The Fiduciary Duties of Company Executive

The Fiduciary Duties of Company Executive

General Information

In corporate governance, the inability to exercise full control over the activities of individuals representing the Company (members of the board of directors, executives) is balanced by the responsibilities of those individuals (fiduciaries). The director of the Company, any person acting on their behalf, including any individual representing the Company in management bodies (supervisory board, executive body), have several obligations to act loyally and in good faith and to act with due care towards the Company. Such obligations are referred to as fiduciary duties. These obligations are also referred to in literature as "duties of loyalty."

In corporate law, the fiduciary duties of company executives are divided into 3 main categories:

(i) to be loyal to the company;

(ii) to act in good faith;

(iii) to act with due care.

Fiduciary Duties

The legislation of the Republic of Azerbaijan also establishes certain fiduciary duties for the management bodies of the company (executive body, board of directors). Specifically, a person acting on behalf of the company is required to (i) act in good faith, (ii) act professionally, (iii) act logically, (iv) be loyal to the interests of the company and all its participants, (v) prioritize the interests of the company over their own, (vi) exercise caution, and (vii) be fair and impartial when making decisions.

In all cases, negative outcomes for the company do not by themselves, indicate that the actions (or inactions) of the person acting on behalf of the company were dishonest and/or unprofessional and illogical, as such negative occurrences may arise due to entrepreneurial (financial) risk. A person acting on behalf of the company cannot be held liable for damages incurred by the company if their actions (or inactions) did not exceed the entrepreneurial (financial) risk. The existence of circumstances indicating the dishonesty and/or unprofessionalism and illogicality of the actions (or inactions) of the person acting on behalf of the company that led to undesirable outcomes for the company must be proven.

The following situations are considered to reflect the dishonesty of the actions (or inaction) of a person acting on behalf of the company: (i) if the person acting on behalf of the company has acted in a situation where their personal interests conflicted with the interests of the company, concealed information about a contract they entered into from the company's participants, or provided inaccurate information, or entered into a contract without the relevant approval required by legislation or the company's charter, or (ii) if they knew or should have known at the time their actions were not in the best interests of the company, for example, if they entered into a contract under terms that were clearly disadvantageous to the company or with a person who would clearly be unable to fulfill their obligations.

The following situations are considered to reflect the unprofessionalism and illogicality of the actions (or inaction) of a person acting on behalf of the company: (i) made a decision without considering significant information known to them, (ii) did not take measures to obtain significant and necessary information for making the decision, or (iii) entered into a contract without adhering to the required internal procedures (without consulting the legal department or accounting) of the relevant company.

Liability for breach of fiduciary duties

A company director who fails to fulfill the duties outlined above, or does so inadequately, shall be liable to the company or shareholders (stakeholders) for any damage incurred in the following cases:

(i) when the company operates at a loss or when bonuses are paid to members of the management bodies of the company in disproportionate amounts to the company's profit;

(ii) when the company's property is alienated or utilized under conditions and at prices significantly below market terms;

(iii) when contracts are entered into with related parties that violate legal requirements or pose a threat to the interests of the company;

(iv) when the company purchases goods (works, services) at prices significantly above their actual value based on concluded contracts;

(v) when the company's property is misappropriated or wasted for the purpose of securing material and non-material benefits for oneself, related parties, or other individuals;

(vi) when unfair agreements are made that harm the shareholders (stakeholders).

The contract that causes the mentioned circumstances can be contested on the grounds of being deemed invalid by the company, and a claim for compensation for damages incurred by the company can be filed against the company's management at the request of a participant (or participants) holding at least a 5% share (stock) in the company's charter capital through civil litigation.

Additionally, violations of fiduciary duties can also lead to criminal liability. Specifically, the individual may be held accountable for (i) embezzlement or misappropriation, (ii) violations of the rules regarding contracts with individuals related to legal entities, or failure to provide information as required by law concerning such contracts, as well as (iii) crimes related to abuse of official authority.

Thus, according to the requirements of the legislation, the representative of the company has a duty to act in a manner that is honest, professional, prudent, fair, and loyal to the interests of the company while exercising their authority. As a result of the mentioned violations of fiduciary duties, the individual acting on behalf of the company bears both civil and criminal liability for the damages caused to the company.

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Note: The information contained in this article should not be interpreted as legal advice or legal opinion.

Our Company has extensive and effective experience in implementing legal remedies against breaches of fiduciary obligations, and we provide professional legal services in this regard. For additional questions or information, please contact us:

Email: office@bonafide.az; Tel: +994125973047; Whatsapp: +994707103785;

Sincerely,

Bonafide Law Firm