Management Board AG - Liability, Liability Avoidance and Compliance in Germany

Guide and Strategies for avoiding (and defending against) Lawsuits, Liability and Damages in Germany

In recent years, management boards and the liability of management board members have increasingly become the focus of public attention, law enforcement agencies and the courts in Germany. In contrast to earlier years, members of the board of management must increasingly expect to be held personally liable with their private assets by the company (supervisory board) or the shareholders.

But how can liability with private assets, damages and lawsuits against the management board be avoided and defended against? The following is a guide to the most important strategies and sensible compliance measures in Germany. These are also the key to successfully enforcing or defending against liability claims.

Our Legal Expertise on Liability, Liability Avoidance and Lawsuits against the Management Board in Germany

Our highly qualified and specialized team of lawyers and german corporate law specialists at our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne will advise you on all issues relating to liability, liability avoidance and lawsuits against the management board.

Members of our team are also academically involved in german stock corporation law, so we have special know-how in this area. Your first contact persons are:

• Dr. Ronny Jänig, LL.M. (Durham), Attorney at law, Certified specialist for german corporate law
• Finn Dethleff, Attorney at law
• Dr. Boris Schiemzik, Attorney at law, Certified specialist for german corporate law
• Dr. Jens Nyenhuis, LL.M. (Cape Town) Attorney at law, Certified specialist for corporate law

For a non-binding inquiry, please contact one of our local contacts in our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne directly by phone or e-mail or simply use the contact form at the bottom of this page.

Duties of the Management Board - Starting Point for Compliance and Liability Avoidance in Germany

The lynchpin of liability for members of the management board are their rights and duties. Management boards of stock corporations should deal with these intensively in order to avoid liability risks. This also applies because, in addition to liability risks under german civil law, there are also risks under german criminal law.

The management board manages the company on its own responsibility, i.e. the management board decides largely free of instructions and independently on the way in which business is conducted. Unlike the managing director of a GmbH, the management board is not - at least according to the german law - subject in particular to any instructions from individual shareholders or the annual general meeting. Nor can the supervisory board in Germany instruct the management board on how to run the company. Only in the case of major decisions that are (required to be) defined by the supervisory board does the management board have to obtain the approval of the supervisory board in advance (keyword: transactions requiring approval).

However, the great independence and freedom from instructions of the management board also entail a large range of tasks, some of which are difficult to grasp, and thus also a difficult-to-understand set of duties. In brief, this can be categorized in various ways:

• Strategic steering decisions concerning planning, organization, finances and information in the company
• Corporate organizational duties (e.g., reporting duties to the supervisory board and shareholders' meeting; preparation of meetings and assemblies of the supervisory board and shareholders; keeping the share register; setting up a compliance system / risk management system.
• Duties aimed at protecting creditors (e.g., auditing duties in connection with the formation of a company / capital measures / cash pooling, periodic / aperiodic disclosure duties; ongoing monitoring of financial circumstances (liquidity planning, financial planning, insolvency, overindebtedness, filing for insolvency)
• Further duties according to articles of association, rules of procedure of the management board and management board contract
• Day-to-day business (ordinary business)
• Fiduciary duties, e.g. maintenance of confidentiality / business secrets, non-competition clause.

Special Risks of Management Board Liability in Germany

In addition to the wide range of duties in Germany, other reasons make the liability of the management board explosive:

• German stock corporation law regulates the duties of the management board in great detail, without it being possible to fundamentally change these in the articles of incorporation, in the rules of procedure for the management board or in the employment contract. It is therefore virtually impossible to limit the duties by contract.
• In the opinion of the german courts, the management board has an increased duty of care. The management board is regarded as a fiduciary for the financial interests of third parties - in this case the shareholders. In connection with this, and coupled with the freedom of the management board to issue instructions, increased demands are placed on the qualifications of each individual member of the management board.
• Contrary to a widespread view, the principle of overall responsibility applies to the management board in Germany. The delimitation of individual areas of responsibility (allocation of departments - see above) does not therefore relieve a member of the management board from liability for the errors of other members of the management board. Mutual control is therefore mandatory.
• In the event of a dispute, it is not the company that has to prove the breach of duty. Rather, the management board must prove that it acted in accordance with its duties.
• Furthermore, in addition to the company, shareholders can also assert claims for damages in favor of the company in court.

For detailed information on enforcing claims for damages against the management board, please refer to action against the management board.

Strategies for reducing the Liability Risk in Germany - along with tips for the Management Board, Supervisory Board and the AG

The liability risk to which the members of the management board are exposed (which always also means costly errors to the detriment of the AG) can be reduced by a number of measures - here is a brief overview:

1. Establishment of a Risk Management System / Compliance System

In german practice, one sustainable way of reducing the liability risk is to set up and maintain a risk management system / compliance system. This is a system that methodically monitors compliance with regulations to which the company is subject and methodically detects irregularities.

