D&O Liability and Insurance – Part 1: Basis of Liability and Avoidance of Liability


Authors: Dr Daniel Jenny / Dr Clemens von Zedtwitz


The maxim "Anything that can go wrong will go wrong" is especially true of business where mistakes can never be fully avoided. Board members (Directors) and managers (Officers) always run a residual risk of being held liable when mistakes are made for simply being members of the managing bodies. Such risks may result in claims for substantial damages. In the aftermath of the financial crisis and the financial woes experienced by large companies, D&O liability has increasingly become the focus of public attention. In addition to showing the basis of liability, this article, Part One of a two-part series, explains how possible liability may be avoided. In Part Two, we show how adequate insurance coverage can be obtained.

Legal basis

The primary basis for D&O liability is governed by art. 754 CO of the Swiss Code of Obligations and concerns "corporate law liability" or "liability of the members of the managing bodies of a stock corporation" (directors' liability, D&O liability). This legal basis is being defined and reinforced by continuously evolving case law and doctrine, which has made D&O liability a specialised field. The Directors and Officers are also subject to the general rules of liability, in particular tort liability (art. 41 ff. CO), which is not the subject of this article.

Who is subject to D&O liability?

According to the Swiss Code of Obligations, both the Directors (being "formal corporate bodies") and "all persons involved in the management" are subject to D&O liability. The latter includes all those within a company who autonomously assume management tasks and take a decisive influence on the decision-making process of the company. Such persons are designated as "material" or "de facto Officer", depending on whether they assume the management tasks based on internal regulations or on a simply factual basis. While Directors are subject to D&O liability regardless of the actual fulfilment of tasks, Officers are liable only if they autonomously carry out managerial tasks. For top managers who are members of the Executive Boards, this condition is certainly fulfilled. Members of the level of management directly below (e.g. General Counsel, Compliance Officer) can also be subject to D&O liability in their capacity as material or a de facto Officer.

Prerequisites for D&O Liability

In the following, we will briefly describe the four prerequisites of D&O liability.


Damage is understood as an involuntary reduction of the net assets. In order to determine a damage, one will compare the present state of the harmed person's net assets to the state in which the same net assets would have been if the damaging event had not occurred.

In matters of D&O liability, several people may suffer "primary" or "direct" damage where a distinction is made as to whether the company is primarily harmed or the shareholders or the creditors were primarily harmed. This distinction is crucial regarding the capacity to sue (i.e. who may sue for what damages).

Damage suffered by the company: D&O liability primarily relates to harm caused to the company itself (which of course may lead to indirect damages for shareholders and creditors). The company suffers such damage for example if it is harmed as a consequence of the ill-advised granting of loans or by an imprudent investment.

  • Outside of bankruptcy proceedings (including composition proceedings) of the harmed company, it is up to the company to sue for the damage suffered by the company against its Directors and Officers. The Swiss Code of Obligations, however, provides that individual shareholders may also sue for damages (primarily) suffered by the company (to be compensated to the company).

  • Once the harmed company goes bankrupt, the capacity to sue changes considerably. The creditors now have the capacity to sue as well. In this context, it is primarily up to the bankruptcy administration to sue for the bankruptcy assets to be indemnified for the damages suffered by the company on behalf of the creditors. As a general rule, bankruptcy administration by default includes possible liability claims in the inventory of assets to be liquidated and distributed in the course of the bankruptcy proceedings. In the event the bankruptcy administration was to waive the assertion of possible liability claims, individual creditors or shareholders may request the assignment of such claims in order to sue the Directors and Officers. In practice, the assertion of damages suffered by the company within the bankruptcy constitutes by far the most frequent constellation of liability claims.

Direct damage to shareholders or creditors: In matters of D&O liability, the shareholders or the creditors may be harmed directly without the company suffering any damage. This is the case if certain shareholders do not receive any dividend or if by a forged balance sheet a creditor is persuaded to grant a loan. In such situations, the directly harmed shareholders or creditors may sue for damages on their own behalf. The Swiss Federal Court, however, has established complex rules regarding the conditions where direct damage may be asserted by shareholders or by creditors.

Breach of duty

D&O liability requires that damage be caused in breach of duty, which is based on applicable laws, by-laws, (internal) regulations or shareholder resolutions.

Duty of care and duty of loyalty: As a general rule, the law requires Directors and Officers to "fulfil their tasks with due care and to safeguard the interests of the company in good faith".

The duty of loyalty requires that a Director or Officer place the interests of the company before his own or those of closely related parties. This general duty of loyalty includes behaviour related to conflicts of interest, confidentiality and secrecy, insider trading and the prohibition against competing with the company.

Both under the duties of care and loyalty, the conduct of Directors & Officers must be assessed against the company's (best) interests. In today's understanding, the company's interests are not limited to short-term profit maximization, but a sustainable growth of the corporate value within the statutory company purpose. In defining of the company's interests, the interests of other stakeholders (e.g., employees and suppliers) may be considered, as long as this is compatible with the shareholder value.

