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A cross-border guide for group directors May 2017 Purpose of this guide Contents This guide aims to help multinational groups by giving an introduction to the 01 Australia 3 role, powers, duties and liabilities of directors of subsidiary in 02 8 different jurisdictions. 03 13 04 18 Directors usually have wide powers to manage the affairs of their company 05 23 and act as its agent and a duty to do so with due care, skill and diligence. 06 28 The interests of the company should also be put ahead of the director’s own 07 India 33 interests. As this guide illustrates, however, the exact nature and scope of these 08 38 duties varies from one legal jurisdiction to another. 09 43 Company directors are, of course, also subject to the company’s constitution 10 48 and to further laws and regulations, depending on the of the company 11 53 concerned. In particular, directors may need to be aware of rules relating to 12 The 58 health and safety, the environment, bribery and anti-corruption and financial 13 People’s Republic of (PRC) 63 and markets regulation. This guide focuses solely on the general laws to which 14 68 a director is subject by reason of becoming a director. 15 73 16 78 For convenience, the information is given in relation to the type of non-listed 17 83 corporate entity most commonly used within a group in each particular 18 South 88 jurisdiction. Different rules will apply to other corporate entities and / or if the 19 93 company is listed. 20 98 Information about Australia and Vietnam was contributed by Allens, 21 103 Brazil by Lefosse Advogados, Indonesia by Widyawan & Partners and 22 United Arab Emirates 108 South Africa by Webber Wentzel. 23 113 24 (Delaware) 118 25 Vietnam 123 01 Australia

Greg Bosmans Allens Partner, Tel: (+61) 3 9613 8602 [email protected]

Kate Towey Allens Partner, Tel: (+61) 2 9230 5053 [email protected]

Linklaters A cross-border guide for group company directors > Australia 4

What type of company? Management structure Board composition Appointment and removal

In Australia, subsidiaries within a group are more Australian companies (with more than one A proprietary company must have at least one Directors are first appointed on likely to be proprietary companies limited by director) are managed by a board of directors. director who must ordinarily reside in Australia. and, thereafter, under a company’s constitution shares but may also be public companies limited A must have at least three or the replaceable rules (as applicable). The In practice, the board may consist of executive by shares. directors on its board, two of whom must replaceable rules (and usually the constitution) and non-executive directors. Executive directors ordinarily reside in Australia. In both cases, a provide for appointment by a majority vote of are employed by the company (or a related company’s constitution may provide for a higher the shareholders or a decision of the existing body corporate) and are in charge of managing minimum number. directors (which, at least under the replaceable its business. Non-executive directors generally rules, must be subsequently confirmed by fulfil a supervisory role and are not expected to All formally appointed directors must be natural majority shareholder vote). Unless required in be involved in the day-to-day management of persons (although a may be a a constitution, there is no limit on the period of the company, although this does not absolve shadow director). Any person over the age of 18 office for directors of proprietary and unlisted them from the legal responsibilities and duties can be appointed as a director, unless he / she: public companies. The appointment of, as well applying to directors. Except to the extent >> has not consented in writing to the as certain personal information about, directors delegated, management decisions must be appointment, (and any subsequent changes) must be taken by the board acting collectively, although notified to ASIC and this information is generally all directors are still personally responsible for >> is disqualified by law from managing accessible to the public. their actions as directors. (unless granted leave by the Australian Securities and Investments For proprietary companies, if the replaceable Under the law, persons not formally appointed Commission (“ASIC”) or by the court), or rules apply or a company’s constitution permits, as directors but who act in the position of a >> is the current (or within the last two years) the shareholders can remove directors by director (de facto directors) will be treated as auditor of the company (other than a small a majority vote. For public companies, the directors. Similarly, persons in accordance with proprietary company). law allows shareholders (but not directors) whose instructions or wishes the directors are to remove directors by a majority vote. The accustomed to act (shadow directors) will also Employees do not have the right to be statutory procedure includes providing at least generally be treated as directors. De facto and represented on the board (unless a company’s two months’ notice to the company and a copy shadow directors are bound by the same civil constitution requires it). Directors are not of that notice to the director. The statutory liabilities and criminal sanctions applying to required to have specific qualifications to act procedure can be used despite anything in a validly appointed directors. as directors. There are no share ownership company’s constitution. However, although not requirements at law on directors, although a The company’s internal management may be settled at law, the constitution is also likely able company’s constitution may mandate those. governed by: provisions of the Corporations Act to provide for an alternative removal procedure. A director can also be a secretary of the 2001 (Cth) that apply to the company (known as Constitutions will generally also provide company (unless the constitution provides replaceable rules), the company’s constitution for circumstances in which a directorship otherwise). Also, it is possible to serve as a or a combination of both. Company constitutions automatically terminates (such as bankruptcy director of several companies in the same are not mandatory. or ill health). group, although directors must avoid conflicts of interest / duty.

Linklaters A cross-border guide for group company directors > Australia (continued) 5

Powers General duties Who are the duties owed to? Dealings with company / conflicts

Under the replaceable rules and generally Directors have the following fiduciary duties Directors owe their duties to the company and Directors have a fiduciary duty to avoid actual or under a company’s constitution, the directors under general law (which are largely reflected not to the company’s shareholders or, generally, potential conflicts between their own interests are given wide powers to manage the business in statute): to the group to which the company may belong. and those of the company, and between their of the company, thereby enabling the board to duty to the company and their duties to third >> to act in good faith in the best interests of the It is important to bear this in mind, in particular, exercise all powers which are not, by law or in parties (for example, duties owed as directors of company and for a proper purpose, when a director is also a director of another the constitution, required to be exercised by the other companies). company within the group (although, under company in a general shareholders’ meeting. >> to exercise a reasonable degree of care, skill and diligence, and Australian law, the constitution of a wholly- Under statute, a director must notify the other The directors must exercise their powers by owned subsidiary may provide for its directors to directors of any “material personal interests” >> to avoid actual and potential conflicts of taking decisions collectively as a board, meaning act in the best interests of the ), they have in matters that relate to the company’s interest / duty. that where the law requires or allows directors to or has been appointed by a specific shareholder. affairs (this can be done by standing notice). do certain things, such as calling a shareholders’ Under statute, directors also must not Exemptions include where a is subject In a situation where a company is or may meeting or issuing shares, such action should improperly use their position, or information to shareholder approval, in relation to the become insolvent, its directors will owe duties usually be approved by the board rather than obtained because they are a director, to gain an director’s remuneration, where the interest to creditors. a sole director. Directors may, however, be advantage for themselves or someone else, or to relates to permitted insurance or indemnities, permitted to act individually where specific cause detriment to the company. or, for proprietary companies, where the other powers and responsibilities have been delegated directors are already aware. The general law duties require directors to to them by the board. For example, under the take reasonable steps to put themselves in a Public company directors with a material replaceable rules or a constitution, a director position to guide and monitor the management personal interest may not generally vote may be appointed to act as managing director of the company. In particular, they must have or be present while the relevant matter is of the company. a general understanding of the company’s considered at a board meeting unless permitted Unless a company’s constitution provides business, act in accordance with its constitution by the non-interested directors (subject to otherwise, the directors may delegate any or, where applicable, the replaceable rules and statutory requirements). of their powers to committees, a company exercise independent judgement. In addition to Shareholders can authorise or ratify any potential secretary (only required to be appointed for reasonable skill, care and diligence, they should breach of the director’s duty to avoid conflicts. public companies) or other individuals. They use any actual knowledge and skills that they generally remain responsible, however, and so have, for example, in financial management. The law also requires certain transactions (such should set up systems to supervise those acting as providing finance or property, buying, selling See also “Dealings with company / conflicts”. under their authority. Directors may also rely or leasing of assets, or supply or receipt of on expert information or advice, but only to the services) with public company directors to be extent it is reasonable to do so. approved by shareholders, unless an exemption applies (a proprietary company’s constitution could provide similarly). Additionally, shareholder approval may be required for the payment of loss of office or retirement benefits to a director.

Linklaters A cross-border guide for group company directors > Australia (continued) 6

Liability Indemnities and protections Insurance Financial difficulty and insolvency

A company may bring claims against its Under Australian law, a company (or related It is possible for a company to take out directors’ Directors have a statutory duty to prevent directors for breaching duties owed by them body corporate) cannot exempt a person from a liability insurance. insolvent trading by their company. A director to the company. In that case, directors may be liability to the company incurred as a director of contravenes this duty if the company is or This insurance may protect a director’s personal personally liable to compensate the company the company. Nor can the company indemnify becomes insolvent after incurring a debt and, assets if claims are made against that director for losses caused, restore company property a director in relation to liabilities owed to the despite the director being aware of reasonable in respect of any negligent acts, errors or and pass to the company any profits they have company or a related body corporate, certain grounds for suspecting that the company was omissions in the director’s capacity as an officer made. Also, depending on the circumstances, civil penalties or compensation orders, or or, after incurring that debt, would become of the company. the company may be able to terminate any liabilities owed to a third party where the person insolvent, failed to prevent the company from with, or involving, the director which did not act in good faith. The law, however, prohibits companies from incurring that debt. have been entered into in connection with insuring their directors against conduct arising A company (or related body corporate) cannot Appropriate legal advice should be taken in the breach of duty. Shareholders may also out of: indemnify a director against legal costs incurred these circumstances. Contravention of this duty bring claims against directors on behalf of the in defending an action for a liability incurred as >> a wilful breach of their duties in relation to may attract similar civil and criminal penalties to company (statutory derivative actions), although a director if the costs are incurred in defending the company, or those described earlier for breaches of general leave of the court must be obtained (and these or resisting certain proceedings, including where statutory duties (see “Liability”). Directors may actions are relatively rare). >> a misuse of position, or a misuse of the person is found to have a liability as stated information. also be personally liable to repay creditors (with ASIC may also commence civil or criminal in the paragraph above, criminal proceedings whom the company traded). Although not settled at law, the prohibition on proceedings (including, if relevant, on behalf where the person is found guilty or proceedings insuring against a director’s “wilful” breach of Some defences may apply in relation to civil of affected persons). If directors breach their brought by ASIC. their duties is likely to encompass an intentional penalty proceedings (for example, the director duties under statute, they may be subject to A company may, however, protect its directors or reckless breach of those duties (which is may have reasonably relied on information a range of civil penalties (including financial against some liabilities, in particular in relation consistent with the statutory trigger for criminal provided by others which led the director to penalties and disqualification from managing to a liability owed to a third party, provided that sanctions for those breaches and also with believe that the company was solvent). There a corporation) and / or criminal penalties the director acted in good faith. A company considerations of public policy). are no defences for criminal proceedings. (including fines and imprisonment). may also provide loans to its directors to meet Failure by a director to take all reasonable steps the costs of defending or resisting civil or to comply with the statutory financial reporting criminal proceedings, provided that the loan is requirements may expose the director to civil / reasonable in the circumstances and is repaid if criminal liability. Directors may also be subject to the costs become costs for which the company civil / criminal liability for failure to comply with cannot indemnify a director under law. restrictions relating to conflicts of interest / duty.

Linklaters A cross-border guide for group company directors > Australia (continued) 7

Decisions and meetings Minutes Administration and accounts Relevant rules

The main sources of regulation of companies Except for single-director proprietary companies, The law requires companies to keep minute The board of directors is responsible for the and their directors are: the exercise by the board of directors of its books in which they record (within one month administration of the company, including such >> general law, powers usually occurs in board meetings. The after the event) all proceedings and resolutions matters as: replaceable rules or a company’s constitution of directors’ or shareholders’ meetings as >> the Corporations Act 2001 (Cth) (and >> making public filings (company secretaries (as applicable) usually set out how board well as any resolution passed by directors or statutory rules made under it), including also have obligations in this regard), decisions are to be made. Apart from regulating shareholders without a meeting. There is no the replaceable rules, which generally physical meetings, they generally also allow for minimum statutory period for which minutes >> appointing and removing company officers supplement the general law requirements, written resolutions and decisions to be made must be kept. and auditors, and where directors are in separate locations but >> maintaining statutory books and records, >> the company’s constitution (if it has one), There is no prescribed form for board minutes. able to communicate effectively with each other. which may impose additional requirements Apart from including basic details (such as the >> displaying the company’s details at places of on, or in some cases displace or modify, the Subject to a company’s constitution (if any), name of the company, chair and attendees, business and in business communications, general law and statutory requirements. notice of a board meeting must usually be the place, date and time of the meeting, and >> paying dividends, and sent to all directors, any director may convene the business transacted), they must record any >> calling annual and other shareholder a meeting and there is no minimum notice notice required by law to be given by a director meetings where required by law. requirement, provided reasonable notice to the other directors disclosing a material The directors must also ensure that written is given. personal interest that the director has in a matter financial records are kept that correctly record that relates to the affairs of the company (see The quorum for a board meeting will normally be and explain the company’s transactions, also “Dealings with company / conflicts”). stated in a constitution (and is also a replaceable financial position and performance, and that rule) and will be at least two directors (for single- Once the minutes have been signed by the would enable true and fair accounts to be director proprietary companies, the law allows chair (which must happen within a reasonable prepared. The directors must also ensure that the director to pass a resolution by recording it time after the meeting, or after the resolution an annual financial report (comprising financial and signing the record). is passed where no meeting took place (as statements, notes and directors’ declaration, applicable)) and recorded in the minute books, including as to solvency) and directors’ report Typically, each director has one vote. Subject to they are evidence of the proceeding or resolution are prepared and audited (although small a company’s constitution, decisions are made by to which they relate, unless the contrary is proprietary companies generally need not a simple majority of those present and entitled proved. This means that, without contrary proof, prepare these documents or appoint auditors). to vote. The chair, elected by the other directors, it is assumed that the meeting (if relevant) was Failure by the directors to take all reasonable may have a casting vote (usually in addition duly convened and held, all proceedings duly steps to comply with these requirements may to their vote in their capacity as a director) to took place and all relevant resolutions were expose them to criminal and civil penalties be used when votes on a resolution are equal passed, as recorded in the minutes. (see also “Liability”). In certain circumstances, (which is also a replaceable rule). a parent company must prepare group consolidated financial statements.

Linklaters 02 Belgium

Eric Pottier Partner, Brussels Tel: (+32) 2 501 94 48 Mob: (+32) 4753 98268 [email protected]

Linklaters A cross-border guide for group company directors > Belgium 9

What type of company? Management structure Board composition Appointment and removal

In Belgium, subsidiaries within a group are most The SA / NV is managed by a board of directors The board of directors must consist of at least Directors are appointed in the company’s likely to be public companies limited by shares (conseil d’administration / raad van bestuur) with three members who may, but need not, be deed of incorporation or by the shareholders’ (société anonyme or “SA” in French / naamloze a single-tier structure. shareholders. The minimum number of directors meeting, usually by a simple majority vote. vennootschap or “NV” in Dutch). can be reduced to two if the company only has Unless the company’s articles provide otherwise, The may, however, provide two shareholders (unless the articles provide whenever a vacancy occurs, the remaining otherwise by creating a management committee otherwise). The articles of association can directors may temporarily fill the vacancy within the board. also provide for a higher minimum number until the next shareholders’ meeting makes Persons who have not been legally appointed of directors. the final appointment. The appointment of a as directors but act as such (dirigeants de fait director is only effective once the mandate has Subject to the articles, there are no age, / de facto leiders) are bound by the criminal been accepted. nationality or residence restrictions on directors. sanctions and civil liabilities which apply Directors which reside outside Belgium are, Directors may be removed at any time, without to directors. however, deemed to be domiciled at the cause and without any notice period or damages company’s registered office and any writs or being due, by a simple majority vote of the notifications, relating to their management of shareholders. This power cannot be excluded by the company, can validly be served on them at the articles of the company or otherwise. that address. An excerpt from the resolutions for the Directors can either be individuals or legal appointment of directors (or, in the case entities. A legal entity acting as a director of corporate directors, their permanent must appoint a person (that is, a director, representatives) must be filed with the clerk’s partner, manager, member of the management office of the competent commercial court committee or employee) as its permanent and published in the Annex to the Belgian representative. The permanent representative is State Gazette. liable in the same way as the legal entity which Directors are appointed for a renewable he / she represents. maximum term of six years. If a director is Persons convicted of certain crimes may be appointed for a longer period, the term of his / barred from acting as directors, as may be her mandate is reduced to six years. Directors unrehabilitated bankrupts or directors of a should remain in office until replaced. bankrupt company.

Linklaters A cross-border guide for group company directors > Belgium (continued) 10

Powers General duties Who are the duties owed to? Dealings with company / conflicts

The board of directors has the power to perform The board of directors / managers must exercise Under Belgian company law, the duties of The Belgian Companies Code governs situations all acts which are necessary or useful for full and effective control over the company directors are usually described in terms of acting where a director has a direct, or indirect, fulfilling the purpose of the company, except by meeting regularly and monitoring senior in good faith in the interests of the company personal and conflicting interest of a financial where powers are expressly reserved for management. The board is also responsible itself, rather than in the interests of any group to nature in a decision or transaction within the shareholders by the law or in the articles. for deciding the company’s long term strategy, which the company may belong. authority of the board of directors. implementing and supervising this and reporting The articles may allow the board to establish The concept of the interests of the company is In such cases, the director must notify the other back to the shareholders. a management committee (comité de a flexible one and means, as a minimum, taking directors of the existence of the conflict prior direction / directiecomité). The board’s powers Each director is under a duty of due care. into account the interests of the shareholders as to a decision being made by the board and this of management can be delegated to this This means that they must act in good faith a whole (and not individual shareholders). declaration must be recorded in the minutes committee, except where decisions concern the and for proper purposes, in a manner which of the relevant meeting with a description of It may also include the interests of the general policy of the company or are specifically they believe to be in the best interests of the the board’s decision and the financial impact company’s employees and creditors. reserved for the board by the Companies company and its shareholders, taking such on the company. In non-listed companies, the Code. These decisions, for example, include care as an ordinarily prudent person, placed director may take part in the meeting and vote. making use of the authorised capital, convening in the same situation, would use under similar Any auditors appointed must also be informed a shareholders’ meeting and drawing up the circumstances (see also “Liability”). of the conflict. The annual report must contain annual accounts. The board remains responsible these minutes in their entirety and the auditor’s This implies that the director must have a for supervising the management committee. report on the accounts must contain a separate reasonable knowledge of the company’s description of the financial consequences for the Powers of daily management may also business, obtain reliable information as relevant company. The company may seek to nullify or be granted by the board to a director, and understand the consequences of decisions void decisions or transactions made in breach usually referred to as the managing director made. Directors can delegate and rely on of the legal provisions if the other party was, or (administrateur délégué / gedelegeerd expert advice, but only to the extent that it is should have been, aware of such breach at the bestuurder), or to any other person, reasonable to do so. time. These rules do not apply to certain intra- typically an employee and usually referred group decisions or transactions or to ordinary to as general manager (directeur général / transactions that take place on normal market algemeen directeur). terms. In addition, the board of directors may give Even if the procedures are followed, directors specific powers, including banking powers, are personally, jointly and severally liable for to any person of its choice. damages suffered by the company or third parties if a decision or transaction procures an unlawful financial advantage for a director, to the disadvantage of the company.

Linklaters A cross-border guide for group company directors > Belgium (continued) 11

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Directors may incur civil liability for failing to Under certain conditions, a company may It is possible to take out insurance against Further to the general rules on directors’ perform the duties of a director and can be sued undertake to indemnify its directors for liability directors’ liability. liabilities, additional regulations come into for such failure by the company, or one or more that the directors might incur in the performance play when a company is facing bankruptcy or Typically, such insurance policies cover amounts minority shareholders acting for the company. of their duties. A company cannot, however, financial difficulties. Appropriate legal advice which may be payable by the directors who are Directors may also be jointly and severally indemnify its own directors for liabilities incurred should be taken in these circumstances. insured because of a claim for damages made liable for violations of the Companies Code or towards the company itself. Third parties (such against them in relation to the performance of In principle, it is the bankruptcy trustee who the articles and actions can be brought by the as shareholders or group companies) are also their duties as directors of a company. brings claims against the directors in the case of company and interested third parties. Directors permitted to indemnify directors, even for bankruptcy and he / she can hold the directors can also be liable for torts committed where liabilities owed to the director’s own company. The insurance will not cover deliberate damage, liable for both contractual and non-contractual the general duty of due care or non-contractual or criminal or tax penalties and fines. In each case, the directors remain liable but the issues. In particular, if directors continue with obligations are infringed. company or a third party agrees to cover the a chronically loss-making company which is in The test is what a diligent director would have financial consequences of the liability incurred. deficit and without any real prospect of success, done in similar circumstances. Courts can this may be a breach of the directors’ duties to Indemnities cannot cover liability as a result take into account all the circumstances under the company and a tort against third parties. of fraud (or wilful misconduct which is similar which a decision was made (including the Under Belgian law, a director is also liable if to fraud) or intentional damage or criminal director’s qualifications, whether the director he / she knew, or should have known, that the penalties imposed on directors personally. is an executive or non-executive and the time company fulfilled the conditions of bankruptcy available for making the decision) but may not As a general rule, any undertaking to indemnify and did not file for bankruptcy within a month substitute their own business judgements for directors for liability they might incur must be in after cessation of payments of its debts. the decisions made by the director. Directors the corporate interest of the company granting Other specific liabilities for directors arise if can only be liable for a breach of the duty of due the undertaking. they commit a manifestly gross fault which care if their judgement was manifestly flawed Exoneration clauses limiting the liability of the contributed to, or resulted in, a bankruptcy, or there was a clear lack of diligence (such as directors towards the company are uncommon or if the directors were involved in at least erratic attendance at board meetings and failure and controversial. Most legal scholars are two bankruptcies, liquidations or similar to properly consider issues). of the opinion that they are invalid. The operations within a five-year period preceding In addition, particular civil liabilities apply annual shareholders’ meeting can, however, the bankruptcy. (for example, if directors fail to convene a agree to release directors from liability to the In certain circumstances, Belgian courts shareholders’ meeting or incur losses because company. This does not release directors can pierce the corporate veil and “extend” the net assets of the company fall below from liabilities towards third parties or criminal a company’s bankruptcy to its directors (or one-half of the company’s registered capital) liabilities incurred. shareholders) by rendering them personally as do sanctions for criminal misdemeanours liable for the company’s debts. (such as, in relation to tax, environmental and accounting matters).

Linklaters A cross-border guide for group company directors > Belgium (continued) 12

Decisions and meetings Minutes Administration and accounts Relevant rules

Board meetings should be held regularly and all The resolutions of the board of directors are The board of directors has a duty to provide The Belgian Companies Code sets out directors must be convened by the chair of the recorded in minutes signed by the chair and the annual accounts for the company and a the general duties of directors and their board to each meeting. The law does not set secretary of the meeting and by those directors management report. responsibilities in relation to the management out a specific notice period, but this should be who wish to do so. and external representation of an SA / NV. The management report comments on the reasonable. The notice of meeting must include The proxies given for the meeting are attached annual accounts in order to set out, in a faithful In addition, corporate documents of the an agenda. The notice period and inclusion of to the minutes of such meeting. manner, the development of the company’s company, including its articles of association the agenda are not required when all directors business and of its position. (statuts / statuten), its internal rules (règlement are present / represented at the meeting and These minutes are kept in a special minute book intérieur / reglement van orde) and any agree to another agenda. Usually, a majority of at the registered office of the company. Other specific duties include convening the specific resolutions may impose additional the directors must be present / represented at shareholders’ meeting and preparing reports in Certain resolutions should be notarised and requirements or restrictions on directors. In each board meeting and board resolutions are defined circumstances. published in the Annex to the Belgian State some cases, the provisions of these corporate passed by a majority vote. Gazette. This includes any decisions to increase documents will override the rules of the Belgian As a general rule, directors must be able the capital using the “authorised capital” Companies Code. to discuss the business of the meeting. procedure, whereby the board of directors Consequently, at least two directors (or more, if and not the shareholders’ meeting resolves to the articles so require) must attend each board increase the company’s capital, in reliance on meeting. The articles may allow joint discussions authorisation set out in the company’s articles to take place by use of telephone or video- and subject to specific conditions. conference. Board meetings should generally be held in Belgium. They can be held abroad from time to time, but this should not become common practice. It is also possible, if the articles so permit, the business is urgent and the corporate interest requires immediate action, for the board to transact certain business by written resolutions signed by all the directors. Written resolutions cannot, however, be used to draw up the annual accounts or to increase capital using the so-called “authorised capital” procedure (see “Minutes”) or for any other business prohibited by the articles.

Linklaters 03 Brazil

Christian Roschmann Lefosse Partner, São Paulo Tel: (+55) 11 3024 6153 Mob: (+55) 11 99400 4159 [email protected]

Linklaters A cross-border guide for group company directors > Brazil 14

What type of company? Management structure Board composition Appointment and removal

In Brazil, a subsidiary within a group is A Sociedade Limitada is usually managed A Sociedade Limitada may have one or several The power to appoint and remove company most likely to be a company by its officers. If the articles of association officers and there is no limit on the number officers lies with the shareholders. Details (Sociedade Limitada). do not specifically provide for the company’s of officers. relating to the appointment of an officer need management, each of the shareholders has to be set out in the company’s articles of A Sociedade Limitada must have at least Only individuals with full legal capacity to act can full powers and authority to manage the association. Nonetheless, officers can also two shareholders. This is normally achieved be appointed as officers. Additionally, officers Sociedade Limitada. be appointed by a separate resolution of by granting a single share to another must be resident in Brazil. Officers which are the shareholders. group company. Consequently, the officer of a Sociedade not Brazilian nationals are also required to have Limitada may be either a shareholder or a permanent visa permitting them to both reside The right to appoint officers entails the right (more usually) a third party appointed by and work in Brazil. to remove them. An officer ceases to exercise the shareholders. his / her functions when he / she is removed Certain legal restrictions may prevent a person from office and this may occur at any time Shareholders of a Sociedade Limitada may also from acting as an officer. For example, persons or upon expiry of the term of office fixed in decide to create complementary management cannot be officers of a Sociedade Limitada if the articles of association or in a separate structures, such as a supervisory board, with they have been prohibited from holding a public shareholders’ resolution. power to supervise the officers in the execution office or found guilty of crimes involving: of their duties or to solve conflicts of interest. In addition, the removal of an officer who is >> bankruptcy, appointed in the articles of association requires Management structures, including a supervisory >> abuse of a public office, the approval of shareholders who hold quotas board, are, however, more common in >> bribery, representing at least two-thirds of the capital of Sociedades Limitadas with large revenues and the Sociedade Limitada, unless the articles of complex activities. >> the economy, association provide otherwise. >> the Brazilian financial system, >> competition, If an officer is appointed by separate shareholders’ resolution, such appointment and >> consumers, removal require the approval of shareholders >> public faith, or representing at least one-half of the corporate >> property. capital of the Sociedade Limitada.

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Powers General duties Who are the duties owed to? Dealings with company / conflicts

The officers are generally responsible for Brazilian law provides for general guidelines and Officers owe their duties to the company and to Officers should avoid conflicts between the representing the company and managing its duties that must be observed by the officers its shareholders. interests of the company and their own interests. business. There are two options for granting in their management of the company. These Possible conflicts of interests should be powers to officers of a Sociedade Limitada. include the following: disclosed to the shareholders. >> Restricted powers: the articles of association >> Duty of care: officers must act with diligence To avoid conflicts of interests, it is common or a separate shareholders’ resolution may and certain standards of care in managing to provide in the articles that officers are require certain acts to be reserved for the the company. To be “diligent” means that prohibited from entering into agreements with prior approval of the shareholders. These the officer must conduct the business of the company, in their own names or on behalf restricted powers, once established, are the company with the degree of care which of third parties. effective against third parties, such as would be expected to be employed by an In addition, the potential for conflicts is creditors and suppliers. Third parties usually averagely diligent peer of such officer. In customarily reduced by reserving certain check the articles of the company to ensure addition, the officer should use the same matters of day-to-day management for the that the officers have the necessary powers degree of diligence that would be expected decision by the shareholders or any supervisory to act. from a person conducting his / her own or advisory board that may be installed. >> Unrestricted powers: the powers of the business. This means that officers are company’s officers are not restricted by the expected to actively protect the company’s articles and they can, therefore, manage the interests and, if they do not, may incur liability company without obtaining the prior approval for actions taken, but also for omitting to take of the shareholders. certain actions. An officer may also delegate activities to non- >> Duty to inform: officers are expected to keep officers by power of attorney. Such delegation the shareholders and the company, as an is valid in relation to third parties. entity, informed of any fact or occurrence which is material to the company’s business. In addition to other matters specified by law or Officers must also keep the shareholders and in the articles, the following matters must be company informed of any conflict of interest approved by shareholder resolution: approval between the company and the officers. of the management accounts, appointment / Furthermore, the duty to inform means removal of administrators, officers’ remuneration that directors should take decisions on an (if not established in the articles), amendment of informed basis. the articles, merger, split, dissolution, cessation >> : officers must perform their / liquidation of the company, appointment / duties in the best interests of the company removal of liquidators, insolvency accounts and and keep its affairs confidential. petition for insolvency protection.

Linklaters A cross-border guide for group company directors > Brazil (continued) 16

Liability Indemnities and protections Insurance Financial difficulty and insolvency

As a general rule, officers are not personally To mitigate the risks to which officers are A Sociedade Limitada is permitted, but not Brazilian law does not set out specific duties liable for actions taken in the normal course of exposed, it is common for companies in Brazil required, to take out directors’ and officers’ for officers where a company is in financial managing the company’s business. Officers may to issue indemnification letters, executed liability insurance. difficulties or insolvency. be held liable, however, if they cause damage by the company and guaranteed by its Such insurance is usually only offered with a The articles of association of the Sociedade to the company, its shareholders and / or third controlling shareholders. considerable liability excess and numerous Limitada can, however, establish obligations of parties because they have acted: An indemnification letter is a written undertaking exclusions and restrictions. this type. >> in breach of applicable laws or the articles, by a company, or by companies belonging to Directors’ and officers’ liability insurance is Requests for insolvency protection (for the same economic group, to hold the officers >> within the scope of their authority, but with contracted by the Sociedade Limitada, or by example for judicial recovery or liquidation) harmless from any damages or liabilities fault (culpa), meaning that they have acted any company within the same economic group. must be approved by a resolution adopted by incurred personally by them during the conduct with negligence or a lack of ability or proper It is directly payable to the officers insured as shareholders in a meeting or assembly and of the company’s business. This is an alternative care, and / or indemnification for certain damages / losses follow the provisions of Brazilian bankruptcy law. to directors’ and officers’ liability insurance. >> in a way which amounts to wilful or in advancement of defence costs, where misconduct (dolus). An indemnification letter may include several the officers suffer a loss as a result of a legal risks that are often not covered by directors’ and action (whether criminal, civil, or administrative) Officers may also be exposed to other types officers’ liability insurance. brought for alleged wrongful acts in their of liability, for example, in relation to tax, capacity as officers of the company. employment, environmental or social security The indemnity provided by the indemnification issues, or other corporate, criminal, civil and letter is usually limited to acts that have been In Brazil, directors’ liability insurance usually commercial liability. performed by the officers with due regard to the aims to provide cover in relation to the legal law and the articles of association. and contractual duties of the officers of the The Sociedade Limitada is liable for any company. Liabilities arising out of the company’s damage caused by its officers to third parties. core activities and operations and other risks are As a result, it may be entitled, depending on normally excluded. the circumstances, to be indemnified by the defaulting officer (or vice versa, if applicable). In some very specific cases, however, any liability for loss / damage caused by an officer will rest solely with the officer (for example, where an officer acts beyond limits on his / her powers which have been registered with the Commercial Registry and are accessible by third parties or acts beyond the scope of the company’s purpose).

