guarantee a permanent or stable profit or the conclusion of only beneficial transactions.34 Therefore, if transactions were challenged just for not being sufficiently beneficial, this would lead to significant instability and uncertainty in the market, since any contract that might be commercially unfavourable to one of the parties could be challenged. It is obvious that, in such an event, the key goal of civil law, i.e., to ensure a fair and legitimate turnover, would not be achieved as there would be material obstacles to the existence of any turnover. When systematically reviewing and analysing Lithuanian case law, we can see that the following main criteria are used to assess adopted business decisions and to determine whether business decisions are illegitimate: (1) obvious harmfulness (unprofitability) (for instance, the gratuitous transfer of company assets to third parties could be considered to create obvious harm);35 (2) unreasonable risk (as opposed to prudent business risk) (for instance, such unreasonable risk could arise when the company has acquired certain worthless assets by using its cash funds, or when any of such purchased assets would appear worthless at a later stage);36 (3) contravention with laws, internal documents or good business standards (for instance, a business decision to terminate the company’s commercial activity and

32 US courts, when settling cases on risky business decisions taken during the financial crisis of 2008 and the resulting compensation of loss, have also declared that the content of such business decisions shall not be analysed until bad faith or failure to obtain sufficient knowledge has been proven. For example, In re Bear Stearns Litigation, No. 600780/08; Irving Ehrenhaus v. John D. Baker, II, et al., No. 08 CVS 22632. 33 Resolution of the Supreme Court of Lithuania of 11 February 2008 adopted in civil case Laivu˛ krovos akcine_ bendrove_ ‘Klaipedos_ Smelte’_ v. UAB ‘Biriu˛ kroviniu˛ terminalas’, D. B. and R. M. (Case No. 3K- 3-73/2008). 34 Resolution of the Supreme Court of Lithuania of 16 December 2011 adopted in civil case BUAB ‘Balmeto Medis’ v. AB ‘Simega’ (Case No. 3K-3-511/2011). 35 Resolution of the Supreme Court of Lithuania of 21 May 2014 adopted in civil case BUAB ‘Taurus– Ekspres’ v. K. N. and Lithuanian and German UAB ‘Transdelta’ (Case No. 3K-3-283/2014). 36 Resolution of the Supreme Court of Lithuania of 29 May 2015 adopted in civil case BUAB ‘Mantrida’ v. L. V., E. M., third person E. Z. (Case No. 3K-3-331-695/2015). 123 The Business Judgment Rule in Lithuania 565 thus increase the company’s losses and decrease possibilities to settle debt in respect of creditors could be regarded as contravention with good business standards)’37 (4) economic unprofitability/non-necessity (for instance, the conclusion of a contract agreeing a higher than normal interest rate or granting the other party certain benefits could be seen as economically unprofitable).38 The abovementioned case law clearly shows that the content of adopted loss- making business decisions taken by directors is typically evaluated by Lithuanian courts. Additionally, it is obvious that the abovementioned criteria appear to be more of an evaluative nature, which allows us to conclude that the purport of a business decision taken by a director shall be assessed on a case-by-case basis and is subject to how these criteria are applied by the respective court when settling each individual case. Therefore, no certainty is created ex ante, as company directors cannot be certain before adopting any business decision how such decisions will be examined ex post by the competent courts. The experience of foreign countries in this matter could be considered when explaining and applying the above criteria. For instance, US courts, when resolving similar disputes or assessing the content of adopted business decisions, broadly apply the so-called decision theory, which assumes that priority is given to the principle of rationality. The supporters of this theory39 state that each business decision is adopted under one of the following circumstances: (1) risk (being aware of the consequences of any choices made and the respective probability thereof); (2) uncertainty (when the consequences are known but the probability is unclear); and (3) unawareness (when neither the consequences nor the probability of their possible occurrence are known). It is acknowledged that a business decision is irrational when taken in conditions of uncertainty or unawareness since the probability that any person who is reasonable, motivated and sufficiently informed would ever have adopted that decision is quite low.40 However, in addition, it is also emphasised that a certain level of risk cannot be eliminated from any business decision-making process; but any such risk should be reasonably and prudently assessed, as a company director is considered prudent if he is convinced that the business decision he adopted is prudent and reasonable. Otherwise, his actions will be regarded as unreasonable and undertaken in bad faith. Considering this decision theory, the US courts acknowledge that any business decision involves the potential of loss to be incurred under certain circumstances, and therefore, when settling individual cases, the courts shall examine if the company director acted reasonably and, while performing the relevant duty of care, assessed the benefits of the business decisions taken, the probability and extent of possible loss, and the means and costs of avoiding such loss. Of course, an objective assessment implies that relevant recommendations of financial and economic experts must be considered. This fact

