Portugal

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

Solvency 

The highest priority is to address the short- and long-term financial sustainability of the company. This will require a careful assessment of projected cash flow solvency as well as balance sheet solvency. Directors must ensure that they have up-to-date information on which to base their decisions, together with a firm grasp on how the company’s markets and prospects are likely to be affected by the crisis. Uncertainty over the timetable for exit from current lockdown rules, and the speed of economic recovery, means that directors will have to plan for a variety of different scenarios, and develop alternative plans that can be implemented as necessary, particularly if the worst case outcomes seem likely. Directors of companies threatened with insolvency should: (i) seek specialist advice, both legal and financial; (ii) ensure that all directors and key stakeholders are kept informed and onside; and (iii) keep a clear record of their decision-making and the materials available to them to review. 

Risk

Even if the company’s solvency is not in question, directors are likely to be faced with a number of difficult decisions as they develop their strategy for the company. For example, the need to ensure safe working conditions for staff will often conflict with purely commercial objectives. Consumer-facing companies will also have to manage new reputational issues as public expectations of companies shift as a result of the crisis, and ensure that their communication strategy is adequately prioritised.

Directors need to find a way to balance these competing considerations as, pursuant to the duty of loyalty, directors shall act in the company’s interest and take into account the long-term interests of shareholders while also considering the interests of other stakeholders (e.g. employees, clients and creditors).

Logistics

Directors should address the logistical challenges which international lockdown rules and social distancing create. Existing operations including supply and distribution chains, and internal processes such as accounting, reporting and HR management, will be disrupted. During the crisis, it may be difficult for directors to hold meetings in the normal way. There is no restriction under Portuguese law on holding virtual meetings (although the company’s articles of association should be checked).

2. What government relief measures have been made available to directors?

Directors should be aware and possibly apply to credit facility programmes created by government to assist businesses with working capital and cash-flow requirements:

  • Credit Facility Funding (Capitalizar) 2018 – Covid-19, mostly directed at small- and medium-sized enterprises (SMEs)
  • Credit Facility for Micro-companies in the Tourism Sector (60ME)
  • Credit Facility for Restaurants and Related Sectors (600M)
  • Credit Facility for Travel Agencies, Tourist Animation, Event Planning and Related Sectors (200ME)
  • Credit Facility for Companies in the Tourism Sector (including tourist complexes and tourism accommodation) (900ME)
  • Credit Facility for Industry – Textile, Clothing, Footwear, Extractive Industries and Wood Sector (1,300ME)

The government has also enacted a moratorium under which companies benefit from: (i) a prohibition imposed on credit institutions from terminating credit facilities or loans for as long as the moratorium is in force; (ii) extension of payment dates of capital and interest payments for a period corresponding to the moratorium period; (iii) suspension of the obligation to pay capital and interest until the end of the moratorium.

The government has also approved measures in respect of public incentive schemes as follows: (i) advance payments of public incentives to companies; (ii) deferral of maturity of reimbursable incentives, within the public programmes QREN, PT2020, and Wine and Vineyard Institute (Instituto do Vinho e da Vinha); (iii) assessment of the effects of COVID-19 on the agreed objectives, there being no penalty for insufficient measures or goals achieved due to COVID-19. Within PT2020, costs borne with events cancelled or postponed are eligible for these measures.

These relief measures are covered in more detail in other CMS publications (see our COVID-19 page). 

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

In general, directors’ duties remain as before, as set out in the rest of this guide.

The government granted relief regarding the duty of directors to apply for a declaration of insolvency on behalf of the company within 30 days of the date on which directors become aware of, or ought to have become aware of, the insolvency situation, by suspending this deadline until further legislation comes into force. Therefore, directors do not have to apply for insolvency during this period of relief, but may do so if applying for insolvency is in the company’s best interest. 

Directors duties and responsibilities

1. What form does the board of directors take?

The company’s management body may consist of either one or more individuals. When a private limited liability company has two or more directors, they may act jointly or collegiately. The articles of association of a private limited liability company may also establish that the company is managed by a board of directors, in which case this body will function on a collegiate basis.
Public limited liability companies are managed by a board of directors – consisting of more than one individual – but may have a sole director provided that their share capital does not exceed EUR 200,000. The board of directors may take one of three governance models:

  • single board
  • single board of directors, comprising an audit committee
  • two-tier board, comprising an executive board of directors and a general and supervisory board.

