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Board member’s duty of loyalty

19.10.2021 | CORPORATE

Board member’s duty of loyalty

Obligations of a member of the management board may arise from law, the articles of association, resolutions of the general meeting and other agreements entered into between the parties. 

In addition to specific obligations arising from law, the articles of association, resolutions of the shareholders or the management board and a possible contract, the members of the management board also have a general duty of care and loyalty arising from § 35 of the Civil Code Act (general obligations of members of the management body of a legal person).

What does the board member’s duty of loyalty mean?

The duty of loyalty of a member of the management board of a private limited company means that the member of the management board must act in good faith and in the interests of the company, as well as be sufficiently informed to make decisions and not take unreasonable risks. 

The duty of loyalty means, inter alia, the obligation to avoid conflicts of interest and not to favor personal interests over those of the company.

A member of the management board must act primarily in loyalty to the company, which also includes constructive cooperation with other members of the management board.

What can be considered as a breach of the duty of loyalty?

A member of the management board may violate the loyalty obligation, inter alia, if, as a member of the management board, he or she enters into a transaction with a company related to him or her under conditions different from the market price. 

In order to accuse a member of the management board of violating the duty of loyalty, the member of the management board should have in some way preferred personal (or related third party) interests to the interests of the private limited company.

 


 

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