37 Resolution of the Supreme Court of Lithuania of 25 March 2011 adopted in civil case BUAB ‘Limantra’ v. N. G. (Case No. 3K-3-130/2011). 38 Resolution of the Supreme Court of Lithuania of 17 May 2013 adopted in civil case Laivu˛ krovos akcine_ bendrove_ ‘Klaipedos_ Smelte’_ v. L. A. (Case No. 3K-3-290/2013). 39 See Gold (2007); Vermeule (2006), at p. 171. 40 Allen et al. (2002), at p. 452. 123 566 V. Bite,_ G. Gumuliauskiene_

firstly emphasises that before adopting any business decision, the maximum possible loss that can subsequently be incurred must be examined. Such loss may in no way exceed or be equal to the company’s owned capital, otherwise the decision will obviously be regarded as illegitimate.41 Lithuanian case law could also benefit from applying such methods of assessing the purport of business decisions. In the practice of English courts, when the content of directors’ business decisions is examined, the so-called ‘proper purpose’ test42 is usually applied, whereby each decision is assessed on the basis of the anticipated purpose, i.e., it is examined if the decisions aim to achieve reasonable or inappropriate purposes. If a decision has been adopted for inappropriate purposes, an obligation is imposed on the company director to compensate the damages which the company has incurred as a result of the decision.43 However, this test is criticised quite often due to the reason that judges do not have any relevant business experience and/or knowledge allowing them to assess and decide whether the purpose anticipated upon adopting a decision is reasonable or not. Therefore, scholars suggest not to apply this test and, instead, to only use the conduct standard which may be reasonably expected from an honest and prudent trustee.44 Practitioners argue that the objectivity introduced by Section 174 of the UK Companies Act (2006) (concerning the director’s duty to exercise reasonable skill, care and diligence) may influence any directors’ judgment of ‘good faith’ in connection with the duty to promote the success of the company under Section 172 (concerning the director’s duty to promote the success of the company).45 With regard to this argument, there is much to be sceptical about. Duties of care, skill and diligence, which attract a mixture of objective and subjective assessments (and rightly so) should not be conflated with fiduciary duties (such as the duty to promote the success of the company) – and the introduction of objectivity into any assessment as to whether these duties have been breached is unlikely to curry favour with the courts, which one suspects will persist in their reluctance to interfere in commercial decisions which have been taken in good faith by directors. Traditionally, UK courts have been reluctant to interfere in business decisions of directors except in cases of obvious dishonesty or if the decision was clearly a non-commercial one. The standards of conduct commonly applied in the case law of both Lithuania and other countries are discussed below.

3.2 Assessment of the Process of Making Risky Business Decisions

The process of making risky business decisions is assessed on the basis of rules established under the applicable laws and existing case law. These rules are usually established, interpreted and implemented differently in and civil law countries, as analysed more explicitly below.

