Liability for Shareholders and Directors of Limited Liability Companies, for CSR-Related Breaches

Margrethe Buskerud Christoffersen

Professor

Department of Private Law, Faculty of Law, University of Oslo

Publisert 15.02.2024, Oslo Law Review 2024/2, side 1-7

Lesetid ca. 11 minutter

If a limited liability company does not comply with its obligations, the directors and the shareholders of the company can be held liable on further terms under Norwegian law. Such liability can be based on section 17-1 of the Limited Liability Company Act, and the shareholders can additionally be held liable based on the doctrine of piercing the corporate veil. There are several statutes that impose obligations on companies related to human rights, climate and the environment, and if directors or shareholders have acted negligently, they can be held liable for third partiesʼ loss suffered as a result of the companyʼs lack of fulfilment of its obligations. The directors may also be liable for compensatory losses suffered as a result of failure to safeguard the companyʼs interests. Societal interests are part of the companyʼs interest, but there are no examples in Norwegian law of board members being held liable for failure to safeguard such interests.

Keywords

  • CSR
  • liability for directors and shareholders
  • piercing the corporate veil
  • company interest
  • proposed EU Directive on corporate sustainability due diligence

1. Introduction

If a limited liability company does not comply with its obligations of corporate social responsibility (CSR), the question of liability for the directors and the shareholders of the company may arise. In Norwegian law, such liability can be based on Section 17-1 of the Limited Liability Company Act, and the shareholders can additionally be held liable based on the doctrine of piercing the corporate veil.

In this article, I comment on the shareholders and directorsʼ responsibility for the companyʼs CSR, according to Norwegian company law. Furthermore, I comment briefly on the proposal for an EU Directive on Corporate Sustainability Due Diligence. Regulation applying only to public limited liability companies is not dealt with.

2. Directorsʼ Liability for Damages

2.1 Limited Liability Company Act Section 17-1

Section 17-1 of the Limited Liability Company Act legislates the general culpa rule in Norwegian law, for persons associated with a company, such as directors of the board, managing director and shareholders. According to case law, for negligence to be found, the person concerned must be in breach of one of their obligations pursuant to law, the articles of association or non-statutory principles, and that they have acted in a blameworthy manner. The Supreme Court has stated in several cases that violation of such duty is a conclusive presumption for negligence. Accordingly, the sum of the duties applying to the person constitutes the standard of care. To decide whether the directors have acted negligently, it can be decisive whether the board of directors have exposed third parties or the company to an increased risk.

The company, the shareholders and the companyʼs creditors may put forward claims under Section 17-1. In addition to the directorʼs negligence, it is a condition for liability under this provision that someone has suffered a loss caused by the director. When calculating a claim, it is necessary to compare the hypothetical situation had the alleged negligent actions not taken pace, with the factual situation. The claim for damage can be based on the difference.

In this article, I focus on the condition of negligence. Accordingly, it is first necessary to explore the directorsʼ duties related to the companyʼs CSR. It is worth mentioning that there is an increasing number of cases regarding liability for board directors, and that an increasing proportion of these cases end with convictions.

2.2 Important Duties for the Directors

2.2.1 Duties Under Law and Associations

The board of directors and the general manager are responsible for the management of the company according to Sections 6-12 – 6-14 of the Limited Liability Company Act. This responsibility includes ensuring that the company meets the statutory requirements, non-statutory principles and the Articles of association. The board of directors has a duty to supervise the day-to-day management and the companyʼs business. In addition, the board of directors will have certain duties, like the duty to ensure that the equity of the company is adequate (Section 3-4). The directors personally have a strong duty of loyalty towards the company, including a general duty to consider the companyʼs interests and to ensure that the board of directors fulfils its duties.

