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CEO was not liable for his mistakes

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Legal news
calendar 30 June 2014
globus Denmark

The CEO of a Greenlandic shipping company was not found liable for damages even though he had made several mistakes. This was mainly due to the fact that the CEO had performed all necessary investigations before making risky decisions.

In 2005 a shipping company owned by the Greenlandic self-government was privatized, which meant that the company was no longer entitled to public subsidies. One of the tasks of the CEO of the company was to investigate new revenue opportunities for the company.

Before the privatization the main activity of the shipping company was passenger traffic in South Greenland, but for the sake of commercializing the CEO wanted to charter out two ships for cruise services in e.g. The Antarctic and Amazonas. This would ensure the ships to be used all the year round.

Thus, the CEO entered into negotiations with an American travel company regarding the opportunities to charter out the two ships. However, before entering into an actual agreement the travel company required that the ships were rebuilt for approximately 2.4 million EUR per ship.

Before the rebuilding was initiated the CEO arranged a meeting with the Danish Maritime Authority, during which the authority allegedly gave an oral declaration that the shipping company would be able to obtain the necessary permits after the rebuilding. On the basis of this meeting the rebuilding of the ships was initiated, even though the CEO never received any official or written confirmation.

However, obtaining the permits was more difficult than expected; i.a. due to the shipping company not submitting the documentation required by the Maritime Authority.

The Board of Directors approved the rebuilding
The CEO kept the board of directors informed about the overall plan for the shipping company and obtained the board’s approval to enter into a charter contract with the travel company.

However, the CEO never discussed the problems with obtaining the permits with the board.

At the same time, the shipping company suffered from declining ticket sales, but it was undisputed that the CEO was not to blame for such decline. However, the shipping company argued that the CEO had failed to conduct proper control with the budgets, and that he had neglected his duty to keep the board informed of any economic development of the company.

The CEO had to leave his position
Accordingly, the parties agreed that the CEO should leave the company. Subsequently, the board and the new CEO initiated a range of measures in order to bring the company back on track. Nonetheless, the new CEO did not submit the acquired documentation to the Danish Maritime Authority that was needed in order to obtain the lacking permits. Thus, the American travel company threatened the shipping company with a claim for damages. To minimize the risk of such claim the board chose to sell one of the ships. The board argued that the ship was sold at a loss due to the missing permit.

The shipping company filed a lawsuit against the former CEO claiming that the CEO’s mistakes had led to the company suffering a loss of 9, 2 million Danish kroner (approx. 1.2 million EUR) consisting of lost profit and reduced marked value.

The Danish Supreme Court found in favour of the CEO
The Supreme Court found that the CEO’s decision to rebuild the ships had been based on specific and well-reasoned commercial considerations and investigations, and that an oral expression from the Danish Maritime Authority constituted a sufficient basis to take the decision to rebuild the ships.

Furthermore, the Supreme Court did not find that the CEO should be liable for the loss of the shipping company due to the failure of submitting the documentation to the Danish Maritime Authority. The Supreme Court put emphasis on the fact that the new CEO had in fact had the time and the opportunity to obtain and submit the documentation after his commencement.

Finally, the Supreme Court concluded, that the other disputed circumstances – e.g. the lack of budgetary control and failure to keep the board informed – might have been giving rise to liability, but the shipping company had failed to prove any loss caused by these circumstances.

Thus, in spite of the fact that the CEO’s behaviour to some extent had been objectionable, the Supreme Court mainly found in favour of the CEO.

IUNO’s opinion

Under Danish law the management of a company – i.e. the CEO as well as the board – is subject to the special rules of management liability provided by the Danish Companies Act. This means that a CEO acting against the interest of the company, or who in any other way neglects his duties, risks being held responsible to the company or the company’s suppliers, collaborating partners, creditors or anyone suffering a loss for this reason.

However, this judgement illustrates that a CEO is not automatically liable for damages just because he has taken risky decisions that subsequently appear to have been wrong. Such legal status would not be desirable as risky decisions and investments can be part of good business practice. The law only demands that the management takes its decisions based on business considerations and on an informed basis. In this judgement the Supreme Court concluded that the CEO had made ​​the necessary inquiries before making the decision to rebuild of the vessels.

At the same time the ruling shows that a CEO – even though he is found to have acted in negligence – is only liable for damages, if the company’s loss is actually caused by this negligent act. In this case it was not proved, that the company had suffered a loss, because of the CEO’s missing budgetary control or reporting to the board. This was the reason the CEO was not found liable for these relations.

A CEO is obliged to keep the board of directors informed, but the Danish Companies Act does not give any guidance as to when and how often such notifications should take place. Therefore, IUNO recommends companies to lay down clear instructions and routines, as to when, how and where a CEO is to report to the board. Such clear instructions are a great advantage for the company as well as the CEO.

[Judgment rendered by the Danish Supreme Court on 1 November 2013, case no. 352/2011]

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The team

Aage

Krogh

Partner

Anna

Bjørk Dahlin Irvold

Senior legal assistant

Johanne

Tange Thams

Legal assistant

Matilde

Grønlund Jakobsen

Associate

Pernille

Skall Søby Nielsen

Legal assistant

Signe

Kræmer Pedersen

Senior legal assistant