41 See Keay (2001), at p. 334. 42 Howard Smith Ltd v. Ampol Petroleum [1974] AC 821, PC. 43 Bishopsgate Investment Management Ltd v. Maxwell (No 2) [1994] 1 All ER 261, CA. 44 See Nolan (1998). 45 See Cabrelli (2008), at pp. 16–17. 123 The Business Judgment Rule in Lithuania 567

3.2.1 The Business Judgment Rule: Origins, Definition and Models of Application

In common law countries it is very common for risky business decisions taken by directors to be assessed by applying the ‘business judgment rule’. This rule was first established by US courts, which already in the XIXth century acknowledged46 that any business decisions taken by directors, acting in good faith and in the company’s best interest, cannot be subject to judicial or other review. Accordingly, in doctrine, two types of standards have been distinguished: the standard of conduct, stipulating that the company director shall duly perform his assigned duties; and the standard of review, stipulating that courts, settling issues related to the imposition of civil liability on company directors, shall examine such performance by the company director.47 Thus, legal doctrine provides that the assessment of the business judgment rule can be considered as a standard of liability and as judicial abstention doctrine.48 The business judgment rule applicable in the US is mainly regarded and applied as a review of decision-making rather than as a way to establish a standard for directors’ conduct.49 Moreover, this rule is also applied to lower-level managers as they also have a certain discretion in respect of decision-making.50 The rule can also be interpreted in regard to other aspects. It is mainly seen as a presumption aimed at protecting company directors from personal liability for good-faith business decisions complying with standards of duty of care. In other words, under this rule, so-called safe harbour principles are established, which help to ensure that directors’ business decisions complying with requirements laid down by law or established by judicial cannot be challenged. In proceedings, this rule is interpreted as a legal measure for courts to allow dismissal of shareholders’ claims for compensation of loss as well as to prevent any modification of the purport of business decisions so as to ensure that this exclusive privilege of adopting business decisions remains with the directors in charge. Finally, the business judgment rule may also be considered as a to ensure economic freedom and to encourage risk assumption.51 The establishment and use of the business judgment rule in legal doctrine is based on the following reasoning: (1) such a rule eliminates court interference in the decision-making process, bearing in mind the inadequacy of courts to review business decisions52 since judges are not business professionals and do not have the required competencies for the management of human and material resources or

46 In the US, the business judgment rule was applied for the first time by the court of the state of Louisiana in 1829, when settling Percy v. Millaudon. See Giraldo (2006), at p. 120. 47 Eisenberg (1993). 48 Giraldo (2006), at p. 153. True, recently some authors have offered a third possible interpretation of this rule: the immunity doctrine, according to which the effect of the business judgment rule is to insulate a director from civil liability for actions undertaken while acting in a capacity related to his position (see Ponta and Catana (2015), at pp. 130–131). 49 Janelyn (2007-2008), at p. 174. 50 See Johnson (2005). 51 Branson (2002), at p. 632. 52 See Veasey and Seitz (1985). 123 568 V. Bite,_ G. Gumuliauskiene_ assets, nor do they have any experience in concluding commercial contracts, and therefore they cannot take over the director’s role; (2) establishing such a rule within the legal system serves to encourage individuals to take up the position of director;53 and (3) the assumption of risk is thereby promoted as well. According to supporters of the risk allocation theory, a rule protecting directors from a possible review of the content of their business decisions and thereby encouraging innovative and risky business performance is particularly necessary.54 Furthermore, such a rule allows the achievement of one of the most essential economic goals: to guarantee, for the director, freedom and expedience within the decision-making process in order to efficiently enlarge the return on shareholders’ investments.55 Directors must maximise shareholders’ benefits by maximising profit. In order to reach this goal, risky business decisions must be taken, and it would therefore be unfair to subsequently demand from directors full liability for making such decisions. However, it should be pointed out again that the business judgment rule allows directors to assume only calculated business risks.56 US courts have also repeatedly reasoned that the business judgment rule is necessary in order for directors, in a risky business environment, to assume certain risk without having to fear subsequent claims.57 It is emphasised that it would be unfair to expect directors to, at all times, make only perfect business decisions.58 The business judgment rule is interpreted quite similarly in different common law systems; however, its application may be fundamentally different. Depending on the way the business judgment rule is laid down in the legal system of the respective country – explicitly, implicitly, statutorily – the following three main models of application can be distinguished:59 (i) low-level model, (ii) medium-level model and (iii) high-level model. The high-level model can be found, for example, in Australia, where on 13 April 2000 the statutory business judgment rule entered into force, laid down in Article 180 of the Corporations Act,60 which stipulates that in decision-making procedures the company director shall only be deemed to act in compliance with the duty of care if (i) his decision is made in good faith and for a proper purpose, (ii) he has no personal interest in the business decision, (iii) he is fully informed of the goal of the decision to the extent that he deems reasonably sufficient, and (iv) he reasonably believes that the business decision is in the best interest of the company. In the US, the analogue of this rule is laid down in the Principles of Corporate Governance,61 under Article 4.01(c), adopted by the American Law Institute. It can also be found in US judicial precedents, where the

