Protection against liability

• Ratification and quitus.  Shareholders can grant quitus (i.e. a discharge) and/or ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons).  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned.
• Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties.  An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in criminal proceedings.  The company may also pay a director's defence costs as they are incurred – however these costs become a loan which must be repaid by a director should the defence be unsuccessful and the costs are not covered by any permitted indemnity.  The company may seek to obtain security for such loans if appropriate in order to protect the company's assets.

• Powers of attorney. Directors could have recourse to powers of attorney in order to delegate day-to-day tasks to competent persons in charge of operational management.

• Indemnity - Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties. This is usually done through an indemnity, insurance and access deed, but may also be provided for in the company's constitution (if it has one).  
• Insurance - Directors' and officers' insurance is common in Australia.  It typically provides indemnification against costs arising from defending proceedings (civil and criminal). Despite indemnification for legal costs, it cannot provide an indemnity in respect of liability arising from wilful breach of duty to the company or improper use of position or information by a director. The rising cost and increasingly onerous terms of D&O insurance remain a hot topic in Australia.
• Ratification - In limited circumstances, a company’s shareholders can ratify or relax duties owed by directors by passing a resolution at a general meeting.  This essentially authorises what would otherwise be a breach or forgives an existing breach.  Any consent given by members must be informed consent.  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation).

• Ratification. Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons).  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (e.g. creditors in an insolvency/pre-insolvency situation).
• Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties. An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but also regulatory fines. However, such an agreement can only be made between the company (represented by the shareholders or the remaining directors) and the respective director after a fine has been imposed or a liability was confirmed by court. Any in-advance agreement on the payment of damages or fines would potentially decrease a director's level of diligence and is therefore void.
• Insurance. Directors' and officers' (D&O) insurance is not common in Austria for companies with limited liability, only directors of large size companies may have a D&O insurance.  It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention).  Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

Generally speaking, as long as a director has not acted in a manner which breaches their duties and powers, then such director will not be liable for any of the company’s breaches. The director may ask for professional indemnity insurance to be bought for them. They may also seek shareholder written resolution be passed endorsing an agreement or action.

The following protection mechanisms exist:

• Informing board members. A director can avoid joint and several liability (for violations of company law or the articles of association), if certain conditions are met:
  • The board member may not have taken part in the wrongful action (e.g. they voted against the resolution by the board).
  • The board member must have notified the board of directors of their protest against the wrongful action. The notification to the board must be recorded in the minutes of the board meeting.
• Capped liability. The law provides for a maximum liability for directors who cause damages due to mismanagement. The cap of liability benefits each member of a management organ, a director, or the delegates for day-to-day management. The amount of the cap varies depending on the size of the company and applies as an aggregate for all directors concerned for claims based on the same fact(s) regardless of the number of plaintiffs. The liability cap applies both vis-à-vis the company and third parties, and is irrespective of the ground or basis of the liability claim (contractual or non-contractual).

Importantly, the cap does not apply in case of common minor error, gross misconduct or fraudulent intent; nor in case of the joint and several liability resulting from unpaid withholding taxes, unpaid VAT, unpaid social security contributions in case of bankruptcy of the company or certain other liabiilties vis-à-vis the authorities.

The company - and its subsidiaries or entities it controls - cannot provide for prior exoneration or further limitation of the directors’ liability against the company or third parties. Any provision in the articles of association or in an agreement in this respect will be deemed null and void. However, exoneration by the parent company is thus considered possible.

• D&O Insurance. Directors' and officers' (D&O) insurance is often used in Belgium. Policy exclusions typically include claims in respect of a director's fraud, intentional fault or criminal behaviour.
• Discharge of liability. When the annual accounts are approved, discharge is granted to the directors by the shareholders for the exercise of their directors’ mandate. This discharge is valid only if the annual accounts contain no omission or false indication concealing the real situation of the company and, as regards acts done in violation of the articles of association or company law, only if they have been specifically indicated in the notice convening the general shareholders’ meeting. A valid discharge given by the company covers both liability for lack of due care and liability resulting from the violations of company law and the articles of association.

However, the fact that a company has discharged its directors does not limit claims brought by third parties.

Finally, it should be noted that any action against directors, permanent representatives, or against all other persons who have effectively held the power to manage the company expire after five years for acts committed in the course of their functions, from the day of those acts or, if they have been concealed by fraud, from the discovery of those acts.

• Indemnity and Insurance. Where a director is found personally liable in respect of negligence, default, breach of duty or breach of trust, the company cannot relieve them of their liability. The company cannot give a director a blanket exemption from liability. However, the company may indemnify them against any liability incurred by them in defending any proceedings in which judgement is given in their favour or in which they are acquitted. Unless its constitution provides otherwise, a company may, with the prior approved of the board, effect insurance for an officer or employee of the company in respect of civil liability and costs in civil and criminal proceedings.
• Ratification. In order for a director or directors to protect themselves from any personal liability for transactions they enter into on behalf of the company, such transactions should be subject to ratification by the board.

