Role of the Board of Directors in the Initiation of International Judicial Process in Europe

Role of the Board of Directors in Decisions on the Initiation of International Legal Process

Strategic guidance for board members and management of international companies

Mainstream

The decision to start an international trial is not just about approving a budget for lawyers. This is a strategic choice that directly affects the value of the business, its reputation, operations and may entail personal responsibility of directors.

The Board of Directors cannot delegate this decision entirely to management or external consultants. The board’s job is to make sure that running the process is in the best interests of the company, not just emotions or tactical considerations.

An effective solution is based on four tests:

1. Commercial feasibility and strategic objective.
2. Real chances of recovery or protection.
3. Evaluate all risks, including reputational and director-specific risks.
4. A plan for control and withdrawal from the dispute.

If these issues are not resolved at board level, the company risks spending millions on a process that will not yield results, and the directors face claims from shareholders or regulators.

When the Board of Directors shall decide to initiate an international dispute

The decision of the Council is mandatory if:

• the amount of claims is essential for the business (the materiality threshold is fixed in the charter or internal policy);
• The dispute may affect the value of shares, M&A transactions or key financial indicators.
• There is a risk of counterclaims that can paralyze the activity.
• the proceedings affect the reputation of the company or the beneficiaries;
• Multiple jurisdictions, including EU countries, need to be involved.
• The dispute relates to assets located in different countries;
• The dispute is financed by a third party (litigation funding);
• There is a conflict of interest between management and the company.
• the process may disclose confidential information or trade secrets;
• The result could set a precedent for other contracts or business lines.

Typical Board of Directors Mistakes

Many councils act reactively: Management reports on the dispute and the board approves the proposed strategy without in-depth analysis.

Wrong approach: “The lawyers said the prospects are good – you have to submit.”

The right approach: “What are the objectives we are pursuing? Where are the defendant's assets? How will we execute the decision? What is the maximum budget we are willing to allocate? What happens if we lose? How will this affect us personally as directors?

The lack of a structured decision of the council leads to uncontrolled growth of costs, loss of focus and loss of the ability to resolve the dispute on favorable terms.

Step 1. Assessing the commercial purpose of the dispute

Before launching an international process, the board should clearly articulate why the company is in the dispute.

Possible targets:

• the actual recovery of funds or assets;
• protection of key assets (intellectual property, contract, investment);
• Creating a negotiating leverage to resolve a broader conflict;
• Minimize reputational damage through demonstration of principled position;
• elimination of competitive violation;
• The way out of the deadlock when passivity brings great losses.

The goal must be measurable and achievable. If the goal is to punish the counterparty, it is an emotion, not a strategy. The board must translate emotions into business logic.

Step 2. Get an independent legal assessment

The board should not rely solely on the internal legal service report. A substantial international dispute requires an independent opinion from external consultants with expertise in a particular jurisdiction and in cross-border processes.

The legal assessment should answer the questions:

• What is the force of the legal position under applicable law?
• Are there reasonable chances of success?
• Are there procedural obstacles (limitation of claim, invalidity of reservation)?
• What is the prognosis for the duration and cost of the proceedings?
• What are the risks of disclosure/disclosure?
• Are there any sanctions, currency or public restrictions?

It is especially important if the dispute is related to EU jurisdictions, the application of the rules of Brussels I bis, Rome I, Rome II, as well as the practice of the Court of Justice of the EU should be taken into account.

Step 3. Select a forum: court

This is not a technical issue, but a strategic one. The board must understand the difference and the consequences.

Arbitration generally provides confidentiality and easier recognition of decisions abroad under the New York Convention, which is important if the defendant's assets are located in different countries. However, arbitration can be more expensive at the start and does not always allow for quick interim measures.

A high court in a particular European country may be preferable if the defendant and his assets are localized, publicity is important, or emergency arrests are required. But enforcement of a judgment in another country may require exequatur.

Step 4. Search assets and assess prospects for execution

The decision to start a process without understanding where and how a future decision will be implemented is a gross corporate governance error. The board of directors must obtain a report on the assets of the potential defendant before allocating a budget for the process.

If assets are in jurisdictions with weak enforcement or the defendant already shows signs of withdrawal, the value of a court victory tends to zero.

In parallel with the legal analysis, it is necessary to develop an enforcement strategy: where will be arrested accounts, what property to apply for for recovery, which foreign structures can be prosecuted.

Step 5. Assessing the risks to the company and to the directors

The Board shall assess all risk categories:

Reputational: Public process can reveal negative information about the company, affect relations with banks, partners, customers.

Operational: Distraction of management, loss of key employees, suspension of projects.

Financial: Not only legal costs, but also potential liability for damages in a counterclaim.

Regulatory: risk of parallel investigations, tax or sanctions consequences.

Personal Liability (D&O): In European jurisdictions, directors have fiduciary duties to act in the interests of the company with due diligence. Unreasonably starting an expensive process without proper evaluation can be regarded as a breach of duty and lead to claims by shareholders or bankruptcy managers.

That is why the minutes of the meeting of the Council and the proper recording of the reasons for the decision are critical documents.

Step 6. Ensure compliance with corporate procedures

In international groups of companies, it is necessary to clearly define which authority and in which jurisdiction is authorized to take a decision. This is especially true for holding structures in the EU, where subsidiaries can be incorporated, for example, in Germany, the Netherlands or Cyprus.

The procedure should include:

• conclusions of the legal and financial departments;
• Independent opinion of external consultants;
• Discussion and voting on the board of directors (or decision of the sole director, if permitted);
• Documenting all the alternatives and motives considered;
• Delegating authority to management with clear limits and reporting stages.