53 Kerr (2007), at p. 636. 54 See Bainbridge (2004). 55 Giraldo (2006), at p. 122. 56 Furlow (2009), at p. 1083. 57 For example, Sinclair Oil Corp. v. Levien, 280 A.2d 717. 720 (Del. 1971); Gagliardi v. TriFoods Int’l Inc., 683 A.2d 1049, 1052 (Del Ch. 1996). 58 Janelyn (2007–2008), at p. 154. 59 Giraldo (2006), at p. 147. 60 Ibid., at pp. 141–142. 61 American Law Institute (2011). 123 The Business Judgment Rule in Lithuania 569 courts apply presumption, assuming that the company director has adopted the business decision (i) in good faith, (ii) reasonably believing that he has acted in the best interest of the company, (iii) on the basis of sufficient knowledge,62 and (iv) after reasonable consideration of all possible alternatives.63 Until the moment this presumption is challenged, the US courts refuse to conduct any judicial review in respect of the of the business decision and/or to impose any personal liability on the company director, even if the decision appears to be harmful to the company.64 Thus, in the US legal system the medium-level model is applied, since the rule is recognised explicitly but not statutorily, i.e., it is explicitly established and applied in relevant case law. Finally, in England, the business judgment rule is applied on the basis of the low-level model since the rule is not explicitly laid down in either legislation or judicial precedents, though it is indirectly recognised by the courts. In the judicial practice of English courts, when settling cases on this matter, the degree of professionalism and competence of each director is determined individually,65 thus recognising the concept of ‘professional director’.66 Therefore, directors can be assessed by the court on the basis of their personal knowledge and skills, considering the circumstances of the individual case and the director’s role within the management structure of the company.67 If the director submits to the court unequivocal evidence confirming that, at the moment the decision was taken, he acted in good faith and believed he acted in the best interest of the company, and this evidence is accepted by the courts, he will not be held in default and/or subsequently no civil liability will be imposed on him.68 It should also be emphasised69 that the model pursuant to which the business judgment rule may be imposed is directly related to the degree of how certain the company director is that his business decisions are not illegitimate. The higher the degree of certainty, the higher the level of the model of application of this rule; i.e., the company director’s certainty in respect of the process of how he has made his business decision should subsequently be assessed on this basis.

62 Aronson v. Lewis, 473 A.2d 805 (Del 1984); Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). 63 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 368–71 (Del. 1993). 64 The US business judgment rule is based on the idea that the company’s managers are more qualified than judges when it comes to adopting relevant business decisions (International Ins. Co. V. Johns, 874 F.2d 1447, 1458 n.20 (11th Cir. 1989)); therefore, courts should not, subsequently, criticise such decisions (Federal Deposit Ins. Corp. v. Stahl, 89 F.3d 1510, 1517 (11th Cir. 1996)). 65 The court shall assess the knowledge, skills and competence of each director separately. See, for example, the Dorchester Finance Co Ltd v. Stebbing case, where it was established that directors, who are also finance professionals and have relevant finance knowledge, negligently signed certain bank cheques, which subsequently meant that the company’s assets were unlawfully wasted. See Dorchester Finance Co Ltd v. Stebbing [1989] BCLC 498. 66 Birds and Boyle (2004), at p. 528. 67 Re Barings Plc & Others [no 5] [1999] 1 BCLC 433. 68 Regentcrest plc v. Cohen [2002] 2 BCLC 80; Re a Company [1988] BCLC 570; Re Smith & Fawcett Ltd [1942] Ch. 304; Extrasure Travel Insurance Ltd v. Scattergood [2003] 1 BCLC 598. 69 Giraldo (2006), at p. 147. 123 570 V. Bite,_ G. Gumuliauskiene_

