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In non-listed small and medium-sized enterprises (SMEs), the CEO is often the largest shareholder, and the board of directors is frequently filled with family members or close associates.
As a result, it is common for CEOs to enter into contracts with their other companies or buy and sell company assets without being mindful of legal procedures. However, the moment they part ways with business partners or the shareholding structure changes, those transactions become key evidence in damages lawsuits.
Article 398 of the Commercial Act requires prior disclosure and board approval for transactions between directors and the company. A point to note here is that the scope of "counterparties" is broader than one might think. The Supreme Court held that self-dealing applies not only when a director is directly a party to a contract, but also when they transact with the company as an agent or representative of the counterparty company. It further stated that directors have an obligation to disclose their interests and material facts before obtaining approval (Supreme Court ruling 2015da70044, pronounced on the 12th, 2017). Transactions where a CEO concurrently serves two companies and stamps seals for both are typical cases subject to approval.
Obtaining approval alone does not ensure safety. The same article stipulates that the content and procedures of the transaction must be fair. In a case where the board approval procedure was lawful, but the consideration for the assignment of patent rights was significantly higher than the appraised value, lower court judges found the transaction unfair and recognized the CEO's liability for damages. This means that both the procedure and the price must be justified.
Conversely, even if there are flaws in the procedure, the causal relationship with the damage must be assessed separately. There are also lower court rulings that denied director liability by determining that the cause of the company's loss was business failure rather than procedural violations. In litigation, ultimately, whether the company actually suffered damages and what actions those damages stemmed from determine the outcome.
The scope of liability is also broad. According to Article 399 of the Commercial Act, directors who voted in favor of an unlawful board resolution bear joint and several liability, and directors who did not record their dissent in the minutes are presumed to have voted in favor. Even if one is not a registered director, a de facto director who uses the title of chairman and directs business operations can be held equally liable as a director under Article 401-2 of the Commercial Act. The defense that "I am not a registered director" does not work as well as one might think.
Disclosing interests before transactions, objectifying prices through external evaluations, and recording even dissenting opinions in the minutes are cumbersome but the most reliable insurance. The more ownership and management are concentrated in one person, the more strictly these principles must be adhered to.
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*This content was translated by AI.View Original