If the decision affects a subsidiary, it is necessary to make sure that the directors of the subsidiary independently assess the interests of their society in order to avoid accusations of violation of obligations to minority shareholders.

Step 7. Approval of the budget and monitoring mechanisms

International litigation tends to increase in price. The board cannot simply approve the total amount – a phased budget with stage gates is needed.

It is recommended to approve funding by phase:

1. Pre-process stage (evaluation, evidence, mediation).
2. Initiation of the process and exchange of pleading papers.
3. The main hearing.
4. Execution.

At each stage, management must return to the board or ad hoc committee to approve the next phase, unless circumstances have changed. This prevents a “non-return investment” situation where a company continues an expensive process just because it has already spent significant funds.

Step 8. Settlement Strategy (Settlement Strategy)

The Board shall determine from the outset the conditions under which the company is prepared to enter into a settlement agreement. A dispute is a continuation of business negotiations by legal means.

Competent settlement strategy includes:

• the target amount or the result of the settlement;
• red lines that cannot be crossed;
• confidentiality conditions;
• options for structuring the settlement agreement (recognition of debt, payment schedule, refusal of counterclaims);
• Management authority to negotiate.

Without such a strategy, the board loses control of the process, and management or lawyers can either miss a good time or agree to unfavourable terms under the pressure of the procedural calendar.

Checklist for the Board of Directors before the start of the international trial

Before approval, make sure you get answers to the following questions:

1. What is the specific commercial purpose of the dispute, expressed in figures?
2. Applicable law and jurisdiction identified, forum selection appeal risks analyzed?
3. Have you received a written opinion from external consultants about the chances of success and the main risks?
4. Where are the defendant’s assets and how is the future decision enforceable?
5. Has the counter-requirements and risks of disclosure been assessed?
6. Is the alternative to settlement considered before the start of the process (mediation, negotiation)?
7. Is the dispute in the long-term strategy of the company and the interests of all shareholders?
8. Are the fiduciary duties of directors documented and no conflict of interest?
9. Are budget limits and checkpoints set for a return to the board?
10. Is there a plan to communicate with shareholders, banks and regulators?
11. Is there a red line settlement strategy?
12. Have D&O insurance and personal liability coverage been reviewed?
13. Are KPIs defined for external consultants and the procedure for their change?
14. What is Plan B if the process does not go according to the expected scenario?
15. Who will oversee the project and how often do you receive reports?

If at least one question is not clearly answered, it is premature to make a decision to start the process.

What a strong council decision looks like

The board's strong decision on an international dispute is not just a resolution to "approve a lawsuit." It is a balanced document reflecting business logic, legal analysis, risk assessment and control mechanisms.

The minutes of the meeting of the Board shall confirm that the Directors acted:

• in the interests of the company;
• based on sufficient information (informed decision);
• with due diligence;
• without conflict of interest.

In case of possible claims against directors, it is the protocol that will become the primary evidence of the fulfillment of fiduciary duties.

Arbitration or a State court: It is important to know the board of directors

The choice should be a conscious decision of the board, taking into account not only legal, but also business parameters.

FAQ

The board may delegate operational management, but a final strategic decision on significant disputes usually requires the board's approval. This is due to fiduciary duties and internal regulations. In European jurisdictions, courts assess whether the board has been sufficiently involved.

What is the personal responsibility of directors if the decision to start the process turns out to be wrong?In compliance with the procedure of informed decision (business judgment rule), no conflict of interest and good faith directors are usually protected. However, if the decision was made without due diligence, without analysis or contrary to the interests of the company, claims for damages may be made.

In some cases, yes, especially if the dispute qualifies as a major transaction or a significant change in activity. This depends on the national corporate law and charter. We recommend that you conduct this analysis in advance.

What if the company does not have the funds for an expensive international process?There are mechanisms for financing litigation disputes by third parties (litigation funding). The Board of Directors shall assess the terms of such funding, the degree of control over the process and the impact on confidentiality.

How often should the board receive progress reports?Regular reporting is recommended, with reference to key procedural milestones or quarterly. In case of significant changes (proposal of settlement agreement, deterioration of prospects), management shall immediately inform the board.

Can the case be initiated in Europe if the defendant is from a non-EU country? Yes, but a special analysis of the applicable international treaties and the regime for recognition of decisions is required. The strategy should take this into account from the start.

Related services

• International Arbitration, Commercial Litigation & Cross-Border Disputes
• Corporate Governance & Directors' Duties
• Risk Management & Compliance for Multinationals
• Asset Tracing & Enforcement in Europe
• Internal Investigations & Business Integrity

Related material

• Fiduciary duties of directors in the EU countries: practicalities
• How to Oversee Major Court Projects by the Board of Directors
• Interim measures in European jurisdictions: board-manager
• Litigation Funding: What the Board of Directors Needs to Know
• Settlement of international disputes: strategy
• Managing Directors’ Personal Liability Risks (D&O) in International Disputes
• Choice between Court and Arbitration: guidance for non-lawyers on the board

Conclusion

The role of the board of directors in deciding whether to initiate an international legal process is not limited to formal approval. It is a strategic function that requires a thorough assessment of the commercial objective, risks and controls.

In European jurisdictions where corporate governance and minority protection are of high standards, directors need to demonstrate that the decision was made in an informed, good faith and in the best interests of the company. A competent process at the board level is not about bureaucracy, but about protecting the value of the business and the personal reputation of the directors.

Before you approve the start of a costly cross-border dispute, make sure you have not only a legal position, but also an answer to the main question: How this decision will bring the company closer to its strategic goals and how you will control the process until it actually gets the results.