3.2.2 The Business Judgment Rule in Civil Law

In the opinion of Greicˇius,70 the business judgment rule (as understood in common law countries) is also applied in Lithuanian court practice. However, we would not support this opinion, first of all, because civil law countries have no common legal instrument which explicitly lay down such a rule. This is often explained by mainly attributing the existence of this rule to the legal traditions of common law countries. Moreover, legal doctrine emphasises that, in order for the Delaware-style business judgment rule to be applied, the judicial abstention doctrine,71 i.e., the doctrine on abstention from criticising directors’ business decisions ex post, must be recognised and applied. However, neither Lithuania nor any other civil law country, even one that tries to formulate its rules as ‘business judgment rules’, recognises and applies this doctrine. Finally, civil law countries do not have legal rules that would allow directors to be confident and certain that the court, on the basis of these rules, would dismiss shareholders’ claim for compensation of loss. While there is no exact analogue of the US Delaware business judgment rule in civil law countries, a number of civil law jurisdictions have started using comparable instruments over the last six or seven years.72 Performance standards are usually laid down in applicable legislation (in Germany, Portugal, Romania, Croatia, Greece and the Czech Republic) or in judicial practice (for instance, in Sweden, Austria, Italy and Lithuania) and differ subject to the developed legal practice of the relevant state in such matters.73 For instance, the director’s performance standard, laid down in Article 93(1) of the German Public Limited Companies Act, shall apply to directors when business decisions are taken in the name of the company. This Article provides that there will be no breach of duty if directors, at the time of taking a business decision, reasonably believed that they were acting on the basis of adequate information and for the benefit of the company.74 This rule is not considered a presumption, which can be a basis for the courts to dismiss the company’s shareholders claim, but is applied when the challenged business decisions are being examined.75 The establishment of this rule in law may contribute to directors’ ex ante certainty as they will be aware of what kind of criteria applicable to the decision-making process must be complied with to avoid civil liability even if subsequent loss is incurred. Thus, the German model deviates from the classical Delaware business judgment rule theory and imposes the burden of proof on the director.76 However, civil law countries mostly stipulate that such performance standards for directors should be part of their decision-making procedures, not in the applicable laws but in judicial practice. For instance, in Swedish judicial practice it is recognised that: (1) the company shall ensure that

