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that the standard of care expected of directors depends on the position held and level of reward received by the director. A clear enunciation of this view can be found in the famous Barings decision of the UK High Court,119 which was also followed (with modifications depending on the context) by Irish courts.120 In Luxembourg, the courts define the standard of care differently for a director who is paid and one who does not receive compensation.121 Similarly, Belgian law applies the general agency law principle that unpaid agents are judged more leniently than paid agents to directors.122 In

Greece, the law requires that the care of a ‘prudent businessman’ shall be determined in light of the duties assigned to the director.123 This effectively establishes different standards for executive and non-executive directors. Most countries focus on factors such as the role of the director and the allocation of functional responsibilities between board members.124 Thus, while the analysis conducted by the courts follows similar parameters, the assessment is highly fact-specific and the observed nuanced differences, combined with the more significant differences in the general formulation of the standard of care discussed above, may or may not lead to different outcomes in individual cases.

A question that is largely unresolved in most jurisdictions is the process by which courts may rationally evaluate and balance the different factors that play a role in the determination and interpretation of the applicable standard of care. A topical example is the responsibility of a non-executive director who holds a key position in the company, for example chairman of the board or of the audit committee. The relevant considerations that commonly inform the court’s assessment are not necessarily congruent. For example, non-executive directors are generally judged more leniently than executive directors (if not in law, then at least in practice). On the other hand, a director who has particular qualifications and acts within his or her area of expertise, as will often be the case with the chair of the audit committee, is held to a higher standard.125 Some non-European courts have found non-executive directors in comparable positions to be liable,126 but in the EU little guidance exists on the issue. In the wake of the financial crisis courts seem to adopt a less deferential approach, both to managerial decisionmaking and the monitoring activities expected by non-executive directors, but legal uncertainty is relatively high.

As far as monitoring duties of the directors and the consequences of a delegation of functions for the standard of care are concerned, we observe again a fairly coherent general approach throughout the EU. Virtually all jurisdictions hold, either in the statutory law, in case law, or in the literature, that the delegation of tasks does not lead to an exculpation of the delegating director(s). The Member States differ, however, in the specificity and comprehensiveness with which they regulate the problem. Some legal systems have specified clearly how delegation affects the standard of care, whereas others simply state that the failure to monitor the discharge of the delegated tasks may be qualified as negligence. We may, therefore, distinguish between high-intensity and low-intensity regulation of this issue. High-intensity jurisdictions distinguish between two or three elements of the duty of care in the

119Re Barings plc (No. 5) [1999] 1 BCLC 433, confirmed [2000] 1 BCLC 523, CA.

120Re Vehicle Imports Ltd, unreported, High Court, Murphy J, November 23, 2000. For more details see the Irish country report,

121See already the discussion above ‘Standard of care’.

122Art. 1992 Belgian Civil Code.

123Art. 22a(2) Law on Companies.

124Austria: the type of company and specific responsibilities of the director within the company are considered (RIS-Justiz RS0116167); Denmark: directors are judged more strictly if they act in a field in which they hold a professional qualification (J.S. Christensen, Kapitalselskaer (1st ed., 3rd sup., Thomson Reuters Professional 2009)); Germany: the allocation of functional responsibilities among board members influences the behavioural expectations of directors (T. Raiser & R. Veil, Recht der Kapitalgesellschaften (5th ed., C.H. Beck 2010)); heightened expectations if the director acts within the area of his or her expertise (BGH, Judgement of 2 September 2011 - II ZR 234/09, Wertpapier-Mitteilungen (WM) 2011, 2092); Italy: reference in

2392(1) Civil Code to the ‘knowledge, skill and experience that may reasonably be expected of an average director carrying out a similar role’ (emphasis by us); Netherlands: the division of tasks within the board of directors is important (Staleman/Van de Ven, HR 10-01-1997, NJ 1997, 360); Portugal: the standard of care varies according to the functions performed by the directors in the different corporate governance models; Spain: the degree of diligence varies depending on the position of the defendant director on the board. For more details see Table 2.4.2.a above.

125See the references above n 124.

