The board's liability in an ApS

Many people set up an ApS and put friends, family or investors on the board without thinking about the legal consequences. But sitting on a board is not a titular honorary post, it is a real responsibility that under certain circumstances can lead to personal liability and liability for damages.

This guide explains what the board of an ApS is responsible for, when board members are personally liable, and what good governance documentation looks like.

Board or management: what is the difference in an ApS?

In an ApS there are basically two management structures:

1. Management (director) alone

The simplest setup: one or more directors run the company. There is no board. The director is the day-to-day manager and the registered person authorised to bind the company.

Suits: Simple, one-person or family-owned ApS companies.

2. Board + management

The board is the top management body and sets the company's overall strategy and controls the management. The director is responsible for day-to-day operations.

Suits: Larger ApS companies, companies with investors, companies with external capital or a governance requirement.

Note: In an ApS a board is not mandatory, unless it appears from the articles of association or is required by the owners. In an A/S, by contrast, a board is mandatory.

What are the board's tasks?

The board's primary tasks are:

Strategic management

• Set the company's overall strategy and goals
• Approve budgets and significant investments
• Approve the acquisition and disposal of significant assets

Supervision of management

• Hire, remunerate and dismiss the director
• Follow up on the management's work and results
• Ensure that the management acts within the framework the board has set

Financial supervision

• Receive and consider quarterly and annual reports
• Ensure a sound capital reserve (liquidity)
• React to signs of capital loss or insolvency

Statutory supervision

• Ensure that the company's activities comply with the law
• Ensure correct financial reporting
• Ensure that the company has sound internal controls

Board members' liability: the basics

Board members in an ApS are subject to the management liability under the Companies Act (selskabsloven §§ 115-118 and 361) as well as the general rules of Danish tort law.

The general duty-of-care principle

Board members must act with the care and consideration that a reasonable and honest person would exercise in the position. This is the central standard for assessing whether a board member has acted in a way that gives rise to liability.

Concretely, this means:

• Attend the board meetings and prepare
• Familiarise yourself with the matters discussed
• Ask critical questions and express your opinion
• React when you discover problems
• Obtain professional advice (lawyer, accountant) in cases of doubt

When does personal liability arise?

Board members are as a rule not personally liable for the company's debt, that is precisely the whole idea of a private limited company. But personal liability can arise when:

1. Grossly negligent or intentional acts The board makes a decision that is manifestly irresponsible and harmful, for example approving a distribution of capital that makes the company insolvent.

2. A lack of reaction to capital loss The Companies Act § 119 requires management to ensure that a general meeting is held no later than 6 months after it is established that the company's equity is less than half of the subscribed capital. If the board fails to do this, it can incur liability.

3. Continued operation during insolvency (masked liquidation) If the board continues operations even though the company is technically insolvent, and this causes losses to creditors, board members can be held personally liable.

4. Breach of specific legislation For example a breach of working-environment law, tax law or GDPR that leads to a loss for the company or a third party.

5. Transactions with related parties (conflict of interest) If the board approves transactions that benefit board members' own interests at the company's expense, it is a clear case of liability.

The director's liability vs. the board's liability

In companies with both a board and management there is a clear distinction:

	Board	Management
Overall strategy	Responsible	Implements
Day-to-day operations	Supervision	Responsible
Hiring/dismissal of director	The board	n/a
Authority to bind	Per the articles	Yes
Liability for day-to-day operational acts	Indirect (supervision)	Direct

It is possible to be both chair of the board and director, but this is not recommended from a governance perspective, as it weakens the supervisory function.

Rules of procedure for the board: the most important governance document

Rules of procedure for the board (bestyrelsesforretningsorden) are an internal set of rules that establish how the board works. They are not mandatory, but strongly recommended and in practice obligatory for companies that want to run good governance.

What must the rules of procedure contain?

1. Meeting cadence and convening

• The number of ordinary board meetings per year (typically 4-6)
• The procedure for convening (notice, who convenes)
• Requirements for the agenda and the deadline for sending out documents

2. Quorum and voting rules

• Quorum requirements, for example that at least half of the board members are present
• Voting rules, simple majority, qualified majority or unanimity for special decisions
• The chair's casting vote

3. Minutes

• A requirement of minutes of all meetings
• Content and approval procedure
• Archiving

4. The director's powers and authority This is one of the most important elements. The rules of procedure should precisely define what the director can do without the board's approval, and what requires approval:

Examples:

• Investments over DKK X require the board's approval
• Hiring employees above a certain salary requires notification
• Taking out loans over DKK Y requires the board's approval
• Changes to business strategy require the board's approval

5. Conflicts of interest A procedure for handling conflicts of interest, when is a board member disqualified, and what is done?