70 Greicˇius (2007), at pp. 139–147. 71 Giraldo (2006), at p. 160. 72 Gerner-Beuerle and Schuster (2014), at p. 204. 73 Gerner-Beuerle et al. (2013), at p. 115; Ponta and Catana (2015), at p. 136. 74 Fleischer (2015), at p. 70. 75 See Cahn (2015), at pp. 13–17. 76 Ponta and Catana (2015), at p. 137. 123 The Business Judgment Rule in Lithuania 571 there is a mechanism for assuming risk since directors are obliged to determine such risk and use their best efforts to decrease it; (2) the company director may only be held liable for business decisions that result in adverse consequences and if such decisions have been made in breach of the law or the company’s articles of association; and (3) the company director shall always be held liable for business decisions amounting to negligence, while acting carelessly and recklessly.77 In Austrian judicial practice, the rule has developed that business decisions taken with due care and diligence, which subsequently appeared to be commercially unprofitable, shall not automatically be treated as unlawful, since directors must assume normal business risk; they are, in any case, obliged to take reasonable decisions acting in good faith and in the best interest of the company.78 The courts of Belgium, when reviewing business decisions taken by directors, analyse whether such decisions, in similar circumstances, would be taken by a reasonably prudent, careful and diligent director.79 A similar practice exists in Finland80 and Italy,81 which also require that if a director has specific knowledge and skills, then, upon review of the legality of his business decisions, that competence must also be considered. Therefore, these civil law countries apply both standards in respect of directors’ performance: objective standards (assessing directors’ knowledge, skills and experience that individuals holding such a position may be reasonably expected to have) and subjective standards (assessing the knowledge, skills and experience of the director in question). It must be emphasised that in the judicial practice of Italian courts risky business decisions must be assessed by reviewing the following: (1) all factual circumstances existing at the time the business decision was adopted; (2) all available information and precautionary measures used by the directors when the business decision was taken, including his personal technical skills and any opinions and contributions of consultants; and (3) forethought as to any possible consequences that might result from such business decisions and that is deemed reasonable for the prudent manager, considering the circumstances mentioned under (2).82 True, France applies a strong positive presumption in favour of directors and, very close to the abstention doctrine, courts are prevented from interfering in management issues, but only as long as the company remains solvent.83 Thus, the above considerations lead to the conclusion that, similar to US law, the European versions of the ‘business judgment rule’ apply if several thresholds are satisfied, namely: (1) the director takes a business decision, (2) the decision is based on appropriate sufficient information, (3) the director is not subject to any conflicts of interest, and (4) he reasonably believes that the decision is in the best interest of the company. However, the business judgment rules formulated in civil law

77 Loos and Pereira (2006), at p. 385. 78 See Kapsch and Grama (2003). 79 Loos and Pereira (2006), at p. 229. 80 Ibid., at p. 262. 81 Ibid., at p. 313. 82 Ibid., at p. 314. 83 Ponta and Catana (2015), at p. 140. 123 572 V. Bite,_ G. Gumuliauskiene_ countries are, arguably, less protective of company directors than their US Delaware counterpart.84

3.2.3 Is the Business Judgment Rule Applicable in Lithuania?

As mentioned above, since 9 January 2014, a business judgment rule has been explicitly identified and applied in the of the Lithuanian Supreme Court. Of course, this rule cannot be considered to be analogue to the US Delaware business judgment rule but must be regarded as a performance standard applicable to the director, similar to the German model. Even before 9 January 2014, in Lithuanian judicial practice, the standard of a reasonable, prudent and cautious director was identified and further developed.85 Currently, when assessing directors’ actions in the decision-making process relating to risky business decisions, it is considered whether the decisions comply with objective and subjective criteria of good faith and prudence.86 According to the objective criteria, the company director shall be obliged to act as a careful, cautious and prudent director.87 The subjective criteria also refer to the company director’s competences, education, experience, etc. For instance, in one of its cases,88 the Lithuanian Supreme Court stated that the question of the director’s liability should be resolved in consideration of whether the director understood the adverse consequences for the company of the transactions he concluded and the actions he performed, as well as whether the transactions concluded and the actions performed fall within the normal scope of indus- trial/commercial risk. Under the legal doctrine, such application of subjective performance standards is deemed reasonable.89 The author Norku¯nas holds the opposite opinion, i.e., that when imposing material liability, the individual fault should not be related to the personal qualities, skills and experience of the person in question.90 Therefore, when imposing civil liability on directors, usually two performance standards are compared: (1) the actual director’s performance in a particular case; and (2) the hypothetical objective standard of performance of a prudent and careful director.91 If non-compliance with these two standards is established, relevant illegitimate actions must be identified (Article 6.246(1) of the Civil Code) as must the fault (Article 6.248(3) of the Civil Code). It should be taken into account that the Lithuanian Supreme Court has resolved92 that the director may