Director’s liability insurance is a common practice. Corporations can pay the director’s premiums. However, as the director is not an employee of the company, the company would be likely to have to prove before the tax authorities or the tax court that the premium expense is needed to generate the company’s revenues.

There is no constraint on the company indemnifying directors and officers in relation to liabilities incurred in their professional capacity, but this is an uncommon practice. Liabilities that arise from gross negligence (culpa grave) or fraud (dolo) cannot be indemnified, in accordance with civil law.

Also, as stated above, to protect from liability for an act or agreement, directors must oppose that act or agreement and this opposition must be recorded in the minutes of the relevant directors’ meeting and made known to shareholders in the next ordinary shareholders' meeting.

Liability for damage to the company caused by the director violating managerial care is unlimited. It cannot be limited by the articles of association,  management agreement or a contractual arrangement between the company and the director.

In practice, waivers of the company's claims against a member of the statutory body (so-called waiver letter used mainly in the termination of office) are widely used, but given the above inadmissibility of limitation of liability there is a risk of such statements being considered void. These statements may, however, be morally persuasive in preventing the company from enforcing claims against the statutory representative in the future.

Directors' and officers' (D&O) insurance is also common in the Czech Republic.  It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention).

• Discharge. At the annual general meeting the shareholder(s) may by simple majority decide to discharge the board of directors from liability with respect to events occurred in the past financial year.
• Indemnification. Members of the board of directors may require that the company or its shareholder(s) hold(s) the director harmless from liability arising out of their duties as board member. Proceedings to take legal action may, however, be commenced regardless of any previous decision on discharge or indemnification if the passed resolution was based on inaccurate or incomplete information.
• Insurance. Companies are also permitted to, and usually do, maintain insurance coverage (i.e. directors and officers liability insurance) for members of the board of directors and executive board in respect of liability to the company.  

• Discharge from liability. Shareholders in an annual general meeting must decide whether to discharge directors from liability. The decision is made by a majority resolution (excluding the votes of the directors concerned or shareholders otherwise benefiting from the decision). Discharge by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation). Also a derivative claim by shareholders is possible within 3 months from granting the discharge. The discharge is not effective if the general meeting has not been given essentially correct and adequate information about the decision or measure underlying the liability in damages.
• Limitation of liability. If all the shareholders approve, the articles of association may contain a provision restricting the right of the company to claim damages from the directors. However, certain liability cannot be excluded. In addition, any such provisions cannot restrict the right of a shareholder or a third party to claim damages from the directors. This kind of limitation is in practice quite narrow.
• Insurance. Directors' and officers' (D&O) insurance is common in the Finland.  It typically provides cover for individual directors against claims made against them in in their capacity as director, including defence costs (subject to an excess/retention).  Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

• When submitting the annual accounts to the shareholders, the directors can ask for a discharge (quitus) relating to the financial year concerned. Although such a discharge is not recognised under French law, it can make it more difficult for the company to bring an action against its directors for the relevant financial year. The discharge would however have no impact on the directors' liability towards third parties.
• When the directors have validly delegated their authority to another person, they may be exempted from civil, tax and criminal liability, provided the person authorised to act on their behalf had the means, the skills and the appropriate authority to comply with the applicable law and regulations.
• The shareholders can ratify conduct by a director which is negligent or in breach of duty. However, the ratification by shareholders does not absolve a director from any liability to a third party in relation to the matter concerned.
• The company may indemnify a director against personal civil (but not criminal) liability arising out of actions occurred in the normal course of the director’s activities for the company. The indemnity agreement shall however not cover situations where the director is held liable for a fault severable from their duties, wilful misconduct or fraud or where the action could benefit the company.
• There are directors' liability insurance policies (the fees of which can be paid by the company), the purpose of which is to cover directors against the financial consequences of civil liability claims brought against them in connection with the management of the company. The insurance policy must however expressly exclude any criminal liability and may also exclude other specific risks (e.g. damages claimed by other directors).

The company may conclude D&O insurances in favour of the directors.

Act 992 protects directors from liability in the following circumstances:

• Indemnification. A company’s constitution may provide for the provision of indemnities for directors.    
• Ratification and Acquiescence. Acts of directors in breach of their duties may be ratified by the company’s members,  board of directors or managing director by expressly or impliedly authorising the director or representing to the director as having the authority of the company to act in the matter, or by knowingly acquiescing in the action by the director.
• Insurance. A company’s constitution may provide for the provision of insurance for directors. Such insurance policies may cover both directors (for loss arising from claims against a director for wrongful acts made in the capacity as director) as well as the company (for indemnifying a director for such loss). Losses which are usually covered include judgments, damages or settlements as well as costs and expenses awarded against a director or incurred by the director with the consent of the insurance company, subject to any exclusions provided for by the policy.

