CAPARO V DICKMAN CASE – STANDARD OF RESPONSIBILITY OF CORPORATE GOVERNANCE OFFICIALS: ISSUES OF PROCEDURAL RECEPTION

Abstract

1. In the process of interaction between the governing bodies and a legal entity, there are situations when the participants of such interaction pursue differently vectored or mutually exclusive goals due to the polar drive to pursue their own corporate interests. Given the above, the problem of legal liability of a legal entity`s officials in making decisions needs to be reconsidered. Therefore, the relevance of theoretical developments regarding the liability of a corporate governance body and its officials for actions harming the interests of a legal entity is beyond doubt. Herewith, this issue concerns not only the material law, but also the procedural aspects of resolving such type of corporate conflict.

2. The Law of Ukraine On Joint Stock Companies (Article 63) establishes the liability of a joint stock company`s officials for damages caused to the company by their actions (omission). In 2015, the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine Concerning the Protection 93 of Investors’ Rights amended the Article 89 of the Commercial Code of Ukraine by establishing the liability of officials for damage caused by acts committed with abuse or malpractice in office, acts committed in violation of the order of their prior approval or other decision-making procedure, etc. Specifically in the banking sector, the civil liability of a corporate governance body officials was introduced by the Law of Ukraine On Amendments to the Law of Ukraine On Banks and Banking Activity to determine the features of corporate governance in banks, which strengthened the liability of bank-related persons, first of all the heads of banks (Article 42), when making decisions affecting the bank`s financial state.

3. The matter under inquiry establishes the general terms of legal liability of corporate governance officials. As of today, it is doctrinally defined and statutory enshrined in the legislation of Ukraine that such conditions are the unity of subjective and objective elements of the tort. However, persons acting on behalf of a legal entity are obliged to act not only within their powers, but also in reasonable good faith. In the course of business, a company and its official (particularly, the director or general director) have fiduciary relationships, for which reason the wrongful conduct of such person may be expressed not only in failure to fulfill obligations directly established by the constituent documents of the company, or exceeding the authority to perform certain actions on behalf of the company, but also in the improper or unfair performance of such actions without complying with the limits of standard economic risk, and making obviously hasty or wasteful decisions. Therefore, an important feature of the activities of a legal entity`s corporate governance officials is the awareness of the risks of their activities and their management. Therefore, the issue of liability should not be conditioned by the presence of subjective elements in the tort.

4. In the countries of Anglo-American legal system, the corresponding viewpoint was stated in the case of Caparo Industries PLC v Dickman (1990). The House of Lords, following the Court of Appeal, put forward a "3- fold test": A set of the following conditions is considered a breach of the due diligence obligation: 1) occurrence of damage is the result of reasonably foreseeable conduct of an official, 2) parties to the conflict are in a fiduciary relationship, and 3) All other things being equal, the reimbursement is fair and reasonable.

According to the above, the basis to release an official from the liability is a causa, i.e. a circumstance that the person has not been able to foresee by the appropriate measures of his/her professional diligence required of him/her under specific conditions.

5. Regarding the procedural aspects of appealing to the court, it should be noted that such right is granted to a legal entity, as well as others, which are legally entitled to appeal to the court in the interests of the legal entity in disputes over indemnification of damages caused by its official. The owner (member, shareholder) of a legal entity holding 10 percent or more of the authorized capital of the company, or which share in the legal entity`s property is 10 percent or more, may, in the interests of such legal entity, file a claim for indemnification of damages caused to the legal entity by its official. National legislation does not provide for a procedural combination of consolidation of interest of several minority shareholders, members who collectively own the limit of 10 percent or more of the authorized capital of the company, which limit is established by part 1 of Article 54 of the Commercial Procedural Code of Ukraine. The above creates a procedural imbalance in the rights of shareholders (members) and actually blocks the functionality of the institution of liability of a corporate governance body officials.

The above puts on the agenda the systematic introduction of procedural and legal mechanisms for consideration of class actions in the civil proceedings of Ukraine. Mass tort is a component of the legal instruments which introduction will testify to the development of the national legal system as a whole, and its use will allow to resolve the issue of access to justice.

6. Peculiarity of the American model of mass tort is that the Federal Rules of Civil Procedure established by the US Supreme Court do not limit the scope of this institution to a particular area of law and do not determine the subject matter of a dispute for resolution of which it is possible to apply to the court. Class actions are possible on any claims, which in general may be reviewed by a court of general jurisdiction in accordance with the rules of civil procedural law