The cornerstones of such a risk management system are

• an identification of potential risks
• an internal information system,
• an internal/external communication system
• and an internal control system.

With such an individualized risk management system in Germany, issues that could lead to liability can be identified at an early stage and countermeasures can be taken. In german practice, the risks affecting a company must inevitably be prioritized by the management board and the resources deployed and used accordingly. If the management board does not have sufficient resources at its disposal, it may even have to resign from office in order to avoid personal liability.

2. Allocation of Duties, Division of Departments on the Board of Management

If the board of management consists of more than one person in Germany, it is advisable to define a concrete distribution of the tasks (duties) of the board of management within the framework of rules of procedure.

In german practice, the tasks are usually distributed according to functional areas ("departments"). What these are in detail depends on the specific circumstances of the company concerned. A division according to the areas of purchasing/sales, marketing, production, IT, legal/human resources, finance/accounting is frequently encountered. In addition to the function-related distribution of tasks, a division is also made according to so-called divisions, especially in larger companies. These can have a geographical (division by sales markets), a product-specific (division by product groups) or other point of reference.

An essential feature of the duties of the management board in connection with the division according to tasks/responsibilities or divisions is that there is an overall responsibility of all members of the management board. According to this - in the starting point - each member of the management board is responsible for the errors of another member of the management board. The reason for this is the obligation to internally "monitor" the other board members (i.e., fellow board members).

However, it must be taken into account that the division of responsibilities is not permissible without restrictions in Germany. It is subject to restrictions and formal requirements. The division of responsibilities itself can be carried out by the management board unless the supervisory board specifies otherwise (which, however, is usually the case in practice).

3. Submission to the General Meeting

The management board may have the annual general meeting decide on management issues. This may take place before or after the implementation of a management measure. A resolution of the general meeting confirming a measure then generally precludes liability on the part of the management board.

4. Business Judgement Rule

The management board in Germany has broad entrepreneurial discretion. According to the statutory provisions, there is generally no breach of duty if the management board has acted based on appropriate information when making a business decision.

A reduction in the liability risk can therefore be achieved solely by creating an appropriate information basis. The documentation of the acquisition and analysis of information is therefore urgently recommended in view of a future dispute.

5. External Advice

The management board in Germany may seek external advice on particularly difficult individual issues that exceed its personal competence. External advice from an independent and sufficiently qualified advisor - usually a lawyer, tax advisor or auditor - can relieve the management board if it provides the advisor with all the necessary information. This applies in particular to the assessment of any obligation to file for insolvency.

6. Approval of the Supervisory Board

Unless the articles of association provide otherwise, the supervisory board is obliged to determine transactions in which the management board may only act with the consent of the supervisory board (Art. 111 para. 4 AktG). The idea is that the management board in Germany should not be able to act autonomously in very important transactions. Rather, the supervisory board, as the responsible control/supervisory body, is to be involved in decisions on matters of importance to the company. In practice, this approval requirement means a de facto veto right. If this is exercised by the supervisory board, the management board can take the final decision to the annual general meeting.

7. D&O Insurance (Financial Loss Insurance)

If liability arises (i.e. the company asserts claims against the management board), a D&O insurance policy taken out for the benefit of the management board can prevent the management board from being sued with its private assets. In practice, D&O insurance policies cover any damage incurred by the german stock corporation.

It is important to know that

• the insurance benefits provided by a D&O insurance policy in Germany can vary greatly, not only in terms of the amount insured but also, for example, the assumption of costs for lawyers, defense attorneys and PR consultants
• the insurance policies are mostly taken out by the AG, but direct insurance policies are also offered.

8. Asset Protection at private level

A management board in Germany can also avoid liability at the private level or mitigate the factual effects of any liability. The main means are measures that are usually summarized under the term asset protection. Put simply, these are legally permissible measures which at least make it more difficult for potential creditors (in this case the stock corporation) to access the assets of the management board (e.g. gifts with seizure-proof claw-back provisions, family pool).

May the AG waive damages in Germany?

In principle, it is also possible for the company to waive a claim for damages against the management board in part or even in full. However, this is only permissible under strict cumulative conditions in Germany:

• More than 3 years have passed since the claim arose.
• The annual general meeting has approved the waiver.
• A minority whose shares together amount to one tenth of the capital stock has not objected to the resolution of the annual general meeting.

In other words, the supervisory board cannot waive claims against the management board on its own initiative without further ado. If it does so, it exposes itself to a high risk of being personally liable with its private assets.

Agreement on Liability Limitation in the Articles of Association or Management Board Contract?

Contrary to a widespread assumption, the approval of measures taken by the management board by the supervisory board in Germany does not lead to a reduction in liability.

Unlike for the GmbH managing director, a reduction in liability cannot be achieved by agreeing to limit liability to a specific sum or to grossly negligent or intentional acts.

Such agreements in the articles of association or in the employment contract / management contract are inadmissible according to general opinion and therefore invalid. The same applies to agreements on limiting the statute of limitations for any liability claims.