• Insurance. A company is permitted to purchase and maintain for its directors:
  • Insurance against any liability to the company, a related company, or any other party in respect of any negligence, default, breach of duty, or breach of trust (except fraud) of which such officer may be guilty in relation to the company or related company.
  • Insurance against any liability incurred by such directors in defending any civil or criminal proceedings taken against them for any negligence, default, breach of duty or breach of trust (including fraud) of which they may be guilty in relation to the company or a related company.

The extent of the insurance coverage can only go as far as covering non-fraud related liabilities. Any liabilities incurred due to fraud on the part of the directors will have to be borne by the directors concerned personally.

• Indemnification. A company is permitted to indemnify its directors against liability incurred by the directors to a third party, provided that the indemnity does not cover certain liabilities and costs, such as criminal fines, penalties imposed by regulatory bodies, the defence costs of criminal proceedings or civil proceedings brought against the directors where they are found guilty or where judgment is given against them. To enhance transparency, a company which provides a permitted indemnity to its directors of the company or of its associated companies must disclose the indemnity in its directors’ report and make it available for inspection by any shareholder on request.
• Ratification. Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons).  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (e.g. creditors in an insolvency/pre-insolvency situation).

There are three main methods that may be used to protect the directors from liability to some extent:

• Contractual limitation of liability. The director’s liability towards his company may be limited in his service agreement with the company (or the articles of association) – in these agreements, indemnity protection can also be agreed for the directors; liability for deliberate breaches of the directors’ duties cannot be lawfully limited; contractual limitation of the directors’ liability is not used widely in practice.
• Hold-harmless/release certificate (felmentvény). This is issued by the general meeting of the company: in connection with the approval of the annual financial accounts or when removed from office (in between the approval of the annual financial statements), the general meeting may pass a resolution confirming that the director duly performed his duties in the previous financial year. If such certificate is issued, then the company may only make a claim against the director for breach of his duties if it proves that the certificate was issued on the basis of incomplete or false information.
• Directors’ liability insurance.

The directors shall perform their duties in good faith, prudently and with a sense of responsibility.

There is no statutory requirement for the company to obtain directors and officers liability insurance. A company is however free to do so.

• Ratification.  Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons).  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (e.g. creditors in an insolvency/pre-insolvency situation).
• Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties.  An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings.  The company may also pay a director's defence costs as they are incurred – however these costs become a loan which must be repaid by a director should the defence be unsuccessful and the costs are not covered by any permitted indemnity.  The company may seek to obtain security for such loans if appropriate in order to protect the company's assets.
• Insurance. Directors' and officers' (D&O) insurance is common in Ireland.  It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention).  Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

• Ratification.  Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons).  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (e.g. creditors in an insolvency/pre-insolvency situation).
• Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties.  An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings.  The company may also pay a director's defence costs as they are incurred – however these costs become a loan which must be repaid by a director should the defence be unsuccessful and the costs are not covered by any permitted indemnity.  The company may seek to obtain security for such loans if appropriate in order to protect the company's assets.
• Discharge by shareholders. When submitting the annual accounts to the shareholders, the directors can ask for a discharge (quitus) relating to the financial year concerned. Although such a discharge is not recognised under law, it can make it more difficult for the company to bring an action against its directors for the relevant financial year. The discharge would however have no impact on the directors' liability towards third parties.
• Insurance. Directors' liability insurance policies are available (the fees of which can be paid by the company), the purpose of which is to cover directors against the financial consequences of civil liability claims brought against them in connection with the management of the company. The insurance policy must however expressly exclude any criminal liability and may also exclude other specific risks (e.g. damages claimed by other directors).

Directors may defend themselves from any claim brought against them in the context of an insolvency or reorganisation by demonstrating that they have been acting lawfully. In short, they should try to prove the following:

• If the claim is brought by the company itself, the directors and officers should demonstrate that they:
  • Fulfilled the duties imposed upon them by the law or the company’s by-laws.
  • Supervised the general conduct of the company
  • Once becoming aware of harmful activities, did what they could do to prevent such activities from being carried out or to limit their negative consequences.

Directors and officers who, lacking any negligent behaviour, had their dissent reported in writing in the book of the meetings and resolutions of the board of directors will not be held liable.

• If the claim is brought by the company’s creditors, the directors and officers should prove that they complied with their duties to preserve the company’s assets (as above) or alternatively demonstrate that the assets of the company, although reduced also as a result of their actions, are still sufficient to satisfy its creditors.
• If the claim is brought by single shareholders or third parties directly damaged by the directors’ conduct, directors and officers should demonstrate that they have not acted with wilful misconduct or negligence (or that the five-year prescription term applicable to such extra-contractual liability is elapsed and therefore the action is time-barred).

Indemnification may also be available. The Italian Civil Code, provides that, through a shareholders’ meeting’s resolution, the company is able to waive its right to bring a liability action, unless a minority of shareholders representing, in case of private SpA, at least one fifth of the corporate capital, or the different percentage provided by the company’s by-laws for the exercise of the liability action itself, are opposed to such waiver.

