Discharge the Board of Director from liability

Corporate governance is one of the fundamental pillars ensuring the success and stability of the commercial entities. The Board of Directors plays a leading role which holds the responsibility for setting strategic policies and making critical decisions.

Under Egyptian Companies Law No. 159 of 1981, members of the Board of Directors are granted a wide authority; however, these authorities are counterbalanced by legal responsibilities that may expose them to civil or criminal liability. In this context, the discharge of liability for board members emerges as a crucial legal mechanism to protect them upon the conclusion of their term of service.

The definition of the Discharge from Liability

The term “discharge from liability” refers to a legal act through which a member of the board of directors is released from any responsibility for actions taken during their term. This discharge is typically granted as per the Ordinary General Assembly of shareholders following their review of the company’s financial statements and the auditor’s report.

• According to article no.220 from the Executive Regulations of the Companies Law the General Assembly is the competent authority to consider granting discharge from liability to the board members after reviewing the financial statements, the board’s report, and the auditor’s report.
• The discharge does not relieve a board member from liability in cases where fraud or deception is proven and was unknown at the time of voting.

The Role of the General Assembly and the Vote on Discharge from Liability

General Assemblies

Under the Companies Law, the Ordinary General Assembly of the company is the competent authority to grant or reject the discharge from liability for members of the Board of Directors. For the Assembly’s decisions to be valid, it must convene with the legally required quorum, and the discharge item must be included in the agenda.

Discharge from Liability in the Ordinary General Assembly – The General Rule:

The primary case in which discharge from liability is granted to the Board is through the Ordinary General Assembly, in the following cases:

• Upon discussion of the annual financial statements (including the balance sheet, income statement, and cash flows):

The Board of Directors presents its report on the company’s annual activities.

The auditor presents his report about the ended fiscal year.

A vote is held on the item: “Discharge of liability of board members.”

• Upon the end of the Board’s term or its re-election:

Discharge is typically attached to the decision of renewing confidence in the board or appointing a new one.

• In the case of the resignation of a board member or the entire board:

The Assembly reviews their performance during their term to decide on granting discharge from liability.

Article 219 of the Executive Regulations provides that the Ordinary General Assembly shall review the approval of the financial statements and the discharge from the Board members.

The Extra Ordinary General Assembly – Rare and Restricted Cases:

The Extra Ordinary General Assembly is not competent to grant discharge from liability, as it does not review the financial or annual administrative matters. Instead, it addresses substantial corporate matters such as:

1. Amending the Articles of Incorporation.
2. Dissolving or merging the company.
3. Increasing or reducing capital.
4. Changing the legal form of the company.

However, in some exceptional cases, the discharge of liability may be discussed in an Extraordinary General Assembly, such as:

1. If a court or regulatory authority (such as the General Authority for Investment or the Financial Regulatory Authority) issues a decision to cancel the Ordinary General Assembly due to procedural defects the company may convene an emergency Extra Ordinary Assembly to insert the discharge item in order to correct the procedural defect.
2. Upon the dissolution and liquidation of the company an Extra Ordinary Assembly is held to discuss the liquidation, during which the discharge of outgoing board members may be mentioned or to settle financial liabilities.
3. Where the articles of Incorporation include a specific clause or a strong justification allowing the Extra Ordinary General Assembly to consider the discharge:
   This is often based on a decision passed by the Extra Ordinary Assembly at the request of a specific shareholder majority.

Voting Mechanism:

The law requires that the voting be and based on a clearly presented financial data.

A board member shall be prohibited from voting on the decision concerning their own discharge.

Legal Effects of the Discharge

1. Exemption from Liability

The granting of discharge by the General Assembly results the following:

• The company shall loss its right to pursue claims against the discharged Board member (in the absence of fraud).
• Legal protection of the Board member from civil or criminal lawsuits related to their financial or administrative conduct during their term.

2. Restrictions on the Discharge

• The discharge does not apply if it is later proven that there was a material violation not disclosed to the Assembly.
• It does not prevent regulatory authorities or courts from initiating liability actions if violations are subsequently discovered.

Importance of the Discharge

1. For the Company: Enhances transparency and accountability before shareholders, and ensures that management has acted in compliance with laws and regulations.

2. For the Board Members: Provides legal protection at the end of their service, and reinforces confidence among leadership to assume roles without fear of future prosecution.

3. Legal and Economic Importance: The discharge encourages qualified professionals to serve on boards within a legally secure environment, and contributes to market stability and improving the corporate governance.

Discharge in Light of Judicial Precedents

The Egyptian Court of Cassation has established an important legal principle whereby a discharge from liability is not valid unless:

• All the financial statements and reports are presented to the Assembly.
• The discharge is granted with full acknowledgement.
• There is no deception or concealment of material facts.

Legal and Practical Recommendations

1. Companies must document everything presented to the Assemblies to ensure the legal validity of the discharge.
2. Shareholders should be trained to understand the contents of the financial statements before voting.
3. There must be a greater supervision on collecting votes for discharge without thorough review.

Conclusion

The discharge from liability under Egyptian Companies Law No. 159 of 1981 remains a vital legal tool that balances the relationship between management and shareholders.

However, it must not be misused as a shield to evade responsibility or conceal misconduct. Its application requires a deep understanding of both legal and accounting principles on the part of shareholders, along with strict adherence to transparency to preserve the integrity of assembly proceedings and the legitimacy of their resolutions.