126Australian Securities & Investments Commission (ASIC) v Rich 174 FLR 128 (2003) (holding that the qualifications, experience and expertise of the defendant director, as well as his occupation of the positions of chairman of the board and chairman of the finance and audit committee give rise to particular responsibilities); Australian Securities & Investments Commission (ASIC) v Healey [2011] FCA 717 (finding executive as well as non-executive directors of an investment company to be in breach of duty because they did not identify inaccuracies in the accounts).

101 Directors’ Duties and Liability in the EU

context of delegation. First, the standard of care is applied to the act of delegation, i.e. the director is required to select the person to whom functions are delegated carefully, instruct this person adequately, and provide for training where necessary. Second, the director has to monitor the performance of the delegated tasks. This does not involve day-to-day supervision, but regular monitoring and additional inquiries where reasons for concern or suspicion exist. Where problems are identified, directors are required to take the necessary steps and intervene in the performance of the delegated tasks. Third, it is not sufficient to be reactive, i.e. to act only when a problem arises. Rather, directors are under a continuing duty to familiarise themselves with all relevant aspects of the company’s operations, ensure that they are apprised of new developments, and that systems are in place that facilitate the transmission of information within the business. Some legal systems provide more generally that directors are responsible for the establishment of effective risk management and control systems, which include sound accounting structures and, depending on the size of the business and the industry, additional operational and compliance controls. This latter aspect of the duty of care has become particularly relevant in financial institutions, where the financial crisis exposed significant risk management failures in some institutions.

Examples for high-intensity jurisdictions are the UK, Germany, or Slovenia. However, it should be noted that there is no clear divide between high-intensity and low-intensity jurisdictions. Rather, as the third column of Table 2.4.2.a shows, the countries differ in degrees. In addition, where a legal system has not developed the specific behavioural expectations outlined in the preceding paragraph, this may simply be a function of the lack of case law. These duties are usually not laid down in the statute, or only laid down in general and fragmentary terms.127 The emergence of coherent and comprehensive rules, therefore, requires that the courts have the opportunity to build on and amplify the existing regulatory framework.128

The answers received to Hypothetical III (duty of care) illustrate the degree of legal uncertainty that currently exists in the EU with regard to delegation and monitoring. We assume in the hypothetical that the CEO of a large banking institution repeatedly used ostensibly arms-length transactions with investment firms that were controlled by his nominees to transfer assets at an undervalue to a company owned by himself. We ask whether (1) the members of the audit committee and (2) the other non-executive directors are liable for oversight failure. Table 2.4.2.c shows the general tendency of legal systems to expect more of directors with specific knowledge and expertise, such as members of the audit committee, than of other non-executive directors. However, the table also implies differences in emphasis with regard to the amplification of the duty of directors to supervise internal operations. Some jurisdictions emphasise the heightened responsibilities of the members of the audit committee in financial matters, others the general responsibility of the whole board for the establishment of sound internal control systems. Yet other jurisdictions allow directors to rely on the information provided by colleagues and lower-level managers in most cases, unless specific facts give rise to suspicion. It is difficult to assess in how far these differences in emphasis would lead to different outcomes in litigation. A conclusive assessment of the non-executive directors’ liability would require a much more detailed set of facts, but the table may indicate the general approach of the legal systems to these issues.

127See for Germany s. 91 Stock Corporation Act; for Slovenia Arts. 31, 32 ZFPPIPP. In the UK, relatively detailed provisions on risk management and internal control are contained in the corporate governance code, see UK Corporate Governance Code 2012, C.2.

128A good example for the derivation of specific monitoring and oversight duties from general duty of care standards is the Barings case, cited above n 119.

