Responsibilities in a limited liability company (AB) – what applies for the board of directors, CEO and authorised signatories?
Latest update: Oct. 22, 2021
Shareholders, the board of directors, the chief executive officer (CEO), the corporate management team and auditors, run, control and are responsible that a limited liability company (Se: Aktiebolag/AB) is managed in the correct manner. Through the annual general meeting, the shareholders appoint the board of directors and, if needed, the auditors. The board of directors in its turn, appoints the CEO who is responsible to the board of directors for the day-to-day management of the limited liability company.
In a limited liability company, the annual general meeting, that is to say, the shareholders, have the ultimate responsibility for the limited liability company. The annual general meeting is the highest decision-making body in a limited liability company. Shareholders do not have any personal financial responsibility for the debts of a limited liability company. The board of directors works to ensure that the objectives and intention of the limited liability company’s owners are met by instructing the CEO, who oversees the operations and employees of the limited liability company. The CEO also works to ensure that bookkeeping is conducted and carried out according to the law and that the finances of the limited liability company are managed in a secure way. Auditors check on and audit the board of directors’ and CEO’s management of the limited liability company and report to the annual general meeting.
For the remainder of this blog, we will focus on the responsibilities the board of directors, CEO and authorised signatories have in a limited liability company.
The board of directors
As has already been noted, the board of directors is appointed by the annual general meeting. All limited liability companies must have a board of directors. In a private limited liability company, the board of directors can consist of one or more board members. In a public limited liability company, the board of directors is required to be made up of at least 3 board members.
A board member must:
- be a natural person,
- be at least 18 years of age,
- not be declared bankrupt,
- not have a guardian,
- not be prohibited to conduct business.
A board of directors with more than one board member must appoint a chair of the board, often referred to as a chairperson. The chairperson is responsible for leading the board of directors and ensuring that the board carries out its duties. The board of directors shall, in the annual general meeting, appoint at least one deputy board member.
What is the role of the board of directors?
The role of the board of directors is described in the Swedish Academy of Board Directors guide on good board governance as follows,
“the board of directors’ most fundamental task is to, starting with the overall intention of the owners, decide on the business concept, goals, strategy and organisation of the limited liability company, with the intention to, in the best manner possible, fulfil the common interests of the limited liability company’s owners”
That said, a board of directors, amongst other things,
- leads the operations of the limited liability company
- is responsible for the organisation and management of the limited liability company
- keeps an eye on the financial position of the limited liability company
- ensures that the limited liability company pays relevant taxes and similar
- summons the shareholders to the annual general meeting
In addition, there exists further obligations for a board of directors, some of which we will outline in more detail below.
The board of directors is responsible for the financial position of the limited liability company. Should there be reason to believe that the share capital of the limited liability company has dropped below half of the registered share capital, the board of directors is obliged to prepare a balance sheet for liquidation purposes (Se: kontrollbalansräkning). Should the balance sheet for liquidation purposes show that the share capital is below half of the registered share capital, an extraordinary annual general meeting should be convened to determine whether the limited liability company should go into liquidation. Should the extraordinary annual general meeting decide that the limited liability company should continue trading, a new extraordinary annual general meeting must be convened, and a decision taken as to whether a new balance sheet for liquidation purposes should be prepared. The decisions which are required to be taken in the extraordinary annual general meeting must be done within strict time frames. Should the balance sheet for liquidation purposes show that the share capital has returned to the required levels, the limited liability company can continue to trade. If the balance sheet for liquidation purposes shows however that the share capital has not been restored to the required levels and the limited liability company continues to trade, personal liability for the shareholders and board of directors arises.
The board of directors is responsible to ensure that the limited liability company pays its taxes and fees. Failure by a limited liability company to pay its taxes may entail personal liability for the board of directors, deputy board members or those who have a senior position in the limited liability company for the tax liabilities.
Personal liability is not normally asserted until a limited liability has been declared bankrupt. The Swedish tax authorities (Se: Skatteverket) can then bring an action before the Administrative District Court (Se: Förvaltningsrätten). It is for the Administrative District Court to then decide on personal liability for the debts of the limited liability company. This liability is usually based on the amounts recorded in the limited liability company’s tax accounts.
A board member is obliged to keep themselves informed and regularly assess the position of the limited liability company and its affairs. As a result, personal liability can arise where this is not done – a board member acts solely in a passive manner. A board member can however avoid responsibility should they reserve themselves from a decision or show that requested information was incorrect.
Conflict of interest
The Swedish Companies Act contains extensive rules on conflicts of interest for members of a board of directors. The primary rule states that a board member may not involve themselves in questions concerning contracts between board members and the limited liability company.
For example: the fee paid to board members is determined by the Annual General Meeting and not the board of directors.
Board members may not involve themselves in work concerning contracts with third parties where the board member has an interest in the topic. For example, if the contract is being entered with a person who has a close relationship with the board member, or with a company the board member represents that is not within the same corporate family as the limited liability company. These rules also regulate that an employee representative may be prevented from partaking in decisions concerning employee benefits.
Board members who commit a breach the rules concerning conflicts of interest that causes damage to the limited liability company, or another board member, can be held liable for the damage. These rules exist to protect the interests of the shareholders and as a result have no impact on questions about which all shareholders agree.