Linklaters A cross-border guide for group company directors > Brazil (continued) 17

Decisions and meetings Minutes Administration and accounts Relevant rules

Officers’ meetings or decisions can take any Although not prescribed by law, the company’s The officers are required to keep due accounts The chapter of the Brazilian Civil Code (Brazilian form established in the articles, for example, articles of association or rules of procedure and prepare the annual financial statements. Law No. 10,406/02) which establishes the meetings can be physical or electronic, may commonly provide that minutes of officers’ They must ensure that an organisation is in rules relating to a Sociedade Limitada sets be replaced by written resolutions, decided by meetings are to be set out in writing and place to provide an overview of the company’s out the general duties of officers and their casting votes, etc. forwarded to the shareholders. economic and financial situation at any time, responsibilities in relation to the representation even when no is available. and management of a Sociedade Limitada. Most commonly, the officers either hold a physical meeting in which the agenda is orally The officers are also responsible for the To the extent that this chapter fails to provide discussed and each officer casts their vote orally company’s compliance with applicable laws, for for certain issues, the Sociedades Limitadas or each officer votes in writing on the matter example, the timely filing of tax declarations. are governed by the rules applicable to general under deliberation. (sociedades simples). Furthermore, officers must make all necessary registrations and filings in the Brazilian Additionally, the articles of association of Commercial Registry and obtain all necessary a Sociedade Limitada may provide (and governmental licences and authorisations. usually do) that the rules applicable to joint stock corporations (sociedades anonimas) (Brazilian Law No. 6,404/76) also apply to the Sociedade Limitada. In a situation where a company may become insolvent, its officers may be subject to specific provisions of the Recovery and Bankruptcy Law (Brazilian Law No. 11,101/05). The company’s constitutional documents (such as its articles of association or internal rules of procedure), specific resolutions and oral or written agreements between the officer and the company may impose additional requirements or restrictions on the officer. Such arrangements, in some cases, may also override the provisions described in this section on Brazil.

Linklaters 04 France

Alain Garnier Partner, Paris Tel: (+33) 1 56 43 57 02 Mob: (+33) 6 10 85 08 37 [email protected]

David Swinburne Partner, Paris Tel: (+33) 1 56 43 58 43 Mob: (+33) 6 88 78 94 15 [email protected]

Linklaters A cross-border guide for group company directors > France 19

What type of company? Management structure Board composition Appointment and removal

In France, a subsidiary within a group is likely Management structures for French companies For an SA, the number of directors and their SA to be either a joint stock company (société can vary, as below: maximum age is generally set out in the articles Members of the Board of directors and of the anonyme or “SA”) or a simplified joint stock and must comply with the limitations of the >> Classic SA: control is exercised by a Board of Supervisory Board of an SA are appointed and company (société par actions simplifiée French Commercial Code. For example, the directors and a General Manager. removed at general meetings of the ordinary or “SAS”). Board of a Classic SA shall have between three shareholders of the company. >> Dual board SA: a Management Board is and 18 members and typically the Chair of the The SA and the SAS are both commercial overseen by a Supervisory Board. Board and General Manager cannot be older The terms of the directors’ mandates are limited liability companies. The SAS is similar to >> SAS: the only legal requirement for its than 65. French law does not require directors generally set out in the articles of association the SA, but is primarily regulated by its articles management is that a President must be to have specific qualifications. and must comply with the French Commercial of association, which means provisions applying appointed. In addition, the articles may Code, being typically for a maximum term of to directors can be more flexible than those Gender quota rules and obligations to appoint provide for other governing bodies or six years. prescribed for an SA. Unlike an SA, however, directors representing employees may apply individuals to be appointed and how they an SAS cannot make public offerings, except to the Board of directors or to the Supervisory The General Manager in a Classic SA is should operate. in limited cases (such as, private placements Board of an SA under certain conditions appointed and removed by the Board of to qualified investors, or to a limited circle In this discussion of the law applying to directors. The Management Board in a Dual It is possible for a company to be appointed to of investors). directors of French companies, the term board SA is appointed by the Supervisory the Board / Supervisory Board of an SA or as “director” means: Board and removed, as a principle, by This section sets out general rules applying to President / manager of an SAS. the shareholders. directors of an SA / SAS. Further regulations, >> the Chair of the Board of directors, the Restrictions apply if directors are employees of duties and responsibilities apply, notably to listed General Manager, the Deputy General SAS the SA / SAS. companies and directors of regulated companies Managers and the directors (Classic SA), In an SAS, the rules for the appointment and (such as credit institutions, financing companies The statutory auditors of the SA / SAS must >> the members of the Management Board and, removal of the directors are set out in the articles and financial holding companies). be given notice of all meetings relating to to a lesser extent, of the Supervisory Board of association. (Dual board SA), and accounts and, in certain cases, two employee representatives (having a right of discussion >> the President and any managers only, but no right to vote) must be given notice appointed (SAS). of all meetings of the Board / Supervisory Board Persons not legally appointed as directors but (SA) / management (SAS). acting as such (dirigeants de fait) are bound by Complex legal restrictions on the holding of criminal sanctions applying to directors in the several corporate mandates apply to an SA French Commercial Code. Any civil liabilities of (but not to an SAS). such directors are determined in accordance with the rules of general civil responsibility set The articles of an SA (and, less frequently, of an out in the French Civil Code. SAS) may set out share ownership requirements for directors, usually complied with by a share loan from another shareholder.

Linklaters A cross-border guide for group company directors > France (continued) 20

Powers General duties Who are the duties owed to? Dealings with company / conflicts

SA A director must exercise the powers conferred A director does not ordinarily have any duties Certain transactions, directly or indirectly, upon him / her and act in the best interests of towards individual shareholders or third parties, entered into between an SA / SAS and a director In an SA, the Board of directors is responsible the company. but only towards the company. (referred to as related party transactions) are for determining corporate strategy and prohibited, including but not limited to, loans supervising its implementation. Powers of day- There is no specific statement of the duties of a made by the company to a director. to-day management are vested in the General director under French law, except for the general Manager (in a Classic SA) or in the Management duty of confidentiality. Other related party transactions are subject Board (in a Dual Board SA). to control procedures, including obtaining the In cases coming before the French courts, prior authorisation of the Board of directors / Specific management decisions taken by an however, it has been established that directors Supervisory Board in an SA and ratification by SA (for example, in relation to related party should conduct the company’s business with the annual shareholders’ general meeting after transactions or the granting of a guarantee by due and reasonable care (gestion en bon père conclusion of the relevant transactions. the company) must be authorised in advance by de famille). the Board of directors or Supervisory Board. This particular approval process is not required In addition, a director must not put himself / for related party transactions relating to ordinary The Supervisory Board, in a Dual board SA, herself in a position where his / her duties operations conducted under normal conditions has the power to supervise the operation of the towards the company may conflict with his / (which are assessed by the French courts on Management Board, but not to take direct part her personal interests (see also “Dealings with a case by case basis) or entered into between in management. company / conflicts”). a company and its wholly-owned direct or SAS indirect subsidiaries. In an SAS, the President has wide powers to Related party transactions which are not manage the company, subject to any specific approved by the Board of directors / Supervisory restrictions set out in the articles. Board in the SA may be cancelled by the French courts (unless duly regularised) if For both an SA and an SAS, the powers of the their performance resulted in any prejudicial directors must be exercised within the limits consequences for the company. Related party of the corporate purpose of the company and transactions which are not approved by the subject to the powers reserved by law to other shareholders remain valid. governing bodies, in particular the shareholders. In both cases, the manager and, if applicable, Legal representatives may temporarily delegate the shareholder having entered into the some of their powers, under strict conditions, transaction may, however, be held liable for any or for the execution of a specific agreement on prejudicial consequence that the transaction behalf of the company. may have for the company.

Linklaters A cross-border guide for group company directors > France (continued) 21

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Directors may incur civil liability if they breach Directors may be exempted from liability in French companies are permitted to take out Directors of an SA or SAS facing insolvency company laws and regulations, the company’s certain cases, for example, where decisions insurance to cover any civil liabilities which may proceedings may face civil liability and / or articles or their duty of care in management, to are taken collectively (if the director can prove be incurred by directors to third parties in the criminal liability. the extent that damage is caused directly to the that he / she personally opposed the relevant course of carrying out their duties as directors. Civil liability, under specific conditions, person bringing the action before the court. decision) or within a group of companies or The insurance policy must, however, expressly may extend to the assets of the directors where powers have been validly and effectively All members of the Board of directors / exclude any criminal liability incurred by a and personal sanctions such as personal delegated to another. No further relief from Management Board of an SA can be held director and may also exclude other specific disqualification and / or prohibition from liability is generally available. jointly and severally liable for wrongful acts or risks (for example, damages claimed by managing a company. negligence of the Board (whilst Supervisory A company may, however, indemnify a director other directors). Board members are jointly liable only). against personal civil (but not criminal) liability arising out of actions or omissions which occur Actions for damages against directors may in the normal course of the director’s activities be brought: for the company. >> on behalf of the company (by its legal An indemnity agreement should not cover representatives or by shareholders), situations where: >> in exceptional circumstances, by a shareholder on its own behalf when it has >> a director is held liable as a result of a suffered personal loss or damage distinct fault severable from his / her duties, wilful from the company’s loss, or misconduct or a malicious action, or >> by a third party, which suffers loss or damage >> the action could benefit the company because of the negligence of the directors. (for example, by contributing to the company’s assets). Directors are only liable to third parties if they A company may also advance the costs of commit a fault severable from their duties (faute any legal proceedings to a director, but to séparable de ses fonctions), defined by case avoid incurring liability for the misuse of the law as an intentional and particularly serious company’s assets, the company should only do fault, incompatible with the normal course of a so where it is in the interests of the company. If director’s duties. the director is found liable for a severable fault, French law also contains numerous criminal he / she must reimburse the company for any sanctions for corporate regulations infringed by such advance. directors, including in relation to the preparation and filing of the annual accounts (for example, misuse of corporate assets). Directors may incur personal criminal liability separate from any liability of the company.

Linklaters A cross-border guide for group company directors > France (continued) 22

Decisions and meetings Minutes Administration and accounts Relevant rules

SA Minutes of directors’ meetings must be set out The Board of directors / Management Board The French Commercial Code is the main in writing. (SA) or President (SAS) must prepare the source of regulation for directors and sets out The articles of an SA determine how and when annual accounts and management report. specific obligations and sanctions applying notice to convene Board meetings is given, Minutes which need to be filed with the to them. how often meetings are held and how they commercial register must also be drafted in, They are also responsible for compulsory public are conducted. or translated into, the French language. filings with the commercial register. In addition, corporate documents of the company may impose additional requirements In the SA, the quorum for meetings of the Board All meetings of the Board of directors / or restrictions on directors. of directors / Supervisory Board requires that at Supervisory Board of the SA must be recorded least half of the members attend the meeting in the relevant register of decisions held at the These include: (including by way of video-conference, if this is registered office of the company. >> the company’s articles of association allowed), and decisions are taken by a majority (statuts), of the members attending or represented at the meeting (including by way of video-conference, >> its internal rules (règlement intérieur), if any, if this is allowed). and >> any specific resolutions or decisions, in Unless otherwise provided in the articles of particular those relating to the appointment, association, the chair of the Board/meeting has renewal and / or compensation of a director. a casting vote in the event of a tie. In some cases, the provisions of these corporate Quorum and majority rules for meetings of the documents will override the rules in the French Management Board of the SA are determined by Commercial Code. the articles of association and are not subject to other restrictions. SAS The articles of an SAS determine how and when decisions are made, how notice to convene meetings is given, how often meetings are held and how they are conducted. These rules are not subject to other legal restrictions.

Linklaters 05 Germany

Ralph Drebes Partner, Frankfurt Tel: (+49) 69 710 03 314 Mob: (+49) 17 239 04 651 [email protected]

Achim Kirchfeld Partner, Düsseldorf Tel: (+49) 211 229 77 183 Mob: (+49) 17 221 19 670 [email protected]

Linklaters A cross-border guide for group company directors > Germany 24

What type of company? Management structure Board composition Appointment and removal

In Germany, subsidiaries within a group are A GmbH is managed by its managing directors. A GmbH may have one or several managing The power to appoint and remove managing most likely to be limited liability companies directors and there is no limit on their number. directors generally lies with the shareholders’ If the company is subject to employee co- (Gesellschaft mit beschränkter Haftung or If the company is subject to parity co- meeting. It can be delegated to another determination provisions, or is an external capital “GmbH”). determination, it must have one labour director corporate body, for example, to a supervisory or management company, it must also have a (Arbeitsdirektor) and, therefore, at least two advisory board, but not to managing directors. supervisory board. managing directors. The right to appoint managing directors usually In addition, the shareholders may choose to Only natural persons with unlimited legal entails the right to remove them at any time, create a supervisory board or other bodies, capacity may be appointed as managing unless otherwise provided. In addition, individual for example, an advisory board (Beirat) or a directors. Managing directors do not need to be shareholders may be given the right to nominate shareholders’ committee. resident or domiciled in Germany, nor to be able a certain number of managing directors by Details of any such arrangements will be set out to speak German. directly appointing them. A managing director in the company’s articles of association. who has been appointed by a shareholder Certain statutory reasons may prevent a on the basis of a nomination right cannot be A person who acts as managing director without person from acting as a managing director, removed without that shareholder’s consent having been formally appointed to that function for example, specific violations of accounting (unless for important cause). may, under certain conditions, be held to be or insolvency rules. liable as a managing director. A shareholders’ resolution to appoint or remove Managing directors must devote their entire a managing director is passed by majority vote, working capacity to the GmbH. It can unless a higher voting threshold is provided for generally be assumed that further activities, in the articles. if considerable and regardless of whether these are remunerated (for example, acting as In companies that are subject to parity co- managing director of another GmbH) or not determination provisions, the power to appoint remunerated (for example, acting as president and remove managing directors rests with the of a sports club), will require the approval of the supervisory board. shareholders’ meeting. There is no fixed term of office for a managing There are no share ownership requirements for director, unless otherwise provided in the managing directors. articles or in the resolution on appointment.

Linklaters A cross-border guide for group company directors > Germany (continued) 25

Powers General duties Who are the duties owed to? Dealings with company / conflicts

The managing directors are responsible for The primary duty of a managing director is to Managing directors owe their duties to the Unless otherwise provided for in the articles, representing the company and managing its manage the company with the due care of a company and not to its shareholders. managing directors are generally prohibited business. prudent businessman. He / she must manage from entering into agreements on behalf of the the business to an appropriate degree and as company with themselves in their own name or Whilst the managing directors’ power to expediently as possible. in the name of a third party. represent the company to third parties cannot be limited, their internal authority to act may If the company has more than one managing Furthermore, managing directors should be restricted, for example, by the articles of director, they are all required to co-operate and avoid conflicts between the interests of the association, the service agreement, standing mutually supervise each other. This applies company and their own interests. Possible instructions or rules of procedure. Of practical even if their responsibilities have been divided conflicts of interests should be disclosed to the importance are approval requirements for up. The duty of supervision involves managing shareholders’ meeting. certain management measures under the directors making use of their wide-ranging right To avoid conflicts of interests, it is common to articles or adopted by shareholders’ resolution. to information. provide in the articles that managing directors If the company has more than one managing The managing directors have standard fiduciary are only authorised to represent the company director, the law provides that they represent duties, which include, among others: jointly together with other managing directors. the company jointly. It is, however, possible for >> the obligation to keep information about the In addition, the potential for conflicts is the articles to provide for sole representation. company confidential, customarily reduced by reserving certain Typically, articles provide for a managing director matters of day-to-day management for the to act jointly together with another managing >> a comprehensive obligation not to compete decision of the shareholders or any supervisory director or person vested with a statutory with the company, or advisory board that may be installed. power of attorney (Prokurist). In addition, the >> the obligation to use any knowledge corporate body with the power to appoint the (including private knowledge) of managing directors (usually the shareholders) opportunities arising in the company’s may grant diverging powers of representation business field for the good of the company in individual cases (such as the authority for and not for the director’s own ends specific managing directors to represent the (Geschäftschancenbindung), and company alone). >> the obligation to surrender to the A managing director may delegate specific company benefits granted by third parties activities to non-managing directors by power in connection with the conclusion of of attorney and this will be valid with regard to transactions by the company (for example, third parties. commissions).

Linklaters A cross-border guide for group company directors > Germany (continued) 26

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Managing directors are liable to the company A managing director cannot be indemnified A GmbH is permitted, but not required, to take Directors have specific duties in a financial for damage caused if they do not meet the by the company for any liability incurred to out directors’ liability insurance. Such insurance crisis of the company. These include, standard of care of a reasonable businessman. the company. is usually only offered with a considerable among other things, the obligation to The extent of the liability depends on the liability excess and numerous exclusions apply for insolvency proceedings without In certain circumstances it may be possible for a type, size and structure of the company. and restrictions. undue delay, and at the latest within three managing director to seek a statutory indemnity A managing director is generally not liable if he weeks of the company becoming unable to from his / her own company for liability incurred / she acts on instructions properly given by the settle its debts (zahlungsunfähig) or over towards third parties. This is only possible, shareholders’ meeting. indebted (überschuldet). however, if the managing director has not Managing directors may also incur specific breached his / her duties towards the company. If it becomes apparent from the annual financial liabilities for corporate breaches (for example, statements or from a balance sheet set up in Statutory indemnity claims should be under rules for the maintenance of capital the course of the business year that half of distinguished from contracts entered into by or if false or incomplete information is given the statutory share capital has been lost, a shareholders or other third parties to indemnify on the company’s incorporation or a share shareholders’ meeting must be called and the a managing director. It is currently a matter of capital increase). shareholders must be informed. dispute in Germany under which conditions Liability to the shareholders may be incurred such agreements can be legally entered into. Managing directors may incur both civil and in specific cases, for example, for a failure to criminal liability for a breach of these rules. file an updated list of shareholders with the The GmbH has a compensation claim against commercial register. the managing director if, after the company A director may also incur liability to a third party has become insolvent or its overindebtedness if he / she breaks a law intended to protect such has been determined, payments are made third party (for example, by failing to file for from the company assets and such payments insolvency or by withholding employee social are not consistent with the due care of a security premiums). prudent businessman. Criminal offences include providing false information (for example, about the company’s financial situation) or failing to file for insolvency or to inform the shareholders if one-half of the share capital is lost.

Linklaters A cross-border guide for group company directors > Germany (continued) 27

Decisions and meetings Minutes Administration and accounts Relevant rules

Under German law, managing directors of a Although not prescribed by law, the company’s The managing directors are required to The German Limited Liability Companies Act GmbH do not form a board, and managing articles or rules of procedure may provide that keep due accounts and prepare the annual sets out the general duties of managing directors directors are deemed to act as individuals. minutes of a board meeting are to be set out in financial statements. They must ensure that an and their responsibilities in relation to the A board structure may, however, be created by writing and forwarded to the managing directors. organisation is in place to provide an overview of representation and management of a GmbH. the articles of association or rules of procedure the company’s economic and financial situation Duties and responsibilities relating to the set out for the management of the company. at any time, even when no financial statement preparation and publication of accounts are set is available. Unless otherwise provided, resolutions of out in the Limited Liability Companies Act in the managing directors may be adopted in The managing directors must convene a accordance with the German Commercial Code. meetings, by telephone, video-conference or shareholders’ meeting if the company’s net In a situation where a company may become in writing (including, for example, by facsimile assets fall below an amount equal to one-half or insolvent, its managing directors may be subject or email). less of the share capital. In addition, a meeting to specific provisions of the Limited Liability must be convened if it appears necessary to The law does not set out a specific notice period Companies Act and the Insolvency Act. protect company interests for other reasons, or if for the calling of meetings, but this should be requested by shareholders representing at least A company’s constitutional documents (such reasonable. The company’s articles or rules of 10% of the company’s share capital. Further as its articles of association or internal rules procedures can allow for notice of meetings to obligations to convene a shareholders’ meeting of procedure), specific resolutions and oral be waived. may be provided in the articles. or written agreements between the managing Apart from certain important measures that director and the company may impose additional The managing directors are also responsible for must be decided on by all managing directors requirements or restrictions on managing the company’s compliance with applicable laws, together, the quorum for board meetings and directors. Such arrangements, in some cases, for example, by filing the company’s tax returns. majorities necessary for passing resolutions are may also override the provisions described in not prescribed by law. Furthermore, they must make all necessary this guide. registrations and filings in the commercial A company’s articles or rules of procedures may register. If the shareholder structure changes provide for weighted voting rights, giving certain and no notary was involved, the managing directors a greater say, and for a casting vote to directors must file an updated list of be used where the voting is tied. shareholders in the commercial register.

Linklaters 06 Hong Kong

Robert Cleaver Partner, Hong Kong Tel: (+852) 2901 5525 Mob: (+852) 9443 4613 [email protected]

Linklaters A cross-border guide for group company directors > Hong Kong 29

What type of company? Management structure Board composition Appointment and removal

In Hong Kong, subsidiaries within a group Hong Kong has a single board system. Directors A private company must have at least one Directors are appointed in accordance with the are most likely to be private companies, with are collectively responsible for decisions made director, and may have as many directors as the company’s articles. These often provide for members’ liability limited by shares. by the board. articles permit. directors to be appointed by a majority vote of the shareholders or by the existing directors, if The law recognises that a person may control Generally, a director must be a person over there is a casual vacancy or where the number a company without formally being appointed the age of 18 and cannot be a body corporate, of directors falls below the prescribed number as a director and may be liable for his / her although exceptions apply. An undischarged of directors set out in the articles. Appointments actions and omissions in the same way as bankrupt cannot act as a director, unless the made by directors usually must be confirmed other directors. leave of the court is obtained. Also forbidden by shareholders at the company’s next annual to act are the company’s auditors and general meeting. individuals disqualified from directorship (for example, because of fraud or dishonesty, or for In addition to what is provided in the articles, persistently failing to file company information). shareholders have the right to remove directors before the end of their term of office by majority A director need not be resident in Hong Kong, is vote. Special notice of the intention to remove not required to have specific qualifications and a director must be given to the company at can serve as a director for multiple companies least 28 clear days before the relevant meeting. (although conflicts of interests must be avoided). On receipt of such notice, the company must Directors are not legally required to hold any immediately send a copy of the notice to the shares in the company, although the articles director concerned and also give notice to may impose a share qualification or authorise all shareholders at least 14 clear days before the company to do so. the meeting. A company cannot use a written resolution for this purpose. The term of office for a director is usually set out in the articles. Directors of a public company are normally subject to retirement by rotation at least once every three years. Having retired, if they wish to stand again, they are generally eligible for re-election as directors.

Linklaters A cross-border guide for group company directors > Hong Kong (continued) 30

Powers General duties Who are the duties owed to? Dealings with company / conflicts

Directors represent the controlling mind of Directors must act honestly and diligently, The fiduciary duties of the directors are owed to The law restricts certain transactions between the company and are empowered by the showing the company their highest loyalty, the company alone, and not to the shareholders. the company and a director, including a loan company’s articles to administer, direct and acting in good faith and in the company’s (or loan guarantee) to a director, unless an It is generally accepted, however, that, while the manage it. Specific powers may be delegated best interests. exemption applies or the transaction is approved company remains solvent, the duty to act in its to committees, agents or individuals to fulfil by shareholders. Directors must exercise their powers for a proper “best interests” is assessed by reference to the specific roles or responsibilities. purpose, act in accordance with the company’s interests of its present and future shareholders. Exemptions include: Directors are generally, however, under a duty constitution and exercise reasonable skill, The directors may, therefore, legitimately >> amounts up to 5% of the value of the not to delegate powers, except with proper care and diligence. This last duty, to exercise balance a long term view against the short term company’s net assets, authorisation and to exercise independent reasonable skill, care and diligence, was codified interests of the current shareholders. judgement in relation to the exercise of their in the Companies Ordinance in 2014. >> funds to meet proceedings or regulatory Directors do not owe fiduciary duties to the powers (for example, a director should not actions defences (see “Indemnities and Furthermore, they must not allow any conflict company’s creditors. Nevertheless, in the blindly accept instructions from a shareholder, protections”), and between their duties as directors and their period immediately prior to any liquidation of the another director or the advice of an adviser >> expenses on company business. personal interests (see “Dealings with company, the directors must take into account without considering the relevant facts). company / conflicts”). the interests of creditors. Shareholder approval is required if a director’s The board retains responsibility for delegated guaranteed term of employment exceeds three decisions and therefore should set up systems to years or for payments made to directors (above supervise those who act under its authority. a certain threshold) to compensate them for a loss of office. A director’s acts are valid, notwithstanding any defect that may afterwards be discovered in his / Directors also have a duty not to place her appointment or qualification. themselves in a position where there is a conflict, whether actual or potential, between their personal interests and their duties to the company. This duty extends to the entry into contracts with the company, the use of information or opportunities for personal profit and competing with the company. Directors are required to disclose the nature of all direct or indirect material interests in any arrangement or transaction involving the company. A company’s articles may require a director to abstain from voting in respect of any such arrangement or transaction in which he / she is interested, or any matter arising from that arrangement or transaction.

Linklaters A cross-border guide for group company directors > Hong Kong (continued) 31

Liability Indemnities and protections Insurance Financial difficulty and insolvency

A company can take action against a director to A Hong Kong incorporated company cannot The law permits a company to purchase In a winding-up of the company, directors will make good any loss suffered by the company exempt its directors from liability they incur to directors’ and officers’ liability insurance for the be personally responsible for contributing to as a result of a breach by the director of any the company for any negligence, default, breach benefit of its directors. the assets of the company if it appears that fiduciary or statutory duty. of duty or breach of trust. A company can the directors were knowingly involved in fraud This insurance may protect a director’s personal protect its directors, however, against liabilities against the creditors or others. Shareholders may also take action against assets against liabilities for any negligence, arising from their directorship in several ways. a director in respect of a wrong done to default, breach of duty or breach of trust Directors may also incur criminal liabilities if the company by way of a derivative action. A company can agree to indemnify its directors of the directors in relation to the company they are found guilty of offences such as: Derivative actions are provided for by common against liabilities incurred in defending civil (including expenses incurred in defending the >> fraudulent trading, and statutory law. Multiple derivative actions are actions brought by a third party, or criminal relevant proceedings). possible, meaning that actions may be brought proceedings, so long as the director is found not >> making false entries in books or registers, by the shareholders of a parent company, on liable or not guilty. The indemnity cannot cover >> concealing assets, or behalf of its subsidiary, in respect of a wrong criminal or regulatory fines where the director is >> failing to keep proper books of account in committed against the subsidiary. found guilty. the two years prior to a winding-up. Directors can also be disqualified from acting A company can also provide funds to its as directors under the law or under the directors to meet expenditure incurred in company’s articles. defending civil or criminal proceedings in connection with any alleged negligence, default, In addition, directors may be subject to criminal breach of duty / trust in relation to the company, conviction or fines for fraudulent trading (see or any investigation or action by a regulator for “Financial difficulty and insolvency”). alleged misconduct. Companies can also help directors to avoid incurring such expenses. In either case the funds must be repaid and company expenses discharged if the director is found liable or guilty. It is also possible for the court to grant relief to a director if proceedings for negligence, default, breach of duty / trust are taken against him / her. Relief is only available if the court determines that the director acted honestly and reasonably and, having regard to all the circumstances, ought fairly to be excused.

Linklaters A cross-border guide for group company directors > Hong Kong (continued) 32

Decisions and meetings Minutes Administration and accounts Relevant rules

Generally, each director has one vote and Minutes of all proceedings at meetings of Directors must ensure sufficient accounting The Companies Ordinance, together with the decisions of the board are taken by a simple its directors must be recorded and kept at records are kept and accounts are common law and other guidance, forms the majority. The chair of the board, elected to act the company’s registered office for at least prepared annually. bulk of the rules and regulations most relevant as such by the other directors, is often given a ten years. to directors. Directors must also prepare a directors’ report casting vote in a deadlock, although this is not There are no specific requirements on the form each financial year, and both the directors’ The Companies Ordinance went through a major provided for by law. The articles usually set out of board minutes. They usually contain basic report and the annual accounts must be review and was substantially amended in 2014. how decisions of the board are to be made, and information such as the name of the attendees approved by the board. Copies of the reports may allow for written resolutions and for lawful A company’s constitutional documents and and the venue, date and time when the meeting and accounts must be sent to parties entitled electronic means to be used. other specific resolutions may impose additional took place and the business transacted. If to receive them and the accounts must be requirements and restrictions on directors. Reasonable notice, having regard to all the a director declared his / her interest in any laid before the members of the company in circumstances, must always be given to arrangement or transaction involving the general meeting. directors before a board meeting is held. The company in writing, the declaration will form part In addition, the directors are responsible for law is silent on how notice is to be given, but of the proceedings of the immediately following the administration of the company, including a company’s articles may set out details. What directors’ meeting. If the interest was declared such matters as making public filings, calling constitutes reasonable notice will depend on at a board meeting, it will form part of the general meetings of members, maintaining the facts of the case and on the structure, proceedings of that meeting. statutory books and records and allowing these business and usual practice of the company. When the minutes have been signed by the to be inspected. Directors may, expressly or by conduct, waive chair of the meeting, or of the next directors’ notice of the meeting. As a general rule, the meeting, they are treated as evidence of the articles of Hong Kong companies provide proceedings at the meeting. This means that, that it is not necessary to give notice to any unless the contrary is proven, it is assumed director who is absent from Hong Kong. If a that the meeting was duly held and convened, director takes the view that inadequate notice all proceedings duly took place and all was given, he / she is entitled to challenge the appointments made were valid. validity of the meeting, although this must be done immediately. For a board meeting to be properly constituted, the quorum prescribed in the articles must be present.

