Discharge of the Management Board of the german AG

Discharging, Not Discharging - Prerequisites and Consequences of the Annual General Meeting Resolution in Germany

Shareholders in Germany have few opportunities to give the management board their opinion and views on its management of the company. One of the few opportunities shareholders have is at the annual shareholders' meeting. Here, the shareholders vote on the discharge of the members of the management board.

Nevertheless, the discharge or refusal to discharge is a bit of a mystery in german practice. This applies both to the shareholders and the board members concerned. All parties involved are aware of the discharge, but not of its legal circumstances and implications.

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What does discharge mean? - Term and definition

Discharge of the management board in Germany means that the annual general meeting approves the management of the company by the management board. The annual shareholders' meeting thereby declares its fundamental agreement with the management of the company by the management board in the past fiscal year. In addition, the discharge is at the same time a vote of confidence in the management board with regard to the future management of the company.

Discharge does not constitute a waiver of any (unknown) claims for damages; further details below.

Who discharges the Management Board in Germany?

Discharge of the management board is the exclusive responsibility of the annual general meeting in Germany (Art. 120 AktG). Neither the supervisory board nor individual shareholders decide on the discharge or refusal to discharge the management board.

When do the Shareholders decide on the Discharge?

According to Art. 120 AktG, the (ordinary) annual general meeting in Germany must pass a resolution on the formal approval of the actions of the management board within the first 8 months of the fiscal year. If, as is usually the case, the calendar year is the fiscal year, the shareholders have until the end of August to pass a resolution on the approval of the actions of the management board at an annual general meeting.

The 8-month deadline corresponds to the deadline set by german law for the presentation of the approved annual financial statements and management report and for the resolution on the appropriation of profits. This ensures that shareholders can ask the executive board and supervisory board questions relating to the past fiscal year (right to ask questions, right to information) and subsequently decide on the approval of their actions.

The management board in Germany is obliged to enable the shareholders to pass a resolution on the approval of the actions of the management board. If the management board fails to issue an invitation to the shareholders' meeting with the discharge as an agenda item, the shareholder may independently initiate the convening of a general shareholders' meeting or a corresponding addition to the agenda.

Who proposes the Discharge or Non-discharge in Germany?

The management board and supervisory board of a german stock corporation are generally obliged to submit proposals to the shareholders' meeting on each item on the agenda as to how they believe the shareholders should decide. This also applies to the (own) discharge. As usual, the proposed resolution must be included with the invitation/convening of the annual general meeting.

Resolution by the Annual General Meeting to discharge the Management Board

The annual general meeting in Germany decides by simple majority resolution. It is important to note that members of the management board cannot discharge themselves. They are prohibited from voting (Art. 136 AktG), which may also be relevant with regard to the question of whether to grant full or individual discharge.

Discharge of the Management Board as a Whole and Discharge of Individual Members of the Management Board

In german practice, the discharge of the management board is mostly carried out in the form of the so-called "total discharge". In this case, the actions of the entire management board are approved or not approved in a single resolution of the annual shareholders' meeting.

In principle, however, a resolution concerning each individual member of the management board is also permissible in Germany. This so-called individual discharge usually takes place if there are breaches of duty by only individual members of the management board or if voting prohibitions prevent individual shareholders who are also members of the management board from voting.

Formulation / Sample of the Discharge or Refusal of Discharge in Germany

The wording of the resolution to approve or refuse to approve the actions of the management board is quite simple. In many cases it is simply worded as follows:

"The acts of the management board are discharged for the fiscal year 20XX."

If the management board or individual members of the management board are not (or are not to be) discharged, the shareholders usually vote against the resolution. There is no express resolution to the effect that the acts of the management board are not discharged.

Consequences of Discharge and Non-Discharge in Germany

Unlike in the case of the german GmbH managing director, the formal approval of the actions of the management board does not have any direct consequences. In particular, the discharge does not entail a waiver by the AG of claims for damages against the management board. Despite the discharge, the german stock corporation is free to bring an action for damages against the management board at a later date.

Refusal to grant discharge also has no direct consequences. However, since non-discharge may constitute a withdrawal of confidence and the withdrawal of confidence in the management board is the starting point for the extraordinary dismissal of the management board by the supervisory board, the refusal to discharge the management board may at any rate have indirect effects.

Liability and Damages of the Management Board Despite Discharge?

Yes, because the formal approval of the acts of the management board in Germany does not mean that the AG has waived any claims against the management board member in question. Only within a very narrow range - and probably only in compliance with Art. 93 para. 5 AktG - can the formal approval of the acts of the management board lead to a release of the management board from liability.

Is the Management Board in Germany entitled to discharge?

No, in principle the management board has no claim against the german stock corporation or the shareholders' meeting for discharge or for a corresponding resolution.

Non-discharge / refusal to discharge vs. resignation / termination of office

It remains to be seen whether a member of the management board who has been refused discharge by the annual general meeting in Germany can seek non-discharge as an extraordinary (important) reason for resigning from office and, more broadly, for extraordinary termination of his management board contract. The circumstances of the individual case are decisive here.

Action for rescission, action for defective resolution against discharge resolutions?

Resolutions of the annual general meeting on the ratification of the acts of the management board can be defective like any other resolution of the annual general meeting in Germany. Therefore, they are generally subject to the provisions on actions for defects in resolutions. The resolutions can therefore also be challenged by means of an action for rescission or an action for annulment. Potential defects in resolutions include legal violations (above all procedural errors) and insufficient information (violation of the right to information).