84 Gerner-Beuerle and Schuster (2014), at p. 205. 85 For example, Resolution of the Supreme Court of Lithuania of 12 April 2011 adopted in civil case BUAB ‘Geosprendimai’ v. G. K. (Case No. 3K-3-177/2011). 86 Greicˇius (2007), at p. 131. 87 Resolution of the Supreme Court of Lithuania of 5 May 2011 adopted in civil case BUAB ‘Vajalio medienos gaminiai’ v. R. K., N. K. (Case No. 3K-3-228/2011). 88 Resolution of the Supreme Court of Lithuania of 27 July 2007 adopted in civil case BUAB ‘Vakaru˛ prekyba’ v. A. Z. and UAB ‘Vakaru˛ Baltijos korporacija’ (Case No. 3 K-3-316/2007). 89 Abramavicˇius and Mikelenas_ (1999), at pp. 250–251. 90 Norku¯nas (2002), at p. 117. 91 Mizaras (2007), at p. 61. 92 Resolution of the Supreme Court of Lithuania of 1 February 2012 adopted in civil case UAB ‘Panevez_ ˇio spaustuve’_ v. R. Sˇ., A. B. and A. G. (Case No. 3K-3-19/2012). 123 The Business Judgment Rule in Lithuania 573 only be held liable for breaching his assigned duties if such breach has arisen from material default on his part, i.e., from intentional misconduct or resulting in explicit unjustified malpractice in the performance of his duties (for instance, assuming certain binding obligations without properly assessing the company’s capacity or without carrying out a comprehensive analysis of available information before taking a decision, or failing to conduct additional research mandatory for adopting such a decision, etc.). Therefore, ordinary negligence, related to the risk of industrial-commercial activities carried out by the company, should not be the basis for imposing civil liability on the company director. This finding becomes particularly important in the settlement of cases that involve releasing, limiting or reducing civil liability imposed on the company director and where the type of default is of significant importance. Therefore, in the Lithuanian legal system, risky business decisions should be addressed through the due performance of directors’ duties, i.e., by establishing standards of such performance. However, to enable directors who adopt risky business decisions, courts that subsequently review their legality and shareholders who intend to require compensation for loss incurred to know what criteria should be imposed to assess business decisions, the Lithuanian Supreme Court has, within its jurisprudence, formulated and applied the business judgment rule. The Court stated that to protect company directors from claims for damages, the business judgment rule applies, stipulating that such persons act bona fide in the best interests of the company. According to the court, this presumption is intended to indemnify directors against personal liability arising from business decisions made in good faith that meet the standards of duty of care. Therefore, a person seeking a remedy has to rebut the presumption by proving (1) the fact of damage; and (2) a breach of duties (loyalty, fairness, prudence, etc.), a clear exceeding of reasonable commercial risks, clear negligence or the exceeding of powers by directors of a company.93 The judicial assessment of the lawfulness (unlawfulness) of actions undertaken by the director must generally be based on an analysis of the director’s duty to identify potential risks based on a comparison, made prior to taking business decisions, between likely benefit and potential damage and the likelihood of these arising; this assessment should also take into account damage prevention, mitigation and amortisation costs. If, during a review of a business decision on the basis of the said criteria, presumption of bona fide actions and performance in the best interest of the company is not denied, the business decision that resulted in a particular loss cannot be considered as a basis for establishing illegitimate actions by the director in question. The Court also emphasised that the exception to this rule should be actions in breach of the law or the company’s articles of association.94 In this respect, the Court also stated that civil liability against the company director may only be imposed if it is established during the judicial review of the legality (illegality) of that director’s actions that he has clearly exceeded a reasonable industrial-