Linklaters 07 India

Savi Hebbur Partner, London Tel: (+44) 20 7456 3388 Mob: (+44) 79 1712 3101 [email protected]

Sushil Jacob Counsel, London Tel: (+44) 20 7456 2031 Mob: (+44) 79 1768 7777 [email protected]

Linklaters A cross-border guide for group company directors > India 34

What type of company? Management structure Board composition Appointment and removal

In India, subsidiaries within a group are most The law provides for a single tier board, which A private company must have a minimum of Subject to the company’s articles, the likely to be private companies limited by shares has the authority to delegate responsibilities to two directors and can have a maximum of 15 subscribers to the memorandum of association and this section, therefore, focuses only on such committees constituted by it. directors (which may be further increased by the are deemed to be the first directors of the private companies. shareholders of the company passing a special company, until directors are appointed by the The board is in charge of the management of resolution, that is, by not less than three-fourths shareholders at a general meeting. The articles A private company which is a subsidiary of a the company and is deemed to act as a whole. of the members present and voting). can prescribe how directors are appointed and public company is treated as a public company The general duties and responsibilities are the allow the board to appoint additional or alternate for the purposes of compliance. Only individuals can be directors. Corporates, same for all directors even if some of them are directors. If the articles are silent, directors firms or other bodies with non-physical legal given additional duties and responsibilities. can be appointed only by the shareholders in personalities cannot be directors. general meeting.

Every company must have at least one director The law allows shareholders to remove directors who has stayed in India for a total period of not by passing an ordinary resolution, that is, by a less than 182 days in the previous calendar simple majority of the members present and year. Therefore, even wholly-owned subsidiaries voting. Special notice of an intention to remove of foreign companies must have at least one a director must be given to the company and director who is resident in India. can only be given by shareholders holding either An individual can be appointed as a director of 1% of the total voting power or paid-up shares a maximum of 20 companies (provided that, out aggregating to INR 500,000. of the 20, he / she is not a director of more than A director may resign from office by giving notice ten public companies). in writing to the company. On receipt of such notice, the company must inform the Registrar of Companies. The resigning director must also

forward a copy of his / her resignation, along with detailed reasons for the resignation, to the Registrar within 30 days. A director also vacates his / her office if he / she remains absent from all board meetings during the preceding 12 months, with or without seeking leave of absence.

Linklaters A cross-border guide for group company directors > India (continued) 35

Powers General duties Who are the duties owed to? Dealings with company / conflicts

The board of directors can exercise all the Directors must act in the way that they consider, As a general rule, directors owe their duties to Directors who are concerned or interested in powers of the company, unless any law or the in good faith, would be most likely to promote the company alone and would not generally a proposed contract or arrangement with the company’s articles require the shareholders to the success of the company, for the benefit owe their duties to the company’s shareholders, company in any way must disclose the nature approve certain acts. of the members as a whole, and in the best subsidiaries or holding companies. of their concern or interest to the board at the interests of the company, its employees, the beginning of the meeting at which the contract / The board can delegate its powers to a shareholders, the community and for the arrangement is discussed. The interested director committee of directors, the managing director, protection of the environment. is prohibited from participating in such meetings. the manager or any other principal officer of the company, subject to such conditions as it may Directors must act in accordance with the In addition, a director is required to disclose his / think fit. articles of the company, exercise their duties her interest in a contract / arrangement, whether with reasonable skill, care and diligence and entered into or to be entered into, with: There are certain powers which can be exercise independent judgement. exercised by the board only at an actual board >> a body corporate in which such director, in meeting (as opposed to a written resolution or A director should avoid direct or indirect conflicts association with any other director, holds more by committee), for example, borrowings by the between the interests of the company and his or than a 2% shareholding, or is a promoter, company, approval of amalgamation, merger her personal interests. manager or CEO of that body corporate, or or reconstruction of the company, issues of In addition, directors must not achieve or >> a firm or entity in which such director is a securities, giving guarantees or providing attempt to achieve any undue gain or advantage partner, owner or member. security in respect of loans etc. either for themselves or for their relatives, Failure by a director to disclose his / her interests In addition, there are certain powers (such as partners or associates. can result in imprisonment for up to one year the sale, lease or disposal of an undertaking) A director is also prohibited from assigning his / and / or a fine of up to INR 100,000. which can be exercised by the board only with her office to another. the consent of the shareholders of the company, A director is prohibited from: by passing a special resolution. Additionally, directors are required to discharge >> entering into any non-cash transactions with certain common law duties which include the All other matters which are not by law or under the company, duty of confidentiality to the company and the the articles required to be approved at a general duty of supervision (that is, a duty to exercise >> participating in insider trading activities, or meeting or a board meeting can be approved by supervision over the officers of the company to >> entering into forward contracts or dealings means of a “resolution by circulation” (similar to whom they delegate powers). (such as put and call options) in relation to a written resolution). Resolutions to be passed the securities of the company and its holding, by circulation become effective when approved subsidiary or associate companies. by a majority of directors entitled to vote on that resolution. Subject to certain exceptions, a company cannot, directly or indirectly, advance a loan to any director or person in whom the director is interested or provide a guarantee or any security in connection with any loan advanced to the director or other person in whom the director is interested. Linklaters A cross-border guide for group company directors > India (continued) 36

Liability Indemnities and protections Insurance Financial difficulty and insolvency

If a company contravenes any provisions of A company can indemnify its officers or It is possible for the company to purchase If a company is unable to pay its debts, a the Indian Companies Act, the company and directors against liability which they may incur directors’ and officers’ liability insurance cover corporate insolvency resolution process may every director in default is liable for the penalty in defending any proceedings, whether criminal and this is common practice in India. be initiated before the National Company Law imposed for the breach. or civil. Tribunal by the creditors of the company or the The premium for such insurance can be company itself. In the absence of a specific director being found A director can claim relief in any proceedings for paid by the company. Any such premiums liable, any or all directors can be regarded as negligence, default, breach of duty, misfeasance paid, however, must be treated as part of the If the corporate insolvency resolution process “officers in default”. or breach of trust. The court may grant such directors’ remuneration in the event that a is unsuccessful and the company proceeds relief if it is of the view that the director acted director is found to be guilty of any negligence, to liquidation, the directors are required to In the case of independent and certain non- honestly and reasonably and, having regard default, misfeasance or breach of duty or trust. extend to the liquidator all such assistance and executive directors, they are only liable if they to the circumstances of the case, ought to be cooperation as may be required to manage the did not act diligently, or in respect of acts by a fairly excused. affairs of the company. company which occur with their knowledge. In the event that a director anticipates any claim A company may also be voluntarily liquidated by As a general rule, since the company and its against him / her in respect of any negligence, passing a special resolution to such effect. director are separate entities, the director has default, breach of duty, misfeasance or breach no personal liability on behalf of the company, In a voluntary liquidation of the company, of trust, he / she may apply to the High Court unless the director has acted in a fraudulent the directors will be responsible for, amongst for relief. manner. A director may be held personally other things: liable, without any limitation of liability, for all >> making a declaration of solvency, or any debts or liabilities of the company if he / she was knowingly involved in the fraudulent >> producing audited financial statements and a carrying on of business. record of business operations of the company for the previous two years, Directors may incur criminal liability in various >> instructing a registered valuer to prepare a ways, for example, for failing to comply with valuation report, and statutory administrative requirements (regarding matters to be stated in the balance sheet or >> giving notice to the Registrar of Companies profit and loss account) or for making a false and the Insolvency and Bankruptcy Board declaration of solvency. of India of the resolution to liquidate the company. As directors owe their duties to the company, Any concealment of information from, or only the company can bring a claim against a non-delivery of the documents or property of director. Claims can, however, also be brought the company to any insolvency professional by one or more shareholders on behalf of the or liquidator during a corporate insolvency company (but not to enforce the personal rights resolution, liquidation or winding-up process is of the shareholders). a criminal offence punishable with a fine and imprisonment for a term between three to five years.

Linklaters A cross-border guide for group company directors > India (continued) 37

Decisions and meetings Minutes Administration and accounts Relevant rules

Every company is required to hold the first The minutes of board meetings must be The directors are responsible for the The Companies Act, 2013 sets out the general board meeting within 30 days of incorporation finalised and entered in the minutes books of administration of the company. Directors are duties of directors and specific responsibilities of the company. One board meeting must be the company within 30 days of the conclusion of responsible for, amongst other things, matters in relation to the administration of companies, held every three months and there must be a the meeting. such as: including the preparation of accounts and total of four such board meetings every year. making public filings. This Companies Act has There is no set form for the board minutes but >> making statutory filings (including filings with The articles of the company usually contain almost entirely replaced the Companies Act, the minutes must include basic details of the the Registrar of Companies for the allotment provisions governing the conduct of the 1956, although a few provisions remain to be business transacted, the names of the chair and of shares and creation of charges over the board meetings. notified. In addition, some of the related rules the attendees, the names of directors dissenting property or assets of the company), had not been finalised at the time this guide was To call a board meeting, it is necessary to give from or not concurring with each resolution >> convening shareholders’ meetings within the published. Accordingly, it will be necessary to not less than seven days’ notice in writing. passed at the meeting as well as the date, place time periods stipulated by law, take further advice on matters of Indian law. Shorter notice may be given to transact and time of the meeting. >> preparing and maintaining the company’s urgent business. A company’s constitutional documents, Minutes must also be signed by the chair books of accounts, including its articles of association, may set The quorum for a board meeting is one-third of of that meeting or by the chair of the next >> approving the financial statements of the out additional duties and obligations of the the total strength of the board or two directors, board meeting. company before they are signed on behalf of directors. These may have been agreed under whichever is higher. Higher requirements can the board and presenting such statements to a shareholders’ agreement (for example, in the be set out in the articles of the company. In the shareholders at the general meetings, case of a joint venture) but will not be binding any event, a minimum of two directors must >> maintaining statutory registers, such as on the company and its directors unless they are be present. the register of members and the register of incorporated in the articles of association. Directors can participate in board meetings by debenture holders and the minutes books Additional duties and liabilities could also be set video-conference or other prescribed audio- of the company, and out in contracts of employment (if any) between visual means, provided that such meetings are >> in cases of winding-up or voluntary the directors and the company. recorded and the records are properly stored. liquidation, ensuring that the books of The board cannot, however, approve the annual accounts of the company are completed In terms of priority, where there is a conflict financial statements or the directors’ report and audited as required by law. between the statute, constitutional documents during these meetings. and / or a contract of employment, a court would first look at the statute, then the Decisions of the board may be taken by the constitutional documents and then any contract requisite majority of the directors voting at of employment. a board meeting or by means of a written resolution. See also “Powers” for information about decision-making.

The contents set out above do not constitute any opinion or determination on, or certification in respect of, the application of Indian law. Any comments concerning India are based on our transactional experience and our understanding of the practice in India. Linklaters LLP is not licensed to practise law in India. We have a best friend relationship with Talwar Thakore and Associates, a in India, and we would be pleased to contact them on your behalf.

Linklaters 08 Indonesia

William Kirschner Partner, Indonesia Practice Tel: (+62) 21 2995 1584 Mob: (+62) 811 871 4692 [email protected]

Sophie Mathur Partner, Indonesia Practice Tel: (+65) 6692 5703 Mob: (+65) 9657 3882 [email protected]

Yolanda Hutapea Widyawan & Partners, Partner, Indonesia Tel: (+62) 21 2995 1596 Mob: (+62) 815 8600 0109 [email protected]

Linklaters A cross-border guide for group company directors > Indonesia 39

What type of company? Management structure Board composition Appointment and removal

In Indonesia, there are three types of private An Indonesian company has a two-tier board Subject to applicable sectoral requirements, Unless a higher threshold is stipulated under the limited liability companies. Only one of these, structure, consisting of a board of directors and all private companies must have at least one company’s articles, directors and commissioners a foreign investment (penanaman modal asing a board of commissioners. director and one commissioner. There is no of a company are appointed and removed by the or “PMA”) company, can have non-Indonesian maximum number. No individual may be a resolution of a general meeting of shareholders The board of directors exercises an executive shareholders and is, therefore, likely to be used member of both boards. attended by the shareholders representing more function and is responsible for the day-to-day as a subsidiary within a multinational group. than 50% of the total number of issued shares operations of the company. Non-Indonesian nationals can be appointed as with valid voting rights, and the resolution is The exceptions to this rule are private directors or commissioners but will need a work The board of commissioners supervises and approved by more than 50% of the total votes limited liability companies which engage in permit if they reside or perform their work in advises the board of directors. cast at the meeting. financial sector activities, including banking Indonesia. Foreigners appointed as directors or and insurance. These do not have PMA Indonesian law does not regulate persons who commissioners without a work permit should not The date on which each director’s or status, but may have foreign shareholders, may be acting as directors or commissioners perform any work in Indonesia. Directors with commissioner’s appointment takes effect should if approval is obtained from the relevant but have not been formally appointed to specific functions (such as finance directors) be stated at the meeting. If no date is given, government authorities. these positions. must reside in Indonesia and have Indonesian appointments are deemed to take effect from nationality. A foreign director or employee the closing of the meeting. This section of the guide focuses solely on is prohibited from handling employment PMA companies. Any resolutions of the general meeting related issues. of shareholders to remove directors and Companies cannot be appointed as directors or commissioners must state the reasons for commissioners. To be eligible, individuals must such removal and the relevant director or be at least 21 years old, unless they are married commissioner must be given the opportunity to and at least 19 (men) or 16 (women) years old. defend him / herself. The resolution should state the date the removal takes effect. If no date is People who cannot become directors or given, the removal is deemed to take effect from commissioners include those who, in the the closing of the meeting. preceding five years, have been: Directors and commissioners are appointed for >> declared bankrupt, a fixed term determined by the general meeting >> on a board of directors or commissioners of shareholders. A director’s or commissioner’s declared by a court as being responsible for term of office cannot be indefinite, although a the bankruptcy of a company, or director or commissioner can be re-appointed >> punished for a crime involving the financial by the general meeting of shareholders. sector and / or the loss of public funds.

Linklaters A cross-border guide for group company directors > Indonesia (continued) 40

Powers General duties Who are the duties owed to? Dealings with company / conflicts

The board of directors is responsible for the The directors must act in good faith and in the The duties of the directors and of the Directors and commissioners, as well as their day-to-day running of the company. By law, best interests of the company, in accordance commissioners are owed to the company, spouses and children, are permitted to own each board member is entitled to take part in with the company’s objectives. and not to the shareholders. shares in the company but must notify the management and to represent and bind the company of such ownership and of any interests Each commissioner must advise the board company. Commonly, however, the articles in other companies. These interests will be of directors in good faith, prudently and give these powers to a specific director recorded in a designated register maintained responsibly, in the best interests of the company, who acts as a CEO and is referred to as the by the board of directors. in accordance with the company’s objectives. “President Director”. There are no specific restrictions on transactions The board of commissioners supervises the between directors / commissioners and management of the company. It can query the company. decisions of the board of directors, request Nevertheless, if a transaction results in a conflict information about the company’s management of interest between a director and the company, and / or suspend directors. The commissioners such director will not be allowed to represent the cannot, however, instruct the directors to take company in relation to the transaction. The law specific actions, but the articles may require also prohibits directors from representing the the board of directors to obtain the board of company in litigation or proceedings involving commissioners’ approval before undertaking the director and the company. certain actions. In addition, the board of commissioners must review (or approve) the If all the directors are disqualified from company’s annual business plan and annual representing the company, the commissioners report before they are presented for approval will be authorised to do so. If all the directors at the shareholders’ meeting, and approve any and commissioners are disqualified from acting, declaration of an interim dividend distribution. the shareholders at a shareholders’ meeting must appoint a separate representative. The board of commissioners must prepare a report on the implementation of its supervisory duty to be presented for approval at the shareholders’ meeting as part of the annual report prepared by the board of directors. The directors may delegate their powers by board resolution to individual directors or committees. Individual directors may delegate their specific powers to non-directors by power of attorney. The relevant directors remain responsible for the acts of any delegate or attorney which they have appointed.

Linklaters A cross-border guide for group company directors > Indonesia (continued) 41

Liability Indemnities and protections Insurance Financial difficulty and insolvency

If the directors and commissioners are negligent It is possible, but not common, for the company It is common practice for PMA companies to If a company is declared bankrupt because of in carrying out their duties, in accordance with to agree to indemnify directors or commissioners arrange for directors’ or commissioners’ liability the fault or negligence of the board of directors the objectives and interests of the company, they against personal liability they may incur. Such insurance and to pay the relevant premiums. and the company’s assets are insufficient will be jointly and severally liable for any losses indemnities would need to be in the best to pay its debts, then the directors are, The insurance will cover directors or suffered by the company. interests of the company and are available only individually and jointly, responsible for paying commissioners against any civil claims for where there has been no breach of a director’s all outstanding debts. Unless they can prove that the losses are compensation which may arise as a result of the or commissioner’s duties to the company. not due to their negligence, the directors and actions taken by that director. The insurance will If the company is declared bankrupt because commissioners are jointly liable for any losses The board of directors is not liable for the not cover any criminal claims made against the of the fault or negligence of the board of suffered by a third party arising from the company’s losses or bankruptcy if it can directors or the commissioners. commissioners in supervising the board company’s public financial statements being prove that: of directors and the company’s assets are incorrect or misleading. insufficient to pay its debts, then each >> these were not attributable to its fault or commissioner, together with the directors, is, If the company suffers losses at the end of a negligence, individually and jointly, responsible for paying financial year and interim dividends have been >> it managed the company in accordance with all outstanding debts. distributed to the shareholders, the directors and the company’s objectives and interests, commissioners are jointly and personally liable This obligation to repay outstanding debts >> it had no personal interest (direct or indirect) for any amounts not returned to the company. applies to all the members of the board of in the managerial actions that caused the commissioners and the board of directors who Shareholders representing at least one-tenth of losses / bankruptcy, or held office in the period of five years before the the total shares in a company may bring a claim >> it took preventative action. declaration of bankruptcy was made. in the name of the company against the board of The board of commissioners is not liable for directors or commissioners. the company’s losses or bankruptcy if it can As there is no concept of a de facto director prove that: in Indonesia, only duly appointed directors or >> these were not attributable to its fault or commissioners are subject to liabilities incurred negligence, in respect of a company. >> it prudently and responsibly supervised the board, in accordance with the company’s objectives and interests, in good faith, >> it had no personal interest (direct or indirect) in the managerial actions that caused the losses, and >> it advised the board on how to prevent such losses. Director / comissioner liability can also be discharged by shareholder resolution if reported to shareholders or disclosed in an annual report.

Linklaters A cross-border guide for group company directors > Indonesia (continued) 42

Decisions and meetings Minutes Administration and accounts Relevant rules

Directors and commissioners can take decisions Although not prescribed by law, articles of The board of directors is responsible for the The rules governing limited liability companies by passing resolutions at a meeting or by association typically provide that minutes of a preparation and accuracy of the company’s are primarily set out in Law No. 40 of 2007 using written resolutions. Written resolutions board meeting are to be set out in writing and accounts. The company’s accounts must, dated 16 August 2007 concerning Limited typically must be signed by each director or kept at the company’s domicile. This is the city under certain circumstances, be audited by Liability Companies. commissioner, as the case may be. or specific area provided for in the company’s a public accountant and submitted to the articles of association and does not have to be relevant authority. A company’s articles may allow video- the registered office of the company. conference / conference calls to be used in A company’s accounts must be audited if: decision-making. >> its business activities relate to the Procedures for board meetings are set out in the mobilisation and / or use of public funds (for company’s articles of association. These would example, banks and insurance companies), usually include: >> it issues debt instruments (such as bonds) >> that written notice is to be sent to all to the public, members of the relevant board prior to >> it is publicly listed, the meeting, >> it is a state-owned enterprise (persero), >> notice periods (which can be waived or >> it has assets and / or business turnover of shortened), typically ranging between three Rp.50 billion or more, or to 21 days, >> this is required by specific laws and >> quorum of the meetings (which can be all regulations applicable to that company or more than 50% of the members of the (for example, sector regulations). relevant board, and can require the presence of one or more directors or commissioners appointed by certain shareholders), and >> voting requirements (which may be unanimous, a super majority (however defined) or a simple majority).

Linklaters 09 Italy

Pietro Belloni Partner, Milan Tel: (+39) 02 88 393 5267 Mob: (+39) 34 6121 0219 [email protected]

Linklaters A cross-border guide for group company directors > Italy 44

What type of company? Management structure Board composition Appointment and removal

In Italy, a subsidiary within a group is likely to SpA SpA The first director(s) are appointed in the be incorporated either as a joint stock company company’s deed of incorporation. Shareholders may choose between Certain specific rules (relating to numbers, (Società per azioni or “SpA”) or as a limited three systems. integrity, professional skills and / or After the incorporation of the company, directors liability company (Società a responsabilità independence) apply, depending on the are appointed by the shareholders’ meeting. limitata or “Srl”). >> Traditional system: (most commonly used): governance system adopted. board of directors / sole director. Unless the by-laws provide otherwise, whenever The capital of an Srl is not divided into shares >> Traditional system: the number of directors is vacancies occur, the remaining directors may but into quotas (quote), therefore investors in >> Two-tier system: management board determined in the by-laws. temporarily fill such a vacancy until the next an Srl are often called “quotaholders” (quotisti). (consiglio di gestione), with management shareholders’ meeting appoints an alternative For the sake of simplicity, in this section on Italy, responsibilities, and a supervisory board >> Two-tier system: the management board director or confirms the appointment made by when referring to investors in both SpAs and Srls (consiglio di sorveglianza). must have at least two members, who cannot the board. we have used the term “shareholders”. >> One-tier system: board of directors, with also be members of the supervisory board. management responsibilities and an internal >> One-tier system: the board must have at Directors may be removed at any time and for management audit committee (comitato per il least two members and at least one-third of any reason by a simple majority vote of the controllo sulla gestione). its members must be independent. shareholders. A director is entitled to claim damages if removed without cause. Srl Srl SpA The company can be managed in different The number of directors is freely determined by ways, most commonly by a sole director or a the shareholders. Directors cannot be appointed for more than board of directors. Other forms of governance three consecutive financial years. In all cases, individuals can normally be less frequently used when more than one appointed as directors as long as they are at Srl director is appointed are those where directors least 18 years old and are not bankrupt or must act either: No minimum or maximum term applies, barred from public office. therefore, directors can be appointed for either >> severally (amministrazione disgiuntiva), or Corporates can be appointed as directors under an unlimited period of time or for a fixed number >> jointly (amministrazione congiuntiva). certain conditions but must have a person (such of financial years. Persons who have not been formally appointed as a director) to represent them. as directors but who exert the powers of a Employees can be appointed as directors within director directly, continuously, freely and in some limits (for example, they cannot be the relation to material aspects of the company’s sole director of a company). business may be subject to the same liabilities as those attaching to duly appointed directors. Non-Italians can be directors as long as Italians can also become directors within the relevant Shareholders of an Srl who have deliberately non-Italian jurisdiction. resolved upon or authorised acts that are prejudicial for the company are jointly liable with the directors.

Linklaters A cross-border guide for group company directors > Italy (continued) 45

Powers General duties Who are the duties owed to? Dealings with company / conflicts

SpA One of the main duties of the directors is to Directors’ duties are generally owed to: SpA manage the company “with care” and to pursue The sole director, board of directors or >> the company (and the company’s Directors must inform the other directors and the company’s interests. management board, as the case may be, has shareholders as a whole), the board of statutory auditors of any direct full power to pursue the company’s objectives, In particular, the directors have the >> the company’s creditors, and or indirect interests they have in specific save for those powers expressly reserved to the following duties. transactions in which the company is involved. >> individual shareholders, as well as to shareholders’ meeting. The disclosure must specify the nature, >> To the company (and the company’s any third party, within some limits. terms, origin and relevance of such interest. Powers are commonly delegated to one or more shareholders as a whole): the main duty of Furthermore, managing directors, before managing directors (amministratori delegati) or the directors is, in general terms, to manage entering into any such transaction, must submit to an executive committee (comitato esecutivo). the company with care and in compliance it to the board for approval. Some powers cannot be delegated (such as the with the duties imposed by the company’s drafting of the balance sheet and of merger / by-laws and the relevant law while pursuing A breach of these rules means the transaction de-merger plans). its corporate purpose. In doing so, the (if prejudicial to the company) can be challenged directors must always act in the best interests by the other directors and the board of statutory It is also common to appoint a general manager of the company, whilst ensuring that the auditors (or the supervisory board, as the (direttore generale) who is in charge of daily company’s activities are fully compliant with case may be) within 90 days of the date of business, but is not on the board. its deed of incorporation, by-laws and any the relevant resolution. Directors in breach are Srl relevant laws. liable, amongst other things, for any damages suffered by the company. Rights acquired in If a board is appointed, management decisions >> To the company’s creditors: the directors are good faith by third parties are, however, valid are taken by majority. As above, the board may liable for the preservation of the company’s and enforceable. delegate certain powers to managing directors. capital and assets. >> To individual shareholders and / or third Srl Specific rules apply to other types parties: the directors are specifically liable of management: Board resolutions which are prejudicial to the for damage to the property of any individual company and which were passed with the >> Directors acting severally (amministrazione shareholder or third party as a direct and decisive vote of a conflicted director can be disgiuntiva): Directors can act alone, unless immediate consequence of actions taken challenged within 90 days of being passed their actions are specifically opposed by the (whether negligently or fraudulently) by by the other director(s) and (if appointed) the other directors. the directors. statutory auditors / external auditor. >> Joint management (amministrazione congiuntiva): Single directors cannot normally Agreements entered into by conflicted directors act alone as the unanimous consent of all which are prejudicial to the company may be directors is required. declared null and void if the other party to the agreement knew (or should have recognised) the conflict.

Linklaters A cross-border guide for group company directors > Italy (continued) 46

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Directors are jointly and severally liable for It is unclear whether companies can indemnify It is common for Italian companies to take out a Certain acts of the directors may, if the company damages which result from a breach of their their directors against civil liability claims brought directors’ and officers’ liability insurance policy is insolvent or in financial distress, give rise to duties (see “General duties”). Directors are also by third parties against the directors, acting in to indemnify their directors and officers against civil liabilities and / or specific criminal offences. liable for any damage caused to the company execution of their duties. losses or costs resulting from legal actions for In particular, liability may be incurred for: by the use of data, information or business alleged wrongful acts brought against them in The company is, however, permitted to advance >> any negligent delay in filing for the opportunities acquired by the directors in their their capacity as directors and officers. funds to pay for a director’s defence against any commencement of insolvency proceedings office as directors and used for their own benefit claims made against such director, on condition (including compulsory administrative or for the benefit of a third party. that the money must be repaid if the director is liquidation proceedings (liquidazione In addition, Italian law contains numerous found guilty / liable. coatta amministrativa)), criminal sanctions for the infringement of >> making payments to, or creating or faking corporate regulations by directors, who incur security interests in favour of, some personal criminal liability separate from any creditors with the aim of favouring them over liability of the company. other creditors, The company, its creditors and its individual >> failing properly to keep the required shareholders and / or third parties may take accounting books, action against the directors. >> diverting, wasting or concealing funds or Judges are not allowed to pass judgement on assets or making transactions (including the merits of a business decision (the so-called intra-group transactions) at an undervalue, “business judgement rule”) and, in general, causing insolvency by breaching directors’ a business misjudgement will not give rise to duties or acknowledging inexistent debts as liability. Where damage is caused by acts / well as false accounting, and omissions falling within the responsibility of an >> seeking financing (including renewals or the executive committee or one or more directors, maintenance of existing financing or waivers the board remains liable if it was aware of the of events of default) from third parties, prejudicial acts but did not prevent them or thereby concealing the company’s insolvency take steps to mitigate their effects. Individual or financial difficulties. directors will not be liable for board decisions if they recorded their dissent in the minutes and by written notice to the chair of the board of statutory auditors.

Linklaters A cross-border guide for group company directors > Italy (continued) 47

Decisions and meetings Minutes Administration and accounts Relevant rules

SpA Minutes of directors’ meetings must be set out Directors must prepare the annual accounts The Italian Civil Code is the main source of in writing, and drafted in, or translated into, the (bilancio d’esercizio) and the management regulation for directors and sets out the general Meetings of the board of directors / management Italian language. report (relazione sulla gestione). duties of directors and their responsibilities. board must be convened at least once a year, but in practice may take place more frequently. The minutes must be entered in a minute book The directors need to approve them and submit In addition, corporate documents of the The by-laws may allow directors to attend the and kept at the company’s registered office. them to the shareholders for approval. company may impose additional requirements meeting using electronic means, provided that or restrictions on directors. These include the Some minutes also need to be notarised and / or certain safeguards are satisfied. by-laws (statuto) and any specific shareholders’ filed with the commercial register (for example, resolutions, in particular those relating to the Srl resolutions relating to the issue of bonds). appointment of, and granting of powers to, Unless otherwise provided, directors’ resolutions a director. may be adopted in meetings, by written consultation or by consensus in writing, provided that certain formalities are satisfied (that is, the written document must clearly state the object of the consensus). As above, the by-laws may allow directors to attend meetings using electronic means. In all cases, board meetings should be held regularly and are usually convened by the chair. The notice of meeting must include an agenda for directors to follow, unless all directors are present and agree otherwise. A majority of the directors must be present at each meeting and resolutions are usually passed by majority vote. Directors must personally participate in the decision-making process and cannot be represented by attorneys. It is possible to hold meetings of the board without prior notice if all directors and statutory auditors are present. Employee representatives cannot take part in directors’ meetings, but statutory auditors should attend or risk losing their office.