There are several statutes that impose CSR-related duties on the company, such as the Transparency Act, the Pollution Control Act, the Working Environment Act and the Accounting Act. It is not possible for the board of directors to follow the business on a daily basis to ensure the compliance with such statutes. However, the board of directors has a duty to ensure that the management of the company has sufficient capacity and competence to be able to meet important requirements in statutes and Articles of associations. Furthermore, the board of directors has a duty to ensure that there are control routines to uncover breach of important requirements. The board should be informed about and follow up the compliance work in the company, including risk management, on a running basis.

2.2.2 The Duty to Act in the Best Interest of the Company

The board of directors has an overriding duty to act in the best interest of the company. The interest of the company includes several different interests, which the directors have to balance.

Traditionally, the most important interest is the financial interest of the shareholders, the profit purpose (shareholder value). However, in Norwegian law, it is accepted that other interests are relevant too (stakeholder value). One such interest is the creditorsʼ interest in having their debt settled. The relevance of that interest increases when the company is under financial distress. Furthermore, the directors must pay particular attention to the interest of the companyʼs employees and the interest of the company as an independent legal entity, meaning the interest in continuing as a going concern. In addition, the interest of the wider society is considered to be a part of the interest of the company, including typical aspects of CSR and corporate sustainability, like the environment, climate and human rights. The consideration of the best interest of the company shall be made on a short- and long-term perspective.

2.3 The Assessment of Negligence

A shown above, the company and the board of directors can have duties related to CSR based on different legal grounds. Most important, such duties for the company follow from statutes, and the board of directors have a duty to see to that the company complies with governing laws. As intimated above, lack of fulfilment of the companyʼs statutory requirements may lead to liability for directors pursuant to Section 17-1 of the Limited Liability Company Act.

In principle, the directors can be held liable for not giving priority to broader societal interests, such as sustainability, when governing the company, although all statutory requirements are fulfilled. This is particularly relevant if it would have been in the interest of the shareholders and creditors to ensure that the company operates sustainably. Normally, it will be in the financial interest of the shareholders to respect CSR, because it can strengthen the companyʼs reputation and goodwill and make it more interesting for investors and customers. In these situations, there will be no conflict between the profit purpose and sustainability. However, it is a more difficult question whether the board of directors has a duty to give priority to CSR at the expense of the shareholdersʼ financial interests.

We have no judgments in Norway stating that the directors have acted negligently because they have prioritised the interests of the company wrongly and paid insufficient attention to CSR. For now, if the company complies with all specific statutory requirements related to CSR, it is difficult in my view to see that the directors of the board can be held liable for not paying more attention to CSR. It is relevant that the Supreme Court has stated that the threshold for imposing liability on directors on the basis of an incorrect assessment of risk, is high. However, this situation may change, as a consequence of the legal development in EU and the increasing focus on corporate sustainability (see section 4 below).

3. Shareholdersʼ Responsibility

3.1 Liability According to Limited Liability Company Act Section 17-1

3.1.1 Shareholderʼs Actions Have Caused the Damage – Section 17-1(1)

As already noted, shareholders can be held liable according to Section 17-1(1) if they are in breach of their duties according to statutes, Articles of associations or non-statutory principles. Claims can be raised by the company, other shareholders or creditors, for damage occurred as a consequence of actions at or outside of the general meeting.

There are few rulings by the Norwegian Supreme Court where shareholders are held liable for damages. The main reason is that the shareholders do not have many duties pursuant to the Limited Liability Company Act. One important shareholder duty is not to abuse rights, as described in Section 5-21 in respect of voting on the general meeting. The Supreme Court has imposed liability for shareholders who have incorporated companies with limited liability, exposing another party to an apparent risk of loss. In doing so, the Supreme Court stated: ‘Transferring the lease to an obviously undercapitalised company … constitutes an abuse of the limited liability company formʼ. Accordingly, if a business is transferred to a company with limited liability, with a low equity and with the only purpose to avoid costs related to the companyʼs CSR, the shareholders may be held liable for the creditorʼs loss if the company cannot pay. However, I would like to underline that it is allowed to operate business in a company with limited liability that meets the requirements of equity in the statutes. Liability may apply in cases of abuse of the possibility to operate business in a company with limited liability.

