ARTICLES & UPDATES

There may be promising investment projects that a manager sees as opportunities for company growth and significant profits, requiring swift and decisive decisions. However, no matter how carefully considered these decisions are, they remain exposed to failure due to market conditions or external factors. If a project fails and losses occur, does this constitute a legitimate business risk that does not incur liability? The truth is that there is a fine line between sound management, which leverages an acceptable margin of risk, and poor management, which involves negligence or exceeding authority.

All legal provisions related to corporate governance, regardless of the type of company, agree that managerial errors, negligence, mismanagement, exceeding authority, recklessness, lack of caution, and violations of the law or the company’s articles of association entail liability.

Examples of managerial errors include making fundamental decisions randomly without sufficient studies or financial and technical reports, ignoring clear warnings or negative financial indicators, or relying on unreliable or unaudited information. Importantly, breaches of corporate governance policies, the company’s articles of association, or exceeding managerial authority are common grounds for liability. For instance, courts have held boards of directors liable where a decision was made without adequate study, even though public information could have prevented the resulting damage.

In another case, the court annulled a contract and held a manager liable for damages because the decision was made for personal benefit rather than the company’s interest, and the contract was executed at prices above the market rate.

Moreover, a flawed managerial decision must result in actual harm to the company or its shareholders to give rise to liability. Such harm may include financial losses, harmful contractual obligations, lost investment opportunities, or exposure to fines or regulatory penalties. Legally, this harm must have a causal link to the managerial error.

However, not every project failure results in liability. A business risk may be legitimate if the management can demonstrate that the decision was made after adequate study, in good faith, and in the company’s best interest. If a manager acts in good faith, relies on professional information and reports, such as feasibility studies, consultant reports, audited financial statements, and risk assessments, has no personal gain, avoids conflicts of interest, and exercises sound business judgment, the mere failure of a project is insufficient to establish wrongdoing.

(Court of Cassation ruling – management is not held liable when decisions are based on feasibility studies or reliable financial data, with external consultations, and made in good faith, even if losses later occur.)

A project’s failure may also result from external factors beyond management’s control, such as an unexpected drop in prices, changes in consumer behavior, the sudden emergence of a global competitor, or shifts in the business environment. These are considered external causes for which management bears no responsibility.

In conclusion, commercial failure does not automatically imply managerial fault. There must be a balance between innovation and the protection of shareholders’ funds. Managers are only accountable if negligence, legal violations, or personal gain are proven. When decisions are well-studied and made in good faith, losses remain a natural part of business risk.

This article was recently published in Arabic in Al-Jarida newspaper. You can view the original newspaper clipping here –https://www.aljarida.com/article/115573