102 Directors’ Duties and Liability in the EU

Table 2.4.2.c: Duty to supervise

Country	Audit committee	Non-executive directors
		who are not committee
		members
Austria	Members of the audit	Other members of the
	committee have to control	supervisory board are also in
	the books and, in doing so,	principle subject to a
	meet the regular standard of	negligence standard, but
	negligence for supervisory	they are generally justified in
	board members	relying on the accuracy of
		the accounts
Belgium	A director’s competences or	The threshold for liability is
	membership of a committee	relatively high, as directors
	are not formally elements of	are not required to monitor
	the judicial determination of	their colleagues
	liability, although it cannot be
	ruled out that courts will take
	the membership of the audit
	committee into account
	when determining the
	standard of care
Bulgaria	The members of the audit	The members of the board
	committee must have	have equal rights and
	unlimited access to the	obligations, regardless of the
	financial information of the	internal distribution of
	bank and ensure that the	functions among them, but
	bank’s assets are	no explicit obligation to
	safeguarded against misuse.	supervise each other. If the
	Hence, they are likely to	transactions are carried out
	have breached their duties	without the knowledge and
	by not identifying the true	participation of the rest of
	nature of the ostensibly	the directors, they will not be
	arms-length transactions.	liable.
Croatia	Subject to the same rules as	All board members are
	all board members, but if the	generally subject to the
	audit committee members	same rules; they are
	have special knowledge or	required to be acquainted
	abilities they must use such	with company transactions
	knowledge and abilities	and must take all reasonable
		measures to be informed of
		the actions of the
		management
Cyprus	Uncertain, no case law on	Uncertain, see right
	supervisory duties; some
	indication that Cypriot courts
	may follow the old English
	common law under City
	Equitable Fire Assurance,129

129 See In Re City Equitable Fire Assurance Co. [1925] Ch 407. According to this decision, non-executive directors are entitled to rely upon the judgment, information and advice of the executives. They are under no obligation to examine the company’s

103 Directors’ Duties and Liability in the EU

	which is a light-touch
	approach
Czech Republic	The audit committee must	Other directors may be liable
	assess the effectiveness of	if they should have
	internal auditing and risk	recognised that the
	management. If they	transactions are damaging
	negligently failed to establish	to the company
	and assess such systems,
	they are liable.
Denmark	Liable if information was	Even if the audit committee
	available to the audit	members are liable, liability
	committee members that	may not extend to the other
	indicated that there was a	members of the board,
	problem	unless the alarming
		information was also
		available to them. A director
		cannot excuse himself by
		arguing that he relied on the
		audit committee to discover
		any wrongdoing.
Finland	The members of the audit	Same standard as for audit
	committee are liable if the	committee members: they
	real nature of the	are liable if they had reason
	transactions taken by the	to doubt the true nature of
	CEO was evident from the	the transactions on the basis
	information received by the	of the information available
	audit committee or there	to them. They may have had
	were other reasons to doubt	less possibility than the audit
	the true nature of those	committee members to
	transactions	notice the suspicious
		transactions and it is
		possible that only the latter
		are liable.
France	Members of the audit	Directors are generally not
	committee are not subject to	required to monitor their
	specific liability rules or a	colleagues. If a director
	separate standard of care in	provides incorrect
	light of their position and/or	information to them or
	expertise. However, if the	deceives them, they will
	board of directors is held	probably not be held liable
	liable for having approved	for not having identified the
	the transaction, members of	incorrect statements, unless
	the audit committee will face	they were obvious.
	a secondary action by other
	members of the board in
	order to share a larger
	portion of the damages by
	arguing that they are more

books and records. The decision is no longer fully applicable in the UK, where the rules have become more stringent in the wake of the Barings decision (above n 119). See also the discussion above, text to n 108.

104 Directors’ Duties and Liability in the EU

	liable.
Germany	Board members who have	Other members of the
	specific knowledge or skill in	supervisory board are also
	a particular area such as	under an obligation to
	accounting are required to	monitor the activities of the
	meet a higher standard of	management. Therefore,
	care when acting in their	they may also be found
	area of expertise. Depending	liable in the present case,
	on the quality of the control	but what is expected of them
	structures in place, the	may in practice be less than
	frequency with which the	what is expected of the
	related transactions	members of the audit
	occurred, and the value of	committee if they lack expert
	the transactions the directors	knowledge in accounting
	should have recognised the	and such knowledge was
	irregularities and	necessary to identify the
	investigated further.	irregularities.
Greece	The diligence of the prudent	Failure to monitor is
	businessman is determined	considered to be a breach of
	in light of the capacity of the	the duty of care, but the
	directors and the duties	hypothetical is difficult to
	assigned to them. Therefore,	assess due to the lack of
	presumably more is	guidance from case law
	expected of members of the
	audit committee, but difficult
	to assess due to the scarcity
	of case law.
Hungary	The directors may have	The directors may have
	breached their duty to	breached their duty to
	supervise, but there is no	supervise, but there is no
	case law or legislation	case law or legislation
	indicating how this case	indicating how this case
	would be decided	would be decided
Ireland	Case law in the area of	A duty to monitor is
	disqualification in relation to	expected in relation to other
	banks in Ireland indicates	directors but it is difficult to
	that directors are under a	identify the circumstances
	duty to inform themselves	where the other directors will
	appropriately in relation to	be in dereliction of their duty
	the company’s affairs. The	in failing to spot a complex
	members of the audit	transaction as being
	committee would be	connected with one of the
	expected to use their	directors. If they have
	expertise in accounting to	relevant financial expertise,
	identify the irregularities.	they would be expected to
		exercise it. And if they do not
		have it, they would be
		expected to take steps to
		educate themselves.
Italy	Liability is likely since	Unclear