Specific legal obligations: Specific legal obligations to be complied with by Directors and Officers within the general framework (duty of care and duty of loyalty) are found not only in corporate law, but also in capital markets, criminal, social security and tax law. In this respect, there is a worrisome tendency to extend the legal obligations of the Directors and Officers. A recent example includes the obligation to determine the beneficial owner of the company and the prevention of private bribery, which is a tightening of criminal law on corruption.

The most important individual Directors obligations are set forth in art. 716a CO, and are non-transferrable and inalienable (i.e. they cannot be delegated to an Officer). According to that provision, Directors are mandatorily responsible for company strategy, defining of the company organisation and organising all bookkeeping. Another inalienable task is the organisation of compliance whereby compliance with all national and foreign laws, statutes and regulations must be assured. Another inalienable obligation for Directors is to notify the court in the event that the company becomes over indebted. This obligation has a large practical importance since the large part of (successful) liability claims are based on the breach of this obligation.

Group relationships: In terms of liability law, the Swiss Federal Court does not admit group considerations and focuses on the interests of a respective group of companies rather than the interests of the group as a whole. Within international groups, in the course of internal reorganisations, there may be some misunderstanding if the Directors and Officers of a Swiss subsidiary raise this subject. The embedding of a company into a group (particularly in the event of a corporate group clause) may certainly be considered when determining the company's interests. A Director or Officer of a Swiss group company, however, may not excuse his corporate duties and the company's interests by referring to the group affiliation. From a practical point of view, it must be considered that – as long as the Swiss group company does not go bankrupt – the risk of a claim based on D&O liability is small. Prior to a bankruptcy, damage suffered by the company may be asserted only by the company or by the shareholders.

Causal nexus

In order for a Director and Officer to be held liable for damages, there must be a causal nexus between the breach of duty and the damage. Quite frequently, damage is caused by multiple circumstances, such as an acquisition of a non-profitable company. In this context, it is sufficient for a corporate body to have provided a partial cause for the damage that occurred. In the event of a non-profitable acquisition, if the Director's strategic decision was implemented in a non-diligent way by the Officers and if, in spite of their supervisory duties, the Directors did not intervene against it in time, both the Directors and Officers may be liable. In external relationships, bodies are generally jointly liable, and certain reductions of liability may be invoked. In the internal relationships among liable persons, the order of liability among the different bodies may vary considerably (regress claims).


Next, it must be possible to subjectively attribute the fault of behaviour to the Director or Officer. However, the denial of fault is a difficult endeavour, given the fact that the Swiss Federal Court applies objective criteria for behaviour. Therefore, purely subjective excuses such as lack of time, specialist knowledge or professional training are of no help. (Specialist knowledge may even aggravate liability). Management organs, however, are allowed an appropriate familiarisation period of a few months. In this case, obeying the instructions of a sole or majority shareholder is not a mitigating factor.

Avoidance of liability, liability risk reduction

These explanations show how the many responsibilities of Directors and Officers create considerable liability risks. Therefore, finding ways to limit risk or avoid liability are of paramount importance. Some of these ways include:


Appropriate organisation and the distribution of tasks constitute an efficient tool to prevent liability. The allocation of tasks among Directors and Officers should be governed by organisational regulations. Within larger companies, it is customary to set up committees within the Board of Directors. Delegation and the distribution of tasks reduce the scope of obligations regarding the choices, instructions and supervision of the executives (e.g. committee members) who were delegated these tasks. In practice, the key lies with the supervision of executives delegated tasks since the Federal Court assumes a far-reaching obligation for people in supervisory roles to intervene with decisions taken by the supervised executives.

Compliance with corporate law

To reduce the risk of liability, Directors and Officers should comply with the formalities of corporate law, also known as "to play the game of the corporation", which includes:

  • Compliance with the rules on the convening and the organisation of shareholder meetings and of meetings of the board of directors;

  • Compliance with the rules on the distribution of profits, taking into consideration new case law of the Federal Court regarding group financing, such as cash pools, and its effects on the distribution of profits;

  • No mixing of private and company assets.

Directors and Officers can further reduce their risk of liability by not getting involved in struggles for power among shareholders and respecting the rights of minority shareholders.

Specific attention to duties

Case law regarding D&O liability shows that breaches of certain legal obligations often leads to successful liability claims. These breaches include:

  • Transfers of property without any corresponding return, particularly in favour of shareholders, a Director or Officer or another group company;

  • Violation of bookkeeping rules;

  • Violation of capital protection rules in case of loss of capital or over-indebtedness;

  • Failure to call on expert advice despite lack of knowledge;

  • Non-payment of social security contributions for company employees.

Directors and Officers should pay particular attention to the fulfilment of these duties and ensure appropriate risk management. A company's ability to conduct business is based on its personal, organisational and financial capacities.

