Legal compliance and value enhancement are appropriate objectives for a director and board to focus on, but directors downplay their custodial role at their peril.
In an age of increasing liability risk, directors and officers are reminded that it is important to put in place systemic governance practices as a defense against shareholder and regulatory litigation.
In this first instalment of our series on Directors’ liability in Thailand, Paul Crosio of Silk Legal considers the concept of governance both in a general sense and as it specifically applies to the director’s duties under Thai company law, employment law, environmental law, and tax law.
The management and direction of companies involves making decision and taking actions which may enhance the company’s fortunes, but which are, at the same time, fraught with risk. This is intrinsic in any organization whether commercial or not for profit. The Corporate laws of Thailand are not intended to dampen business enterprise and penalize bona fide but unsuccessful entrepreneurial activity. But questions of whether a director has exercised a reasonable degree of care and diligence can only be answered by properly understanding the foreseeable risk of harm in contrast to the potential benefits that could accrue to the company.
Most directors understand and routinely monitor the statutory duties of their role. The general law in respect of Directors’ statutory liability in limited companies is set out in Section 1150 to 1170 of the Thai Civil and Commercial Code (“CCC”) and in public companies under the Limited Public Company (“PLC”) Act B.E.2535 Section 85. A Director’s liability in a limited company is normally restricted (CCC Section 1101) according to the Company’s Memorandum.
Although the civil liabilities are relatively well understood, and indeed are similar in many jurisdictions, Thailand is unique in having extensive criminal sanction for infractions and, until 2017, when the Act on the “Amendment to Legal Provisions Related to Criminal Liability of Representatives of Legal Entities B.E. 2560 (2017)” (the “Criminal Liability Act”) was endorsed, there was a strict presumption of director and executive liability.
However, whilst the burden of proof has shifted under new legislation, it does not alter the underlying civil and criminal liabilities of company directors and executives. It merely means these officers are not automatically presumed guilty of breaches along with their company.
Just following the law may not be enough…there is now even more that Company Directors and Board Members need to know.
Recent regulatory reviews have found, and courts are now more often considering, whether directors and other company executives are failing to exercise their duties “appropriately” rather than simply ignoring or not knowing what their duties are.
Let me give an example; Directors approved an aggressive bonus program for executives but failed to anticipate this bonus scheme led to management practices that resulted in long term decline in the business and disenfranchised customers. Strictly speaking, even if the director did not act with mal fides and otherwise followed the law, the courts are still entitled to consider the appropriateness of the directors’ decision. Under Thai corporate law the primary responsibility of a director is to act with the “diligence of a careful business man” or “in good faith and with care to maintain interests of the company”. This means that directors, besides their absolute legal responsibilities, owe a statutory duty to the company (CCC Section 1168 / PLC Section 85).
This “diligence” test is temporal, and standards have hardened over time. For a director to defend themselves they need to show that their action (or inaction) was appropriate given the circumstances. The former distinction between breach of legal duties leading to liability (civil and/or criminal) as opposed to the view that noncompliance with governance standards is not crucial has been successfully challenged. Shareholders and third parties can contest all facets of directors’ decision making. The Thai law, taking its lead from German Company Law, has extensively codified shareholder rights.
CCC Section 1169 gives the company, or upon their failure to act, shareholders the right to commence proceedings against directors “for compensation for injury caused by them to the company”.Similarly under PLC Section 85 “one shareholder or shareholders holding an aggregate number of shares not less than five percent …may give a written notice requesting the company to make such claim (or)…if the company failed to comply….such shareholder or shareholders may take a legal action to claim compensation on behalf of the company”. Both Acts are broad and provide no guidance on the threshold or quantification of “injury.”
So how does a director ensure they act with the “diligence of a careful business man”?
When Thai laws on director responsibility changed in 2017, good governance became even more important.
Thai law appears to take a pluralist approach where the idea of shareholder primacy is, in certain circumstances, to be put to one side in order to serve other constituencies. In other words, in the appropriate circumstances, it is acceptable and sometimes even necessary to sacrifice shareholder interests in order to serve other goals. Companies and their Boards are asked to consider broad questions where short term profits are being discounted over longer term goals which are much harder to quantify.
Growing numbers of business enterprises are pursuing additional protection through publicly articulated governance processes that provides a shield should even their best efforts be inadvertently detrimental to the company or shareholders.
If such a business has appropriate governance, then this process will provide a substantive defense to challenges concerning directors’ decision making.
To be considered “good governance” such processes should follow at least the following guidelines; it must be participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follow the rule of law.
In the next article I will consider what makes effective governance practices, how to set up good these practices in a listed and private company as well as the anticipated protections this offers to the directors and stakeholders.
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