105 Directors’ Duties and Liability in the EU

		members of the company’s
		internal audit committee are
		supposed to be able to
		identify the true nature of the
		ostensibly arms-length
		transactions in carrying out
		their duties in accordance
		with the knowledge, skill and
		experience that may
		reasonably be expected of
		an average director carrying
		out a similar role. They must
		also use the specific care
		and competence that the
		individual member may
		have.
	The Netherlands	The members of the audit		The other board members
		committee may be held		may also be held liable as all
		liable for not being cautious		board members should take
		enough while monitoring the		sufficient care when fulfilling
		CEO’s actions. In case law		their specific supervisory
		the specific knowledge and		tasks; they bear a collective
		expertise a member of the		responsibility for the
		supervisory board is deemed		performance of the
		to have could be a factor		company. However, possibly
		determining the outcome in		a lower standard applies
		court proceedings. This may		than the one outlined to the
		apply to the members of the		left (because possibly no
		audit committee.		specific knowledge in
				accounting/finance)
	Poland	Duty to monitor exists, but		The members of the
		whether the members of the		supervisory board have the
		audit committee have		duty to monitor the
		violated their duties in the		management, but whether
		present case is difficult to		the directors have violated
		judge due to the lack of		their duties in the present
		guidance in the case law		case is difficult to judge due
				to the lack of guidance in the
				case law
	Portugal	Liability is likely; the		Liability is likely if the
		members are subject to a		directors failed to identify the
		particularly high standard of		wrongdoing of the CEO due
		professional care		to the lack of appropriate
				monitoring
	Romania	Presumably the members of		Directors are not required to
		the audit committee would		supervise their colleagues.
		be subject to a higher
		standard of care, but unclear
		how this case would be
		decided
		106	Directors’ Duties and Liability in the EU

Slovenia	Members of the audit	Directors are not explicitly
	committee would effectively	required to monitor their
	be held to a higher standard	colleagues on the board.
	of care because they would	However, the supervisory
	be expected to take	board is required to monitor
	advantage of their auditing	the management board;
	expertise	members of the supervisory
		board may be in breach of
		their duty if they could have
		identified wrongdoing by the
		CEO, but did not do so.
Spain	It does not seem to be the	Outside directors are not
	case that members of the	liable for the actions of the
	audit committee are subject	executive management
	to a higher standard of care	unless in cases of fault in
	than other directors; they	eligendo, in vigilando or in
	also do not have to have	instruendo. On the other
	specific expertise	hand, they are liable to the
		company if they negligently
		perform the tasks that are
		assigned to them as non-
		executive directors.
		Monitoring is one of them.
UK	No liability if the directors	The extent of the duty to
	took care that internal	supervise depends on the
	controls were in place to	director’s role in the
	provide for the reporting of	management of the
	the transactions. If on the	company. It was held that
	other hand the directors	the duty of directors to
	were aware of the red flags	question accounts prepared
	but did not take any steps to	by the company’s finance
	address the issues they may	director was limited to
	be found liable.	matters which would have
		been apparent to a man of
		the director’s business
		experience and knowledge.
		However, all directors have
		responsibility for the
		existence of internal control
		structures (see left).

