Responsibilities of the board (supervisory)
Is the predominant board structure for listed companies best categorised as one-tier or two-tier?
The predominant board structure for (listed) companies organised under Luxembourg law is one-tier. In this case, a company is only managed by a board of directors, which is vested with the broadest powers to act in the name and on behalf of the company.
The two-tier structure was introduced into Luxembourg corporate law by the Law of 25 August 2006. In a two-tier system, the company is managed by two corporate bodies: a management board, which is in charge of the day-to-day management of the company, and a supervisory board, which is in charge of controlling the management board.
Board’s legal responsibilities
What are the board’s primary legal responsibilities?
The board of directors or the management board can take any action necessary or useful to realise the corporate object of the company, except the powers reserved to the shareholders’ meeting by the articles of association or by law. Any limitations to the powers of the board of directors or the management board resulting either from the company’s articles or from a decision of the competent corporate bodies are not enforceable towards third parties, even if they are published.
Whom does the board represent and to whom do directors owe legal duties?
The board of directors or the management board represents the company. The directors or the members of the management board must act with loyalty, honesty and in good faith for the exclusive benefit and in the corporate interest of the company. The notion of corporate interest is thereby not limited to the interests of the shareholders, but also entails the interests of employees, minority shareholders, third parties and creditors.
Enforcement action against directors
Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed? Is there a business judgement rule?
The liability of the directors or the members of the management board and of the supervisory board in the performance of their mandate is conceived as a contractual liability with regard to the company. The shareholders cannot sue the directors as individuals; it must be a collective decision.
However, there is an exception to this general rule. Where there is a violation of the Law of 10 August 1915 on Commercial Companies, as amended (the Companies Act), or a violation of the articles of association of the company, the directors, the members of the management board and the supervisory board are jointly and severally liable with regard to the company and any third parties, including individual shareholders, if the individual shareholders or third parties have suffered a distinct and independent prejudice. The directors and the members of the management committee shall be discharged from such liability in the case of a violation to which they were not a party provided no misconduct is attributable to them and they have reported such violation, as regards members of the board of directors, to the first general meeting and, as regards members of the management committee, during the first meeting of the board of directors after they had acquired knowledge thereof.
The foregoing rules do not restrict the ability of the company’s individual shareholders and third parties to sue on the basis of general tort rules when the directors have engaged in tortious conduct (as opposed to a mere management fault).
Care and prudence
Do the duties of directors include a care or prudence element?
The directors or the members of the management board must exercise their duties with as much care, diligence and skill as would be displayed by a reasonable person in the same circumstances. If the directors or the members of the management board are professionals, one might expect a higher standard, namely that which would be displayed by a reasonably competent member of the same profession.
Board member duties
To what extent do the duties of individual members of the board differ?
The standard of care is that of a reasonable person acting in the same circumstances. Hence, if the director or the member of the management board is a professional, a higher standard of care (customary for such profession) can be expected.
Delegation of board responsibilities
To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?
The board of directors or the management board may delegate the day-to-day management of the company and the power to represent the company to one or more directors, members of the management board as the case may be, managers, officers, or other agents acting either alone or jointly, except such persons who are members of the supervisory board (two-tier system). If authorised by the articles of association of the company, the board of directors may also delegate its management powers to a management committee or to a managing executive officer. However, such delegation may not comprise the general policy of the company or the whole of the actions reserved to the board of directors pursuant to the law.
Non-executive and independent directors
Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?
The Companies Act does not contain any provisions on independent directors. It merely states that directors are obliged to report any conflict of interest to the board of directors and subsequently to the next general meeting.
The Luxembourg Stock Exchange principles on corporate governance (the LSE Principles) recommend having an appropriate number of independent directors depending on the nature of the company’s business activities and on the structure of its shareholder base. The guideline recommends having at least two independent directors. To be considered independent, a director must not have any significant business relationship with the company, a close family relationship with any executive manager, or any other relationship with the company, its controlling shareholders or executive managers that is liable to impair the independence of the director’s judgement.