Under the Limited Liability Company Act, the shareholders have no duties related to the management of the company. Accordingly, as a starting point the shareholders have no duty to ensure that the company complies with different statutory requirements. However, statutes applying to the company may be interpreted to include the shareholders, like the Pollution Control Act. According to Section 51 of the Pollution Control Act ‘anyone who possesses, does or initiates anythingʼ can be ordered to pay for a pollution survey. The question dealt with was whether a parent company could be held liable for the costs for a survey related to its subsidiaryʼs business. The Supreme Court held that the wording is rather vague, but that the formulation was carefully chosen to enable the pollution control authorities to choose the obligated party based on the circumstances of the particular case in question. Despite the principle of shareholdersʼ limited liability, the parent company was held liable for the costs for the survey.

Furthermore, the shareholders have a more general duty of loyalty towards the company and the other shareholders, as highlighted in HR-2019-1947-A (Akademiet). This ruling concerned claims by a minority shareholder against the majority shareholder of a company that was part of a group. As the interest of society is a part of the interest of the company, the duty of loyalty towards the company may include a duty to secure CSR. Accordingly, a shareholder can possibly be held liable when a company does not comply with CSR-requirements, if they are in breach of the duty of loyalty. The content and strength of the duty of loyalty will vary with the conditions relevant for each company, and the duty will typically be most comprehensive in smaller companies based on cooperation between the shareholders.

3.1.2 Shareholders Have Contributed to the Damage – Section 17-1(2)

Section 17-1(2) regulates liability for the person who has intentionally or negligently contributed to the injury caused by any of the persons referred to in the first paragraph of Section 17-1. A shareholder who has committed such contribution, will typically be a company and the provision is considered particularly relevant in groups. There is no requirement that the person who caused the injury has acted negligently.

There are a few rulings where shareholders have been found liable under this provision. In HR-2016-1440-A (Håheller) referred to above, the Supreme Court found the husband of the shareholder and sole director liable for contribution pursuant to Section 17-1(2). The Supreme Court gave no justification for the participation, but stated that the couple acted together in the running of the company even though the husband had no formal roles.

In legal theory, it is assumed that if the board of directors of a subsidiary follows an instruction from a shareholder, without conducting an independent consideration of the case, the instructions may qualify as contribution of the person who issued said instructions. Accordingly, if a shareholder instructs the board of directors to make decisions contrary to the companyʼs CSR, the shareholder can under certain conditions be held liable for contributing to damage.

3.2 The Doctrine of Piercing the Corporate Veil

There has been a discussion over many years whether the doctrine of piercing the corporate veil exists under Norwegian law, and if so, under which conditions the shareholders can be responsible for the companyʼs debt. This doctrine is problematic because it implies that a shareholder can be held liable contrary to the basic principle of the shareholdersʼ limitation of liability pursuant to Section 1-2 of the Companies Act. The Supreme Court has recently confirmed that the doctrine exists. Consequently, a parent company can be held liable for the subsidiaryʼs debt.

The first condition for such responsibility will be that the situation otherwise will be unjustifiable for the creditors. This will normally imply that the creditorsʼ claim is based on considerations that are more legitimate than the limitation of liability for shareholders. Secondly, it is a condition that the company structure does not deserve protection. This will typically be the situation in cases of abuse of rights or serious misconduct, exposing the companyʼs creditor to an apparent risk of loss.

The doctrine is particularly relevant for groups and if a company is set up for fraudulent purposes, without sufficient equity. However, in these situations, normally someone has acted negligently and can be held liable according to Section 17-1 presented above. It is likely that the courts will apply the compensation rules rather than the doctrine of piercing the corporate veil. It seems more satisfactory to apply a statutory rule rather than a non-statutory principle which is contrary to the fundamental rule in Section 1-2 of the Limited Liability Company Act.

