The new corporate legislation increases the liability of members of a company’s executive body so that they exercise their office with due managerial care. In the event of a breach, the executive body will face a large number of sanctions. In performing its office, the executive body must comply with the loyalty obligation towards the interests of the company and exercise its office in good faith, with informed acts and in the defensible interest of the company. These obligations also apply to intra-group relations (holding companies, related persons).
The acts of members of executive bodies are required to be informed acts performed in the defensible interest of the company.
In fact, members of executive bodies are liable for their activity, not for its result. In this context, we should emphasise the importance of the informed quality of their acts. In order to make a decision, an executive body must have sufficient relevant information. It is understandable that the executive body is not an expert in all fields of the company’s activity. Nevertheless, it is required to secure the necessary information. In this respect, fairness opinions will become more and more important. For instance, when an executive body is to make a decision on an investment with a significant value that will place a long-term financial burden on the company, the executive body must obtain sufficient relevant information for its decision (such as expert opinions determining whether the investment is profitable). Subsequently, if the investment ceases to be profitable in the future due to unforeseeable adverse economic development, such fairness opinions may play a key role in the executive body’s defence that it acted with due managerial care. Hence the crucial factor will be whether the executive body has complied with the prescribed procedure.
Similar rules apply to holding companies or related parties. Transactions between related parties often involve transfers of assets (currently regulated by Section 196a of the Commercial Code) or other performance. Such transactions must continue to be conducted on arm’s length terms and this is the responsibility of the executive body. Substantial support can be derived from expert/fairness opinions and analyses. If the controlling person in a holding company exercised its influence on a transaction that causes harm to the influenced person, the harm must be compensated for.
Beware of sanctions
Penalties that may be imposed on executive bodies are relatively broad: such as the obligation to compensate for damage, the surrender of any benefit acquired by the executive body on the grounds of its office if the company becomes insolvent, and prohibition on performing the office of an executive body.
The Valuation Institute of RSM TACOMA prepares expert and fairness opinions, financial analyses and statements. In most cases, fairness opinions are used in M&A transitions, related-party transactions and in financing.
Please contact us if you have any questions. We will be glad to advise you.