Linklaters 10 Japan

Hiroya Yamazaki Partner, Tokyo Tel: (+81) 3 6212 1435 Mob: (+81) 90 4411 6574 [email protected]

Linklaters A cross-border guide for group company directors > Japan 49

What type of company? Management structure Board composition Appointment and removal

In Japan, a subsidiary within a group is most The type of management structure typically A company with a board of directors must have The initial directors are appointed upon likely to be a private stock company (kabushiki used in a Japanese subsidiary is a company at least three directors. In such company, a incorporation and, thereafter, appointed by kaisha), which is a limited liability company with with a board of directors without statutory representative director must be elected among a majority vote of the shareholders. restrictions on the transfer of its shares. committees (iinkai) formed by directors to the directors by a decision of the board. A Changes to the information about directors supervise executive officers (such committees company can elect one or more representative must be registered in the . are typically used for larger listed companies). directors and all the representative directors can Thereupon, the names of the directors (and, be residents outside Japan. In such company, a representative director will in the case of representative directors only, be the legal representative of the company. Employees do not have the right to be their home addresses) will be made available A representative director has unlimited represented on the board. to the public. representative power and therefore represents Body corporates cannot be appointed as The Japanese Companies Act allows the company in all business actions. a director. shareholders to dismiss a director at any time by A company with a board of directors must a majority vote. A director who is dismissed by An employee of a company can be a director have a statutory auditor (kansa yaku), unless the shareholders may make a damages claim of the same company, but a director of a the company has an accounting adviser against the company, except in cases where company cannot be a statutory auditor of the (kaikei sanyo). there are justifiable grounds for such dismissal. same company. Serving as a director of several The statutory auditor’s main responsibilities companies in the same group is permitted. The default rule of the appointment term of a are to check the financial information of the director under the Japanese Companies Act Directors are not required to have specific company and to monitor the activities of the is until the closing of an annual shareholders’ qualifications (note, there are some general directors of the company. meeting in relation to the last financial requirements such as that a candidate must year which ends within two years from the not be bankrupt) and there are no nationality appointment. The articles of incorporation may or residency restrictions or share ownership stipulate a shorter period or, where the company requirements. Further, there is no age restriction is a private company (that is, a company with and no need to appoint an independent director restrictions on the transfer of its shares), a in a private stock company. longer period. A director’s term of office cannot, however, be longer than a period until the closing of an annual shareholders’ meeting in relation to the last financial year which ends within ten years from the appointment.

Linklaters A cross-border guide for group company directors > Japan (continued) 50

Powers General duties Who are the duties owed to? Dealings with company / conflicts

Decisions of a company are made by the board Each director owes a fiduciary duty to Each director owes his / her fiduciary duty and a In relation to conflicts of interest between the of directors. the company. duty of care to the company. company and its directors, there are three types of conduct stipulated in the Japanese A board can, however, delegate certain matters A director is also required to exercise a duty of This effectively means that the directors owe Companies Act that require prior board approval. to a designated director, except where matters care of a prudent manager in performing his / their duties towards the shareholders as a whole. They are: are reserved to the shareholders or to the her duties. board by the Japanese Companies Act or by >> a director engaging in a business that In addition, each director has a duty to supervise the company’s constitutional documents (for competes with a business of the company, other directors of the company. example, a merger or changing the articles of >> a director entering into a transaction with the incorporation). In many cases, the articles of company, and incorporation set out a clause by which the >> a company entering into a transaction board delegates power to its president / CEO to which has a conflict of interest between the determine certain daily operations. company and a director of the company. A representative director has unlimited In addition, a director must report the key representative power to represent the company. contents of the transaction that has a conflict of Many companies delegate certain representative interest to the board after the completion of such powers to their senior employees under their transaction. Even if a director obtains board constitutional documents. approval in connection with transactions entered In addition, a company can issue a power into with the company, he / she is still liable for of attorney to any person to act on behalf of any damages incurred by the company as a the company. result of such transaction. A director with a conflict of interest in relation to items to be determined by the board (not limited to the cases set out above) may not participate in the discussions of the board in relation to such topic and has no voting rights in the decision-making process for such items.

Linklaters A cross-border guide for group company directors > Japan (continued) 51

Liability Indemnities and protections Insurance Financial difficulty and insolvency

If a director breaches his / her duties to the The liability of a director for damages incurred Directors’ and officers’ liability insurance is If a company becomes insolvent, the directors of company, he / she may be personally liable to by the company can be discharged by a permitted under the Japanese Companies Act the company are liable to third parties (typically compensate the company for losses caused. unanimous affirmative vote by shareholders. and the company can pay the premiums for creditors of the company) to the extent that the such insurance. court finds that the company became insolvent In addition, a director may be liable to third In addition, a two-thirds affirmative vote of the because of the wilful misconduct or gross parties (including shareholders) in cases where shareholders can limit the liability of directors negligence of the directors (see “Liability”). such third parties incur damages which were to a certain amount set out in the Japanese caused by the wilful misconduct or gross Companies Act (for example, six times the Under the Japanese Bankruptcy Act, a director negligence of a director in his / her exercise annual compensation for a representative of the company is subject to criminal sanctions of those duties. director), unless the damages incurred by the if the director effects any of the actions below, company were caused by the gross negligence the director was aware of a likelihood that such A breach of certain obligations under of the relevant director. action would be detrimental to the creditors and the Japanese Companies Act, such as bankruptcy proceedings are commenced: administrative requirements, can constitute This power to limit the liability of the directors either a criminal offence or a violation subject can be delegated to the board of directors in the >> hiding assets of the company (making a to an administrative penalty. articles of incorporation of the company. fictitious disposal of assets or incurring fictitious debt is also considered to be Partial limitation of liability is not possible, hiding assets), however, where the liability of the company is caused by a transaction between the company >> destroying assets of the company, and its director (that is, in cases where there are >> prejudicing the value of assets of the certain conflicts of interest). company by changing the condition of them, or >> disposing of the company’s assets or incurring obligations in a manner that is detrimental to the creditors.

Linklaters A cross-border guide for group company directors > Japan (continued) 52

Decisions and meetings Minutes Administration and accounts Relevant rules

The quorum for a board meeting is a majority The Japanese Companies Act requires A representative director of a company is The Japanese Companies Act (Act No. 86 of of the directors and decisions are made by a companies to prepare minutes of the generally responsible for the administration of 2005, as amended) sets out the rules regarding simple majority of the directors present. Each proceedings at board meetings and to keep the company, including tasks such as preparing the general duties of directors and their specific director has one vote and a casting vote cannot such minutes for ten years from the date minutes and updating company registrations. responsibilities in relation to the administration of be given to a director in advance. of the relevant board meeting. Minutes the relevant company. A representative director of a company must must be prepared, even in the case of a Board meetings can be conducted through ensure that the company’s financial statements Further, the constitutional documents of a written resolution. a medium which enables the directors to (such as the balance sheet and profit and loss company, such as its articles of incorporation communicate effectively with each other (that There is no set form for board minutes. Certain account) and the business reports are prepared and internal board rules, may impose additional is, by video-conference or teleconference). contents listed in the Japanese Companies every financial year. The financial statements requirements or restrictions on its directors. A written resolution can be used if such method Act must, however, be covered in the minutes. and the business reports must be approved by is specifically allowed in the company’s articles Board minutes must also be in writing and the board. The company must make its balance of incorporation. in Japanese. sheet (and also a profit and loss account for companies of a certain size) available to the A representative director of a company must Notarisation of the minutes is not necessary. public after its annual shareholders’ meeting. report his / her business activities to the board The attendees to the board meeting must sign at least once every three months. Therefore, a the board minutes. board meeting must be convened at least once every three months. Board minutes are not published. A convocation notice of a board meeting must be sent to all the directors and statutory auditors of the company at least one week prior to the board meeting, unless a shorter period is stipulated in the articles of incorporation. Nevertheless, a board meeting can be held at any time without a meeting having been convened, as long as all the directors and statutory auditors agree to it.

Linklaters 11 Luxembourg

Peter Goes Partner, Luxembourg Tel: (+352) 2608 8362 Mob: (+352) 6 9110 8362 [email protected]

Linklaters A cross-border guide for group company directors > Luxembourg 54

What type of company? Management structure Board composition Appointment and removal

In Luxembourg, subsidiaries within a group may A S.à r.l. is managed by its managers. A S.à r.l. can be managed by one or more Managers are appointed by the shareholders, take various forms depending on the group’s managers and there is no limit on their number, either in the company’s deed of incorporation In principle, each manager has individual specific requirements. unless imposed by the articles. or by a simple majority vote of the shareholders’ responsibility and the power to manage and meeting. The articles may require a Public limited liability companies (sociétés represent the company. Among others, shareholders and employees larger majority. anonyme or “S.A.”) and private limited liability may be appointed as managers. Managers may When two managers are appointed, however, companies (sociétés à responsabilité limitée or be either individuals or legal entities. The appointment is made for a limited or the articles usually provide that these can only “S.à r.l.”), which ensure limited liability and can unlimited period. Unless the articles provide represent the company by acting jointly. Subject to the provisions of the articles, there are be set up by a single shareholder, are the most otherwise, whenever vacancies occur, the no age, nationality or residence restrictions on likely to be used. If three, or more, managers are appointed, the remaining managers continue to be authorised managers, nor restrictions on the ability of the articles usually provide that the managers are to act until the next shareholders’ meeting The simplified public company société( par managers to hold several mandates. to be organised within a board of managers. appoints new managers. actions simplifiée or “S.A.S.”) also ensures Consequently, the articles will lay down specific If appropriate, it is advisable for a majority of limited liability, but offers greater flexibility with In principle, managers can resign at any time. rules about how the board is to be organised the managers to be Luxembourg residents respect to . A resigning manager should, however, remain and operate. to prove that the company has its central in office if the interest of the company requires Partnerships may also be relevant in specific administration in Luxembourg and, therefore, is Persons who have not been formally appointed this, until the shareholders’ meeting or the circumstances. A can be: of Luxembourg nationality. as managers but act as such will be treated as remaining managers could reasonably have >> limited by shares (société en commandite par de facto managers (gérants de fait) and may be A manager who has contributed to the found a replacement. Managers who wish actions or “S.C.A.”), liable under statutory rules which govern liability bankruptcy of a company is disqualified from to resign should also bear in mind that they >> a common (société en generally and in specific cases, such as where acting as a manager of other companies. may incur liability if they leave a company in a the company is insolvent. difficult situation. commandite simple or “S.C.S.”), or The auditors of the company’s annual accounts >> a special limited partnership (société en cannot be appointed to act as its manager. Managers may not be removed by shareholders commandite spéciale or “S.C.Sp.”). without cause, unless the articles provide otherwise. To remove managers appointed in the As S.à r.l. are, by number, the most frequently articles, it is necessary to observe the quorum used companies, due to their simplicity and and majority rules for amending the articles. flexibility, this section of the guide refers to managers’ duties in relation to the S.à r.l. The Appointments and removals of managers must duties and liabilities of the managers and be published in the same way as the articles directors of other Luxembourg entities are, in the Luxembourg Register of Commerce however, largely similar under the Luxembourg and Companies. legal regime.

Linklaters A cross-border guide for group company directors > Luxembourg (continued) 55

Powers General duties Who are the duties owed to? Dealings with company / conflicts

Generally, managers have wide powers to The managers / board of managers must Under Luxembourg company law, the duties In case of conflicts of interests the rules manage the company and delegate to others. exercise full and effective control over the of managers are usually described in terms governing a Luxembourg public company limited They may carry out all acts necessary or useful company by meeting regularly and monitoring of acting in good faith in the interests of the by shares (société anonyme) apply. in order to fulfil the corporate object of the its day-to-day activities. Managers must act company itself. The interests of the company Managers with an interest in a transaction which company, except for those reserved for the in accordance with the articles and exercise are not necessarily aligned with the interests of conflicts with the corporate interest should general meeting of shareholders by law or by independent judgement. The board is also its shareholders. disclose such conflict at the relevant board the articles. responsible for the company’s long term The concept of the interests of the company meeting. The conflict of interest should also be strategy, implementing and supervising this The internal authority of the managers may is not very specific but means taking into referred to in the minutes of the board meeting, strategy and reporting back to the shareholders. be restricted by rules set out in corporate account the interests of all stakeholders in the except where such transaction is at arm’s length documents, in particular the articles. Such Each manager has a duty of due care and company, including: and concerns the daily affairs of the company. restrictions do not bind third parties, even if the specific confidentiality obligations. This means >> the shareholders as a whole (and not In addition, managers with a conflict of interest restrictions have been published. The power that they must act in the way they consider (in individual shareholders), cannot take part in deliberations on the of the managers to represent the company in good faith and for proper purposes) to be in resolutions relating to the conflict of interest. relation to third parties can be limited, however, the best interests of the company. Managers >> the company’s employees and creditors, and If the quorum is not met, the board can delegate if it can be demonstrated that the third party should take such care as an ordinarily prudent >> the company’s group (that is, its affiliates). the decision to the shareholders, unless the knew or should reasonably have known about person, placed in the same situation, would articles provide otherwise. the representation regime of the company. use under similar circumstances. In doing so, they must have regard to the likely long term The board must inform the shareholders of the In addition, the board of managers may give consequences of their decisions. conflict of interest at the subsequent general specific powers to any person of its choice. meeting of shareholders before any votes are Individual managers also have the power to The general duties of managers imply that each taken by the general meeting. delegate in this way, in the absence of a board manager must have a reasonable knowledge of managers. of the company’s business, obtain reliable Where the company has only one manager, information and understand the consequences such sole manager is not prevented from acting The company is bound by the acts of its of decisions made. on a transaction where there is a conflict and managers, even if these exceed the company’s does not need to inform the shareholders’ object, unless it is proved that the third party Managers may delegate and rely on expert meeting of the conflict of interest. In such case, knew that the act exceeded the corporate object advice, but only to the extent that it is reasonable however, the manager must include details of or could not, in view of the circumstances, have to do so. If powers are delegated, managers the transactions where a conflict of interest been unaware of it. The fact that the articles have a duty to supervise such delegation. arises in the minutes recording such decision. have been published does not prove that third parties were aware of the corporate object.

Linklaters A cross-border guide for group company directors > Luxembourg (continued) 56

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Managers are jointly and severally liable to the It is not possible for a S.à r.l. to exempt a Luxembourg companies are permitted to take When a company is in financial difficulties company and third parties for damages resulting manager from liability to the company for out directors’ and officers’ liability insurance. or insolvent, managers may face additional from violations of the articles or law, unless breach of the duty of due care, for negligence liabilities. In such case, managers must take Typically, such insurance policies cover amounts they were not responsible for the misconduct or for other defaults in relation to the company’s every reasonable step to minimise creditors’ which may be payable by the managers and on becoming aware of it informed the management. Therefore, clauses in the articles losses and appropriate legal advice should because of a claim for damages made against next shareholders’ meeting. Managers are which seek to exonerate managers from liability be sought. them in relation to the performance of their also liable to the company for management are invalid. duties as managers of the company. Firstly, criminal liability may attach to the misconduct (faute de gestion) and, in specific Managers can be protected, however, in various managers of an insolvent company in certain circumstances, to the company and third parties The insurance does not cover: ways against liabilities to third parties arising situations. This can result in imprisonment of for infringement of the general duty of due care from their roles as managers. >> criminal, tax or administrative penalties two years for simple bankruptcy (banqueroute (obligation générale de prudence). incurred by managers, simple) and five to ten years for fraudulent As a general rule, any undertaking to indemnify The courts can consider what a diligent bankruptcy (banqueroute frauduleuse). managers for liability they might incur must be >> damages caused intentionally by the and reasonably skilled manager would have Managers found guilty may also be prohibited in the interest of the company. This means that managers, or done in similar circumstances, but cannot from carrying on any commercial activities and a manager can be indemnified by the company >> damage resulting from the gross negligence substitute their own business judgements for from acting as managers or statutory auditors of against civil claims brought by third parties, of the managers. the managers’ decisions. Managers are liable a company. but not against legal actions which are brought only if their judgement was manifestly flawed Legal or investigative costs incurred in defending by the company itself. Likewise, the indemnity Secondly, the managers may be ordered to or there was a clear lack of diligence (such as a prosecution may, however, be covered. cannot cover liability arising because of the assume all or some of the company’s losses erratic board meeting attendance and failure to fraud or wilful misconduct of the manager, as joint or separate debtors if serious faults of properly consider issues). nor any criminal or regulatory penalties which the managers contributed to the company’s Claims against managers are brought by the may be imposed on the manager, nor the cost bankruptcy and its assets are insufficient to company, if the shareholders’ meeting so votes. of defending criminal proceedings where the satisfy all claims. The right to initiate claims can also be waived manager is found to be guilty. Finally, if managers have entered into by shareholders. Managers cease to be liable It is also possible for third parties (including commercial transactions in their own interest to the company on resignation (except for faults shareholders or group companies) to indemnify under cover of the company or disposed of the previously incurred). The statute of limitations managers. Such indemnities can be widely company’s property as if it was their own or for actions against managers is five years, drawn and cover liabilities owed to the company for their own benefit, or created losses which from the date of the facts giving rise to the itself. In any such case, the managers remain could only lead to the company’s insolvency, claim or discovery of such facts, if fraudulently liable, but the third party can cover the financial the court may declare the managers personally concealed. Relevant criminal offences consequences of the liability incurred. bankrupt. This means that the liabilities of (punishable by imprisonment for several years the bankrupt manager include the bankrupt and / or fines of up to €250,000) include company’s liabilities. infringement of disclosure obligations, illegal distributions to shareholders and the fraudulent use of corporate assets.

Linklaters A cross-border guide for group company directors > Luxembourg (continued) 57

Decisions and meetings Minutes Administration and accounts Relevant rules

If the articles provide for the company to be The resolutions of the board of managers are The managers / board of managers have a The Law of 10 August 1915 on Commercial managed by a board of managers, such board recorded in minutes signed by the chair and the duty to prepare annual accounts consisting of Companies, as amended from time to time, sets forms a collegiate body and the articles will secretary of the meeting. The minutes may also a balance sheet, a profit and loss account and out the general duties of managers and specific set out how decisions of the board are to be be signed by those managers who wish to do so. notes. These should include the items required responsibilities in relation to the management adopted. The rules governing the boards of by Luxembourg law. Depending on the size of and external representation of companies. The proxies, if any, given for the meeting are public companies limited by shares (société the company and other circumstances, a S.à r.l. attached to the minutes of such meeting. In addition, corporate documents of anonyme) have inspired the legal provisions may choose to apply International Financial the company, in particular its articles of regarding the decision-making process for Certain resolutions should be notarised Reporting Standards as implemented in the incorporation and any specific resolutions, may the S.à r.l.’s management, as set out below, and published in the Recueil Electronique European Union, instead of Luxembourg GAAP. impose additional requirements or restrictions and there is great contractual freedom in des Sociétés et Associations. This notably Managers must also, where required by the on managers. In some cases, such corporate this respect. includes any decision by the board (rather law, draft a managers’ report which comments documents may override certain provisions of than the shareholders’ meeting) to increase A chair is appointed from among the board’s on the annual accounts in order to set out, the law as described in this section. Managers the company’s capital by using the authorised members. The chair in turn appoints a secretary in a faithful manner, the development of the should therefore be aware of relevant provisions. capital procedure (capital autorisé), in reliance (who does not need to be a manager) for taking company’s business and position. on authorisation set out in the articles and The duties and specific responsibilities of the minutes of the meetings. subject to specific conditions. Other specific duties include convening the managers in relation to the preparation and Board meetings are generally convened by the shareholders’ meeting and preparing reports in publication of accounts are regulated by the chair or by at least two managers. Generally, defined circumstances. Law of 19 December 2002 on the Register of three days’ written notice is required and Commerce and Companies and the Accounting decisions are adopted by a majority of the votes and Annual Accounts of Undertakings. of the managers present or represented at the meeting. Managers may participate in meetings by conference call, video-conference or other similar means of communication enabling the participants to simultaneously communicate with each other. Such participation is deemed equivalent to physically attending the board meeting in Luxembourg. In most cases, the articles also allow decisions of the board to be taken by way of written unanimous decisions signed by all the managers.

Linklaters 12 The Netherlands

Bart Jan Kuck Partner, Amsterdam Tel: (+31) 20 799 6320 Mob: (+31) 61 192 3573 [email protected]

Linklaters A cross-border guide for group company directors > The Netherlands 59

What type of company? Management structure Board composition Appointment and removal

In the Netherlands, subsidiaries within a group Dutch companies can use one of the A Dutch company must have at least one The first directors are appointed in the are most likely to be private companies with following systems. director, although the company’s articles of company’s incorporation deed and thereafter, as limited liability ( met association (statuten) may specify that there a general rule, by the shareholders’ meeting. The >> Two-tier system: This includes, in any case, beperkte aansprakelijkheid or “BV”). should be a greater number. articles may provide that directors are appointed a shareholders’ meeting and a management by a meeting of holders of shares of a specific board, entrusted with the management of Both legal entities and individuals can act class, provided that each shareholder with voting the company. It may also include a separate as directors. rights can take part in the decision-making for supervisory board, responsible for supervising Unless the articles provide otherwise, directors the appointment of at least one director. There and advising the management board. are not required to have specific qualifications is no fixed term of office for a director, unless >> One-tier system: In this case there is only and there are no nationality or residency otherwise provided in the articles or in the one board, consisting of executive directors restrictions or share ownership requirements. resolution on appointment. and non-executive directors. The executive For tax purposes, it may be necessary for a A director can be suspended and / or removed directors are generally responsible for certain number of directors to be resident in at any time by the corporate body empowered to day-to-day management and the non- the Netherlands. executive directors are at least responsible appoint that director. Other corporate bodies can for supervising the management of the board Directors of “large” Dutch companies and also remove directors, if permitted to do so by as a whole. All directors, however, remain certain “large” Dutch foundations (as defined the articles. Directors can also be suspended by collectively responsible for actions taken in Dutch law) cannot hold more than a certain the supervisory board (if any), unless the articles (see “Powers”). number of supervisory positions. If directors are provide otherwise. A resolution to suspend or appointed in violation of these restrictions, the remove a director can be voided by the court A person who acts as a managing director last appointment is void. Supervisory positions at if the relevant director was not given a proper without having been formally appointed as such more than one legal entity within the same group hearing before such resolution was adopted. may, under certain conditions, be held to be are regarded as one position only. If the company has a works council, the works liable as a managing director. council may be entitled to give non-binding The two-tier system is the most commonly used advice to the board before a director is expected management structure for group companies to be appointed or removed. in the Netherlands. In this section on the If the “large” company regime applies, specific Netherlands, therefore, the term “directors” rules for appointing and removing directors must refers to managing directors and the term be observed. The articles must provide for the “board” refers to the management board. temporary management of the company if a seat Further rules apply to supervisory directors and on the board is vacant or one or more directors members of a one-tier board. are unable to perform their duties.

Linklaters A cross-border guide for group company directors > The Netherlands (continued) 60

Powers General duties Who are the duties owed to? Dealings with company / conflicts

The board is entrusted with the management of The board is responsible for determining the In performing their duties, the directors must A conflict of interests will, in principle, only the company. company’s long term strategy, implementing and act in the interests of the company and of the affect a company’s internal decision-making. supervising such strategy and reporting back business connected with the company. This may The authority of the board and its directors to The board is not subordinate to the shareholders to the shareholders. The strategy determined include the interests of the: represent the company remains unaffected. or supervisory board (if any). The articles may, by the board must be in accordance with the however, provide that certain board resolutions >> shareholders (meaning all the shareholders A director cannot take part in discussions and company’s objects, the interests of the company require the approval of another corporate jointly, not individual shareholders), decision-making by the board if he / she has and the business connected with the company. body (such as the shareholders’ meeting >> employees, a direct or indirect personal interest in the or the supervisory board) or that the board Each director is under a duty of due care. This business being considered that conflicts with >> group to which the company belongs, and must comply with the instructions of another means that a director must properly fulfil the the interests of the company or the business corporate body. Any such instructions should duties assigned to him / her in accordance >> creditors. connected with the company. not conflict with the interests of the company with what can be expected of a reasonable and If, as a result, no resolution can be adopted, the and the business connected with it. If the competent director in the same circumstances. resolution must be adopted by the supervisory company has a works council, the board may In doing so, directors must act in good faith and board. If there is no supervisory board, the be required to seek its consent or advice before for proper purposes in a manner which they resolution must be adopted by the shareholders’ taking certain important decisions. believe is in the best interests of the company meeting, unless the articles provide otherwise. and of the business connected with the The board may establish written regulations company (see “Liability”). Any resolution adopted in violation of these rules (reglement) which set out its working methods can be nullified. and decision-making process and may also This implies that a director must have a determine the duties which particular directors reasonable knowledge of the company’s Actions taken as a result of such resolution, are responsible for. business, obtain reliable information as however, as a general rule, remain unaffected. relevant and understand the consequences of This means that a company can only nullify The directors have collective powers and decisions made. such actions or claim damages in very specific responsibilities as they share responsibility for circumstances, where a third party knew all decisions and acts of the board and the The duty of good faith means that the company that there was a conflict of interests and took individual directors can, in principle, be held and its directors and shareholders (as well as advantage of the situation. liable for mismanagement if duties are not any other parties connected with the company’s fulfilled properly (see Liability“ ”). organisation pursuant to the law or the articles) must behave in a reasonable and fair way The company is represented by the board. Each towards each other. individual director is also authorised to represent the company, unless the articles provide otherwise. In addition, the board may give specific powers to any person of its choice.

Linklaters A cross-border guide for group company directors > The Netherlands (continued) 61

Liability Indemnities and protections Insurance Financial difficulty and insolvency

The directors are collectively responsible for A company may agree to indemnify its current Dutch companies are permitted to take out If the company goes bankrupt, the directors the management of the company. A director and former directors against liabilities to third insurance against liabilities which may be are liable to the joint creditors, rather than to fails to properly perform his / her duties if parties for acts done in the performance of their incurred by their directors. the company. it is established that he / she did not act in duties. Such an indemnity may also be provided Typically, such insurance policies cover amounts Each director, and each person who was accordance with what can be expected of by a major shareholder or direct or indirect which may be payable by the directors insured involved in determining the company’s policy as a reasonable and competent director in the parent company. because of a claim for damages made against if he / she were a director, is jointly and severally same circumstances. If the company has been Companies cannot, however, indemnify directors them in relation to the performance of their liable for a deficit in the insolvent company’s improperly managed, as a general rule each against claims resulting from the intentional duties as directors of the company. estate if the board appears to have performed its director is fully liable to the company, unless acts, gross negligence or seriously culpable duties improperly in the three years preceding he / she cannot be seriously blamed and he / The insurance will not cover: conduct of the directors. Likewise, an indemnity the bankruptcy and if it is apparent that the she did not fail to take measures to avert the cannot protect the directors if the company is >> criminal, tax or administrative penalties, bankruptcy was to a large extent caused by such consequences of such improper management. declared bankrupt. improper performance of duties. If duties have been allocated to other directors, >> intentional damage, or this is also taken into account. In line with this Damages which can be indemnified by the >> damage resulting from the gross negligence An individual director can avoid liability if he / general rule on liability, Dutch law explicitly company may include payments to third parties of the directors. she can prove that he / she cannot be blamed provides for BVs that directors can be held as a result of civil, criminal or administrative for the improper management of the company Legal or investigative costs incurred in defending personally liable if, as a result of a distribution claims. In addition, a director may be and that he / she did not fail to take measures to a prosecution may, however, be covered. or repayment on shares, the company is no indemnified by the company for the reasonable avert the consequences of the company being longer able to satisfy its debts as they fall due, costs of defending a claim. Most insurance terminates if a company is improperly managed. and the directors knew or reasonably should declared bankrupt. In most cases, however, The indemnity may be provided in the articles or If the board has not complied with its obligation have known that this would be the case. As it is possible for the directors to extend the in a separate agreement with each director. to keep proper books and records of the above, individual directors can avoid liability period during which claims can be filed and company or with the obligation to publish in certain circumstances. Exoneration clauses which seek to limit the will be covered following the termination of the annual accounts and annual report liability of the directors to the company are in the insurance. A director can also be directly liable to third (if applicable) in a timely manner, it will be general deemed null and void. The shareholders’ parties (such as individual shareholders or assumed that the company was improperly meeting can, however, resolve to release creditors) for breaching a personal duty of managed and the directors cannot contest this directors from liability towards the company. care towards them or indirectly liable if found presumption. It will also be assumed that the Directors cannot rely on such a release in responsible for unlawful acts which would improper management of the company was a circumstances where it would be unfair or otherwise be attributed to the company. major cause of the bankruptcy, although the unreasonable for them to do so. In addition, directors can seek to prove that this was not In addition, directors may incur liability such release does not release directors from the case. under specific rules for matters such as tax liabilities towards third parties or from criminal liabilities and the publication of misleading liabilities incurred. annual accounts.

Linklaters A cross-border guide for group company directors > The Netherlands (continued) 62

Decisions and meetings Minutes Administration and accounts Relevant rules

Dutch law does not specify how board meetings The board must keep a record of the resolutions The board must keep books and records of the Book 2 of the Dutch Civil Code sets out should be convened or held. Procedural rules it adopts. company and store these for a period of at least the general duties of directors and their may, however, be laid down in a company’s seven years. The books and records must be responsibilities in relation to the management Dutch law does not prescribe the form of such articles or regulations. For tax purposes it may set out in a way that, depending on the nature and external representation of a company. record. Resolutions adopted in a meeting are be necessary for board meetings to be held and size of the company, allows an accurate usually recorded in the minutes of the meeting. In addition, corporate documents of the in the Netherlands or that a certain number of assessment to be made fairly quickly of its These minutes are usually signed by the chair company (including its articles, regulations directors participates in board meetings from financial status. and secretary of the meeting as evidence of and any specific resolutions or agreements the Netherlands. their adoption. The board must prepare the annual accounts between a director and the company) may Unless the articles or regulations provide and the annual report (if applicable) of the impose additional requirements or restrictions otherwise, board resolutions are adopted by company and make them available to the on the directors. an absolute majority of the votes cast, without shareholders within five months of the end of a quorum being required, provided that all the financial year. In special circumstances, the directors have been given the opportunity to shareholders’ meeting may extend this period by participate in the decision-making. no more than six months. As a general rule, directors have equal voting The board must file the annual accounts with rights. The articles or regulations may, however, the Dutch Trade Register within eight days give certain directors more than one vote, after they have been adopted or, if they are not provided that no director has voting powers that adopted, within 13 months of the end of the allow him / her to override the votes of all the financial year. The annual report (if applicable) other directors acting together. must be deposited with the Dutch Trade Register at the same time. A director may be represented at a board meeting by another director and may give a The board is also responsible for making other specific proxy to another director to vote on his / filings with the Dutch Trade Register, where her behalf. Such proxy can only be granted for a required by law. specific meeting and not on a continuing basis. Other administrative responsibilities of the board Usually the articles or regulations allow for include keeping the company’s shareholders’ a board resolution to be adopted in writing, register, convening shareholders’ meetings and provided that all directors agree to the relevant keeping a record of the resolutions adopted at resolution or that the proposal concerned is those meetings. submitted to all the directors and none of them objects to it.