However, historically the Italian courts have been unwilling to uphold liability waiver agreements, although more recent cases suggest that waivers in respect of specific liabilities and actions may be permissible. In light of this, it can be said that a broader view affirming the validity of the waiver agreements in relation to liability actions against directors (for damages caused to third parties) has been increasingly developing.

Directors' and officers' (D&O) insurance is common in the Italian SpAs, while it is quite rare in the Limited Liability Companies (srl).  It typically provides both cover for individual directors against claims made against them in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention).  Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

Limitation by shareholders' resolution

Liability of directors to the company can be reduced by a special resolution of a shareholders' meeting whereby such special resolution is passed by a two-thirds majority (or a higher proportion if required by the company's articles of incorporation) of shareholders present at the shareholders' meeting, and who represent more than half (or a proportion of one-third or higher if required by the company's articles of incorporation) of the total voting rights of shareholders entitled to vote at such meetings.

Limitation by the director(s)

Where the company's articles of incorporation expressly provide and if the company has two or more directors and one or more statutory auditor(s), the liability of directors to the company can be reduced by a resolution of the board of directors (or a majority of the directors in case of the company does not have a board of directors), unless shareholders holding three per cent or more (or a lower percentage if prescribed by the company's articles of incorporation) of the total voting rights oppose this action.

Limitation by contract

In the case of non-executive directors, where the company's articles of incorporation expressly so provide, the amount of their personal liability to the company may be capped to some extent by contractual agreement.

In each of the above limitations, where the company has a statutory auditor(s), the proposal of such a grant of limitation of liability for a director must be approved by each statutory auditor before the proposal is submitted to the general shareholders' meeting.

Directors liability insurance

Directors liability insurance is available although the Companies Act was amended in December 2019, and came into effect in March 2021 (Amended Act), to provide that a directors liability insurance contract with the insurance company must be approved at a shareholders' meeting (or, if the company has a board of directors, at a board meeting).

Directors liability insurance usually provides coverage in the event of a claim by a third-party where the director's actions in the course of executing the business of the company resulted in damages to a third party. Director's liability insurance also usually provides coverage for the director's attorney's fees associated with a claim by the company where the director's actions resulted in damages to the company if the director were to successfully defend such claim.

Indemnification agreement with the company

Under the Amended Act, by obtaining the approval from the shareholders' meeting (or, if the company has a board, the board), a director may enter into an indemnification agreement with the company so that they could be indemnified by the company for certain defense costs and losses incurred by them.

• Ratification. Where a director acts without authority, shareholders may ratify the action in question. Ratification by shareholders does not, however, affect third party claims which can still be lodged against the director but in that case the company would bear the burden of the claim.
• Indemnity. A company can indemnify its directors against certain liabilities incurred by them in relation to third parties. An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings. Indemnities are also not valid where directors are fraudulent, have failed to act in the interest of the company or to exercise due care and skill.
• Insurance. Directors' and officers' insurance is also available in Kenya. It typically provides both cover for individual directors against claims made against them in their capacity as directors, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention). Insurance policies usually exclude claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

Managers may mitigate their liability by:

• Subscribing to managers’ civil liability insurance covering liability to the company and third parties arising from a management misconduct, a violation of the LSC or the company’s Articles , or in tort. Such insurance does not cover risks based on criminal liability.
• Entering into an indemnity letter which aims to transfer the monetary consequences of managers’ civil liability to the company which enters into them. They are most often used within a group of companies, where the parent company undertakes to indemnify the group's managers for all losses they may bear as a result of their civil liability as managers.
• Using a legal entity with limited liability as a manager.

The shareholders may reduce the risk that the company may sue the managers for management misconduct by granting the managers discharge for the exercise of their mandates at the general meeting of shareholders approving the annual accounts. This has the following consequences:

• the managers no longer risk facing actions for liability on the basis of decisions taken during that financial year; and
• the discharge is a waiver by the company of its right to act against the managers for their decisions made during the relevant financial year.

Discharge is only valid if the annual accounts contain no omissions or false information concealing the company's true situation, and if any actions falling outside the scope of the Articles have been specifically stated in the convening notice.

Indemnity

Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties.  An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings.  The company may also pay a director's defence costs as they are incurred – however these costs become a loan which must be repaid by a director should the defence be unsuccessful and the costs are not covered by any permitted indemnity.  The company may seek to obtain security for such loans if appropriate in order to protect the company's assets.

Insurance

The company may, subject to its constitution, with the prior approval of the Board, effect insurance for a director of the company or a related company in respect of:

• liability, not being criminal liability, for any act or omission in their capacity as director of the company;
• costs incurred by that director in defending or settling any claim or proceeding relating to any such liability; or
• costs incurred by that director in defending any criminal proceedings:
  • that have been brought against the director in relation or any act or omission in their capacity as director
  • in which that person is acquitted, or
  • in relation to which a notice of abandonment of the prosecution (nolle prosequi) is entered.