Business judgment rule

The Business Judgment Rule (BJR) refers to the fact that courts will examine corporate decisions only in a limited manner provided that certain conditions are met. In a recent case, the Federal Court admitted "that the courts will have to show restraint when subsequently examining corporate decisions taken within a flawless decision-making process, based on appropriate information and free from any conflicts of interests". If these conditions are met, a court will likely only examine whether the corporate decision is "rational". In other words, in such a situation, a Director or Officer would be seen as acting contrary to his duties only if the corporate decision is considered unjustifiable. If one of the above conditions is not fulfilled, however, the corporate decision will be examined without restrictions. In this case, liability already occurs if the corporate decision in this situation appears to be "flawed". The decision in this case does not need to be downright unjustifiable.

Given federal case law on the BJR, companies should carefully prepare any corporate decisions and document them thoroughly. This also includes weighing the pros and cons of a decision and keeping records of it. Why a corporate decision is in the best interest of the company should also be recorded. Within reason, the specific corporate decision should be fully discussed and not expressed by standard boilerplate wording. Furthermore, Directors and Officers likely to be involved in a conflict of interest must not participate in the decision. If there is serious conflict of interest, the concerned Directors and Officers must be excluded not only from the decision, but also from all deliberations.

Relying on experts

A managing body does not need to have specialised knowledge at its disposal and the time to personally deal with all questions arising. On the contrary, advice can be sought from internal or external specialists if the necessary expertise and time are not available within the managing body. If Directors and Officers rely on the recommendations of an expert, this should excuse it from liability under the following circumstances:

  • The expert called upon is a renowned specialist;

  • Correct definition of tasks and necessary information are provided;

  • The recommendation is critically verified (plausibility check, seeking of additional clarifications); and

  • Recommendations are diligently implemented.

In practice, relying on experts constitutes an efficient means of defence against possible liability claims, as long as the expert appraisal is not token.

Opposition and resignation

Opposition by Directors and Officers against a management decision normally excludes the breach of obligation or the fault of the opposing member of management. The negative vote of the opposing member, however, must be substantiated and recorded for evidence. For the opposition to avoid liability, the opposition must continue. If an overruled Director or Officer cannot fend off the resolution, resignation as ultima ratio constitutes an efficient protection against D&O liability, but only excludes D&O liability for the future.


The discharge granted by a shareholders resolution is an effective means to limit or avoid the risk of D&O liability. This is, however, somewhat overrated since by virtue of the law the effects of the discharge are limited in the following ways:

  • The resolution to grant discharge only applies to "disclosed" facts. Whether simply "recognisable" facts are also covered by the discharge is disputable. As a general rule, the effect of a discharge granted in the course of an ordinary shareholders meeting is greater than a discharge granted during an extraordinary shareholders meeting since – due to their ratification of the annual report and balance sheet – they are privy to more facts.

  • The effects of a discharge are also restricted by the fact that the discharge is valid only regarding the damage suffered by the company and may be brought up as an objection only to claims asserted by the company and the approving shareholders, whereas the right of the disapproving shareholders to claim damages expires six months after the resolution to grant discharge. This rule also applies to the bankruptcy of the harmed company. Within bankruptcy proceedings, however, the discharge of a harmed company has no effect on the bankruptcy administration or the creditors. In other words, for most damages, the discharge is ineffective.

Indemnification clause

In practice, the question has been raised repeatedly whether Directors and Officers may be effectively released based on indemnification clauses. This depends on who provides the indemnification undertaking, and the following considerations:

  • If an indemnification undertaking is entered into by (individual) shareholders, this does not generally represent a problem. From the point of view of a managing body, such indemnification undertaking constitutes an effective means to avoid liability, as long as the indemnifying shareholder's solvency is assured. An indemnification clause by the shareholders often occurs within fiduciary director mandates (as a clause of the fiduciary agreement) as well as in group of companies.

  • From a legal point of view, however, things are more problematic when the company itself provides an indemnification undertaking in favour of its own corporate bodies. In the event of damages suffered by the company, this would lead to paradoxical situations in which the company would hold the members of the managing bodies harmless regarding its own claims. As a result, such an indemnification clause would have to be construed as an exemption from D&O liability. It is controversial whether such an exemption would be admissible given the generally mandatory nature of D&O liability. Furthermore, it is unclear which corporate body (board of directors or the shareholders) would be competent to grant such a release from D&O liability. The effect of such release being comparable to the effect of the discharge would suggest that a release granted by the company would have to be resolved by the shareholders.

Core messages: You are personally liable if caused damage by breach

  • The basis for the D&O liability is to be found in art. 754 CO and is specified and completed by a complex and constantly evolving case law and doctrine. You are liable with your personal assets in the event you have caused damage by a breach of duty.

  • There are various possibilities to limit or avoid the risk of D&O liability, including an appropriate organisation and distribution of tasks, compliance with the formalities of corporate law, taking company resolutions in a flawless decision-making process based on appropriate information and free from any conflicts of interests and calling upon experts if the members of the managing bodies do not have the necessary expertise or time.

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