2. What is the role of non-executive or supervisory directors?

Any governance model allows for the board of a company to comprise both executive directors and non-executive directors (or roles akin to those of executive and non-executive directors). Executive directors and non-executive directors are subject to the same duties, however executive directors discharge their duties by having an executive role within the company, whereas non-executive directors discharge their duties by exercising a general oversight of the executive directors’ management.

3. Who can be appointed as a director? 

Both private individuals and legal persons, such as corporations, are eligible to be appointed for directorship positions. This is specifically established for public limited companies and is also accepted practice in relation to private limited liability companies (although there is case law which rejects this possibility). In the event that a legal person is appointed as a director, it must appoint a private individual to represent it. The legal person will share liability with the private individual appointed to represent it.

A director is not required to be a shareholder in the company and does not need to be resident in Portugal or a Portuguese national. However, a foreign director will need to obtain a Portuguese Tax Identification Number (NIF).
Minors, incapacitated persons or persons pronounced legally incapable by the courts are not eligible to act as directors.

4. How is a director appointed?

As a general rule, directors are appointed by a shareholders’ meeting (such appointment may also occur upon the company’s incorporation, with a provision included in the relevant incorporation document to appoint the relevant directors).
The articles of association of a public limited liability company may grant minority shareholders (with at least 10% of the shares representing the share capital of the company) the right to appoint one director.

If one or more directors of a public limited liability company are permanently absent they may be substituted by an alternate director(s) – if one or more have been appointed – or if there are no alternate directors, the board of directors may co-opt a new director. If no new director is appointed by co-optation, the audit board or the audit committee are entitled to appoint a new director. In both situations, such appointment requires the ratification of the shareholders in a subsequent shareholders’ meeting.

Directors of private limited companies are appointed for an indefinite term, unless the articles of association establish otherwise. The directors of a public limited company are appointed for a period of time set out in the articles of association of the company up to a maximum of 4 years.

In both cases, directors can be re-elected unless the articles provide otherwise. Directors must accept the appointment (this acceptance is deemed implied if directors start acting in such capacity) and the appointment must be registered with the Commercial Registration Office.

In certain situations (in particular if the management of the company is jeopardised by the permanent or temporary absence of one of the directors or if the board does not have sufficient quorum to function), the directors or the shareholders may request the court to appoint a new director. For public limited liability companies, such request can only be submitted to the courts by shareholders.

5. How is a director removed from office?

A director may resign from office at any time by notifying the company.

The resignation of a director of a private limited liability company becomes effective 8 days after the notification has been received. The resignation of a director of a public limited liability company becomes effective at the end of the month following the notification, except if a substituting director is appointed in the meantime.

Directors are also removed upon expiry of the term they have been appointed for. If a term for which the directors have been appointed has expired without a shareholders’ meeting having convened and appointed new members, the directors will remain in office until the appointment of substituting members.

In addition, a director may be removed at any time by resolution of a shareholders’ meeting. Such removal may be: (i) based on just cause; or (ii) without just cause, in which case the company may be liable to pay compensation to the dismissed director for the damages the latter suffered as a result of the dismissal.

The compensation resulting from removal without just cause is capped and may not exceed the amount the director would have received up to the end of the period he/she had been elected for. For private limited liability companies, if there is no time limitation in the articles of association of the company for the relevant term, there is a legal presumption that such period does not exceed 4 years.

Removal or resignation of a director is subject to registration with the Commercial Registration Office.

6. What authority does a director have to represent the company?

The directors are the company’s managing body with full authority to represent the company in all actions related to the company’s corporate purpose.

The company will always be liable to third parties acting in good faith in respect of actions taken by its directors, even when acting outside its corporate purpose. The authority to represent the company becomes effective upon acceptance of the directorship position. However, in relation to third parties, the appointment is not enforceable until registration with the Commercial Registration Office occurs.

In the case of private limited liability companies, it is not common for a board of directors to be established to manage the company. When there is more than one managing director, the respective powers and authority are exercised jointly and the company is deemed bound by the transactions concluded by the majority of managing directors.