The board of directors, and therefore, board members, may not, whether internationally or through negligence, cause damage to the limited liability company. A board member who, in their role, whether intentionally or by negligence, damages the limited liability company, shall compensate for the damage. This applies to both obvious breaches of the Swedish Companies Act, bylaws of the limited liability company and other laws and violations of duty of confidentiality, loyalty and duty of care.
Penalties and fines
Undertaking board member assignments comes, as we hope is now clear, with responsibilities, obligations and corresponding potential consequences. There are four instances (unless there is a crime) where fines and prison sentences can apply,
- Distribution of shares
- Failure to maintain the share register or make the share register available
- Failure to hold a board meeting, failure to give the opportunity for a board member who is unable to partake in a board meeting to appoint their deputy and failure to take decisions in accordance with the Swedish Companies Act.
- the lending of a prohibited loan by the limited liability company
Deputy board member
As previously mentioned, a board of directors with one or two board members must appoint at least one deputy board member.
The responsibility of the deputy board member, where the deputy board member partakes in decision making when present on the board due to the absence of the ordinary board member, is the same as that of an ordinary board member.
Additionally, it is important to be aware that deputy board members are required to always keep themselves informed of the status and health of the limited liability company and to therefore act should something potentially cause harm to the limited liability company.
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The board of directors’ responsibility as deputy and authorised signatory
The board of directors and CEO drive and manage the limited liability company. In short, the CEO is the person who manages the limited liability company’s day to day management in accordance with the instructions and guidelines of the board of directors. What is considered as ‘day to day management’ depends to a large extent on the size of the company. It can generally be considered as the daily, normal work tasks of the limited liability company – the operational management of the limited liability company. Moreover, the CEO has the responsibility to ensure that the limited liability company’s bookkeeping is handled in accordance with the applicable law and that the financial position of the company is being managed and maintained to an adequate level.
Both the board of directors and the CEO have, within their areas of responsibility, the right and authority to enter into contracts with third parties. In addition, specific authorised signatories can be appointed, formally or informally, within a limited liability company. An authorised signatory is considered to have an assignment from the board of directors. Members of the board of directors can together or individually represent the limited liability company. The CEO can individually represent the limited liability company when it concerns the day to day management. Furthermore, other persons can, as a result of their position within the company, have the right to represent and sign on behalf of the company. An example of such a position is the head of purchasing.
What happens if someone acts outside of their authority?
There exists set rules governing situations where someone acts outside of their authority. These rules state that where someone enters a contract for which they do not have the authority to do so – whether based on the rules set out in the Swedish Companies Act or other instructions they have received – the contract will not apply to the limited liability company. The individual who has entered the contract will instead be personally responsible for the contract.
We earlier explained the rules concerning liability for damages in the Swedish Companies Act - that it is solely shareholders, board members and CEOs for whom liability for damages can arise under the Act. Authorised signatories are not covered under the Act and therefore have no liability for damages towards the limited liability company. An authorised signatory is not considered to have any specific duty of administrative care towards the limited liability company. Should an authorised signatory cause damage to the limited liability company, it is the general rules governing damages for businesspersons set out in the Commercial Code (Se: Handelsbalken) that will apply. That said, case law of the courts has considered that the responsibility that rests with the board of directors and CEO can be considered to rest with another person with a position within the limited liability company – they who, given their position, has influence over the operations of the limited liability company.
This means that a person with significant influence over what contracts a limited liability company enters can be considered to have the same responsibilities as the board of directors and CEO. This responsibility means that damages can be claimed from an authorised signatory should the shareholders consider the authorised signatory to have entered a contract that has caused damage to the limited liability company.
Considering the above, it is important that authorised signatories keep in mind that,
- authorised signatories should request clear, written instructions as to when he/she can sign on behalf of the limited liability company and only act within those instructions. To not do so risks her/him being held responsible for the signed contract,
- depending on the scope of influence that the authorised signatory has on what contracts the limited liability company enters, the authorised signatory can have the same responsibility as the board of directors and CEO. Should the authorised signatory sign contracts that can be seen by the shareholders as damaging to the limited liability company, the shareholders can demand that he/she compensate for the damage caused, and
- criminal liability can arise under the Penal Code.
A limited liability company is run by its shareholders, board of directors, CEO, management team and auditors. Taking on a board member position or role such as CEO comes with responsibilities and obligations which carry potential consequences. It is important that those taking on these roles understand the responsibilities and obligations that these positions entail. In addition to those mentioned above, there exists further provisions on the responsibility of board members. We recommend that those with or intending to take on these roles take the time to familiarise themselves that the responsibilities which follow from the position. Certain protection can be obtained by taking out liability insurance. If taken out, it is important that the terms and conditions of the insurance are relevant to the situation and risks that can arise with the limited liability company in question. That said, there exists not insurance that can cover the responsibility of a person who has committed a crime.
We at Lundberg & Associates have many years of experience working with corporate governance and even take on board of director positions. As a result, we have extensive experience of corporate governance within differing industry branches and can advise in both small and complex questions. You are welcome, and please don’t hesitate, to contract us should you have any questions.
Published: Oct. 22, 2021