The Board must ensure that particulars of any indemnity given to, or insurance effected for, any director of the company or a related company are recorded in the interests register (where the company has one), the minutes of directors and in the annual report. If the insurance has been effected for a director and the above conditions have not been complied with, the director shall be personally liable to the Company for the cost of effecting the insurance unless the director proves that it was fair to the company at the time the insurance was effected.

The business judgment rule shields directors and managers from liabilities for decisions that result in losses to company, to its controlled entities or to those over which the company has significant influence, provided that they comply with the required standard of care and loyalty. The law and the principles of corporate governance view the business judgment rule as a safe harbor for a director or manager who makes decisions in good faith and in the best interest of the company and its controlled entities while complying with legal and the corporate by-laws provisions. There is a presumption that the directors and managers will perform in accordance with the business judgment rule and will comply with the duty of care and duty of loyalty to which they are subject. However, such presumption will be lost if it can be shown that the director or manager acted fraudulently, illegally or with a conflict of interest.

In case of any infringement of any of those principles, the affected company may not agree otherwise, or provide in its bylaws for, any benefits or exclusions of liability, the purpose of which is to limit, release, substitute or compensate the director/manager for any liability incurred by them arising from the infringement of their duties.

Hence, all directors that breach their duty of loyalty must indemnify the company for the damage caused by their acts or omissions, and companies can´t put in place in favor of any person any insurance, bonds or guarantees covering the amount of such indemnity.

The director(s) will be personally liable for any breach of their duties – in particular if they breach the duty of loyalty, disclose false information to the stock exchange, hide material information, include false information accounting statements of the company or its controlled entities, and destroy any kind of information that may be useful for any investigation of the CNBV.

General managers/directors can be exempted from liability in two main ways.

• Delegation of authority. General managers/directors assume the criminal liability of the head of the company and are therefore liable for numerous violations of the regulations applicable to companies and, where applicable, to the regulations governing more specifically their sector of activity (press law, environmental law, etc.). However, the criminal liability of the head of the company can be set aside if, not having personally taken part in the commission of the offence, they can prove that they have delegated their powers to subordinates. Delegation in this context means a delegation of competence rather than a delegation of signature. The implementation of delegations is therefore recommended, especially when the company has several establishments.
• The act of a third party and force majeure. The general managers/directors remain liable towards third parties, even when they have committed a tort or a quasi-tort on the express order of the company or with the unanimous consent of the shareholders. However, the fact that they have obeyed a given order gives them a right of recourse against the company or the shareholders. In addition, the shareholders cannot claim that the general managers/directors have caused prejudice to the company by complying with their express orders. Acts of God or force majeure may exonerate the general managers/directors from all or part of their liability. The common law criteria of force majeure must be established (unforeseeability, irresistibility and exteriority).

Except for SAS companies, any clause/agreement excluding or limiting the directors´ liability is null and void. In SAS companies, the articles of association may exclude and/or limit directors´ liability. However, such exclusion/limitation has no effect in relation to affected third parties.

As a general principle, directors’ liability may be guaranteed by a guaranteed deposit, a bank guarantee or by D&O insurance, regardless of the type of company. Whether the directors´ liability is so insured must be reflected in the articles of association or subject to shareholders´ resolutions.

In the case of SA companies, the guarantee (or D&O insurance) cannot be inferior to 25% of the share capital. In the case of Public Companies or companies listed on the Stock Exchange, it is mandatory that the director´s liability is guaranteed/insured.

The following actions can be considered by directors to avoid or reduce their exposure to liabilities:

• Record contrary votes and do not participate in the execution of resolutions which: (i) they voted against; or (ii) they did not participate in. Directors who did not participate in or who have voted against and who have not taken part in the execution of a decision of management are not liable for damages resulting from it. The contrary vote must be duly recorded in the minutes of the meeting where such decision was made.
• no execution of unlawful resolutions – as a general rule, directors are not liable to the company if the act or omission is based on a decision of the shareholders, even if voidable, with the exception of resolutions that are passed with the conscious purpose of obtaining for a controlling shareholder or for a third party undue advantage to the detriment of the company, other shareholders or the company´s creditors.
• Ratification – (i) when taking decisions in respect of a related party transaction; (ii) when the act or business was conducted only by one director, and the ratification is obtained from the majority of the directors; (iii) when the act or business needed approval from the General Assembly and a ratification is obtained from this corporate body; or in case of sensitive matters where the approval or ratification is recommended to confirm the director´s decision; (iv) when the resolution has some irregularity (e.g. misses the opinion of the supervisory body, the minutes miss some other crucial element for the resolution, etc). Ratification may not, however, absolve a director from liability towards third parties. It should be considered on a case-by-case basis.

It is possible for a director to take out professional indemnity insurance.  However, it should be noted that the Companies Act specifies that any provision, whether contained in the articles of a company or in any contract with a company, and whether expressed or implied, which purports to exempt any director or officer or the auditor of the company from any liability which by law would otherwise attach to them in respect of any negligence, default, breach of duty or breach of trust of which they may be guilty in relation to the company or to indemnify them against that liability, is void.  Therefore, an agreement with the company to indemnify a director is invalid.  Directors may however take out professional indemnity insurance.