Linklaters 13 People’s Republic of China (PRC)

Jian Fang Partner, Shanghai Tel: (+86) 21 2891 1858 Mob: (+86) 13 8019 05559 [email protected]

Richard Gu Senior Consultant, Shanghai Tel: (+86) 21 2891 1839 Mob: (+86) 13 6016 06156 [email protected]

Linklaters A cross-border guide for group company directors > People’s Republic of China (PRC) 64

What type of company? Management structure Board composition Appointment and removal

In the PRC, subsidiaries within a corporate EJV / CJV An FIE established as a limited liability EJV / CJV group are usually limited liability companies. company must have a board of between In an EJV or CJV, the board of directors is The term of office for a director of an EJV is In particular, three types of foreign investment three to 13 members, except for a WFOE the highest decision-making authority of limited to four years and for a director of a CJV to enterprise (“FIE”) are used by non-PRC which is “comparatively small” (see the company and exercises powers and three years. Directors can stand for re-election. investors setting up a new PRC enterprise “Management structure”). functions which would normally be reserved or acquiring an existing PRC enterprise. WFOE for shareholders in other jurisdictions. There is Only natural persons over the age of 18 can These include: no separate shareholders’ committee to which be appointed to the board. The term of office for a director of a WFOE >> Equity Joint Venture (“EJV”): a limited the board of directors is responsible. cannot be longer than three years, although The board of directors may have employee liability company with at least one foreign this is renewable upon re-election. Directors are WFOE representatives, elected by the employees. investor and one domestic investor. elected and removed by the sole shareholder / >> Co-operative Joint Venture (“CJV”): a limited The board is responsible to the sole shareholder The general manager of a company, if not a shareholders’ committee. or the shareholders’ committee of the WFOE director, is entitled to attend meetings of the liability company or unincorporated venture For all types of company, it is necessary to (made up of all of the WFOE’s shareholders). board of directors as a non-voting attendee. with at least one foreign investor and one file the letter of appointment / replacement Accordingly, the sole shareholder / shareholders’ domestic investor. In this section of the guide, In addition, a supervisor is entitled to attend and other supporting documents (such as committee is the highest decision-making we only focus on the limited liability form meetings of the board of directors as a non- the application form signed by the legal authority and makes decisions on major issues rather than unincorporated venture, which is voting attendee and can raise queries or make representative of the company) with the State affecting the company. The board carries out not used often in practice. suggestions on the matters discussed at the Administration for Industry and Commerce. the functions assigned to it by law as well as any >> Wholly Foreign Owned Enterprise (“WFOE”): meetings of the board. A supervisor is an officer The legal representative is the officer of powers and functions granted to it by the articles a limited liability company which is wholly- of the company who, sometimes as a member of the company with the apparent authority to (see “Powers”). A WFOE with a “comparatively owned by foreign investors. a supervisory committee, performs the function represent and enter into binding obligations small” number of shareholders, or which is of supervising the directors and calling them on behalf of the company. Non-PRC investors can also establish PRC “comparatively small” in scale, may have one to account. holding (or investment) companies to invest in executive director instead of a board. There is other entities, subject to specific qualification no specific definition of what “comparatively requirements including those in respect of small” means. In practice, if a WFOE has a sole total asset value and number of FIEs held. shareholder, it is common to have one executive A holding company is strictly for investment director instead of a board of directors. and not permitted to engage in manufacturing All types of company may (and in practice operations. Holding companies can be EJVs almost always do) have a “general manager”, or WFOEs. who is appointed / dismissed by the board, Other possible vehicles, not addressed by this accountable to the board and in charge of the section of the guide, include companies limited production, operation and management of by shares. the company.

Linklaters A cross-border guide for group company directors > People’s Republic of China (PRC) (continued) 65

Powers General duties Who are the duties owed to? Dealings with company / conflicts

EJV / CJV The duties expressly owed by a director of a The general duties of the director are owed Directors are expressly forbidden from carrying company by law are the duty of loyalty and the to the company. out certain acts which may cause them to act In an EJV or CJV, the board of directors is duty of diligence. contrary to their duties of loyalty and diligence to the highest decision-making authority of the the company. These include: company and therefore has wide powers to act. The duty of loyalty is not defined, but is generally understood to mean that directors must perform >> accepting bribes or other illegal income or WFOE their duties so as to avoid conflicts of interest seizing the property of the company, The directors of a WFOE can exercise the and to protect and act in the best interests of, >> misappropriating company funds, powers specifically granted to them by the and for the benefit of, the company. >> depositing company funds in an account articles. In addition, the law gives the directors The duty of diligence is not defined either, but opened in the name of the director or anyone the statutory power to: is generally understood to mean directors must else other than the company, >> implement the decisions of the sole exercise due care and protect the interests of >> breaching the company’s articles by lending shareholder / shareholders’ committee, the company. company funds to a third party or using >> decide on the company’s business plan and Please refer to the section “Dealings with company property to provide security for a investments, company / conflicts” for examples of acts which third party without obtaining shareholder and >> draw up the company’s annual financial would breach directors’ duties of loyalty and / or board approval, budgets and final accounts, diligence to the company. >> entering into a contract with the company in breach of the articles or without obtaining >> formulate the company’s profit distribution Directors must also discharge any additional shareholder approval (in the case of a WFOE) plans and plans for making up losses, obligations imposed on them by the company’s or board approval (in the case of an EJV >> plan any increase or reduction of the articles of association. or CJV), registered capital or issue of corporate bonds of the company, >> using the director’s position to divert commercial opportunities of the company, or >> decide on any merger, division, dissolution, engaging in business similar to the business liquidation or change to corporate form of the of the company, for the benefit of the director company, or another third party, without obtaining >> set up a system for managing the company, shareholder approval (in the case of a WFOE) and or board approval (in the case of an EJV >> appoint or remove a general manager, deputy or CJV), general manager and the person responsible >> accepting commissions for transactions for financial matters and decide on their between third parties and the company, and remuneration. >> disclosing company secrets without authorisation.

Linklaters A cross-border guide for group company directors > People’s Republic of China (PRC) (continued) 66

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Directors who breach their duties may be Generally speaking, the personal liability The directors may request that the company put Directors may be held personally liable for a subject to civil liabilities, fines and administrative (whether civil or criminal) of a director cannot in place liability insurance. company becoming insolvent if they are found to punishments in accordance with the procedures be restricted or limited by contract or otherwise. be in breach of their duties to the company and Directors’ liability insurance in the PRC typically of the relevant PRC government authorities, The company or group may, however, agree that this breach led to the company’s insolvency. covers liability incurred by a director to third disciplinary measures of the company set specific terms with directors in relation to their Conversely, directors cannot be held personally parties in the course of acting in the capacity out in its articles or criminal liabilities for any engagement as directors (for example, that liable for any decisions made or acts undertaken of a director in respect of which the director crimes committed. insurance cover will be provided). which are not in breach of their duties, even is unable to obtain reimbursement from the if these decisions or acts were, in hindsight, Civil liabilities may arise where directors violate To mitigate risk, it is advisable for directors company. It does not cover insider trading, commercially unsuccessful and led to the PRC laws, administrative regulations or the to voice their objections if they are aware of bribery or any criminal offences committed by insolvency of the company. company’s articles during the performance decisions which are in breach of, or may breach, the director, or death, disease or personal injury of their duties. If this results in a loss to the law. This is because the law provides for directly or indirectly resulting from the acts of Directors found personally liable for the the company, the supervisory committee / directors to be collectively responsible for board the director. insolvency of a company will incur general supervisor(s) or a shareholder may initiate legal resolutions passed in violation of PRC laws, liabilities. These may include responsibility for proceedings against the director. If shareholders’ administrative regulations or the articles of the the company’s debts to the extent that the acts interests are adversely affected, those company and which cause material loss to the of the directors caused loss to the company. shareholders may initiate legal proceedings company. It is thought, however, that directors In addition, these directors will not be permitted against the director. are likely to be released from such liability if to act as directors of any company in the PRC proven to have expressed their opposition to Directors may incur criminal liabilities for for three years commencing from the date such resolution when it was put to vote and their misconduct contrary to PRC criminal laws (such when the insolvent liquidation of the company opposition was recorded in the minutes of the as the giving or accepting of a bribe) or where is completed. board meeting. an activity of the company is illegal and the director is directly responsible for such activity. It is also advisable for directors to attend all Directors are not automatically considered liable board meetings or appoint a suitable person to for crimes committed by the company. Whether act as their proxy if they cannot attend. or not a director is considered responsible for such activity will depend on the circumstances of the case.

Linklaters A cross-border guide for group company directors > People’s Republic of China (PRC) (continued) 67

Decisions and meetings Minutes Administration and accounts Relevant rules

The articles of association usually set out how The board is required to keep minutes of board The directors must ensure that the shareholders The Company Law issued by the Standing decisions of the board are to be made and how meetings. These should be signed by all the can inspect the company’s accounts. Committee of the National People’s Congress of board meetings are to be convened, constituted directors who attended the meeting. the PRC, as amended with effect from 1 March Companies in the PRC are generally subject to and held. Apart from resolutions passed at 2014, applies to EJVs, CJVs and WFOEs. Under PRC law, there are no specific rules a requirement to submit an annual report to the board meetings, the articles may provide for about the language in which the minutes should State Administration for Industry and Commerce Other laws also apply as set out below. written resolutions. They may also allow for be written or which require the registration, before 30 June. The annual report will be made attendance at board meetings via conference EJV publication or notarisation of the minutes. available for public inspection. FIEs are required call / video-conference. to submit, between 16 May and 31 August of >> The PRC Sino-foreign Equity Joint Venture Generally, there is no minimum notice each calendar year, details of investments and Law and Implementation Rules. requirement under PRC law (other than for a other information on an online platform jointly CJV CJV), so this will be subject to a company’s operated by a number of government authorities. articles. Each director generally has one vote. >> The PRC Sino-foreign Joint If a company provides false information or Venture Law and Implementation Rules. EJV / CJV conceals material information in any financial / accounting documents submitted to any WFOE Special requirements apply (subject to any authorities, the relevant authorities may impose higher threshold imposed under the articles of >> The PRC Wholly Foreign Owned Enterprise a fine of between RMB 30,000 and RMB association of the company): Law and Implementation Rules. 300,000 on those who are directly responsible, >> a board meeting must be convened at least including directors. Holding company once a year by the chair or, failing which, the >> The Provisions and the Supplementary vice chair, Provisions on the Establishment of >> directors making up one-third or more of the Investment Companies by Foreign Investors. total may call a board meeting, In addition, the directors of a company must >> the quorum for a board meeting is two-thirds comply with the constitutional document of the or more of the total, company, that is, the articles of association. >> at least ten days’ prior notice is required for a board meeting of a CJV, and >> certain statutory matters (such as amendments to the articles and increases or reductions of the company’s registered capital) require the unanimous approval of the directors present at the board meeting.

The contents set out above do not constitute any opinion or determination on, or certification in respect of, the application of PRC law. Any comments concerning the PRC are based on our transactional experience and our understanding of the practice in the PRC. Like all international law firms with offices in the PRC, Linklaters LLP and its affiliated firms and entities (including Linklaters in Hong Kong) are not licensed to undertake PRC legal services. We have standing arrangements with a number of PRC lawyers. If you would like advice on the application of PRC law or other PRC legal services, please let us know and we would be pleased to make any necessary arrangements on your behalf.

Linklaters 14 Poland

Marta Bleszynska Managing Associate, Warsaw Tel: (+48) 22 526 5047 Mob: (+48) 60 337 9431 [email protected]

Ewa Szmigielska Associate, Warsaw Tel: (+48) 22 526 5174 Mob: (+48) 60 165 7887 [email protected]

Linklaters A cross-border guide for group company directors > Poland 69

What type of company? Management structure Board composition Appointment and removal

In Poland, subsidiaries within a group are most In most cases, the Sp. z o.o. is governed by An Sp. z o.o. may have one or more members Board members are appointed by shareholders’ likely to be limited liability companies (Spółka z the members of a management board only. on the management board. There is no resolutions. The articles of association can ograniczoną odpowiedzialnością or “Sp. z o.o.”). maximum number of board members. delegate this power to another corporate body, The shareholders of the company may, however, for example, to a supervisory board or give choose to create a supervisory board or an audit Only individuals with full legal capacity to act individual shareholders the right to appoint a committee (komisja rewizyjna). (generally under Polish law individuals aged 18 certain number of board members. years have full legal capacity) may be appointed A supervisory board (or an audit committee) as board members. Board members can also be dismissed by must be created in a Sp. z o.o. if the share shareholders’ resolution or resign before the end capital of the Sp. z o.o. exceeds PLN 500,000 Certain statutory reasons may prevent a person of their term in office. The articles of association (approx. €120,000) and there are more than from acting as a managing director, for example, may include additional provisions, for example, 25 shareholders. if they have been convicted of certain crimes to limit the right to dismiss a member of the under the Polish Criminal Code. Details of any such arrangements will be set management board, unless this is done for out in the company’s articles of association. There are no nationality or residence restrictions important reasons. nor qualification requirements applying to The term of office of a member of the board members. management board is determined by the It is possible to serve as a member of the company’s articles of association. management board of more than one company within the same group. A member of a management board must not, however, without the consent of the company, engage in any business activity in competition with the company or serve as a board member of a competitor company. Board members are allowed, but not required, to own shares in the company.

Linklaters A cross-border guide for group company directors > Poland (continued) 70

Powers General duties Who are the duties owed to? Dealings with company / conflicts

The management board has the power to run The members of the management board Managing directors owe their general duties to The law regulates conflicts of interest between the affairs of the company and represent the have a general duty to manage the affairs of the company and not to its shareholders or to the company and: company. Each member of the management the company. the group to which the company belongs. >> a member of the management board, board may, without a prior resolution of the In doing this, the members of the management management board, conduct the company’s >> his / her spouse, relatives or relations up to board must exercise diligence and carry out affairs within the ordinary course of the the second degree, and / or their duties in a professional way. company’s business. Certain management >> persons with whom he / she has personal board decisions, however, require the relations. prior consent of the shareholders or of the If such a conflict arises, the member of the supervisory board. management board cannot take part in making Whilst a board member’s power to represent decisions on the relevant matters and may the company to third parties cannot be limited, request that this be recorded in the minutes of their internal authority to act may be restricted. the company’s proceedings. If the management board has more than one In contracts between the company and a member, the company may be represented by member of the management board and two members of the management board, acting in disputes with him / her, the company is jointly, or by one member of the board acting represented by the supervisory board or an together with a holder of a commercial power of attorney appointed under a resolution of the attorney, that is, a commercial proxy (prokurent). shareholders’ meeting. The articles of association may restrict powers of representation to some board members or grant The consent of the shareholders is required powers of representation to a commercial proxy. where the company and a member of the management board enter into certain Acts carried out by the company which require a agreements, including: shareholders’ resolution (such as the acquisition / disposal of real estate) are considered null and >> loan agreements, void if the required resolution is not obtained. >> credit agreements, and Acts which are carried out without consents >> surety agreements. required by the company’s articles are treated as valid under the law (although the members of the management board may incur liability for violating the articles of association).

Linklaters A cross-border guide for group company directors > Poland (continued) 71

Liability Indemnities and protections Insurance Financial difficulty and insolvency

A member of the management board is liable to In certain cases, it is possible to limit the liability The company may enter into a directors’ civil The board must convene a shareholders’ the company for any damage caused because of a member of the management board towards liability insurance contract to protect members meeting if the balance sheet drawn up by the of acts or omissions in breach of the law or of the company by way of a contract in which the of its board from liability for damage caused in management board shows a loss exceeding the the company’s articles of association, unless liability for the damages caused to the company connection with their corporate duties. aggregated supplementary and reserve capitals the member was not at fault. The extent of the in connection with the member’s corporate and half of the share capital. Such insurance is usually only offered with a liability depends on the type, size and structure duties is limited to a certain amount. considerable liability excess and numerous It is a criminal offence for the management of the company. It is, however, not possible to indemnify exclusions and restrictions. board to fail to file for bankruptcy. Members of the board may also incur specific members of the management board against Generally, liability of an Sp. z o.o. will not attach liabilities for corporate breaches (for example, damage caused to the company intentionally. to the board members, however, if enforcement for providing false data in their representation proceedings against the company will be that contributions towards the share capital have ineffective, then the board members are jointly been made by all shareholders in full when filing liable with the Sp. z o.o. for the company’s for registration of the company). liabilities. A board member may discharge If the company does not bring an action for himself/herself from liability if he/she can redress of damage caused to it within one demonstrate that: year from the date on which the act causing (i) a petition for bankruptcy was filed at the the damage was discovered, any shareholder appropriate time, a decision on opening may file a statement of claim to redress the restructuring proceedings (otwarcie such damage. postępowania restrukturyzacyjnego) or a Members of the management board can also decision on approving the arrangement incur liability for criminal offences if, for example, (zatwierdzenie układu) was issued, they fail to file for bankruptcy, submit false data (ii) he/she was not responsible for not filing or authorise the acquisition by the company of a petition for bankruptcy, or its own shares. (iii) the circumstances specified in point (i) above did not cause any damage to the creditor.

Linklaters A cross-border guide for group company directors > Poland (continued) 72

Decisions and meetings Minutes Administration and accounts Relevant rules

The management board makes decisions by The law does not provide for any specific Each management board member has the right The Polish Commercial Companies Code passing resolutions at board meetings. formalities with regards to the minutes of and the obligation to manage the affairs of the (Kodeks spółek handlowych) sets out the board meetings. company. general duties for members of the management The by-laws of the management board may board and their responsibilities in relation to the allow members to attend board meetings via Certain board resolutions, however, must be The management board is required to keep representation and management of a Polish conference call / video-conference. recorded in minutes taken by a notary and due accounts and prepare annual financial limited liability company. published in the commercial register, therefore, statements after the end of each financial year. Resolutions of the management board will need to be set out in Polish. A company’s constitutional documents (such will be adopted if all of the members have The management board convenes shareholders’ as its articles of association or internal by- been properly notified of the meeting of the The company’s articles or the by-laws of the meetings and must do so in certain laws), specific resolutions and oral or written management board. management board may also provide that circumstances (see “Financial difficulty and agreements between the management board minutes of a board meeting are to be set out insolvency”). Further obligations to convene a Resolutions are usually adopted by an absolute and the company may impose additional in writing and forwarded to the members of shareholders’ meeting may be provided in the majority of votes, but the articles of association requirements or restrictions on board members. the board. articles of association. may provide otherwise. Such arrangements, in some cases, may also The board is also responsible for the company’s override the provisions described in this section Other issues such as the place of the meetings, compliance with applicable laws, for example, by of the guide. quorum requirements and alternative methods filing the company’s tax returns. of passing the resolutions are determined by the articles of association and by-laws of the Furthermore, the management board is management board. responsible for all necessary registrations and filings with the commercial register. Whenever the shareholder structure changes, the board must file an updated list of shareholders with the commercial register.

Linklaters 15 Portugal

António Soares Partner, Lisbon Tel: (+351) 21 864 00 13 Mob: (+351) 91 969 23 29 [email protected]

Linklaters A cross-border guide for group company directors > Portugal 74

What type of company? Management structure Board composition Appointment and removal

In Portugal, a subsidiary within a group is most SA Managing directors can be either individual Managing directors may be appointed in the likely to be a joint stock company (sociedade persons with full legal capacity or company’s by-laws or elected by the general In an SA, the management and supervisory anónima or “SA”). corporate entities. shareholders’ meeting. structure may follow one of three A subsidiary can also be a private limited different models. Corporate entities which act as managing SA company (sociedade por quotas or “Lda.”). directors must, however, appoint an individual >> Traditional model: board of directors / sole An SA’s managing directors are appointed for a A Lda. largely follows the same rules as are set with full legal capacity as their permanent director (management) and a supervisory renewable maximum term of four years and, as out in this section of the guide for an SA, except representative. In this case, the individual and board. a rule, they should remain in place until a new where otherwise specified. the legal entity which he / she represents are appointment is made. >> One-tier model: board of directors and an jointly and severally liable for the acts carried out advisory Audit Committee (Comissão de by the individual. Managing directors may be removed at any time Auditoria) with management responsibilities, by a simple majority vote of the shareholders. In an SA, the number of directors is set out in and a statutory auditor / audit firm with Directors are entitled to receive compensation, the company’s by-laws. supervisory responsibilities. however, if they are dismissed without a justified >> Two-tier model: board of directors with If employees are appointed as directors of a reason. It is also possible for one or more executive responsibilities (Conselho de company or of a company in the same group, shareholders, representing at least 10% of the Administração Executivo) and a general this suspends or terminates the employment share capital, to apply to the Portuguese courts supervisory management board (Conselho contract (see “Dealings with company / for removal of a managing director, as long as Geral e de Supervisão) and a statutory auditor conflicts”). this is based on a justified reason. / audit firm with supervisory responsibilities. Lda. Shareholders may change the management The managing directors of a Lda. are generally structure at any time by choosing another appointed without a maximum term and remain one of these three models and modifying the in place until they are removed or resign. The company’s by-laws accordingly. Persons which company’s by-laws may state otherwise. have not been legally appointed as directors but act as such (administradores de facto) As for an SA, the majority of the quotaholders are bound by the criminal sanctions and civil can remove a director at any time. In addition, liabilities which apply to directors. removal by the courts for a justified reason can be requested by any quotaholder. Lda.

These are managed and represented by one or more managing directors (gerente). The term “managing director” in this section refers to both the SA (administrador) and to the Lda. (gerente), as appropriate.

Linklaters A cross-border guide for group company directors > Portugal (continued) 75

Powers General duties Who are the duties owed to? Dealings with company / conflicts

The managing directors are responsible for The board is responsible for deciding the Managing directors owe their duties to the Managing directors should avoid conflicts representing the company and managing company’s long term strategy, implementing company, its shareholders, employees, clients between the interests of the company and their its business. it and reporting back to the shareholders. and creditors. own interests. SA Each director is under a duty of due care. Managing directors are also forbidden from This means that they must act in good faith taking loans or security or guarantees from The SA’s managing directors have the power, and for proper purposes, in a manner which the company. among other things, to: choose the chair of the they believe to be in the best interests of the board, require a shareholders’ meeting to be As a rule, other contracts between the company and its shareholders. The actions of convened, decide on the acquisition or disposal company and its managing directors are the directors are measured against the standard of real estate by the company, open or close null and void unless: of care of a reasonable businessman. commercial , make major changes >> such contracts have previously been to the company’s organisation, sign agreements The managing directors have to perform their approved by non-conflicted directors, and with other companies, decide on share capital duties with loyalty, in the best interests of the increases (with some constraints) and plan company, taking into consideration the long term >> a favourable report from the supervisory body mergers, divisions and transformations of interests of the shareholders and balancing other is obtained. the company. interests of other parties which may be relevant Managing directors are, however, permitted to to ensure the sustainability of the company, enter into contracts with the company without Lda. including the company’s relationship with its any restrictions applying to them if: The managing directors of a Lda. have the employees, clients and creditors. >> the contract falls within the usual business of power to carry out all acts deemed necessary Directors are also subject to other general duties. the company, and or convenient for achieving the objects of These include the duty to: the company, provided that they respect any >> the managing director is not given any special resolutions of the shareholders. >> not compete with the company, benefit under such contract. The managing directors cannot work under a In this type of company, however, the powers of >> maintain the company’s confidentiality, and subordinating contract for the same company the managing board may be more restricted by >> respect the principles of good or any other companies in a controlling or the shareholders’ meeting than in an SA. corporate governance. group relationship. This means that the Directors may continue to be subject to certain appointment of any employee as a director of duties, with regard to non-competition or that company or in another group company confidentiality, after their term of office comes to will trigger the suspension or termination of the an end, if so specified in their contracts. employment agreement.

Linklaters A cross-border guide for group company directors > Portugal (continued) 76

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Managing directors are liable to the company for A managing director cannot be indemnified for In Portugal, the company can only pay directors’ Directors have specific duties when the damage caused if the directors do not meet the any liability incurred to the company itself. and officers’ insurance premiums to the company is in financial difficulty. These include, standard of care of a reasonable businessman extent that the relevant indemnity exceeds the amongst other things, the obligation to apply for In certain circumstances, it may be possible and / or act in breach of their duties or of the minimum coverage set out in the Portuguese insolvency proceedings without undue delay, for a managing director to obtain a statutory company’s by-laws. Directors will not be liable Companies Code. This is because the premium and at the latest within 30 days of the company indemnity from his / her own company for for a breach of their duties if they can prove for the minimum coverage has to be paid by becoming unable to settle its debts. liability incurred towards third parties. Indeed, that they acted without fault. In addition, the the director. Minimum coverage rates may vary the liability of each director must be secured by If a managing director fails to apply for business judgement rule applies in Portugal, between €50,000 and €250,000. any of the ways permitted by law. insolvency, he / she will be liable for any meaning that the decisions of the directors will This obligation of the directors may be dismissed damages caused. be treated as valid as long as the directors act This is only possible, however, if the managing by the shareholders’ meeting or by the by-laws, informedly, independently and in accordance director has not breached his / her duties to If it becomes apparent from the annual financial except where the company is listed or of a with acceptable business criteria. The period the company. statements or from a balance sheet set up in certain size. for which directors can be held liable is, as a the course of the business year that half of rule, five years following the term of the unlawful Typically, such insurance policies cover amounts the statutory share capital has been lost, a action or omission or of the occurrence of which may be payable by the directors who are shareholders’ meeting must be called and the the damage. insured because of a claim for damages made shareholders informed. against them in relation to the performance of If damage arises as a result of a decision of the Managing directors may incur both civil and their duties as directors of a company. Most management board, managing directors who are criminal liability for breach of insolvency rules. Portuguese policies, however, exclude liabilities absent or who vote against the relevant decision deriving from actions qualified as “intentionally are not liable for such decision. guilty” (doloso) and only cover negligence, thus Liability to the company’s creditors may be significantly reducing the effect of such policies incurred when a managing director acts in a in what concerns the protection of the directors. way that deprives the creditors of the return of Further, the insurance will not cover criminal or their capital. tax penalties and fines. Managing directors may also incur subsidiary liability, if, as a result of the managing director’s conduct, the company fails to fulfil its tax obligations. Furthermore, the directors are liable in general terms for damages directly caused to the shareholders and to third parties.

Linklaters A cross-border guide for group company directors > Portugal (continued) 77

Decisions and meetings Minutes Administration and accounts Relevant rules

SA Although not prescribed by law, the company’s The managing directors are required to keep due The Portuguese Companies Code (Código by-laws or internal rules of procedure often accounts and to prepare and submit the annual das Sociedades Comerciais) sets out the In an SA, board meetings should be held at least provide that minutes of a board meeting are to financial report and the management report for general duties of managing directors and their once a month, unless otherwise provided in be set out in writing. the approval of the shareholder’s meeting. responsibilities in relation to the management the company’s by-laws. Meetings are convened and external representation of the company. by the chair of the board or by two other The reports must be signed by all the acting managing directors. managing directors. A managing director can, The company’s constitutional documents however, refuse to sign all or part of the reports (such as its by-laws or any internal rules of The law does not set out a specific notice as long as an explanation for this is provided in procedure), specific resolutions and oral or period, but it states that it should be reasonable. the report and by the director in person at the written agreements between the managing The notice of meeting must be written and next shareholders meeting, even if he / she has director and the company may impose additional include an agenda, which directors must follow, already left office by then. requirements or restrictions on managing unless all directors are present or represented directors. Such arrangements, in some cases, at the meeting and agree otherwise. Usually, A managing director who has left office, but was may also override the provisions described in a majority of the directors must be present or in office during the year under review, may be this section on Portugal. represented at each board meeting and board required, if necessary, to provide information resolutions are passed by a majority vote. about such period to the shareholders’ meeting. In a situation where a company may become insolvent, its managing directors may be The managing board of an SA elects its chair, The managing directors must act to call a subject to specific provisions of the Portuguese unless the company’s by-laws provide for the shareholders’ meeting if the company’s net Insolvency Code (Código de Insolvência e da chair of the board to be elected by the general assets fall below an amount equal to one-half or Recuperação de Empresas). shareholders’ meeting. less of the share capital. Unless otherwise provided, meetings may be held by electronic means, as long as the company ensures that the means of communications used are secure. Lda. In a Lda., the managing board generally decides and acts by majority, unless the by-laws state otherwise.

Linklaters 16 Russia

Hugo Stolkin Partner, Moscow Tel: (+44) 20 7456 3394 Mob: (+44) 77 9977 2310 [email protected]

Linklaters A cross-border guide for group company directors > Russia 79

What type of company? Management structure Board composition Appointment and removal

If a Russian company is used as a subsidiary A JSC and an LLC can have up to four layers The supervisory board of a non-public JSC/LLC Supervisory board within a multinational group, the choice is of governance, including: may include any number of persons. Members of a public JSC’s supervisory board generally between a non-public joint stock >> a general meeting of shareholders (JSC) or The minimum number of directors sitting on the are elected by the shareholders on a “cumulative company (“non-public JSC”) and a limited participants (LLC), supervisory board of a public JSC is five. voting” basis for a term until the next annual liability company (“LLC”). general meeting. This means that the number >> a non-executive supervisory collective The number of executive board members is not Another, though less common, entity used of votes of each shareholder is multiplied by the management body (or “supervisory board”), fixed either for JSCs or for LLCs. as a Russian subsidiary is a public joint stock number of persons to be elected to the board. >> an executive collective management body company (“public JSC”), which is similar to a For both JSCs and LLCs, only individuals can be Each shareholder is entitled to give all its votes (or “executive board”), and UK public or a French société appointed to the supervisory or executive board. so calculated to one candidate, or to distribute anonyme. This form may be used, for example, >> an individual chief executive or CEO. them among two or more candidates. The Under recently enacted amendments, the if a Russian IPO is planned. A non-public JSC and an LLC must have a candidates with a majority of votes are elected to CEO may be both an individual and a legal general meeting and a CEO. The executive board the supervisory board. The regulation of non-public JSCs and LLCs entity and a company may have several CEOs and the supervisory board are optional and has recently been substantially aligned. acting on behalf of the company, either jointly The removal of a single director requires the re- are typically used in entities which require an Both enjoy substantial flexibility in relation to or individually. election of the whole supervisory board. additional layer of corporate control at the local corporate governance. level. A public JSC must have a general meeting, There are no general age, nationality or By default, directors of a non-public JSC are also A public JSC is, on the contrary, very heavily a specific supervisory board and a CEO. residence restrictions on directors and share elected by cumulative voting. However, the law regulated because its shares (securities ownership is neither required nor prohibited. arguably permits the establishment of any other Specific management structure requirements convertible into shares) can be publicly procedure for their election/dismissal. may also be imposed on certain industries (for Specific qualifications may be required, however, placed through an open subscription and example, banks must have all four layers of for directors in particular industry sectors, such Members of an LLC’s supervisory board are, by publicly traded. corporate governance). as banking or professional participants in the default, appointed and removed by the general securities market. meeting by a majority vote of the participants The term “directors” in this section on Russia for a term specified in the company’s charter. includes the CEO, members of the supervisory In addition, there are certain restrictions in The company’s charter may, however, require a board and members of the executive board. relation to directors simultaneously holding supermajority or establish “cumulative voting” or positions in the supervisory board and other procedures for this resolution. executive bodies. CEO and Executive Board The CEO and executive directors of any JSC/ LLC may be appointed by the general meeting or supervisory board, depending on the charter.