When the company’s management body is organised as a board of directors (not common in private limited liability companies but common in public ones), corporate authority vests with the board of directors as a whole and such authority is exercised by the directors acting jointly. The company is bound by the majority of the directors (or ratified by such majority), unless the articles of association provide that a lower number of directors is required.

7. How does the board operate in practice?

The board of directors is a collegiate body and does not have a maximum number of members. The articles of association must set out the number of members of the board, or the minimum and the maximum number of members, in which case the general meeting determines the actual number of directors for the relevant term.

A minimum attendance of a majority of the board’s members is required for a quorate board meeting.
Decisions of the board are reached by a majority of present or represented members. The chairman of the board has a casting vote in the event the board consists of an even number of members (or if the articles of association establish such a casting vote). Board minutes have to be recorded in the relevant meetings book.

It is common in public limited liability companies to delegate certain powers to a managing director (this is also possible but not as common in private limited liability companies), or to an executive committee. The delegate(s)/executive committee have the same authority to represent the company as the board within the powers that have been attributed to it. There are, however, certain powers that cannot be delegated, such as approval of the annual accounts, creation of guarantees, mergers, transformations, share capital increases and change of registered office.

In both private and public limited liability companies, the board of directors or managing directors (with the necessary authority) can grant powers of representation to third parties to act, with full authority, on behalf of the company.

8. What contractual relationship does the director have with the company?

The characterisation of the relationship of a director with the company is a disputed issue in Portugal.

The appointment of a director is generally deemed to be a corporate relationship in which a sui generis contractual relationship is also established between the company and the director, comprising aspects of mandate, services and employment agreements.

In public limited liability companies, it is common for an administration agreement (incorporating elements from typical services and mandate agreements) to be entered into between the company and the director.

As a general rule, directors are remunerated, although the articles of association of a private limited liability company may establish otherwise.

In public limited liability companies, if the appointed director was previously an employee of the company, the employment agreement is automatically deemed suspended, ceasing to be effective upon appointment. It will however automatically come into force when such a person ceases to be a director, irrespective of the method of removal (i.e. resignation or dismissal).

9. What rules apply in respect of conflicts of interest?

Portuguese law does not have specific rules on conflicts of interest applicable to a director. However, it does establish conduct rules, specifying that the directors have a duty of loyalty towards the company.

It is generally accepted that directors should not make decisions when there is a situation of conflict of interest (i.e. the director has a personal interest in a particular decision which may not be in line with the company’s interests). In such cases, the director may be liable towards the company for any damages resulting from breach of this duty.

To avoid potential conflicts of interest, and unless the shareholders give their consent, directors are prohibited from conducting, directly or indirectly, any competing activity with the company, being liable towards the company for any breach of this obligation. Portuguese law also establishes a general prohibition for the company to enter into agreements with the directors unless the board of directors has previously passed a resolution approving this. Portuguese law establishes a specific prohibition on companies facilitating loans to directors, making payments on their behalf or creating guarantees to cover their obligations.

10. What other general duties does a director have?

The main duties of the director are: (i) a duty of care, which entails that a director has the necessary availability, skills and knowledge of the company’s business while performing his/her functions with the diligence of a cautious, thorough and organised businessperson; and (ii) a duty of loyalty, which entails acting in the company’s interest and taking into account the long-term interests of shareholders, while also considering the interests of other stakeholders (e.g. employees, clients and creditors).

These general fiduciary duties are the basis of several specific duties established in the Portuguese Companies Code which are applicable to directors of both private and public limited liability companies.

11. To whom does the director owe duties?

As a general rule, directors’ duties are owed to the company. Although is a debatable issue in Portugal, it is generally understood that this means that duties are in fact owed to the shareholders as a whole and not to the company itself, as if it were a separate person with interests that are autonomous from those of its shareholders. 

In respect of the duty of loyalty, directors shall also consider the interests of other stakeholders (e.g. employees, clients and creditors).

12. How do the director’s duties change if the company is in financial difficulties?

A scenario of financial distress does not entail any changes to a director’s duties mentioned above. However, there are additional duties that directors have to comply with.