Internal liability: discharge

The general meeting can grant discharge (décharge or kwijting) from liability to the directors for their management conducted during a specific period. Generally, discharge is granted at either:

• The annual general meeting in which the annual accounts for a financial year are adopted.
• The end of the director's position as a member of the board by way of a shareholders' resolution. 

Discharge can only be granted for management conducted in the period prior to the resolution granting the discharge was taken, i.e. discharge cannot be forward looking. Discharge can only release a director from liability for management activities to the extent that these appear or may appear from the company's annual accounts or were made known to the general meeting. A director may not invoke discharge as a ground of release from liability if this is in breach of the principle of reasonableness and fairness (redelijkheid en billijkheid), which is assessed on the basis of all relevant circumstances. Discharge is limited to prevention of a director's contractual internal liability towards the company, i.e. it cannot prevent external liability to third parties.

External liability: indemnity

External liability of a director can be covered by an indemnity from the company and may include costs for legal assistance. Furthermore, the general meeting or the company may contractually waive its rights to claim damages from a director (i.e. in relation to liabilities not covered by discharge). Such indemnity will have no have effect if the company is in a state of bankruptcy.

D&O insurance

It is customary in the Netherlands for a company to take out directors and officers liability insurance for its directors, covering both internal and external liability risks.

A company may, if authorised by its constitution, indemnify a director or employee of the company in respect of liability to any person other than the company or a related company for any act or omission of the director or employee (other than criminal liability, or breach of the director's duty to act in good faith and in the best interests of the company, and in the case of an employee, any fiduciary duty owed to the company or a related company).  The company may also indemnify a director or employee for costs incurred by that director or employee in defending or settling any claim or proceeding relating to such liability. 

Provided that it is authorised by its constitution, a company may put in place and pay for directors’ insurance in relation to the directors’ roles as directors (D&O cover). The directors of the company must resolve to give effect to the insurance and sign a certificate stating that the cost of the insurance is fair and reasonable to the company.

At a minimum, we recommend company directors to:

• know and understand the nature and scope of D&O cover in place, and be briefed on the limits of all such insurance cover; and
• ensure that appropriate disclosures are made at the annual renewals of that cover.

• Indemnity: A company cannot indemnify a director from liability arising from the breach of any law in relation to the company. Such breaches may include negligence, default, or breach of trust. However, a company may indemnify a director in the form of an advance against legal costs incurred by the director in successfully defending legal proceedings. If the director is however not successful, the advance must be repaid to the company.
• Insurance: Directors' and officers' (D&O) insurance is available in Nigeria.  It typically provides cover for individual directors against claims made against them in their capacity as director (including defence costs) and company reimbursement when it has indemnified its directors. 
• Ratification: shareholders can ratify or confirm negligent actions taken by directors, or conduct which breach a director’s duty, except where the breach is an illegal or fraudulent. This does not, however, absolve a director from any liability to a third party.

The company can take out an directors & officers insurance for the board of directors, which is common in Norway. Usually, this insurance is taken out for the whole board of directors, and not for single members of the board of directors.

The general meeting can adopt a resolution to approve an agreement between the company and members of the board of directors that governs or restricts their liability. The general meeting can also adopt a resolution of no liability, but this can only be done for specific actions, not in general. A resolution of no liability is only effective between the company and the board of directors, which means that shareholders and others still may hold the board of directors liable.

A director will be protected from liability if, having participated in an unlawful agreement or being aware of it, expressed their disagreement with it at the time the agreement was made, provided that their disagreement is stated in the minutes or is notified to the company by means of notarised letter.

Directors can also take out D&O (Directors & Officers) insurance to cover them against civil liability arising from the exercise of such position, providing them with economic resources for the payment of indemnities for damages and losses.

• Acknowledgement of the fulfilment of duties by members of the management board. At the ordinary shareholders’ meetings to be held each year, the shareholders should issue an acknowledgement of the fulfilment of duties by members of the management board holding their position in the previous financial year. As a result of adopting such resolution on acknowledgement, it will be difficult for the company to prove that a management board member has failed to fulfil their duties, although such a resolution does not automatically mean that the company waives any claims that it may have against the member of the management board. Such resolution is not effective towards third parties.
• Insurance. Directors' and officers' (D&O) insurance is common in Poland. This insurance protects the management board members from civil liability towards third parties that has arisen from the performance of their duties as members of the governing bodies in the company. Insurers provide assistance also in the event of (actual or alleged) breach of criminal or administrative law. Certain insurance policies may finance administrative penalties imposed on members of the management board, but not on the organisation they manage. Under such type of insurance, it is also possible to cover the management board’s defence costs in both civil and criminal proceedings and some administrative and regulatory proceedings.