Linklaters A cross-border guide for group company directors > Russia (continued) 80

Powers General duties Who are the duties owed to? Dealings with company / conflicts

The executive board deals with the management A director of a JSC or LLC in the course of The law applying to both a JSC and an LLC Potential conflicts of interest must be notified of the company’s day-to-day activities, alongside exercising his / her rights and performing his expressly states that a director must exercise his by a director in the case of a JSC to the the company’s CEO, and effectively limits the / her duties must act in the interests of the / her rights and perform his / her duties in the company, and in the case of an LLC to the powers of the latter to the extent established by company and carry out such rights and duties interests of the company. company’s general participants’ meeting and the company’s charter. with regard to the company, reasonably and in supervisory board. This means the interests of that particular good faith. The supervisory board is a non-executive body company, and not the interests of its The following information should be provided: intended to control the activities of the CEO There is no statutory definition of the obligation shareholders / participants, the group or >> entities controlled by such director, his / her and executive board. The main function of the to act “reasonably and in good faith” that can be the ultimate holding company. close relatives and their controlled entities, supervisory board is to call general meetings applied to the acts of the directors. According to and to pass certain specific resolutions reserved court practice, it means taking all necessary and >> entities in whose management bodies for its competence, for example, the company’s sufficient measures to achieve the purposes for the director, his / her close relatives or significant and related party transactions. which the company has been created. their controlled entities hold management positions, and The supervisory board may create board >> details of any existing or planned transactions committees, but these will not have any in which a director may be interested. independent decision-making power. Their purpose is usually to carry out a preliminary A director is considered interested in a analysis of matters for which the supervisory transaction if such director, his / her close board is responsible and to provide relevant relative or an entity controlled by them: recommendations and proposals to the >> is a party, beneficiary, intermediary or supervisory board. representative in such transaction, The powers of the supervisory board and >> controls a legal entity that is a party, executive board are strictly limited to the issues beneficiary, intermediary or representative specified by law and the company’s charter. in such transaction, or All residual power (potentially a great deal) lies in >> is a member of any management body the hands of the CEO. of a party, beneficiary, intermediary or representative in such transaction. By default, an interested party transaction does not require a mandatory preliminary approval. However, such approval must be obtained upon demand by the company’s directors or shareholders (participants) holding at least 1% of the company’s voting shares (charter capital).

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Liability Indemnities and protections Insurance Financial difficulty and insolvency

If directors fail to disclose interests in Under Russian law, it is not possible for The company may take out and pay for Directors of a company are liable for losses transactions by the company they may be liable companies to indemnify directors against insurance for directors to cover any civil caused by their violation of the provisions of to the company for damages. liabilities they may incur as a result of carrying liability which they may incur. the Russian insolvency legislation. out the duties of a director. Administrative fines of up to RUR 30,000 can Such insurance is not, however, very typical If a company becomes insolvent because be incurred and directors can be disqualified for The Russian Civil Code expressly provides for a for the Russian market. of the acts or omissions of the directors, an up to a year for failing to: possibility of limiting the liability of directors of arbitration manager acting for the creditors, or a JSC / non-public LLC for acting unreasonably the creditors themselves, may bring an action >> call a shareholders’ meeting, (but not in bad faith). against the directors. Directors will be liable >> include certain agenda items, and for a company’s debts on insolvency only if it >> properly prepare a list of permitted attendees. is proved that the insolvency was “caused” by their actions. In this case, the liability of directors Directors may also incur criminal liability for will be secondary and will not arise unless the illegally failing to convene a shareholders’ creditors’ claims cannot be satisfied out of the meeting or preventing the free exercise of voting company’s property. rights at a meeting of shareholders or the board. The law also establishes administrative and Specific liabilities which may be incurred criminal liability for: where directors fail to comply with insolvency legislation are described in “Financial difficulty >> premeditated bankruptcy, where directors and insolvency”. have intentionally acted in a way which makes the company unable to perform its If more than one director is liable in respect monetary obligations in full, of a particular act or matter, the liability of all directors will be joint and several. >> fictitious bankruptcy, where directors make a deliberately false declaration of bankruptcy, and >> unlawful actions on insolvency, including the concealing, transferring to others, disposing of and destruction of property and information. It should be noted that, in practice, liability for causing bankruptcy, as well as liability for premeditated and fictitious bankruptcy, is more likely to be imposed on the company’s CEO than on the members of the supervisory or executive board.

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Decisions and meetings Minutes Administration and accounts Relevant rules

JSC (supervisory board) Minutes of the meetings of the JSC supervisory JSC The key rules governing JSCs and LLCs board and executive board must be in writing are established by the Russian Civil Code, Resolutions of the JSC’s supervisory board are The general meeting is responsible for approving in the Russian language and must be kept at federal laws on JSCs and LLCs and certain generally passed by a simple majority of votes, the company’s accounts. The supervisory the location of the company’s CEO. They do not subordinate legislation. although there are exceptions set out by law. board carries out the preliminary approval of the need to be registered, published or notarised. The charter may also require a supermajority annual accounts prior to their approval by the These rules may be expanded by the company’s of votes for specific resolutions and provide for general meeting. charter and by-laws. the chair of the board to have a casting vote. The supervisory board of a JSC is also In general, JSCs are subject to stricter rules than A director cannot delegate the right to vote at a responsible for calling annual and extraordinary LLCs. This is primarily due to the fact that they board meeting to any other person, even if they general meetings, approving the agenda of the are subject to the provisions of the securities are also directors. general meetings, fixing the date for compiling a legislation and, in particular, to regulations of the Board meetings are convened by the chair of list of persons who have the right to participate Russian Central Bank (“CBR”), whereas only the board at his / her own discretion or at the in a general meeting and certain other matters those LLCs which have issued “issue securities” request of any director, the auditing committee, relating to the convening and holding of such (such as bonds) are affected by the relevant the external auditor, the CEO or any other meetings. statutory provisions. persons provided for by the charter. The quorum LLC It should be noted that the CBR can impose for the meeting is established by the charter and additional requirements on JSCs (but not may not be less than half of all directors. The law does not specifically set out directors’ on LLCs) which do not necessarily relate to duties regarding the administration of the Directors may take part in meetings by securities, such as procedures for convening company and its accounts. The extent of conference call / video-conference if permitted general shareholders’ meetings. their duties will, therefore, depend on the to do so by the charter. responsibilities of the board, as set out in the LLC (supervisory board) company’s charter. The decision-making process of the supervisory board of an LLC is not regulated by law. The necessary procedures should be set out in the charter. JSC and LLC (executive board) As in the case of the LLC’s supervisory board, provisions regarding decisions and meetings of the company’s executive board are established by the charter.

Linklaters 17 Singapore

William Kirschner Partner, Singapore Tel: (+65) 6692 5758 Mob: (+65) 9751 3200 [email protected]

Sophie Mathur Partner, Singapore Tel: (+65) 6692 5703 Mob: (+65) 9657 3882 [email protected]

Parthiv Rishi Partner, Singapore Tel: (+65) 6692 5866 Mob: (+65) 9734 3011 [email protected]

Kwok Hon Yee Senior Associate, Singapore Tel: (+65) 6692 5884 Mob: (+65) 9645 8422 [email protected]

Linklaters A cross-border guide for group company directors > Singapore 84

What type of company? Management structure Board composition Appointment and removal

In Singapore, subsidiaries within a group are Each company is governed by a board of Every company must have at least one director The procedures for appointing and removing most likely to be private limited companies. directors. There is no supervisory board. who is ordinarily resident in Singapore. Where directors are generally set out in the company’s the company only has one member, that sole constitution. Subject to the company’s Any person occupying the position of director of member may also be the sole director of the constitution, shareholders of a private company a corporation is treated as a director, regardless company. may appoint directors by majority vote. The of the title such person is given. board of directors usually also has the power Only individuals who are aged at least 18 years Directors also include: to appoint additional directors. and have full legal capacity can be appointed as >> persons in accordance with whose directions directors of a company. Subject to the company’s constitution, or instructions the majority of the directors of shareholders can remove directors by Undischarged bankrupts may not be appointed a corporation are accustomed to act, and majority vote. as directors or be directly or indirectly concerned >> any alternate or substitute directors appointed with the management of the company. This No specific term of office is provided for by law, by the existing directors. restriction applies whether they were adjudged although this may be set out in the constitution. To enhance the transparency of companies in bankrupt by a Singapore court or by a In practice, most private companies have Singapore, the Companies Act is being amended foreign court. tailored constitutions which do not require so that companies are required to maintain a The constitution may provide that directors must directors to retire from office each year. If register of nominee directors which will include hold a prescribed number of shares. In this Singapore’s default private company constitution information on nominee directors and the case, the director should obtain these shares applies, at the first annual general meeting of the person for whom a director is a nominee. The within two months of appointment or such company, all the directors of a company must register will only be accessible to Singapore law shorter period as is set out in the constitution. retire from office and, at the annual general enforcement agencies and not to the public. The relevant director must also vacate his / her meeting in every subsequent year, one-third office if he / she ceases to hold the specified must retire from office. Retiring directors are number of shares and the shares must be held eligible for re-election by shareholders. by the director alone and not as one of several joint holders. A director can be appointed to several companies in the same group. However, if he / she is an employment pass holder, approval from the Ministry of Manpower must be obtained if he / she is to be appointed director of a company which is not the employing entity. A person with multiple directorships must avoid conflicts of interest.

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Powers General duties Who are the duties owed to? Dealings with company / conflicts

The business of a company is managed by Directors must at all times act honestly and use As a general rule, directors owe their duties A limited company must keep a register of each or under the direction or supervision of the reasonable diligence in the discharge of their to the company, that is, the shareholders of director’s interests in shares in the company or directors. The directors may, therefore, exercise duties as directors. the company collectively and not individual in related corporations (unless these are wholly- all the powers of the company, except any power members of the company. owned subsidiaries). Directors shall not make improper use of their that the law or the constitution of the company position as officers of the company or of any In exercising their powers, directors are entitled Directors have a duty to avoid conflicts of requires the shareholders to exercise in general information acquired by virtue of their position to have regard to the interests of the company’s interests. Certain specific conflicts (such as meeting. as directors to gain an advantage (directly or employees generally, as well as the interests of the granting of loans to directors, payments It is possible for directors to delegate their indirectly) for themselves or for someone else or its members. for loss of office and concerning directors’ powers to other directors, committees and non- to cause detriment to the company. fees / emoluments) are prohibited and require Where the company is insolvent, the directors directors, such as employees. The constitution shareholder approval. A director is regarded as a fiduciary of a need to take into account the interests of the usually provides for the delegation of powers company and, accordingly, he / she is bound creditors of the company when exercising Direct or indirect interests in transactions or to committees. The board, however, remains to observe all fiduciary duties imposed by the their powers. proposed transactions with the company must responsible for exercising proper supervision common law. be disclosed to the board. Directors must also and managerial control over the company. declare any office or property which may lead The fiduciary duties mean that directors should: In the absence of bad faith or fraud, the acts of to a conflict of interest. The rules extend to the directors remain valid, notwithstanding any >> act in what they honestly believe are the interests of the director’s family. defect that may afterwards be discovered in the company’s best interests, Where the board waives a conflict in advance, appointment of such directors. >> avoid placing themselves in a position of this must be recorded in the meeting conflict between their duty to the company minutes. Disclosure must also be made to the and their personal interests, and shareholders in general meeting, although the >> exercise for proper purposes the powers and constitution may waive this requirement. assets with which they have been entrusted. A failure to disclose interests means that directors, if convicted, may have to pay a fine not exceeding SGD 5,000 or be jailed for up to 12 months. The company may also have the option of voiding the relevant transaction and directors may have to account for any profits made.

Linklaters A cross-border guide for group company directors > Singapore (continued) 86

Liability Indemnities and protections Insurance Financial difficulty and insolvency

If a director fails to carry out the statutory A company cannot, in the constitution or in any The law does not prohibit a company from Aside from their general powers to disqualify obligations imposed on him / her, he / she contract with a company or otherwise, exempt purchasing directors’ and officers’ liability persons convicted for certain offences, the may be criminally liable and subject to a jail its directors from, or indemnify them against, insurance for its directors against any liability Singapore courts may disqualify a person from sentence and / or a substantial fine. Less serious any liability which by law would otherwise attach which would otherwise attach to them in respect being a director or in any way taking part in offences carry a fine only, sometimes coupled to them in respect of any negligence, default, of any negligence, default, breach of duty or the management of a company for up to five with a default penalty. For example, directors breach of duty or breach of trust in relation breach of trust in relation to the company. years if that person was a director of a company who breach their duties to act honestly and use to the company. Companies can, however, which went into liquidation while he / she was a It is common practice for a company to arrange reasonable diligence in the discharge of their indemnify directors against liability which the director or within three years of ceasing to be a for directors’ and officers’ liability insurance for duties to the company are liable to the company directors may incur in defending civil or criminal director and his / her conduct as director makes its directors. for any profit made or for any damage suffered proceedings where judgment is given in their him / her unfit to manage a company. by the company as a result, as well as liable on favour or where the court decides to grant In deciding whether a person’s conduct as a conviction to a fine not exceeding SGD 5,000 or them relief. director makes that person unfit to manage to imprisonment for up to 12 months. The shareholders may also by majority vote a company, the court will take into account: In addition to being criminally liable, directors release directors from their duties and excuse >> breaches of duties to the company, who breach their fiduciary duties or wilfully them from liability for breach of such duties. Any breach statutory provisions (for example, by such release means that the company may not >> misapplication or retention of company paying a dividend otherwise than out of profits or subsequently sue the director. The release is property, allowing a company to incur obligations which it only effective, however, where: >> the director’s responsibility for any failure by cannot meet as the company is insolvent) may the company to comply with its obligations >> it does not amount to fraud on the minority, also be liable to the company or to third parties to keep registers, make filings and produce or oppression or disregard of interests of the for losses incurred. The company may take accounts, minority shareholders, action against the directors for such breaches. >> the director’s responsibility for the company >> the transaction which the members are becoming insolvent, Since, as a general rule, directors do not owe ratifying is not illegal, fiduciary duties to the members, members >> the director’s responsibility for failures by the >> the release is not made on fraudulent or cannot sue the directors to enforce the company to supply goods or services which incomplete facts, and company’s rights, except by a derivative action. have been paid for, >> the company is solvent at the time of A member whose interests are affected by the >> the director’s responsibility for the company the release. director’s conduct may, however, apply for an entering into any transaction to dispose injunction to restrain the director from engaging The Singapore court may also relieve a director the property of the company after the in such conduct. from proceedings or anticipated proceedings for commencement of the winding-up, and negligence, default, breach of duty or breach >> whether the causes of the company of trust. becoming insolvent are attributable to its carrying on business in a particular industry where the risk of insolvency is generally recognised to be higher.

Linklaters A cross-border guide for group company directors > Singapore (continued) 87

Decisions and meetings Minutes Administration and accounts Relevant rules

The law does not dictate how the board The law requires every company to cause The directors have a duty to ensure that the The rules which are relevant to directors are should regulate its meetings and, therefore, minutes of all board meetings and written company’s accounts are properly prepared. In set out in Chapter 50 of the Companies Act of this is typically set out in the constitution. It is resolutions to be entered in the minute books addition, they must take all reasonable steps Singapore. In addition, common law rules on possible, and common, for directors to pass of the company within one month of the to ensure that statutory provisions regarding directors, to the extent that they have not been written resolutions and to attend meetings meeting being held or the written resolution accounts are complied with by the company. codified in, or are not inconsistent with, the via telephone or video-conference, as these being passed. Companies Act, are also applicable. The directors are required to present at the are typically expressly provided for in the Minutes of board meetings must be signed by annual general meeting of the company a profit The Companies Act does not dictate how constitution. Sole directors make decisions by the chair of the relevant meeting (or the chair of and loss account and a balance sheet, as well the board of directors should be organised, signing a declaration in line with the law. If the the following meeting). as a directors’ statement. The accounts should hence the structure and organisation of the constitution does not require prior notice of cover the period since the preceding accounts board of directors of a company (such as the meetings to be given, it is not necessary to do There is no specific period for which the were laid and not more than six months before composition of the board and the regulation of so. Under Singapore’s default private company minutes must be kept. the date of the meeting. board meetings) are usually provided for in the constitution, the board can regulate the constitution of that company. frequency of its meetings as it sees fit. Decisions The Companies Act is being amended so that are taken by majority vote, with the chair having private companies will be exempt from holding There is a default model constitution issued a casting vote. The quorum for a meeting is two annual general meetings as long as they send under the Companies Act which a company directors, unless otherwise fixed. financial statements to members not later than can adopt. In practice, it is more common five months after the end of the financial year to for companies to be governed by a tailored The default constitution does not allow the which the financial statements relate. constitution prepared by their legal advisers. votes of directors with a personal interest in a contract, or proposed contract, with the The law imposes numerous obligations on the company to be counted. In practice, a private directors to maintain statutory registers and company’s constitution typically allows directors prepare, file or distribute various documents or to vote on transactions in which they are returns with the Registrar of Companies or to the interested and count in the quorum for such company’s shareholders. meetings, provided they disclose their interests It is generally an offence for directors to fail to in the transaction / proposed transaction / comply with these statutory obligations. other office / property held which may create a conflict. The Singapore Institute of Directors has, however, stated that it is good practice for conflicted directors to refrain from voting on conflict-related matters, even if there is no such prohibition. Case law also suggests that, if conflicted directors take part in a decision, the transaction’s validity may be “impaired”.

Linklaters 18 South Africa

Charl Jonker Partner, Webber Wentzel, Johannesburg Tel: (+27) 11 530 5800 [email protected]

Simone Gouws Senior Associate, Webber Wentzel, Johannebsurg Tel: (+27) 11 530 5008 [email protected]

Linklaters A cross-border guide for group company directors > South Africa 89

What type of company? Management structure Board composition Appointment and removal

In South Africa, subsidiaries within a group are South African companies are managed by A private company must have at least one The first directors are the incorporators of the most likely to be private companies. A private a single board of directors. The board has director. The memorandum of incorporation company. Thereafter, the directors are appointed company’s memorandum of incorporation must the authority to exercise all company powers may specify a greater number. or elected in accordance with the company’s prohibit it from offering any of its securities and functions unless legislation or the memorandum of incorporation, provided that Any natural person over the age of 18 can be to the public and must restrict the transfer of company’s memorandum of incorporation at least 50% of the directors must be elected appointed as a director, unless they are: its securities. provides otherwise. by shareholders. >> prohibited by a court or any public regulation, Executive directors are involved in managing The memorandum of incorporation may provide or declared a delinquent by a court, the company and may also be employed by for the direct appointment of a specified person the company. A non-executive director is not >> an unrehabilitated insolvent, or for a person to be a director due to holding a involved in the day-to-day management and is >> removed from an office of trust for particular office or title. also not a full-time employee of the company. misconduct or dishonesty, On appointment or election, details about the The law does not distinguish between executive >> convicted and imprisoned, or fined over director will be entered into the company’s and non-executive directors and decisions must R1,000, for offences involving theft or record of directors which is available for be taken by the board acting collectively. dishonesty, or offences under other South inspection by the shareholders and the public. African legislation, or These details include: the director’s name and Persons who occupy the position of a director >> the auditor of the company. any former names, identity or passport number but are not designated as such will be treated and nationality. Details of the appointment must as directors. Additionally, persons exercising Directors are not required to have specific also be notified to the South African Companies significant control and management, despite qualifications unless imposed by the and Intellectual Property Commission. not being a director, have the same duties as memorandum of incorporation. There are no directors in some respects (for example, in share ownership requirements, or nationality or Shareholders may remove a director by relation to the disclosure of personal financial residency restrictions. majority vote (ordinary resolution). For private interests and standards of conduct). companies, the default position is for notice to A director may serve as a director of several be given to the shareholders and the director companies in the same group, although concerned at least ten business days before the directors should avoid conflicts of interest. meeting. The memorandum of incorporation may alter this, however. Directors may serve indefinitely or for a term set out in the memorandum of incorporation (typically three years).

Linklaters A cross-border guide for group company directors > South Africa (continued) 90

Powers General duties Who are the duties owed to? Dealings with company / conflicts

Generally, the board is given wide powers The duties of directors are determined by Directors’ fiduciary duties are owed to A director may not use his / her position of to manage the company and to delegate to common law, legislation, the company’s the company and not to the company’s director or any information obtained in that others. The South African Companies Act memorandum of incorporation and any shareholders, or to the group to which the position to gain an advantage or to cause harm 2008 and the memorandum of incorporation contracts with the company. company may belong. to the company. may, however, limit the powers of the Fiduciary duties of directors include, amongst It is important to bear this in mind, in particular, A director must also not place him / herself in directors in relation to certain actions (such as others, the duty to: where a director is also a director of another a position where he / she has or may have a amending the authorised share capital, issuing company within the group, or has been personal interest conflicting with his / her duty to shares, reclassifying shares and authorising >> act in good faith and for a proper purpose, nominated by a specific shareholder. the company. Directors must disclose conflicts financial assistance). >> not exceed a director’s own or the of interest when contracting with the company. If Directors may only sanction a company from The directors must exercise their powers and company’s powers, the director fails to make the required disclosure, incurring debt if the company is in a position take decisions collectively as a board. This >> act in the best interests of the company, the contract is voidable against him / her. to repay the debts in question. As such, the means that where the law requires or allows >> account for profits, and directors have a duty (whether it be directly If a director has a personal financial interest directors to do certain things, such as calling >> exercise an independent and or indirectly) to take creditors’ interests into or knows that a related person has a personal a general meeting of the shareholders, issuing unfettered discretion. account. Additionally, where a company is financial interest, he / she must disclose that shares or authorising the company to provide in business rescue proceedings (which are interest to the board and recuse him / herself financial assistance, such actions should A director must exercise the necessary skill specified statutory proceedings to facilitate the from voting on the matter. If a director fails to usually be approved by the board and not by a and diligence in performing his / her duties. rehabilitation of a company that is financially do so, he / she may be liable for breach of his sole director. This depends on the nature of the business, distressed), the directors have a duty to the / her fiduciary duties or statutory obligations. the obligations on that director and the degree Directors can, however, act individually where company to exercise any management function The decision of the board or the agreement of skill that could reasonably be expected of a specific powers and functions have been within the company in accordance with the approved by the board will be invalid if the person with the director’s knowledge, skill and delegated to them by the board, for example, express instructions or directions of the director fails to comply with his / her obligations. experience. so that one director can act as chief executive appointed business rescue practitioner. The shareholders or the court may, however, officer or managing director of the company. Other statutory duties include the duty: ratify such decision or agreement. It is also common for the board to delegate >> not to use the position of director to gain Certain transactions between a company and specific powers and functions to committees, a personal advantage, its directors must be approved by shareholders. officers, agents and the company secretary. >> to disclose any material information, and These include loans, guarantees and security. The directors remain responsible, however, >> to avoid conflicts of interest. and are not absolved from their own duties. The board should, therefore, set up systems to supervise those acting under their authority.

Linklaters A cross-border guide for group company directors > South Africa (continued) 91

Liability Indemnities and protections Insurance Financial difficulty and insolvency

If a director breaches his / her duties to the The provisions of a memorandum of A company may purchase insurance to protect Directors have a duty to acquaint themselves company, he / she may be held personally incorporation or any other agreement with the a director against any liability or expenses for with the financial position of the company. liable for losses or damages caused to the company seeking to relieve a director from his / which the company is permitted by law to Directors should not irresponsibly incur debts company. A director may also be liable in delict her duties or from liability for breach of his / her indemnify a director. A company may also take and liabilities, particularly if the company is in if he / she failed to perform his / her functions duties to the company are void. out insurance to protect itself against any liability a near insolvency situation. as director with due care, skill and diligence. for which it is permitted to indemnify a director. A company can, however, indemnify a director Further remedies against a director for breach Directors are personally liable for loss, damages in respect of any liability to both the company A director may also, in his / her personal of his / her duties include interdict, the right to and costs sustained by the company where and third parties, except for liability for wilful capacity, purchase insurance for an set aside agreements concluded in breach of they engage in reckless or fraudulent conduct misconduct or wilful breach of trust, lack of indemnifiable event. duties, the right to claim the profit or benefit of the company’s affairs. It is also an offence authority or carrying on the company’s business arising from the breach and damages. If there for a director to participate in reckless or in a fraudulent manner. is an employment contract between the director fraudulent trading. and the company, he / she may also be liable for A company can also indemnify or make an A shareholder is able to apply for the winding-up breach of contract. advance to a director for expenses incurred in of the company if the directors are acting in a defending any litigation against the director. The Any person (this includes the company and fraudulent or illegal manner or if the company’s director is not required to repay such expenses any shareholder) who has suffered a loss or assets are being misapplied or wasted. if the proceedings are abandoned or absolve the damage as a result of a breach by a director director or arise in respect of a liability for which of his / her duties, provisions of the company’s the company may indemnify the director. memorandum of incorporation and other provisions in the South African Companies Act A company cannot pay any fines imposed on a 2008 may bring a claim against a director. director who has been convicted of an offence in terms of any national legislation. It is a criminal offence for a director to be party to fraudulent activities or to sign or authorise financial information containing false statements. The court has the power to relieve the director from any liability if it appears to the court that the director acted honestly and reasonably and it would be fair, having regard to all the circumstances, to excuse the director.

Linklaters A cross-border guide for group company directors > South Africa (continued) 92

Decisions and meetings Minutes Administration and accounts Relevant rules

Legislation sets out the default procedure in A company must keep minutes of all meetings The law grants the directors the power to The South African Companies Act 2008 and the relation to meetings of directors, however, the of the directors. manage the business and affairs of the company Companies Regulations 2011 set out the duties memorandum of incorporation may alter the subject to the provisions of the company’s of directors and their responsibilities in relation There is no set form for directors’ minutes. default position. memorandum of incorporation. to their service to the company. The minutes must, however, be kept in writing Meetings may be conducted by electronic and must include any declaration of personal Directors must approve matters such as the: The directors’ general duties and liability are also communication as long as it enables effective financial interest made by a director (see governed by South African common law that >> issue of shares, participation, and decisions may be adopted by “Dealings with company / conflicts”) and every must be read in conjunction with the Companies written resolution instead of at a board meeting, resolution adopted by the directors. >> provision of financial assistance to directors Act 2008. unless the memorandum of incorporation or to certain persons acquiring shares in the The minutes must be signed by the chair of The company’s memorandum of incorporation provides otherwise. company, the meeting or by the chair of the next meeting may contain provisions imposing additional >> distribution of dividends, and Generally, any authorised director may call a of the directors. The signed minutes serve obligations on the directors or restricting the board meeting. Notice of a meeting must usually the purpose of verifying the business that was >> acquisition by the company of its own shares. directors’ powers or delegating their powers. be given to all directors. There are no minimum adopted by the directors. Directors have access to the financials and The memorandum of incorporation may notice requirements and the board may accounts of the company. not, however, negate or limit the duties of A company must retain the minutes of all determine the manner of giving notice, provided the directors. meetings of the directors for seven years after Annual financial statements must include a it complies with any requirements under the the date of each meeting or on which each report by the directors on the state of affairs, If a company faces financial difficulties, the memorandum of incorporation. resolution was adopted (if it was adopted business and profit and loss of the company. It provisions of the repealed Companies Act 1973 The quorum for a board meeting is generally in writing). must be approved by the board and signed by in relation to winding-up and liquidation of a majority of the directors, however, the an authorised director. companies continue to apply until further notice Minutes of the directors’ meetings are not memorandum of incorporation may specify a from the legislature. accessible for inspection by shareholders of Directors are liable to the company for any false different quorum. the company unless the memorandum of or misleading statement or information in the Generally, each director has one vote, however, incorporation of the company permits it. financial statements of the company if they knew the memorandum of incorporation may alter that the statement was false or misleading. this and provide that each director has an equivalent number or percentage of votes as that of the shareholder who nominated such director. Decisions are usually taken by majority vote unless altered by the memorandum of incorporation. The chair of the board, who will usually be elected by the other directors, is often given a casting vote to be used when votes for and against a resolution are equal.

Linklaters 19 Spain

Alejandro Ortiz Partner, Madrid Tel: (+34) 91 399 61 40 Mob: (+34) 68 746 73 84 [email protected]

Victor Manchado Partner, Madrid Tel: (+34) 91 399 61 63 Mob: (+34) 66 745 14 34 [email protected]

Linklaters A cross-border guide for group company directors > Spain 94

What type of company? Management structure Board composition Appointment and removal

In Spain, a subsidiary company is most likely to The management of a company can be In principle, unless the company’s articles of Directors are ordinarily appointed by the be a (Sociedad Anónima entrusted to: association set out any particular restrictions, shareholders in general meeting (or by the sole or “SA”) or a private limited liability company any person over the age of 18 can be appointed shareholder, as the case may be) and can be >> a sole director, (Sociedad de Responsabilidad Limitada or “SL”). as a director. Certain people cannot, however, freely removed by them at any time, according >> two or more directors, acting jointly, act as directors because of misconduct or to the voting majorities set out in the law and / or An SA is required if the company will be listed or >> two or more directors, acting separately, or bankruptcy or because they hold a position the articles. will issue any kind of securities. The SA is also (meaning certain public offices) which is the required form if the company is to carry on >> a board of directors (made up of a minimum In SA companies, when there is a vacancy, considered incompatible with carrying out the certain regulated activities (for example, banking of three members), acting collectively. directors can be also appointed by the board duties of a director. or insurance services). Where there is a board of directors, all or part itself. The appointment of any such director of the board’s authority can be delegated to Directors are not required to have specific (who needs to be a shareholder) must be ratified The SL has a more flexible legal framework. one or more of the board members (save for qualifications and there are no nationality by the shareholders at the next general meeting. In this section on Spain, references to the those powers and authorities which cannot or residency restrictions or share ownership It is customary to include the term of company include both SAs and SLs, unless be delegated by law or under the articles of requirements (unless otherwise provided in the appointment of the directors in the company’s otherwise stated. association). These are usually referred to as company’s articles of association). Directors articles of association. Such term shall not the Managing Director(s) or the Managing not resident in Spain must, however, obtain exceed six years for an SA. Directors can, Committee (acting collectively). a Foreign Resident Card Number (Número however, be re-appointed for further terms. de Identificación de Extranjero) before being Persons who have not been formally appointed appointed as directors. There are no time limits on the appointment of as directors, but in fact have major influence directors of SL companies. over the actual directors and effectively control It is possible to serve as a director of several the company (in certain cases, outwardly companies in the same group, although, where appearing as the actual directors), will be treated there is a conflict of interests, the affected as directors under the law for the purpose of director(s) cannot participate in or vote on potentially incurring civil and criminal liabilities. any decision related to such transaction (see “Dealings with company / conflicts”) Corporations can act as directors, but they must nominate an individual to represent them (who, in turn, will be jointly and severally responsible with the corporation). If an employee of the company is to be appointed as a director, specific advice should be taken on any employment law issues which may arise.