107 Directors’ Duties and Liability in the EU

2.4.3 Business judgement rule

Summary of the country reports

Table 2.4.3.a: Business judgment rule and similar mechanisms to address risk aversion

Country		Adoption of an	Threshold		Burden of proof	Possibilities for
		institution	requirements for		for the threshold	liability when the
		comparable to	the protections		requirements	protections
		the US business	of the BJR to			apply
		judgment rule	apply
		(BJR) in statute
		or case law
Austria		No explicit BJR,	-		-	-
		but long-standing
		acceptance by the
		courts that
		directors have a
		margin of
		discretion when
		taking business
		decisions. Some
		commentators
		argue that the
		margin of
		discretion afforded
		to directors under
		Austrian law is
		more effective in
		shielding directors
		from liability than
		some codified
		BJRs, such as the
		German BJR.
Belgium		Courts accord	No threshold		-	-
		directors a ‘margin	requirements, but
		of discretion’; they	breach must
		will not interfere	involve an
		with business	obligation of
		decisions if the	means. In case an
		director’s act falls	obligation of result
		within that margin	is breached, the
			director bears the
			burden of proof.
Bulgaria		Literature: the	Literature: the		Burden of proof	-
		duty of care is	directors must		for all elements of
		procedural in	make an objective		liability is on the
		character; it does	assessment and		claimant
		not apply to the	act on an
		content of the	informed basis
		decision taken,
		e.g. whether it is
		in the interests of
		the company
Croatia		Yes, in s. 252(1)	1) Entrepreneurial		Director	-
			decision (not
			108	Directors’ Duties and Liability in the EU

		applicable to
		supervisory
		board)
		2) Director must
		reasonably
		believe that he
		acts in the best
		interest of the
		company
		3) Not excessively
		risky (to be judged
		objectively)
		4) Based on
		appropriate
		information
		5) No conflict of
		interest
		6) Good faith
Cyprus	No BJR	-	-	-
Czech Republic	No	-	-	-
Denmark	Yes, developed by	1) Business	Claimant	Claimant must
	the courts: the	decision		show that the
	courts are	2) Directors have		directors
	reluctant to			exercised their
		informed
	intervene in			discretion
		themselves of all
	business			recklessly
		material
	decisions if the
		information
	threshold
		reasonably
	requirements are
		available to them
	satisfied
		3) No disloyal
		behaviour
Estonia	Liability for any	-	-	-
	type of
	negligence, no
	clear expression
	of the BJR.
	However, the
	courts distinguish
	between the
	decision-making
	process and the
	outcome of the
	director’s act and
	have held that
	directors are not
	liable solely for
	the reason that
	their business
	decisions were
	detrimental to the
	company
Finland	Not expressed in	If the directors	Claimant, unless	-
	the Companies	have based their	burden of proof

109 Directors’ Duties and Liability in the EU

		Act, but the	decision on		reversed (see
		preparatory works	information that is		above Table
		to the Act refer to	sufficient and		2.4.2.a for more
		the BJR and	appropriate,		details)
		acknowledge that	considering the
		risk-taking is	circumstances,
		characteristic for	they will not be
		business and that	held liable.
		decisions are
		typically made
		under conditions
		of uncertainty.
France		No BJR, but	-		-	-
		French courts are
		not likely to
		second-guess
		business
		decisions as long
		as the company
		does not become
		insolvent
Germany		Yes, s. 93(1),	1) Management		Director	No
		sentence 2	decision
			2) The director
			reasonably
			believes to act for
			the good of the
			company
			(subjective, but
			the director is not
			protected if he
			misjudged the
			risks of a business
			decision in an
			irresponsible way)
			3) No conflict of
			interest
			4) Based on
			appropriate
			information
Greece		Yes, Art. 22a	1) Business		Director	Rationality review
			decision			exists, but
			2) Reasonable			belongs to the
						threshold criteria
			3) In the
						that have to be
			company’s best
						shown by the
			interests
						director (the
			4) Good faith			decision must
			5) Based on			have been
						reasonable)
			sufficient
			information
			6) No conflict of
			interest
Hungary		No explicit BJR,	-		-	-
		but courts do not
			110	Directors’ Duties and Liability in the EU