Board size and composition
How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?
The Companies Act does not contain any provisions on the criteria that an individual director or the board as a whole must fulfil or related disclosure requirements. Depending on the corporate form, the board of directors submits to different rules relating to the minimum number of seats. For example:
- a public limited liability company (SA) may be managed by one director as long as it has a single shareholder. In the case of plurality of shareholders, the SA shall be managed by a board of directors comprising at least three directors, irrespective of whether they are shareholders; and
- a private limited liability company shall be managed by one or several managers appointed by the shareholders’ general meeting. If several managers are appointed, they may constitute a board of managers, irrespective of whether they are shareholders.
The size of the board is determined by the shareholders’ general meeting in accordance with the Companies Act and the articles of association. The Companies Act does not define a maximum number of seats.
The shareholders’ general meeting has the power to appoint directors on newly created directorships. Besides the general meeting in case of a vacancy, the board of directors of an SA has the power to co-opt a temporary director whose mandate shall be confirmed at the next general meeting.
The LSE Principles recommend that the board is composed of competent, honest and qualified persons. In their backgrounds and diversity, the members of the board represent a contrast of experiences and knowledge and, as far as possible, the board should have an appropriate representation of both genders, as well as geographical origin. In order to ensure effective deliberation and decision-making, a maximum of 16 directors may be considered as a reasonable limit. A list of the board members should be disclosed in the corporate governance chapter of the company’s annual report, which shall contain information regarding each board member’s level of independence. Every director shall undertake to dedicate the time and attention required to his or her duties and to limit the number of his or her other professional commitments to the extent required to be able to fulfil his or her duties properly.
Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?
The combination of the function of board chair and CEO is not regulated by the Companies Act. The LSE Principles recommend that the board shall make a clear distinction between the duties and responsibilities of its chair and the CEO and set this out in writing.
What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?
The board of directors may decide to create committees. The composition and the duties of such committees shall be determined by the board of directors and they shall exercise their activities under the responsibility of the board of directors. Companies that constitute ‘public interest entities’ in the sense of the Law of 23 July 2016, such as listed companies, credit institutions, insurance undertakings and pension funds, shall have an audit committee.
The LSE Principles provide in general terms that the board of directors shall ensure the setting up of special committees necessary in order to review specific issues and to advise the board of directors on these issues. Special committees shall be composed of at least three members. In addition, the LSE Principles recommend that the board shall establish an audit committee to assist in the areas of financial reporting, internal control and risk management; a nomination committee to assist in the selection of directors; and a remuneration committee to assist, among other things, in drawing up a remuneration policy, assessing the performance of the executive management and submitting proposals regarding their remuneration.
Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?
There must be at least one board meeting a year to approve the annual accounts and to convene the annual general meeting of shareholders. The Companies Act does not set a minimum number of board meetings a year, except for European companies where the board of directors or the management board shall meet at least once every three months at intervals laid down by the articles of association of the company to discuss the progress and foreseeable development of the business of the company.
Is disclosure of board practices required by law, regulation or listing requirement?
For listed companies, Appendix B of the LSE Principles sets out transparency requirements regarding the main aspects of the company’s corporate governance policy, such as a description of the company’s governance structure; the essential features of the corporate governance framework; the policy established by the board regarding transactions in the company’s securities and other contractual relationships; and a description of the risk management system.
Board and director evaluations
Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?
In accordance with the LSE Principles (which are applicable to listed companies only), the board of directors is required to discuss its operation, the effective fulfilment of its remit and compliance with good governance rules at least once every two years.
Law stated date
Give the date on which the information above is accurate.
14 May 2020
- 1) Recruit, supervise, retain, evaluate and compensate the manager. ...
- 2) Provide direction for the organization. ...
- 3) Establish a policy based governance system. ...
- 4) Govern the organization and the relationship with the CEO.
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The Board of Directors is authorized and responsible for the management of the company in the interests and to achieve the objectives of the company and for representing the company both inside and outside the courts in compliance with the provisions of the Articles of Association.