Linklaters A cross-border guide for group company directors > Spain (continued) 95

Powers General duties Who are the duties owed to? Dealings with company / conflicts

As a general rule, the directors have authority to Directors must comply with general duties set Directors owe their duties to the company and Directors must abstain from discussions and manage and represent the company and to deal out by law. These include a duty on directors to must act in the best interests of the company. voting on resolutions or decisions in which a with any matters which are not reserved for the carry out their role with the diligence expected director or a related party has a direct or indirect This is generally understood to be the shared decision of the shareholders by the company’s from an orderly businessman. This means conflict of interest. This obligation excludes interests of all the shareholders, taken as a articles or by law (such as the approval of the directors should act with due care, attention decisions that affect directors in their capacity whole, and not the interests of only one, or annual accounts, appointment and removal of and prudence. as such (for instance, board appointments or some, of the shareholders or the directors’ the directors, amendments of the articles and removals or similar decisions). Directors also have a duty to act as loyal own interests. increases and decreases in capital). representatives in the best interests of the In addition, directors must take the necessary The standard of due care will be deemed to Third parties who deal with the company in company. This means that, where there is a steps to avoid situations where their interests have been fulfilled when the directors have good faith are entitled to rely on the acts of conflict between the interests of the director and may come into conflict with the company’s acted in good faith, without any personal the directors. They may also be able to rely those of the company, the director must put the interests and with their duties to the company. interest in the subject of the decision, with on those who appear to have authority to bind company’s interests ahead of his / her own (see This means that directors must refrain from sufficient information and in accordance with the company. “Dealings with company / conflicts”). carrying on transactions with the company or an appropriate decision-making procedure taking advantage of business opportunities that Directors are also required to comply with the (the “business judgement rule”). belong to the company (for their benefit or for duty of secrecy, safeguarding all confidential the benefit of any related party). information to which they have access in their position, even after they leave office. Directors are required to notify the other directors and the company’s management

body (and where there is a sole director, the shareholders) of any direct or indirect potential conflict of interest in which they or any related party may be involved. Any such conflicts of interest or related party transactions must be published in the annual report included in the company’s annual accounts.

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Liability Indemnities and protections Insurance Financial difficulty and insolvency

As a general rule, directors are jointly and Generally speaking, it is not possible for a It is common for large companies to take out Specific obligations arise in cases of financial severally liable to the company, the shareholders company to exempt a director from legal liability. directors’ and officers’ liability insurance for the difficulty and appropriate legal advice should and third parties (including the company’s benefit of the directors. be taken. Directors will not be liable for damages caused creditors) for any damages caused by breaches if they can prove that they did not participate in Policies are usually taken out to cover all the Directors must call a shareholders’ meeting to of the law, the company’s articles or their the approval or execution of the decision causing directors as a group and not individually. decide on a share capital increase or decrease duties as directors. De facto directors and the the damage and were not aware of it. It is also a Premiums are usually paid by the company. (for SA companies only) or to wind-up the most senior executive (if there is no managing defence for directors to show that, even though company if losses have reduced the company’s director) are subject to liability as well. The insurance protects the director’s personal they were aware of such decision, they took net worth below certain thresholds. If the assets if claims are made against him / her. Breaching the duty of loyalty (conflicts every available measure to avoid the damage, or company is insolvent, the directors must request Legal costs and any sums that have to be paid of interest) entitles the company to ask at least expressly opposed it. the start of insolvency proceedings. are also usually covered. for damages and for unfair enrichment The authorisation or ratification by the In a winding-up scenario, if the shareholders’ compensations. The cover provided will protect against wrongful shareholders of acts of the directors which led meeting is not held or the shareholders fail to acts (actuaciones culposas) carried out by the Directors may also incur criminal liability for to damage having been caused does not release pass the appropriate resolutions, the directors director. It will not, however, protect directors crimes arising out of their duties as directors, as the directors from liability. must apply for the judicial winding-up of the from acts carried out in bad faith, wilful defined by the Spanish Criminal Code. These company. This should be done within two misconduct or any criminal liability incurred by include the falsification of company information, months of the date on which the meeting should the director. the adoption of harmful or abusive agreements have been held or on which the resolution or fraudulent management. was not adopted, as the case may be. Failure to do so means that the directors in breach incur joint and several liability for all the company’s obligations which arise after the legal requirement to wind-up the company was met. In addition, when directors have generated or increased the insolvency with malicious intent or gross negligence, they could be ordered to pay, from their own assets, a portion or all of the outstanding debts following the liquidation of the company.

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Decisions and meetings Minutes Administration and accounts Relevant rules

Where the company is run by a board of The law requires companies to keep minutes of The directors are responsible for the The Companies Act 2010 (Ley de Sociedades de directors, the articles will normally set out how all meetings and decisions of the directors. management of the company. Capital) sets out the general duties of directors meetings of the board are to be convened and and their specific responsibilities for managing Minutes must be in the Spanish language The directors must ensure adequate accounting decisions made. The articles may also allow for an SA or an SL. and should comply with the requirements records are kept and annual accounts are written resolutions without a physical meeting established by law. These include making prepared, as well as carry out any public filings In addition, the Insolvency Law 2003 sets out a needing to be held, as long as no director reference, among other things, to the names required by law. specific regime for the obligations and liabilities opposes this procedure. of the attendees, the date, place and time of of directors of companies in financial difficulty. In addition, the directors must prepare a Notice of a board meeting must be sent to the meeting, the business transacted and the directors’ report for each financial year. Both the The company’s articles of association may all directors (unless it is a universal meeting decisions adopted. annual report and accounts must be drawn up impose additional requirements or restrictions with all directors attending). Meetings can be Depending on the decisions adopted, such by the board and submitted to the shareholders’ on directors. Directors should, therefore, convened by the chair of the board or by a third minutes must be formalised in a public deed meeting for approval. make themselves aware of and comply with of its members if the chair refuses to convene a granted in front of a notary and registered with the provisions in their company’s articles meeting on request and without reason. There the Commercial Registry. of association. is no minimum notice requirement, as long as reasonable notice is given. A meeting of the board will usually be quorate if a majority of the directors attend the meeting. A higher quorum may be stated in the company’s articles, although the articles cannot stipulate that all members of the board must attend. Each director has one vote. Usually, each decision of the board will be adopted by a majority of the votes of the directors present / represented at the meeting. The articles may give the chair of the board a casting vote to be used when the votes for and against a resolution are equal.

Linklaters 20 Sweden

Elisabet Lundgren Partner, Stockholm Tel: (+46) 8 665 67 77 Mob: (+46) 70 326 67 77 [email protected]

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What type of company? Management structure Board composition Appointment and removal

In Sweden, a subsidiary company is most Swedish companies are governed by a single Private limited companies must have at least The board of directors is appointed by the likely to be a board of directors. one director. If the board has three directors shareholders at the general meeting, usually (privat ). or less, at least one alternate director must by a majority vote. The articles of association If the board has more than one member, one be appointed. The number of directors and may also provide for one or more directors director must be appointed as chair to preside alternates or maximum and minimum numbers to be appointed by a third party or by a over the work of the board and ensure that it of directors and alternates must be set out in the particular shareholder. performs its duties. company’s articles of association. The right to appoint members cannot There is no specific legislation concerning the In companies with at least 25 employees, be delegated to the board or to an liability of a person who acts as director without the employees are entitled to have two individual director. having been formally appointed to this role. It representatives on the board and one alternate should be assumed, however, that a person will Employee representatives on the board are for each such representative. In companies not be able to escape from liability by not being appointed by a local union that is bound with at least 1,000 employees, the employees formally appointed as a director if he / she in by a collective bargaining agreement with are entitled to three representatives and three practice carries out the role of a director. the company. alternates. Exemptions from this mandatory rule Further, the law does not permit a person to be may be granted in particular circumstances. Directors may at any time resign or be removed appointed as director if such person does not Employee representatives have the same by the person who appointed them. A change intend to participate in performing the duties obligations and responsibilities as other in the composition of the board does not take of the board, unless there is an acceptable members of the board. effect, however, until the Swedish Companies reason for this. This restriction aims to prevent Registration Office (Bolagsverket) has received The following cannot be directors: non-physical companies being used for criminal activity. notification of the change. persons (such as companies), minors, persons It does not prevent directors from acting in a under guardianship, persons subject to a ban The term of office for a board member is until supervisory rather than an executive role in on trading and persons who are bankrupt. In the close of the first annual general meeting held the company. addition, only those who plan to take part in after the year in which the board member was the activities of the board may be appointed as appointed. A longer period may, however, be set directors (see “Management structure”). out in the articles of association. The maximum period is four years. At least half the board must be domiciled within the EEA, unless otherwise permitted by the Swedish Companies Registration Office (Bolagsverket).

Linklaters A cross-border guide for group company directors > Sweden (continued) 100

Powers General duties Who are the duties owed to? Dealings with company / conflicts

The board of directors has the power to organise Directors must perform their duties with Directors owe their duties to the company and A director cannot deal with any agreement or the company and manage its affairs. care and loyalty and in the best interests of not to the company’s shareholders. legal proceeding between the company and: the company. The board may delegate certain duties to one It is especially important to bear this in mind >> the director, or more directors or to other persons, but must The directors also have an obligation to where a director has been appointed by a >> a third party, where the director has a act with care and regularly monitor that the individual shareholders, the company’s creditors particular shareholder and where conflicts of material interest which conflicts with that of delegation can be maintained. and other third parties to act in accordance interest may arise. the company, or with the Swedish Companies Act, the Swedish The allocation of work between directors, if The directors also have general obligations to >> a legal person, which the director, alone or Annual Reports Act, certain other regulations any, must be set out in the board’s rules of shareholders and to other third parties, including together with another, may represent. and / or the articles of association. procedure. These rules must be adopted each an obligation to treat all shareholders fairly and The conflict of interest rules mean that the year to govern the work of the board. This means, for instance, that the board may equally (see “General duties”). director may not even be present in the room not make a resolution that is likely to provide an The board may also appoint a managing director when the matter is discussed. undue advantage to one shareholder or another to take care of the day-to-day management of person to the detriment of another shareholder. These rules do not apply, however, if the director the company in accordance with the guidelines is the only, direct or indirect, shareholder of the and instructions issued by the board. The company or if the agreements are made intra- allocation of work between the board of directors group. The restrictions in the second and third and the managing director should be set out in bullet points may also be set aside where all written instructions. shareholders agree. The board of directors may authorise a board As a general rule, a decision made in violation member, the managing director or any other of the conflict of interest provisions is void. If person to represent the company and sign its the decision concerns an agreement with a name (this is referred to as a special company third party, the agreement is void if the third signatory). Such authorisation does not, party acted in bad faith with regard to the however, delegate any management rights to conflicting interest. the special company signatory. The Swedish Companies Act also prohibits companies from making loans to persons closely related to the company, including the directors and their family members. To intentionally violate this prohibition is a criminal offence.

Linklaters A cross-border guide for group company directors > Sweden (continued) 101

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Directors may become personally liable to At each annual general meeting, the It is possible for private limited companies to If there is reason to believe that the company’s compensate the company if they intentionally or shareholders must vote on whether or not take out directors’ liability insurance. equity has fallen to less than one-half of the negligently cause the company damage. to discharge the board from liability for the registered share capital, the board must prepare, This insurance may protect a director’s personal preceding financial year. and an auditor appointed by the company must Liability is incurred on an individual basis, so it assets if claims are made against him / her. review, a balance sheet for insolvency purposes is possible that only certain directors may be If shareholders representing at least 10% of the Criminal penalties and sanctions cannot be (kontrollbalansräkning). The board must also found liable, depending on matters such as the shares vote against this discharge resolution, an insured against and nor will the insurance convene a general meeting of shareholders expertise or knowledge which a certain director action in damages can be commenced, but this cover damages that a director has caused by to determine whether the company should go has and the allocation of duties within the board. must be done within one year of the relevant intentionally breaching the law. into liquidation. If the general meeting does The chair has an increased personal liability general meeting. not resolve to liquidate the company, the and is, for example, responsible for planning Even where the shareholders have resolved to company has eight months to solve its financial the work of the board so that all directors can discharge the directors from liability, a claim difficulties. Within this time, a new balance sheet participate properly. for damages may still be made where the for insolvency purposes must be prepared, Civil liability may also be incurred to third shareholders were not given true and complete which must show that the share capital has parties such as shareholders, creditors or information by the directors, for example, in the been restored in full. If the company fails to employees, but only if the directors intentionally annual report. meet this demand and the general meeting or negligently breach the Swedish Companies does not resolve to liquidate the company, the Further, the board may initiate a claim towards a Act, the Swedish Annual Reports Act, certain board of directors must submit a petition to director for damages caused by criminal actions other regulations and/or the company’s articles the District Court that the company be placed regardless of the discharge resolution or the of association. into liquidation. one-year deadline. If more than one person is held liable, their The directors may become personally liable for liability is joint and several. obligations incurred by the company if the board fails to: Directors can also incur criminal penalties under the Swedish Companies Act, for example, for: >> prepare and have audited a balance sheet for insolvency purposes, >> attempting to distribute shares or securities to the general public, >> duly convene a general meeting for insolvency purposes, or >> failing to maintain and keep available a share register, or >> apply for liquidation in time and continues to run the company. >> making loans from the company to persons related to the company. Liability is limited to obligations incurred during the period of such failure to act.

Linklaters A cross-border guide for group company directors > Sweden (continued) 102

Decisions and meetings Minutes Administration and accounts Relevant rules

There are no formal requirements for how Written minutes must be taken at board The board of directors is responsible for The Swedish Companies Act (Aktiebolagslagen and where meetings should be held, but the meetings and must include a record of the the organisation of the company and the ((2005:551)) sets out the general duties of frequency should be stated in the board’s rules decisions made at the meeting. management of the company’s affairs. directors and their responsibilities in relation to of procedure. the management and the external representation The minutes should be signed by the keeper In particular, the board must ensure that the of a Swedish private limited company. The chair of the board must ensure that board of the minutes and by the chair of the meeting, company’s organisation is structured so that meetings are held as often as required. In as a minimum. If decisions are taken by written accounting, management of funds and the The Swedish Annual Reports Act addition, any director or the managing director resolution, the minutes should be signed by all company’s finances in general are monitored in (Årsredovisningslag (1995:1554)) sets out may request that a meeting be convened at board members. a satisfactory manner. reporting requirements which the directors must any time. comply with. There is no legal obligation to draft the minutes The obligations of the board of directors also There is no minimum notice requirement, in the Swedish language. Where a resolution include specific actions such as preparing the In addition, corporate documents of the as long as reasonable notice is given. needs to be filed with the Swedish Companies annual report, convening shareholders’ meetings company, including its articles of association, Non-compliance with this rule is Registration Office, however, (for example, and keeping the share register up to date. its internal rules (such as the board’s rules of penalised to preserve the rights of the in connection with a share issue) Swedish procedure) and any specific resolutions may employee representatives. language minutes are required. impose additional requirements or restrictions on directors. The meeting is quorate when more than half of The board minutes must be kept in numerical the directors are present, unless the articles of order and stored in an adequate manner, so that Where permitted by the Swedish Companies association prescribe a higher number. the directors can access them. Act, these rules may take precedence over the provisions of the Companies Act. For a decision to be approved, more than half of The minutes do not have to be published the directors present at the meeting and more or notarised. than a third of all directors must vote in favour. The chair has a casting vote if the votes are tied. The managing director is entitled to attend and speak at board meetings even if not part of the board, although the board can exclude him / her from specific meetings. The board may also make resolutions by circulating board minutes, which should then be signed by all directors.

Linklaters 21 Thailand

Wilailuk Okanurak Partner, Bangkok Tel: (+66) 2305 8024 Mob: (+66) 8182 80104 [email protected]

Pornpan Chayasuntorn Partner, Bangkok Tel: (+66) 2305 8018 Mob: (+66) 8920 45516 [email protected]

Linklaters A cross-border guide for group company directors > Thailand 104

What type of company? Management structure Board composition Appointment and removal

In Thailand, subsidiaries within a group are, A private limited company is managed by the A private limited company must have at least A director can be appointed or removed only generally, private limited companies. board of directors. one director, with a maximum number fixed by by a resolution of the shareholders’ meeting. a shareholders’ meeting. The directors may, however, delegate any of their There is no specific term of office under Thai powers to managers or to committees consisting There is no nationality restriction for directors law, however, at every general shareholders’ of members of the board of directors. of a private limited company in Thailand, meeting after the company is registered, one- unless the company is deemed to be a foreign third of the directors, or the number nearest company under the Foreign Business Act to one-third, must retire from office. A retiring and conducts certain types of business. For director is eligible for re-election. example, businesses related to Thai national A shareholders’ meeting may remove a director safety or security and businesses affecting arts before his / her term of office has expired, and and culture, tradition, folk handcrafts or natural the replacement director can retain such office resources and the environment are required only for the remainder of that term. to have a board comprised of at least 40% Thai nationals. If there is a vacancy on the board of directors, other than by rotation, the board can appoint If a director becomes bankrupt or incapacitated, replacement directors to fill the position. The his / her office is vacated. replacement director can retain such office only A director can serve on the board of several for the remainder of that vacating director’s term. companies in the same group. Directors must, however, avoid any conflicts of interest and have time for each company in order to maximise shareholder wealth. A director is allowed to own company shares. Companies are not allowed to have corporate directors under Thai law. An employee can be appointed as a director of a Thai private company.

Linklaters A cross-border guide for group company directors > Thailand (continued) 105

Powers General duties Who are the duties owed to? Dealings with company / conflicts

A private limited company must be managed by In conducting the company’s business, directors A director, in general, owes his / her duties to A director must not, except with the consent of a director, or directors, under the control of the must act with care to preserve and protect the the company. a shareholders’ meeting, undertake commercial shareholders and according to the company’s interests of the company as a whole. Directors transactions of the same nature as, and articles of association and applicable laws. should also comply with the company’s competing with, the company, either on his / her memorandum and articles of association, own account or on behalf of a third person. The board of directors may delegate any of any resolutions of the shareholders’ meeting, their powers to managers or to committees, as Further, directors may not be a partner with applicable laws and their contracts with long as these are also members of the board unlimited liability in another commercial concern the company. of directors. carrying on a business of the same nature as, Although the standard of care required for and competing with, the company. directors is not specifically provided by law, In addition, a director must perform his / her the Thai Civil and Commercial Code states that duties in good faith in the best interests of the a director must act with the same care as a company and act with proper purpose and prudent businessman. not in a way significantly in conflict with the It is relatively difficult to establish a standard, company’s interest. since this depends upon the nature of the company, its business and the relevant circumstances. Nevertheless, if a director acts in accordance with the company’s objectives, the company’s articles of association and the resolutions of a general meeting of shareholders and does not violate the law, he /she is unlikely to be liable to the company for any damage which occurs as a result of his / her actions.

Linklaters A cross-border guide for group company directors > Thailand (continued) 106

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Compensation claims against directors for injury After any action of a director has been approved The law does not prohibit a company The Thai courts have the power to cancel any they have caused the company can be made by by a shareholders’ meeting, the director is no from purchasing directors’ and officers’ asset transfers or actions taken by a debtor the company or, if the company fails to do so, by longer liable for these acts to the approving liability insurance. which were intended to give undue preference any of the shareholders. shareholders or to the company. to a creditor who was an insider of the debtor during the year before a petition for business Other than the civil liability mentioned above, a Shareholders who did not approve the acts reorganisation was filed or an application director may also be subject to criminal liabilities, of the director in question can file a lawsuit for a declaration of bankruptcy adjudication such as fines, penalties or imprisonment, if he / against the director for his / her actions within six was made. she fails to comply with duties specified by Thai months from the date of the approval. law. For example, if a director who is responsible Insiders for this purpose can include the A company’s articles of association are allowed for the company’s management acts to gain debtor’s directors. to include a provision to protect directors from unlawful interests for him / herself / another, or liabilities related to their position, except criminal fails to prevent this occurring, and the company liabilities or where these have been caused is damaged as a result, the director will be liable by the director’s negligent actions or wilful to a fine not exceeding Baht 50,000. misconduct.

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Decisions and meetings Minutes Administration and accounts Relevant rules

A director may, at any time, call a meeting of Minutes of all proceedings and resolutions Directors must ensure that a balance sheet is The Civil and Commercial Code, Act on Offences the board of directors. of a meeting of the board of directors must prepared at least once every 12 months, at Relating to Registered Partnership Limited be prepared and kept at the company’s the end of the company’s financial year. The Partnership Limited Company Association The quorum for a board meeting is usually registered office. balance sheet must contain a summary of the and Foundation B.E. 2499 (1956), including specified in the articles of association. If a company’s assets and liabilities and a profit and its regulations and orders, and the articles of quorum is not specified in the articles of Any minutes signed by the chair of that meeting loss account. Balance sheets must be audited association of the respective company set out association and the company has more than or by the chair of the next successive meeting by an auditor and submitted for approval to the duties, responsibilities and liabilities of a three directors, the quorum must consist of at are deemed to provide true evidence of the a general shareholders’ meeting within four private limited company in Thailand. least three directors. proceedings at that meeting. months after completion of the balance sheet. Additionally, there are several provisions that Resolutions of a board meeting are passed by When the board of directors proposes the impose criminal liability upon directors in a majority vote. In the case of tied votes, the chair balance sheet to the general shareholders’ number of other acts, such as the Foreign has the casting vote. meeting, the board must report on the Business Act. B.E. 2542 (1999) and the According to the current interpretation company’s business operations during the year Building Control Act B.E. 2522 (1979), as of the law, it is not possible for proxies or under review. amended. Hence, all relevant laws should be alternates to attend meetings of the board of examined before activities are undertaken. Directors must ensure a general shareholders’ directors because a company’s directors have meeting is held within six months after Relevant insolvency legislation is set out in the been appointed to act on the basis of their incorporation of the company and subsequently Bankruptcy Act B.E. 2483 (1940). personal qualities, such as their qualifications, at least once every 12 months. capabilities, trustworthiness, etc. In addition, the meeting can be physically assembled or conducted via video-conference, provided that it is conducted in accordance with the measures prescribed by laws and explicitly allowed under the company’s articles of association. However, it cannot be taken by means of a written resolution which is circulated to the directors.

Linklaters (excluding Dubai International 22 United Arab Emirates Financial Centre)

David Martin Partner, UAE Tel: (+971) 2 659 2113 Mob: (+971) 50 956 6757 [email protected]

Linklaters A cross-border guide for group company directors > United Arab Emirates (excluding Dubai International Financial Centre) 109

What type of company? Management structure Board composition Appointment and removal

In the UAE, subsidiaries within a group are most An LLC is managed by one or more “managers”. An LLC must have at least one manager. Managers of an LLC are appointed on likely to be limited liability companies (“LLCs”). If there is more than one manager, the partners incorporation in the company’s memorandum Managers are not required to have specific LLCs are the most common form of corporate may appoint a Board of Managers. of association, which must be registered in the qualifications and there are no nationality entity used by foreign investors in the UAE. commercial registrar at the Competent Authority If an LLC has more than seven shareholders or residence restrictions or share ownership in the relevant emirate (but this is not available (referred to as “partners”), the partners may requirements (in contrast, the chair and a for inspection by the public). Thereafter, they appoint a supervisory board, which must consist majority of the directors of a UAE Public Joint may be appointed in accordance with the of a minimum of three partners. Stock Company, must be UAE nationals). procedure for appointment in the memorandum Managers may delegate their management It is possible for a manager to be appointed to of association, by separate agreement or by the powers to a single authorised representative, several companies of the same group, although partners in general assembly. often referred to as a “General Manager”, who is any such director must avoid conflicts of interest. There is no maximum limit on a manager’s term likely to be treated as a “de facto” manager for of office. the purposes of UAE law and subject to all of the duties and liabilities applicable to managers. A manager may be removed by: >> majority decision of the General Assembly of the partners (unless the memorandum or contract provide otherwise), >> the court, on request of one or more partners and the court deems the dismissal justified, or >> written resignation of the manager, submitted to the General Assembly and approved by it within 30 days.

Linklaters A cross-border guide for group company directors > United Arab Emirates (excluding Dubai International Financial Centre) (continued) 110

Powers General duties Who are the duties owed to? Dealings with company / conflicts

Managers have wide powers to manage Managers have a duty to act to preserve the The managers owe their duties to the company Managers have a duty to notify the board of any the company, unless the memorandum of company’s rights and exercise at least the level and to the partners. conflict of interest, which must be noted in the association or the agreement appointing the of care that a “diligent person” would exercise. board minutes and the conflicted manager may manager(s) provides otherwise. not vote. If a manager fails to notify the board, A “diligent person” is defined as being a the company or any of its partners may apply A manager (acting within the scope of this person who has sufficient experience and who to court to annul the contract or to require the authority) has authority to bind the LLC. demonstrates the necessary commitment to his/ manager to pay any profit to the company. her duties. This duty of care is enhanced by a However, certain powers, such as opening bank duty to work with integrity and honesty in the A manager may not be a manager of a accounts, signing cheques, obtaining loans and interests of the company or the partners. competing company, or company with similar initiating legal proceedings, should be explicitly objects, or conduct any business for his own described in the appointment mandate of There is also a general duty on managers of an account in competing or similar activities, the managers. LLC not to engage in fraud, abuse power, violate without the prior consent of the partners. law or the company’s constitution or mismanage Managers may delegate their powers to third the company. In the event that a manager breaches this parties, unless the memorandum of association provision, the company may either claim provides otherwise. This is typically evidenced Additional duties may arise where an LLC is compensation or consider such business by a power of attorney or other written authority in financial difficulty. performed by the manager as conducted on in a form approved by the board. behalf of the company. UAE law also restricts a company from providing loans to, or guaranteeing the liabilities of managers or his/her close relatives.

Linklaters A cross-border guide for group company directors > United Arab Emirates (excluding Dubai International Financial Centre) (continued) 111

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Managers may be liable for losses caused to It is not possible for an LLC to exempt a manager An LLC can purchase and maintain insurance Managers owe additional duties in a distressed the company, its partners and / or third parties from liability for breach of duty, breach of law, for managers, although, as far as we are aware, context under UAE law, which contains specific for breach of duty, breach of law, fraud and fraud and negligence, improper use of their this is not common practice for LLCs in the UAE. provisions intended to hold directors to account negligence or improper use of their powers. powers or other defaults. if they fail to act in accordance with their duties or if they act recklessly or fraudulently All managers of the company are jointly liable Indemnities for managers are not typical in their treatment of the company’s assets for the actions of the company in the event of a market practice in the UAE, principally because or its creditors. default arising from a board decision. A manager there is s risk that a notary is likely to reject will not be liable if he / she voted against the any indemnity in the LLC’s memorandum of Managers may face penalties including up to resolution and his / her objection is stated in the association. However, it may be possible for five years’ imprisonment, fines, personal liability written minutes of the meeting. Managers may managers to rely on separate indemnities from and disqualification for offences which become also be liable to pay fines or imprisonment for shareholders. punishable where a company ends up in a specific breaches of duty. formal insolvency procedure. The partners in general assembly can ratify They may also face potential criminal liability acts of the managers. However, this does not Although there is no general duty on the for their actions in circumstances where the prevent civil proceedings against the managers managers to consider, or to act in the best company is in financial difficulty or insolvent. for breach of duty, but results in any such interests of, the company’s creditors in a proceedings being forfeited after one year situation where a company may become from the date of ratification (unless there is a insolvent, the managers are effectively required concurrent criminal case, in which case the to consider the interests of the creditors as a proceedings are not forfeited unless the criminal whole as a result of the potential liability for proceedings are also forfeited). preferential treatment given to any particular creditor or group of creditors imposed by UAE law. If an offence has been committed, a manager will generally only be able to avoid personal liability if he/she can prove that he/she did not participate in it or voted against it at the board meeting approving the relevant action. Managers do not appear to be able to rely on a general defence that they believed that what they were doing was in the best interests of interests of the company and its partners or that they were acting in fulfilment of their duties under UAE law.

Linklaters A cross-border guide for group company directors > United Arab Emirates (excluding Dubai International Financial Centre) (continued) 112

Decisions and meetings Minutes Administration and accounts Relevant rules

UAE law sets out the basic requirements for The law requires LLCs to keep minutes of all The managers of LLCs are responsible for the The UAE Commercial Companies Law (Federal board meetings and how decisions of the board proceedings at meetings of managers. There administration of a company, including preparing Law No. 2 of 2016) and related secondary are to be made. The company’s memorandum is no set form for manager’s board minutes. the accounts within three months from the regulations (in particular, Ministry of Economy of association may provide for more detailed Board minutes must be signed by attending end of the financial year, including the annual Decree No. 272 of 2016) set out the general rules and may vary this position. board members and by the company secretary. budget, the profit and loss account, an annual duties of managers and specific responsibilities A dissenting director may enter his/her report on the affairs and financial position of the in relation to the administration of companies. The board must meet at least four times a objections to a resolution in the minutes. company and their recommendations on the year and the chair may also invite the board to An LLC’s memorandum of association may distributions of the profits to the partners. meet at any time on the request of at least two There is no express requirement that the board impose additional requirements or restrictions members of the company (unless otherwise minutes be held at the head office of the The company’s annual financial accounts on managers. provided by the memorandum of association). company. A copy of the minutes of a meeting including balance sheet and profit and loss In a situation where a company may become must be sent to the board members and the accounts, must be prepared in accordance with Typically, notice of a board meeting must insolvent, the managers may be subject to the board must notify the shareholders of the International Accounting Standard & Practices be sent to all managers under a company’s provisions of the UAE Bankruptcy Law (Federal decisions of the board taken at the meeting. and must be audited. memorandum of association. Specific Decree Law No.9 of 2016). requirements regarding minimum notice periods, If a resolution contains authority for a person method and content of the notice should be to sign transaction documents, or is to be used set out in the memorandum of association. before a government authority, then it should The law requires the board of an LLC to hold a be drafted in dual Arabic and English language meeting at least 30 days before the date of the and notarised. general assembly. The quorum for a board meeting will normally be stated in the memorandum of association. If the memorandum does not provide for a quorum, this will be a majority of board members, present in person (unless the articles permit directors to attend virtually). Board decisions are passed by a majority of votes. The chair has a casting vote to be used when the votes for and against a resolution are equal. UAE law permits written resolutions of the board.