93 Resolution of the Supreme Court of Lithuania of 9 January 2014 adopted in civil case UAB ‘Mitnija’ and UAB ‘MG Baltic Investment’ v. V. G. and E. R. (Case No. 3K-7-124/2014). 94 Resolution of the Supreme Court of Lithuania of 5 May 2014 adopted in civil case BUAB ‘Star 1 Airlines’ v. M. L. (Case No. 3K-3-244/2014). 123 574 V. Bite,_ G. Gumuliauskiene_ commercial risk or has displayed explicit misconduct. Finally, like in US practice, it was stated that the business judgment rule may be applied only where there is no conflict of interests, i.e., where the duty of loyalty95 has not been breached. In summary, it can be noted that the term ‘business judgment rule’ has explicitly been established and developed in Lithuanian judicial practice since 9 January 2014. However, this rule is not identical to the business judgment rule established and developed by the courts of the US State of Delaware, as Lithuania, like other civil law countries, which have even established standards for duty of care, including some form of ‘business judgment rule’, does not apply this rule as appropriate standard of judicial review. The burden of proof of alleged negligence lies with the director. In other words, this kind of ruling is only a substantive ruling of law, not a procedural ruling of evidence.96 In Lithuania, the business judgment rule is rather understood as a performance standard imposed on the director in the business decision-making process. In addition, this rule does not eliminate the practice already developed by the Lithuanian courts, and which existed before 9 January 2014, to assess the content of a director’s adopted business decision. Thus, Lithuanian courts, when settling cases on directors’ civil liability for loss caused due to risky business decisions, evaluate both aspects: the content of the business decision as well as the decision-making process. However, this practice does not allow the directors to know the rules ex ante, so that their decision would not be assessed as illegal ex post.

4 Conclusion

Risky business decisions made by directors are evaluated through the prism of duty of care in the Lithuanian legal system, i.e., on the basis of the appropriate performance standards. However, there are no uniform content standards for the judicial review of such decisions. Although Lithuanian judicial practice regarding the assessment of the content of risky decisions applies the criteria of obvious harm, undue risk, non-compliance with the law, internal documents, good business standards and economic uselessness, they are of an evaluative nature and the purport of decisions adopted by directors depends on how the court will interpret and apply the abovementioned criteria when deciding on specific cases. Such case law does not create the necessary clarification ex ante, because at the time decisions are adopted, directors do not know how they will be assessed by the courts ex post. Lithuanian case law, either directly or indirectly, did not provide a real business judgment rule (as understood and applied in common law countries), since the Lithuanian legal system, like other civil law tradition countries, did not recognise the judicial abstention doctrine, which emphasises a court‘s right not to consider the ex post criticism of directors’ decisions. This doctrine is essential for implementing

95 In Lithuanian case law, the duty of loyalty mainly includes the duty to avoid (both passively and actively) conflicts of interests (see Resolution of the Supreme Court of Lithuania of 9 January 2014 adopted in civil case UAB ‘Mitnija’ and UAB ‘MG Baltic Investment’ v. V. G. and E. R. (Case No. 3K-7- 124/2014)). 96 Master (2012). 123 The Business Judgment Rule in Lithuania 575 such a rule in the . In Lithuania, there was no tradition of litigation proceedings and rules formulated in judicial decisions that allowed directors to be aware of the rules ex ante, so that their decisions would not be assessed as illegal ex post. However, since 9 January 2014, the term ‘business judgment rule’ is clearly established and applied in the jurisprudence of the Lithuanian Supreme Court. Even though this rule cannot be specifically compared to the US Delaware business judgment rule, it should be considered as a particular performance standard applicable to directors, according to which it will be presumed that a director acts in a bona fide manner and in the best interest of the company, if there is no conflict of interests (breach of the duty of loyalty). Furthermore, this rule does not eliminate previous Lithuanian court practice in assessing the purport of business decisions taken by company directors. Therefore, Lithuanian courts, when settling cases on civil liability of a company director for risky business judgments resulting in respective loss to the company, analyse both the purport of such business decisions and the related decision-making process. However, this practice implies a lower certainty level of company directors as they cannot be aware ex ante which particular rule will be applied upon a judicial review of the decisions ex post.

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