Directors' and officers' (D&O) insurance. It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention). Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

In the context of a LLC, the shareholder's must release the directors from their liability for the preceding financial year during the annual general meeting.

Although not common, directors may request an indemnity from the LLC and require that the LLC takes out professional indemnity insurance that covers that negligent acts committed by a director.

• The business judgment rule. The Company Law has introduced the common law concept of the "business judgment rule" as a legal limitation of the directors' liability. Thus, in the case of a decision based on adequate information, where it is reasonable to consider that the director has acted in the interest of the company, the director will not be held liable for damages suffered by the company. However, the director is not exempted from liability in case of fraud or gross negligence.
• Possibility to contractually limit directors' liability. The Company Law does not regulate the possibility of limiting director’s liability. To the contrary, according to the law, failure to perform or inadequate performance of any of the duties bestowed on directors by the shareholders shall be assessed based on the highest standard of care and diligence (subject to the above-mentioned business judgment rule).

However, taking into account that the directors' duties and powers are regulated by the rules of the mandate agreement, such limitations of liability are conceivable, but only as regards the liability of the directors towards the company (theoretically, the director's liability towards the company may also be limited through the articles of association or the management agreement) and not against third parties. Nevertheless, the limitation of liability for fraud, gross negligence or wilful misconduct is not possible under Romanian law. In addition, criminal liability cannot be limited.

• Liability insurance. While, in case of JSCs, it is mandatory for the directors to have insurance for professional liability, in case of LLCs, there is no such legal requirement. If deemed necessary, such an insurance may be concluded.

Although it is not possible for shareholders to exempt/discharge its directors from liability, an LLC or its shareholders can indemnify its directors against certain liabilities incurred to third parties.  D&O insurance can also be considered for the benefit of directors.

Liability insurance may be purchased on behalf of the directors.

• Ratification. Shareholders can ratify conduct by a director which is negligent or is in breach of any duty by an ordinary resolution (excluding the votes of the director concerned or their connected persons) upon a full and frank disclosure of all material facts.  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (e.g. creditors in an insolvency/pre-insolvency situation).
• Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties. Notwithstanding, a company cannot directly or indirectly provide an indemnity (to any extent) for a director of the company against any liability attaching to them in connection with any negligence, default, breach of duty or breach of trust in relation to the company. To the extent that a third party indemnity is obtained, the indemnity would be void if it is against, inter alia, any liability incurred by the director in defending criminal proceedings in which they are convicted.
• Insurance. Directors' and officers' (D&O) insurance is common in Singapore.  It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention).  Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

Agreements between a company and its director that exclude or limit the liability of the director are not permitted. The Articles of Association can neither limit nor exclude liability of the director. A company may waive its claims for damages against a director or conclude a settlement agreement with them only after a period of three years since such claims arose, provided that the general meeting approves this and that no shareholder or shareholders with contributions amounting to 10% of the registered share capital file a protest against such decision at the general meeting.

Insurance of liability for damage can be concluded.

• Ratification.  Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons).  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (e.g. creditors in an insolvency/pre-insolvency situation).
• Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties.  An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings.  The company may also pay a director's defence costs as they are incurred – however these costs become a loan which must be repaid by a director should the defence be unsuccessful and the costs are not covered by any permitted indemnity.  The company may seek to obtain security for such loans if appropriate in order to protect the company's assets.  A company may not indemnify a director in respect of the following:
  • A liability arising from:
    • actions undertaken on behalf of the company whilst knowing they had no authority to act
    • acquiescence in the company carrying on business recklessly, with gross negligence or with the intention to defraud any person, or
    • a director being party to an act or omission by the company calculated to defraud a creditor, employee, or shareholder or for any other fraudulent purpose.
  • Wilful misconduct or wilful breach of trust.
  • A liability to pay a fine as a consequence of conviction of an offence (excluding a strict liability offence).
• Insurance. Directors' and officers' (D&O) insurance is available in South Africa.  It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention).  Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

• Authorization. Directors may request authorization from shareholders to carry out some actions that could otherwise imply a breach of the duty of loyalty. The company may waive the prohibitions by authorising a director to carry out a specific transaction with the company, to use certain assets, to take advantage of a specific business opportunity, or to obtain an advantage or remuneration from a third party.
• Ratification. Shareholders can ratify the conduct of a director. However, ratification by shareholders does not absolve a director from any liability to a third party in relation to the matter concerned.
• Insurance. This is effected through a directors' and officers' (D&O) insurance agreement. It typically provides both cover for individual directors against claims made against them in their capacity as director, including, generally, defence costs. Policy exclusions include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

• Ratification. Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons).  Ratification by shareholders does not, however, discharge a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation).
• Insurance. Directors' and officers' (D&O) liability insurance is common in Sweden.  It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs. The insurance also provides a cover for those entitled to compensation, which often is the company itself.  Policy exclusions typically include claims in respect of a board member's fraud, dishonesty, wilful default or criminal behaviour.