Linklaters 23 United Kingdom

Lucy Fergusson Partner, London Tel: (+44) 20 7456 3386 Mob: (+44) 77 9522 7611 [email protected]

Wilma Rix Senior Associate, London Tel: (+44) 20 7456 4914 Mob: (+44) 79 1753 1168 [email protected]

Linklaters A cross-border guide for group company directors > United Kingdom 114

What type of company? Management structure Board composition Appointment and removal

In the UK, subsidiaries within a group are most UK companies are managed by a single board A private limited company must have at least The first directors are appointed on incorporation likely to be private companies limited by shares. of directors. one director, although the company’s articles and, thereafter, under the company’s articles. may specify that there should be a greater These often provide for appointment by a Executive directors are in charge of managing number. majority vote of the shareholders or by a the business and may also be employed by the decision of the existing directors. company. As a general rule, anyone over the age of 16 can be appointed as a director, unless he / she is: On appointment, details about the director will If there are any non-executive directors, these be entered into a company register, which is are generally expected to fulfil a supervisory role. >> an undischarged bankrupt, available for inspection by the shareholders and The law does not, however, distinguish between >> disqualified from acting as a director, the public. The details include: the director’s executive and non-executive directors and >> prohibited for failing to pay amounts owed name and any former names, country of habitual decisions must be taken by the board acting under a court judgment or order, residence, nationality, occupation and date of collectively. >> the auditor of the company, or birth. The director’s residential address will be recorded but does not have to be made available Persons who have not been formally appointed >> a director of an insolvent company and the to the public. Details of the appointment must as directors but act as such will be treated as appointment is to a company with a name also be notified to the UK Companies Registrar. directors. Similarly, persons in accordance with similar to that of the insolvent company. whose directions or instructions the directors of The law allows shareholders to remove directors Corporates can act as directors of subsidiaries, a company are accustomed to act will be treated at any time by a majority vote. Special notice although the law on this is due to change in as directors for certain purposes. of an intention to remove a director in this the future. way must be given to the company 28 days Employees do not have the right to be before the relevant meeting. It is not possible represented on the board. to use a written resolution for this purpose. The articles usually also provide an alternative, Directors are not required to have and simpler, way of removing directors, as specific qualifications and there are no well as circumstances in which a directorship nationality or residency restrictions or share automatically terminates (such as bankruptcy or ownership requirements. severe ill health). It is possible to serve as a director of several There is no maximum limit on a director’s term companies in the same group, although of office. directors must avoid conflicts of interest.

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Powers General duties Who are the duties owed to? Dealings with company / conflicts

Generally, directors are given wide powers Directors must act in the way that they consider, Directors owe their duties to the company and Directors are under a general duty to avoid under the articles to manage the company in good faith, would be most likely to promote not to the company’s shareholders, or to the conflicts of interest and must notify the board and to delegate to others. The articles are also the success of the company, for the benefit group to which the company may belong. of these. The other directors usually have the likely to specify that the powers of the directors of the members as a whole. In doing so, the power to authorise such conflicts and / or they It is important to bear this in mind, in particular, are subject to the law, the articles and to any directors must have regard, amongst other can be authorised by shareholders. Separately, when a director is also a director of another specific action which the shareholders, by matters, to: directors have a duty to declare direct or indirect company within the group or has been resolution, may direct them to take. interests they may have in transactions involving >> the likely long term consequences of their appointed by a specific shareholder. the company. It is a criminal offence not to The directors must exercise their powers by decisions, In a situation where a company may become declare an interest in an existing transaction taking decisions collectively as a board. This >> the impact on the environment, insolvent, its directors must also have regard to so it should be done as soon as reasonably means that where the law requires or allows >> the company’s reputation for high standards the interests of the company’s creditors. practicable, at a meeting or in writing, unless the directors to do certain things, such as calling a of business conduct, other directors already know, or should know, general meeting of the shareholders or issuing about this interest. shares, such action should usually be approved >> employees’ interests, by the board and not by a sole director. >> fostering business relationships, and Certain transactions with directors must also be approved by shareholders, unless a subsidiary is Directors can act individually, however, where >> the need to treat members fairly. wholly-owned or an exemption applies. specific powers and responsibilities have been It is for the directors, not the courts, to decide delegated to them by the board. For example, what success means and how to achieve it. The Restricted transactions include arrangements for one director can act as chief executive officer of factors listed above highlight areas of particular a director to buy / sell a “substantial non-cash the company. importance. Directors must do more than pay lip asset” from the company. All assets above service to these, but can decide what weight to £100,000 are caught, as are those above 10% It is also common for the board to delegate give to each one. of the company’s net asset value (and worth at specific powers to committees, agents and a least £5,000). In addition, the company needs company secretary, if the company has one. Directors must also act in accordance with approval to lend or advance money to a director, The directors remain responsible, however, and the company’s constitution and exercise or to provide a guarantee. Exemptions include should, therefore, set up systems to supervise independent judgement. They should use intra-group transactions and defence funding those acting under their authority. reasonable skill, care and diligence, as well as (see “Indemnities and protections”). Likewise, any actual knowledge and skills that they have, shareholder approval is needed for long term for example, in financial management. service contracts of directors guaranteeing a Directors must not accept benefits from third term of office of more than two years or for parties. They should avoid conflicts between payments made to directors to compensate the interests of the company and their them for a loss of office. personal interests and declare any interests in transactions with the company (see “Dealings with company / conflicts”).

Linklaters A cross-border guide for group company directors > United Kingdom (continued) 116

Liability Indemnities and protections Insurance Financial difficulty and insolvency

If directors breach their duties to the company, It is not possible for a UK company to exempt UK companies are permitted to take out Where a company is in financial difficulties or they may be personally liable to compensate a director from liability for breach of duty, directors’ and officers’ liability insurance. insolvent, its directors must protect the interests the company for losses caused. They may also negligence or other default in relation to the of the company’s creditors as a whole. This insurance may protect a director’s personal have to restore company property and pass any company. There are various protections, assets if claims are made against him / her. In particular, when directors become aware profits they have made to the company. however, that can be given against liabilities Criminal penalties and sanctions cannot be that there is no reasonable prospect that arising from the role of the director. Depending on the circumstances, the company insured against, but legal or investigative costs the company will avoid becoming insolvent, may be able to terminate any contracts with, A company can indemnify its directors incurred in defending a prosecution may they must take every step to minimise the or involving, the director which have been against civil claims brought by third parties be covered. creditors’ losses. entered into. for negligence, default, breach of duty / trust. Appropriate legal advice should be taken in Indemnities cannot cover legal action taken As the directors owe their duties to the company, these circumstances. The directors may be by the company itself, criminal or regulatory it is the company who should bring a claim required to repay creditors with whom the penalties imposed on a director, the cost of against a director. It is possible for a claim to company traded while they were aware that defending proceedings where the director is be brought by one or more shareholders on insolvency was probable. found guilty or where a court refuses to behalf of the company, but in the shareholder’s grant relief. own name. Such “derivative actions” are relatively rare. The company can also make a loan to a director to meet the costs of defending criminal or civil It is generally a criminal offence to fail to comply proceedings or seeking court relief or to help the with statutory administrative requirements for director to avoid incurring such expenditure (for accounts to be prepared and public filings example, by engaging lawyers on the director’s to be made. As noted above (see “Dealings behalf). The loan must be repaid if the director with company / conflicts”), it is also a criminal is convicted in the proceedings, judgment is offence for a director to fail to declare his / her given against the director or the court refuses interest in a transaction involving the company. to grant an application for relief. In addition, In proceedings against directors for negligence, the company is specifically permitted to assist default or breach of duty / trust, the court may a director in meeting the costs of a defence relieve the director of liability where it considers against an investigation or action proposed to be that the director acted honestly and reasonably taken by a regulatory authority. and, having regard to all the circumstances of Finally, the shareholders can resolve to ratify the the case, ought fairly to be excused. conduct of a director amounting to negligence, default or breach of duty / trust in relation to the company.

Linklaters A cross-border guide for group company directors > United Kingdom (continued) 117

Decisions and meetings Minutes Administration and accounts Relevant rules

The articles, rather than the law, usually set The law requires companies to keep minutes The directors are responsible for the The UK Companies Act 2006 sets out the out how decisions of the board are to be made. of all proceedings at meetings of directors for administration of the company, including general duties of directors and specific Apart from regulating board meetings, these ten years. such matters as: responsibilities in relation to the administration of generally allow for written resolutions and for companies, including as to the preparation and There is no set form for directors’ board minutes. >> making public filings, decisions to be made where directors are in publication of accounts. Apart from including basic details (such as separate locations but able to communicate >> appointing and removing company officers the names of the chair and the attendees, the A company’s constitutional documents, effectively with each other. (such as directors, any company secretary date, place and time of the meeting and the and the auditors), including its articles of association and any Notice of a board meeting must usually be business transacted) these must, however, specific resolutions, may impose additional >> maintaining statutory books and records and sent to all directors. Generally, any director can refer to any interests of directors in transactions requirements or restrictions on directors, and in allowing these to be inspected and copied, convene a meeting and there is no minimum involving the company which are disclosed at some cases may override the provisions of the notice requirement, as long as reasonable notice the meeting, as required by law (see “Dealings >> displaying the company’s details at places of UK Companies Act 2006, as described in this is given. with company / conflicts”). business and in business communications, section of the guide. >> paying dividends, and The quorum for a board meeting will normally Once the minutes have been signed by the In a situation where a company may become be stated in the company’s articles and will chair of the meeting, they are treated as >> taking measures to prevent money insolvent, its directors may be subject to be at least two directors. If the articles do not evidence of what took place at the meeting. This laundering, anti-competitive behaviour, provisions of the Insolvency Act 1986. provide for a quorum, this will be a majority of means that, unless the contrary is proven, it is bribery or corruption and breaches of health the directors. assumed that the meeting was duly held and and safety legislation. convened, all proceedings duly took place and The directors must also ensure that adequate Typically, each director has one vote and each all appointments made were valid. accounting records are kept and annual decision is decided by a simple majority. The accounts are prepared. In addition, the directors chair of the board, who will be elected to act must prepare a directors’ report and a strategic as such by the other directors, is often given a report each financial year. The directors’ report, casting vote to be used when the votes for and the strategic report and the accounts must be against a resolution are equal. approved by the board.

Linklaters 24 United States (Delaware)

Scott Sonnenblick Partner, New York Tel: (+1) 212 903 9292 Mob: (+1) 917 514 9552 [email protected]

Linklaters A cross-border guide for group company directors > United States (Delaware) 119

What type of company? Management structure Board composition Appointment and removal

In the United States, the general duties and Corporations Corporations Corporations responsibilities of directors are primarily Unless the certificate of incorporation provides The board of directors of a Delaware corporation Directors may be first named in the certificate of governed by state law (the law of the state where otherwise, a Delaware corporation is managed must consist of at least one or more members, incorporation, and, thereafter, are elected at the the company was incorporated) rather than by by a board of directors, which is permitted to each of whom must be a natural person. The annual meeting of stockholders. A corporation’s US federal law. designate committees. To the extent provided number of directors is fixed by the by-laws or charter documents may provide for up to three Delaware is the most important state for by the by-laws or by resolution of the board certificate of incorporation. classes of directors, with the term of each business law, with more than 66% of all US of directors, a committee may exercise all first class director expiring after the first year Directors are not required to have specific publicly traded companies and more than the powers of the board of directors, except following election, the second two years after qualifications, and there are no age, nationality 60% of the Fortune 500 incorporated there. for approving, adopting or recommending and the third three years after, so that the term or residency restrictions or share ownership to stockholders any matters required to be of any class may not be more than three years. Under the laws of Delaware, subsidiaries within requirements, unless the certificate of submitted to stockholders for approval, or a group are most likely to be private corporations incorporation establishes such requirements. A majority of shares entitled to vote constitutes a adoption, amending or repealing any by-laws. or private limited liability companies (“LLCs”). quorum and the affirmative vote of a majority of There are no independence requirements for LLCs shares present (in person or by proxy) will elect directors of private Delaware corporations similar a director, unless the charter documents specify A fundamental policy of the law governing to those imposed on US public companies. The otherwise (though a quorum must consist of at LLCs is to provide maximum freedom of law does not establish a right for employees to least one-third of the shares entitled to vote). contract, meaning that LLC members have be represented on the board. broad discretion to draft their LLC agreement to Any number of directors (including the entire Directors do not have to serve for a specific manage the LLC. board) may be removed, with or without cause, term, and may resign at any time upon notice by the holders of a majority of the shares Management of a Delaware LLC is initially given in writing or by electronic transmission to entitled to vote, unless the charter documents vested in the members, who may delegate the corporation. provide otherwise. If the board is divided into management to a managing member, non- LLCs classes, however, a director may not be removed member manager or board of managers. without cause, unless the charter documents A Delaware LLC may, but is not required to, vest The manager(s) may, but are not required provide otherwise. management in a manager. A manager does not to, designate officers to manage day-to-day have to be a natural person and does not have LLCs operations, though certain major decisions to be resident in Delaware. typically have to be approved by the members. The LLC operating agreement governs the procedures for the appointment and removal of managers.

Linklaters A cross-border guide for group company directors > United States (Delaware) (continued) 120

Powers General duties Who are the duties owed to? Dealings with company / conflicts

Corporations Corporations Corporations Corporations Generally, directors have wide powers to manage Directors owe fiduciary duties to the corporation Directors owe their duties to the company and Transactions with interested directors are the company and to delegate to others. and its stockholders. The core fiduciary duties shareholders as a whole, even when they are permitted if the material facts are disclosed to are as set out below. also directors of another company within the the other directors or to the stockholders, and Third parties who deal with the company group, or appointed by a shareholder. the transaction is approved by a majority of the are entitled to rely on those who have actual >> Duty of care: a director must use the amount disinterested directors or by a shareholder vote. authority to act on behalf of the company. They of care an ordinarily careful and prudent In the case of a wholly-owned subsidiary, may also be able to rely on those who have person would use in similar circumstances. however, the directors of the subsidiary are Such a transaction is also permitted if it is fair apparent authority to act for the company. >> Duty of loyalty: a director must act in good only obliged to manage the affairs of the as to the corporation at the time it is authorised subsidiary in the best interests of the parent or approved by the board of directors, a board LLCs faith for the benefit of the corporation and its stockholders. and its shareholders. committee or the stockholders. Managers have wide powers to manage the LLC Under the business judgement rule, there LLCs LLCs and delegate powers to others, unless the LLC is a presumption that a director acted on an agreement provides otherwise. It is not clear whether managers of Delaware Except as provided in the LLC agreement, a informed basis and in the honest belief that LLCs owe fiduciary duties to their investors (see member or manager may transact business with Unless otherwise provided in the LLC the action was taken in the best interest of the “General duties”). the limited liability company. The LLC operating agreement, each member and manager has corporation. There may be greater scrutiny of agreement will govern the procedures for the authority to bind the LLC. If the members do a director’s decision in connection with certain approval of transactions, which may (or may not) not want each of the members or each of the transactions, such as a change of control of the specifically cover the approval of transactions managers to be permitted to bind the LLC to company or where the director has a conflict with interested directors. third party contracts, the default rule needs to of interest. be modified in the LLC agreement. LLCs It is not clear whether managers of Delaware LLCs owe fiduciary duties of loyalty and care to their investors as a default rule under the law, although these may be provided for in the LLC agreement (see “Indemnities and protections”).

Linklaters A cross-border guide for group company directors > United States (Delaware) (continued) 121

Liability Indemnities and protections Insurance Financial difficulty and insolvency

Corporations Corporations Corporations / LLCs Corporations If a director breaches his / her duties to the A corporation may eliminate or limit the Delaware corporations and LLCs are permitted, Directors owe the same fiduciary duties of care company, he / she may be personally liable to directors’ personal liability to the corporation or but not required, to take out directors’ and and loyalty when the company is insolvent or the corporation and its stockholders (although, its stockholders for breaches of fiduciary duties, officers’ liability insurance. near insolvency. Where the company falls in to a certain extent, directors may be indemnified but not for: breaches of the duty of loyalty, acts the so-called “zone of insolvency” (and, in at A company or an LLC may provide insurance to by the corporation for such breaches – see or omissions not in good faith or which involve least one case, the “vicinity of insolvency”), directors, managers or members, regardless of “Indemnities and protections”). Derivative suits intentional misconduct or a knowing violation Delaware courts have held that directors owe whether the company is permitted to indemnify can also be brought by stockholders on behalf of law, certain unlawful issues of dividends, fiduciary duties to the corporate enterprise, such person under Delaware law, to supplement of the company, provided that certain conditions stock purchases and stock redemptions or any which includes both shareholders and creditors. the protections provided under the law. The are met. transaction from which the director derived an The courts have not provided much guidance, primary limitations on such insurance will be improper personal benefit. Claims for which however, as to how conflicts in the duties should Under Delaware law, however, directors in the insurance policy itself. directors are typically indemnified involve the be resolved or whether a primary fiduciary duty are generally protected under the business waste of corporate assets, failure to act on is owed to a particular constituency. judgement rule, which provides significant adequate information, inadequate disclosure protection to directors from personal liability for There is not a uniform, statutory test that courts to stockholders and decisions about mergers. their good faith, informed business decisions. must follow in determining whether a corporation Indemnification of a director is permitted One study has found that, from 1980 to 2006, is insolvent and judges generally have discretion even where a director is not successful in there have only been two instances of directors to look at other factors in determining insolvency. proceedings and is mandatory if the director is of Delaware corporations being required to Legal advice should be taken to determine successful. The charter documents may provide personally pay for their misconduct. whether the corporation falls in the “zone” or for the advance of expenses on an undertaking “vicinity” of insolvency, as the definitions are not Personal liability may also be imposed on to repay. clear or consistent. directors for unlawful payment of a dividend or LLCs an unlawful stock purchase or redemption. LLCs LLCs have broad authority to include indemnities LLCs The law prohibits an LLC from making a in the LLC agreement. An LLC agreement can distribution if, after the distribution, the LLC A manager may be liable for breach of fiduciary also eliminate or limit liability for breach of would be insolvent under a “balance sheet” duties if the LLC agreement does not restrict or contract or duties (including fiduciary duties) insolvency test (that is, a test that determines eliminate such duties. Under the law, a member of a member, manager or other person to whether the total assets of the LLC would be less who receives an unlawful distribution, and who an LLC or another member or manager or to than its total liabilities). knew at the time of the distribution that the another person bound by the LLC agreement, distribution was unlawful, is liable for the amount as long as there is no bad faith violation of the of the distribution. The law does not, however, implied contractual covenant of good faith and provide that managers are personally liable for fair dealing. approval of wrongful distributions.

Linklaters A cross-border guide for group company directors > United States (Delaware) (continued) 122

Decisions and meetings Minutes Administration and accounts Relevant rules

Corporations Corporations Corporations In general, Delaware law is permissive and flexible, imposing minimal restrictions on how an The charter documents usually set out how Delaware law does not expressly require minutes The directors are responsible for the entity chooses to organise and govern itself. decisions of the board are to be made. Unless to be taken of meetings, but it is common administration of the company. Delaware law the charter documents provide otherwise, practice to do so. does not impose any specific requirements with Corporations board members may participate in meetings respect to directors and accounts. Any minute books (as well as any other records Directors of corporations incorporated in by telephone or through other communications maintained by a corporation in the regular LLCs Delaware are governed by the Delaware General equipment, and board action can be taken course of its business, such as its stock ledger Corporation Law and by the corporation’s charter without meeting if all board members consent Unless otherwise provided in the LLC and books of account) must be kept in a form documents (the certificate of incorporation in writing and the consents are filed with agreement, management of an LLC is initially such that they can be converted into clearly and by-laws). the minutes. vested in the members, who may delegate legible paper form within a reasonable time. management duties (see “Management LLCs Unless the charter documents provide LLCs structure”). Delaware law does not impose otherwise, a majority of the total number of LLCs are governed by Delaware’s Limited any specific requirements with respect to directors constitutes a quorum and a vote of The LLC operating agreement will determine Liability Company Act. The Act does not require administration and accounts. a majority of the directors present constitutes whether minutes of meetings are required. an LLC to have a board of directors. An LLC’s an action of the board. A quorum may not, management structure and governance is An LLC may maintain its records in other however, be less than one-third of the total primarily set out in the LLC agreement, and than a written form if such form is capable number of directors. there are few “default rules” under the Act of conversion into written form within a that would cover issues not addressed in the Delaware law does not set out any notice reasonable time. LLC agreement. requirements for the meetings of directors. LLCs The LLC operating agreement will govern the procedures for decisions and meetings by members and / or managers.

Linklaters 25 Vietnam

Hop Dang Allens Partner, Tel: (+84) 4 3936 0990 [email protected]

Robert Fish Allens Partner, Tel: (+84) 8 3822 1717 [email protected]

Linklaters A cross-border guide for group company directors > Vietnam 124

What type of company? Management structure Board composition Appointment and removal

In Vietnam, the entities most commonly used for LLC LLC LLC subsidiaries within a corporate group are single- For an LLC with more than one member, The number of persons on a Members Council Each member of an LLC has a place on the member or multiple-member limited liability the highest decision-making authority is the will depend on the number of members in Members Council and may appoint (and companies (“LLCs”). Members Council, which comprises all of the the company, as well as how many authorised remove) one or more authorised representatives Members of an LLC hold capital contributions in members (that is, the owners of charter capital) representatives those members choose to represent them on the Members Council. the company. An LLC cannot issue shares and of the company. A member may authorise to nominate. An appointment must be made in writing, cannot be listed. another person or persons to represent it on SC notified to the company and the business the Members Council, and must do so if it is a The other common corporate entity is the registration body within seven days, and is corporate entity. The Members Council must An SC’s Board of Management must have at shareholding, or “joint stock”, company (“SC”). effective until revoked. appoint one of its members to be the Chair least three, and not more than 11, members. An SC must have three or more shareholders. and must also appoint a General Director, the They must have management qualifications, SC An SC must have ordinary shares but may equivalent of a CEO, who manages the day-to- professional expertise and experience in also issue preference shares, including voting Investors holding specified percentages of an day business of the company. The same person business management but do not need to be a preference shares, dividend preference shares SC have the right to nominate candidates for can be both Chair of the Members Council and shareholder of the company. Some industries and redeemable preference shares. election to the Board of Management. the General Director. may also require the members of the Board of Management to have specific qualifications. Unless other voting methods are provided An LLC with 11 or more members is also A member of the Board of Management can in the company’s charter, members of the required to have an Inspection Committee, the concurrently be a member of the Board of Board of Management are appointed by a primary role of which is to keep a check on the Management of other companies. shareholder vote by way of a “cumulative voting” Members Council. For other LLCs, an Inspection method. This means each shareholder may Committee is optional. Modified rules apply to the composition of the “accumulate” or split their votes (the total of Board of Management of public and listed SC which is determined by multiplying the total companies. of shares owned by the number of members An SC has a “Board of Management”, akin to a For both LLCs and SCs, members of the to be elected to the Board) in favour of one or board of directors in other jurisdictions. If an SC Members Council / Board of Management must more candidates. has less than 11 corporate shareholders holding be individuals over the age of 18 with full legal less than 50% of the shares, an Inspection The term of office of members of the Board capacity. They must not be currently in jail, not Committee is not compulsory. For other SCs, the of Management cannot exceed five years, but have certain involvement with Vietnamese state SC must have either; is renewable on re-election for an unlimited bodies and not be barred by the courts or the number of terms. >> an Inspection Committee; or bankruptcy laws. >> an internal auditing committee sitting under There is no general nationality or residence the Board of Management and at least 20% restriction, unless the particular member is of the members of the Board of Management also the legal representative of the company, must be independent members. in which case they must reside in Vietnam. Modified rules apply for public and listed companies.

Linklaters A cross-border guide for group company directors > Vietnam (continued) 125

Powers General duties Who are the duties owed to? Dealings with company / conflicts

LLC Each member of the Members Council, the The general duties of the Board of Management, LLC Board of Directors and the General Director has Members Council and General Director, as the The Members Council is the highest decision- Members of the Members Council are required general duties set out by law, which include case may be, are expressed to be owed to both making authority of an LLC with broad powers to to notify the company of any enterprise in which the duty to: the company and the shareholders or owners of act, including specified matters which must be they, or their related persons, hold an interest. the company. decided by the Members Council. The Members >> act in accordance with laws and the Additionally, transactions between the company Council also appoints the General Director company’s charter, and a member of the Members Council, or their and the General Director is responsible to the >> act honestly and prudently to their best ability related persons, must be specifically approved Members Council. to maximise the interests of the company and by the Members Council, with the conflicted SC the owners of the company, member prevented from voting. >> be loyal to the interests of the company The Board of Management manages the SC and the owners of the company, to not use company and has full authority to make information, secrets, business opportunities Members of the Board of Management must decisions in the name of the company and to of the company or abuse the position and also notify the company of any enterprise in exercise the rights and perform the obligations powers and assets of the company for their which they, or their related persons, hold an of the company, other than those expressly own personal benefits or for the benefit of a interest. reserved for shareholders. third party, and Transactions between the company and a The law specifically tasks the Board of >> notify the company of enterprises in which member of the Board of Management, or their Management with various rights and duties, they, or their related persons, own or control related persons, must be approved by the Board including: capital or shares. of Management or the shareholders (depending >> making decisions on medium term Additionally, an authorised representative of a on the value of the transaction). The conflicted development strategies and annual member of the Members Council is required to member is not able to vote. business plans, perform their rights and obligations in an honest >> the offering of new shares and other and prudent manner and to their best ability fundraising, for the legitimate interests of that member and the company. >> making recommendations on matters, including classes of shares offered and dividends and appointment, and >> the supervision and direction of the General Director.

Linklaters A cross-border guide for group company directors > Vietnam (continued) 126

Liability Indemnities and protections Insurance Financial difficulty and insolvency

The law provides generally for disciplinary action, Generally, Vietnamese laws provide no specific There are no general laws regulating directors’ The law provides that if the owner of a company administrative penalty or criminal prosecution provisions on indemnities and protections, and officers’ liability insurance in Vietnam. or the legal representative (that is the General for any person found to have breached the so any indemnification of personal liability of Director) of a company fails to file a petition While insurers have started offering cover for law, depending on the severity of the breach, officers would be a contractual arrangement to commence bankruptcy procedures within officers, it remains relatively unusual in Vietnam, including the duties set out in it for Members between the company and the officer. three months of observing that the company where the majority of companies do not take out Council and Board of Management members. has become insolvent, they will be liable in such insurance. In any case, such insurance will accordance with law. Moreover, if the Board of Management passes not cover criminal activities. a resolution which is contrary to law or the Separately, the law stipulates that the rights and Directors and officers appointed by international company’s charter and which causes damage duties of the Board of Management include investors may be covered under group D&O to the company, the members of the Board of requesting the bankruptcy of the company. insurance policies, depending on the terms of Management who agreed to pass the resolution such policies. There are no other express obligations on will be jointly liable and must compensate the directors and other officers to provide notice of company for the damage. Those opposing the certain events during bankruptcy proceedings, resolution will be exempt from liability. although this may not stop a court (or creditors) The law also provides for a general basis for claiming against an officer for failure of the compensation for non-contractual damages company to provide such notice. where loss arises due to an “illegal act”, which is generally defined as any breach of the law. Vietnam’s criminal code also contains various offences which may be relevant to a director, including in relation to abuse of position and negligent performance of duties.

Linklaters A cross-border guide for group company directors > Vietnam (continued) 127

Decisions and meetings Minutes Administration and accounts Relevant rules

LLC All meetings of the Members Council or LLC The Law on Enterprises and its subordinate Board of Management must be recorded in a regulations are the main source of regulation The Members Council must hold ordinary The Members Council has the right and duty to minute book archived in the head office of the for corporate enterprises in Vietnam and meetings at least annually. Extraordinary approve annual financial statements and plans company. The minutes may be voice-recorded their directors. meetings are convened by the Chair at any time for use and distribution of profits or plans for or recorded and stored in other electronic forms. or if requested by member/s owning 10% of dealing with losses of the company. Specific laws and regulations apply to certain the charter capital, or by the remaining minority The minutes must be prepared in Vietnamese types of companies, including public companies. SC members where one member holds more than but can also be prepared in a foreign language, In addition, corporate documents of the 90% of the capital. All members must be given if required, and both versions will have The Board of Management is required to submit company (primarily the charter) may impose written notice of the meeting, including the equal validity. annual final financial reports to the general additional requirements or restrictions agenda, issues to be discussed and documents meeting of shareholders for approval. The Chair and the appointed minutes recorder on directors. tabled. The quorum is 65% of the charter (for example, the secretary) are jointly capital. If inquorate, the meeting is reconvened responsible for the accuracy and truthfulness within 15 days with a quorum of 50% and, if of the minutes. again inquorate, within ten days and with no quorum. Resolutions are passed by at least 65% (sometimes 75%) of the aggregate capital of attending members. The charter can prescribe higher (but generally not lower) thresholds and permit written resolutions and attendance at meetings by electronic means. SC The Board must meet regularly (at least every quarter). The Chair can convene meetings at any time and if requested by the Inspection Committee, General Director, two Board members, five other management personnel or as stipulated in the charter. Generally, five business days’ written notice of the meeting is given. The quorum is 51%, attending in person or by proxy. If inquorate, the meeting is reconvened within 30 days and the quorum is then 33%. Resolutions are passed by a majority of the attendees. If votes are tied, the Chair decides.

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