4. The Proposal for a Directive on Corporate Sustainability Due Diligence (COM/2022/71)

The proposal for a Directive on corporate sustainability due diligence is a part of the European Green Deal towards a sustainable future. The proposal implies duties for companies over a certain size, including duties to conduct human rights and environmental due diligence.

In addition, Article 25 of the proposed Directive imposes duties directly on the directors of the company:

Member States shall ensure that, when fulfilling their duty to act in the best interest of the company, directors of companies referred to in Article 2(1) take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences, including in the short, medium and long termʼ (emphasis added).

If the directors do not comply with this requirement, they can be held liable according to Article 26. There is no requirement of negligence.

As explained in section 2.2.2 above, Norwegian law requires the directors to act in the best interest of company, and they need to balance different relevant interests. However, they have a rather wide discretion in fulfilling this duty, and the threshold for imposing liability on directors on the basis of an incorrect assessment is high. The proposed directive seems to place a stricter duty on the directors, as it imposes a duty to take certain interests into account when making decisions. If the board members fail to take sustainability into account, there may be a breach of duty and they can be held liable. Accordingly, if the Directive with the above-mentioned articles is adopted, it can extend the directorsʼ duties beyond current Norwegian law. However, this matter must be assessed more thoroughly once the directive is adopted, in order to draw safer conclusions.

In my view, it is necessary to consider whether increased responsibility for board members is the best vehicle to ensure a sustainable future. The companies are independent legal subjects and the starting point must be that they are responsible for their actions and omissions and the legislature can make demands on the companies. Recent case law has shown that Section 17-1 of the Limited Liability Company Act is an effective means of holding board members accountable for non-compliance with rules that apply to the company. This includes statutory requirements related to sustainability, human rights, climate change and environmental consequences.

5. Concluding Remarks

Liability for the directors and the shareholders of a limited liability company can be based on Section 17-1 of the Limited Liability Company Act and the shareholders can, in addition, be held liable based on the doctrine of piercing the corporate veil. These rules may apply if the company does not comply with its obligation related to CSR according to statutory rules. The directors may also be liable for compensatory losses suffered as a result of failure to safeguard the companyʼs interests, including societal interests. However, there are no examples in Norwegian law of board members being held liable for failure to safeguard societal interests. If the proposed EU directive is adopted, it will presumably entail stricter liability for board members.