6. Confidentiality Board members are subject to a duty of confidentiality about the company's confidential information.

7. Evaluation Many professional boards evaluate the work of the board and the director at least once a year.

Board meetings: practical conduct

Effective board meetings require:

Preparation:

• The agenda is sent out in good time (typically 7-14 days in advance)
• Relevant documents (quarterly report, budget, strategy documents) are sent in advance
• The board members prepare thoroughly

During the meeting:

• All items are dealt with thoroughly
• Critical questions are asked
• Disagreements are noted in the minutes

Minutes:

• The minutes must reflect the discussions and decisions made
• A board member who votes against a decision should have their protest noted

Important: Good minutes are your best defence if questions later arise about what was decided and what you as a board member knew.

D&O insurance: directors' and officers' liability insurance

A D&O insurance (Directors & Officers Liability Insurance) covers board members' and directors' personal liability for damages arising from errors or omissions in the exercise of their office.

D&O insurance typically covers:

• Legal costs for defence against claims
• Claims for damages from shareholders, creditors and third parties
• Claims from public authorities

D&O insurance does not cover:

• Intentional harm
• Personal enrichment
• Criminal acts

If you are considering sitting on a board, D&O insurance should be a requirement of the company.

Disqualification: when are you disqualified?

A board member is disqualified when they have a personal interest in the matter that may conflict with the company's interest. Disqualification entails a duty to:

1. Disclose the conflict of interest
2. Leave the meeting during the consideration of the item in question
3. Refrain from participating in the vote

Examples of disqualification:

• The board member has a personal business interest in the company being considered as a partner
• The board member is a close relative of an employee to be hired
• The board member has an interest connected to a supplier

A breach of the disqualification rules can in itself lead to liability for damages.

Build a good board: composition and competencies

A well-functioning board in an ApS should have:

Diversity of competence:

• Industry expertise
• Financial competence
• Legal understanding
• Network and business relationships

Independence:

• At least one or two independent board members (that is, without personal/business relationships with the company)

Size:

• A board of 3-5 members typically works best in an SME ApS
• Larger boards are harder to coordinate

Board fees and tax matters

Fees to board members

Board members can receive a fee for their work. The fee:

• Is taxable as personal income
• Is A-income (kildeskatteloven § 43), so the company must withhold A-tax and AM-bidrag on payment and report the fee as salary
• Is deductible for the company as a salary cost
• As a rule is not subject to VAT for a personal board office, but can be if the member carries out the office as a self-employed person

Market conformity: The fee to related parties (for example family members on the board) must reflect a market price for the work the board member actually carries out. Too-high fees can be reclassified by the tax authorities as dividend.

The company's right of deduction

The company can deduct board fees as an operating cost, provided that:

• The board member actually carries out work that justifies the fee
• The fee corresponds to market terms for comparable competence

The board's liability in reconstruction and bankruptcy

If the company faces serious financial difficulties, the board's liability comes particularly clearly into focus:

Reconstruction

If the company meets the conditions for reconstruction (technical insolvency, but a probability of recovery), the board can choose the reconstruction process via the probate court.

• A reconstructor is appointed by the court
• The board assists the reconstructor and retains a role in operations
• The board is still liable for acts carried out after insolvency should have been recognised

Bankruptcy

If the company is placed in bankruptcy, the trustee takes over the management. The board is obliged to:

• Hand over all relevant documentation to the trustee
• Assist the trustee in clarifying the company's situation
• Answer questions about transactions carried out before the bankruptcy

Avoidance: The trustee can avoid (reverse) transactions the board approved in the period up to the bankruptcy if they unlawfully favoured particular creditors or occurred under suspicious circumstances.

Establishing a board in an existing ApS

Does your ApS have only a management and you want to establish a board?

1. Adopt the change at a general meeting (typically requires a 2/3 majority)
2. Update the articles of association
3. Register the board members with the Danish Business Authority
4. Issue rules of procedure for the board
5. Register any new authority to bind the company

Related topics

Are you going to hire a director for your ApS? Read our guide to director contracts.

Are you considering setting up an ApS? Read our guide to setting up an ApS step by step.

Does your ApS have several owners? Read about shareholders' agreements.

Do you want to update the articles of association in your company? Read about articles of association in an ApS and A/S.

Create board documents with LegalDock

LegalDock's templates for rules of procedure for the board and a director contract are drawn up in accordance with the Companies Act and good governance practice. Perfect for ApS companies that want a professional management structure.

See the templates: Rules of procedure for the board and Executive service agreement.

See our price overview for information about packages and subscription.