• Ratification.  A company can ratify a breach by directors by passing a members’ resolution to that effect. However, such resolution must be passed by members without counting any shareholder votes of the director in breach and any other member connected to the director. Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (eg winding up, bribery/anti-corruption, fraud, dishonesty, wilful default or criminal behaviour).
• D&O Insurance. A company can purchase insurance for directors and officers (D&O) to cover director’s liability for negligence, default or breach of duty.  The policy must be taken with an insurance company in Tanzania (unless a dispensation is obtained is given by the Tanzania Insurance Regulatory Authority), exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.
• Costs of a suit. A company may indemnify a director for any costs in defending any civil or criminal proceedings in which judgement is given in favour of the director or the director is acquitted.

The most efficient way for a manager to protect themselves from liability claims is via liability insurance for corporate officers. This insurance allows the managers of a limited liability company to cover themselves against the pecuniary consequences of civil liability actions, which sometimes can be serious when the sums due are large.

It is important to note that this insurance only covers the pecuniary consequences of civil liability, as no insurance or other protection can protect the manager against criminal prosecution. 

Internally, directors may be absolved from liability for breach of duty or for negligent conduct by ratification through a general resolution of a company. Shareholders may also ratify transactions executed by directors without the requisite authority. However, ratification does not protect directors or the company from liability to third parties.

Against third parties, directors may be protected from liability either by indemnity or insurance cover for acts done in a managerial capacity and any resultant loss or damage.

Onshore UAE

• Ratification.  Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons). Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation).
• Indemnity. Although it is not possible for an LLC to exempt its directors from liability, an LLC is able to indemnify its directors against certain liabilities incurred to third parties, to the extent permissible under the law. An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings.

Dubai International Financial Centre

• Ratification.  Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons). Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation).
• Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties. An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings. The company may also pay a director's defence costs as they are incurred – however these costs become a loan which must be repaid by a director should the defence be unsuccessful and the costs are not covered by any permitted indemnity. The company may seek to obtain security for such loans if appropriate in order to protect the company's assets.

• Ratification. Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons). However, there are limits on what may be ratified (eg illegal acts cannot be ratified) and ratification by shareholders does not absolve a director from any liability to a third party in relation to the matter concerned (eg creditors in an insolvency/pre-insolvency situation).
•  Indemnity. Although it is not possible for a company to exempt its directors from liability, a company is able to indemnify its directors against certain liabilities incurred to third parties. An indemnity can potentially cover both the award of damages against a director and the costs involved in defending a claim but cannot cover regulatory fines or the unsuccessful defence of, or fines imposed in, criminal proceedings. The company may also pay a director's defence costs as they are incurred – however these costs become a loan which must be repaid by a director should the defence be unsuccessful and the costs are not covered by any permitted indemnity. The company may seek to obtain security for such loans if appropriate in order to protect the company's assets.
• Insurance. Directors' and officers' (D&O) insurance is common in the UK. It typically provides both cover for individual directors against claims made against them in in their capacity as director, including defence costs (which applies when indemnification by the company is not available), and company reimbursement when it has indemnified its directors (subject to an excess/retention). Policy exclusions typically include claims in respect of a director's fraud, dishonesty, wilful default or criminal behaviour.

Directors can be protected from liability by:

• A written provision in the company’s certificate of incorporation that exculpates a director or officer from personal liability for breach of the duty of care (a company may not exculpate a director from liability for a breach of the duty of loyalty).

• Indemnification in the company’s charter documents and in written indemnification agreements between directors and the company, including advancement of litigation costs.

• Obtaining directors and officers insurance.

• The Companies Act provides that valid acts of directors may be indemnified.
• It is also possible for directors to take out insurance that protects against claims against them in their capacity as directors.
• The Companies Act provides certain acts of the directors may be ratified. However, such ratification or approval does not prevent the Court from exercising a power which might, if it were not for the ratification or approval, be exercised in relation to the action of the board of directors.

A director of a company is liable for unlawful distributions as set out in the COBE:

• If the director was present at a meeting when the board approved a distribution, or otherwise participated in the making of such a decision.
• If the director failed to vote against the distribution, despite knowing that the distribution was contrary to the COBE Act.

 However, directors may be protected from this liability and others in the following ways:

• Ratification. Shareholders can ratify conduct by a director which is negligent or in breach of duty by a majority resolution (excluding the votes of the director concerned or their connected persons).  Ratification by shareholders does not, however, absolve a director from any liability to a third party in relation to the matter concerned (e.g. creditors in an insolvency/pre-insolvency situation).
• Indemnity. The company may seek to indemnify a director against any liability incurred by successfully defending the director in any proceedings brought against them. It is important to take note that neither the articles nor any contract may have the power to exempt a director from any such liability which by law would otherwise attach to them in respect of any negligence, breach of duty, or of trust of which they may be found guilty. The company may only defend the director in this regard, while the court can make an order as fit if they believe that a person was acting honestly and reasonably.