When it results from the annual or interim accounts that “half of the share capital is lost”, or when there are, at any given time, grounded reasons to consider that such a loss occurs, directors should call or request the convening of a shareholders’ meeting to inform shareholders of the situation and to take the measures deemed convenient. “Half of the share capital” is considered to have been “lost” when the company’s net equity is equal to or less than half of the share capital.

Directors are also legally required to apply for a declaration of insolvency on behalf of the company within 30 days of the date on which directors become aware of, or ought to have become aware of, the insolvency situation. 

13. What potential liabilities can a director incur?

Liability vis à vis the company

Directors are jointly and severally liable vis à vis the company for unlawful actions or omissions resulting from a breach of their legal or contractual duties and which have caused damages to the company, except in the event that the director was not in attendance at the meeting when such a decision was taken or he/she voted against it. A claim may be brought by the company or, on its behalf, by shareholder(s) holding at least a 5% stake in the company (or 2% if the company is listed). The company is not required to prove that the conduct of the directors resulted from wilful misconduct or negligence, as there is a legal presumption to that effect.

Directors will not be liable if they are able to prove that they were properly informed, that no conflicts of interest existed and that the relevant decisions were based on rational criteria from a corporate/economic standpoint or if the unlawful actions or omissions of the directors resulted from a shareholders’ resolution.

Liability vis à vis the company’s creditors

If the directors have wilfully or negligently breached legal or contractual duties which are established for the protection of creditors, they may be liable vis à vis the company’s creditors if the assets of the company are insufficient to meet the company’s indebtedness towards its creditors. If no action is taken by the company or its shareholders (as a result of the mechanism described above), the company’s creditors may exercise the company’s rights and claim the relevant damages from the directors for the company.

Liability vis à vis shareholders or third parties

Directors may also be liable vis à vis shareholders or other third parties for any direct damages that may result from the performance of their functions as directors. In this case, directors shall only be liable if all general requirements for civil liability are met, i.e. there is an unlawful action or omission by the directors, the conduct is carried out with wilful misconduct or negligence, such action or omission has caused damages and there is a link between the action or omission and the damages. Third parties will include any party which is not the company, a director or a shareholder (while acting in such capacity) and may include employees, suppliers, clients, the State or any other creditors.

Liability arising from company’s tax debts

In the event a company has a liability under tax law, and the company does not possess enough assets to cover such liability, directors may be jointly and severally liable for any tax debt which derives from actions or facts occurring during their term in office.

In addition, directors may also be found criminally liable for such actions or facts.

Liability arising from labour credits

Directors may also be jointly and severally liable for the payment of labour credits arising from the labour relationship, its breach or termination, if they are overdue for more than 3 months, to the extent the requirements regarding liability vis à vis the company’s creditors or its shareholders/third parties, as provided above, apply.

Liability arising from social security and other labour administrative offences

Directors may be jointly and severally liable for the payment of the applicable administrative fines for social security and other labour administrative offences.

Criminal liability

In addition to criminal liability deriving from tax debts, there are several actions that may result in criminal liability of the directors, including: (i) refusing to provide information relating to the preparation of shareholder meetings to interested parties; (ii) misrepresentation of company information to persons with a right to receive information; (iii) irregular issuance of share or bond certificates; or (iv) rendering the company insolvent (either as a result of wilful misconduct or negligence).

14. How can a director limit his/her liability?

Directors’ liabilities cannot be limited by agreement. Such clause, if it exists, is deemed null and void.
In addition, shareholders may only waive their right to receive compensation or agree on a reduction thereof by a resolution of the shareholders representing more than 90% of the company’s share capital.

Directors of public limited liability companies are required to provide a performance guarantee to cover potential liabilities (which may be replaced by the aforementioned insurance). Notwithstanding the above, insurance policies may be used to cover directors’ liability. However, with the exception of listed companies, the performance guarantee may be waived by the company. 

Notwithstanding the above, insurance policies may be used to cover directors’ liability. It is generally accepted that the company pays for insurance premiums. Directors are required to provide a performance guarantee to cover potential liabilities (which may be replaced by the aforementioned insurance), unless at least two of the following thresholds are not exceeded for a period of 2 consecutive years:

  • aggregate assets: EUR 20 million
  • aggregate turnover: EUR 40 million
  • number of employees: 250.
João Caldeira
João Caldeira
Partner
Lisbon