  • 1
    The EU Commission has defined CSR as ‘the responsibility of enterprises for their impacts on societyʼ: Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the regions (COM/2011/681 final) para 3.1.
  • 2
    LOV-1997-06-13-44 om aksjeselskaper (aksjeloven).
  • 3
    Commission Proposal for a Directives on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 (COM/2022/71 final). Subsequent to finalisation of this article in the spring of 2023, the proposal has undergone trilogue negotiation, with adoption expected in early 2024.
  • 4
    Mads H Andenæs, Aksjeselskaper og allmennaksjeselskaper (Mads Henry Andenæs / Calax 2016) 648.
  • 5
    See HR-2020-1947-A (Akademiet) para 74 and HR-2016-1440-A (Håheller) para 41.
  • 6
    HR-2022-1148-A (Sea Lice).
  • 7
    Claims from the company are regulated by contract law and claims from creditors and shareholders are to be considered as tort law.
  • 8
    Andrea Dahlum, Styreansvar i praksis (Fagbokforlaget 2021).
  • 9
    For a comprehensive analysis of the duty of loyalty, see Jessica Østberg, Styrelseledamöters lojalitetsplikt (Jure Förlag 2016).
  • 10
    LOV-2021-06-18-99 om virksomheters åpenhet og arbeid med grunnleggende menneskerettigheter og anstendige arbeidsforhold (åpenhetsloven), LOV-1981-03-13-6 om vern mot forurensninger og om avfall (forurensningsloven) and LOV-2005-06-17-62 om arbeidsmiljø, arbeidstid og stillingsvern mv (arbeidsmiljøloven).
  • 11
    See an analysis of the discussion from an international perspective in Jessica Östberg, ‘The Duty to Act in the Interest of the Companyʼ in Hanne S Birkemose, Mette Neville and Karsten Engsig Sørensen (eds), Instruments of EU Corporate Governance: Effecting Changes in the Management of Companies in a Changing World (Kluwer Law International 2022) ch 2. She states that the discussion of the content of the interest of the company ‘has intensified as a result of the increased focus on corporate sustainabilityʼ (p 15).
  • 12
    Rt 1993 p 1399 (Ytternes) at p 1404.
  • 13
    See the preparatory works for section 8-10 of the Limited Liability Company Act: Prop 135 L (2018–2019) Endringer i aksjelovgivningen mv (langsiktig eierskap i noterte selskaper mv) p 94-95; HR-2017-2375-A (Ulvesund Elektro) regarding CEO liability; Tore Bråthen and Stine Winger Minde, ‘Styrets arbeid med bærekraft etter norsk rettʼ (2022) 4 Nordisk Tidsskrift for Selskabsret 51 and references cited therein.
  • 14
    Beate Sjåfjell, ‘Kan aksjeselskaper sette miljøet foran gevinstkravet?ʼ (2011) 46(6) Jussens Venner 309.
  • 15
    Prop 135 L (2018–2019) Endringer i aksjelovgivningen mv (langsiktig eierskap i noterte selskaper mv) 95.
  • 16
    See eg Rt 1922 p 272 (Freia).
  • 17
    Bråthen and Minde (n 13) item 4.3.
  • 18
    See among others HR-2022-2484-A para 54.
  • 19
    HR-2022-1148-A and HR-2016-1440-A (Håheller).
  • 20
    HR-2016-1440-A (Håheller) para 81.
  • 21
    See Rt 2010 p 306 (Hempel).
  • 22
    Margrethe B Christoffersen, ‘Aksjeeiers lojalitetsplikt etter norsk rett – HR-2020-1947-Aʼ (2021) 56(3) Jussens Venner 152.
  • 23
    For analysis of shareholdersʼ duty of loyalty, see Margrethe B Christoffersen, Aksjeeiers lojalitetsplikt (Gyldendal 2019).
  • 24
    Kristin Norman, ‘Medvirkeransvaret i Aksjeloven og Allmennaksjeloven 17-1(2) – Særlig om Medvirkeransvar i Konsernforholdʼ in Gudmund Knudsen, Kristin Normann and Geir Woxholth (eds), Selskap, kontrakt, konkurs og rettskilder: Festskrift til Mads Henry Andenæs (Gyldendal akademisk 2010) 232.
  • 25
    Kristin N Aarum, Styremedlemmers erstatningsansvar i aksjeselskaper (Gyldendal 1994) 246.
  • 26
    HR-2022-1948-A.
  • 27
    See further analysis in Margrethe B Christoffersen ‘Ansvarsgjennombrudd – kollisjon og samspill mellom erstatningsrettslige og aksjeselskapsrettslige prinsipperʼ (2017) MarIus nr 484, Det 27. Nordiske sjørettsseminar 121-143.
  • 28
    Rt 1996 p 672 (Kongeparken).
  • 29
    Östberg (n 9) para 2,04; Bråthen and Minde (n 13) para 5.
  • 30
    Line G Tjelflaat, ‘EUs forslag til direktiv for virksomheters aktsomhetsvurderinger for menneskerettigheter, klima og miljø – ett skritt frem og to tilbake eller et sidesprang?ʼ Juridika Innsikt (10 May 2022) <https://juridika.no/innsikt/eus-forslag-til-direktiv-for-virksomheters-aktsomhetsvurderinger-for-menneskerettigheter-klima-og-miljø> accessed 12 December 2023.
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