The international financial crisis stroked the entire World economy back in 2007, and have since then, had a major impact of the trust to the Financial Sector. In 2008, the growing concern for the Danish financial sector resulted in a governmental intervention. It furthermore resulted in a series of legal cases for the years that followed against the management and board of directors in the Danish banks, which have suffered from bankruptcy due to the crisis. These legal actions formed new case-law in the field of the assessment of the liability of the banks' management under Danish law.
This paper examines the standards of conduct, which can be derived from case-law in the assessment of liability of a "sound basis for decision-making" for the management and board members of a financial institution in Denmark. The legal analysis is based upon the specific legal requirements to the management and board of directors of financial institutions. This paper includes three case-law studies of some of the most important cases during the past ten years after the financial crisis. The analyses of the three case-law cases will help deduce the right conduct for the management and board of directors of financial institutes in order to avoid liability for loss-making dispositions.
The economic analysis goes in depth with the economic effects, which are experienced because of a loss-making disposition, both outside and in contractual relationships. The theory used to describe the relationship and behavior between the management and board of directors and the shareholders, is the Principal/agent-theory. The theory predicts that the management and board of directors have incentive to act on behalf of opportunistic behavior in self-interest. The shareholders can give the management and board of directors’ incentive to act on behalf of the right conduct in execution of the contract. The shareholders can compensate the management and board of directors for the right conduct or sanctioning the management and board of directors for the opportunistic behavior. The economic part furthermore provides an analysis of how the parties through a contractual relationship can allocate the risk of a loss-making disposition based on the theory by Coase, the Coase theorem.
Finally, the paper includes both a legal and economic viewpoint to what action can be taken against the management and board of directors of financial institutions to optimize their behavior. The analysis provides an explanation of strategic contract design, with the elaboration of which proactive measures, which can be done to affect the behavior of the management and board of directors. Lastly, the law implications of risk management in financial institutions are explained, and further elaborates how risk management impacts the information flow.
|Educations||MSc in Commercial Law, (Graduate Programme) Final Thesis|
|Number of pages||109|