Manager Liability, D&O
Liability as managing director, executive board member and supervisory board member
In recent years the general trend to hold managers accountable for their mistakes has spread wide and far and, driven by a shift in public opinion in Germany, has led to a situation where companies tend to actually take action against their managers if required. Manager liability is therefore a real danger for managing directors, board members and supervisory board members. This is even more true in times of a corporate crisis. The risks associated with claims for damages can threaten the very existence of those affected. Companies and managers can exert considerable influence on the legal and economic outcome of liability cases through the right design measures in advance as well as through a strategically sophisticated approach in the event of damages.
Overview of Manager Liability
In the event of an intentional or negligent breach of duty, under German law a managing director, a member of the management board or the supervisory board of the company concerned may generally be held liable for the loss incurred. German law stipulates a personal liability of managers in such cases. Typical risks of liability for managing directors are associate with the following possible breaches:
- Disregard of instructions of the shareholders in case of managing directors of limited liability companies (GmbH) under German law
- Disregard of internal restricted matter catalogues set down in the articles of association or within the rules of procedure of the company, either restricting certain measures to only be allowed upon approval by the shareholders’ meeting in case of limited liability companies (such as a GmbH or UG) or the supervisory board in case of a stock corporation (such as an AG or SE)
- Breach of obligations to properly and duly pay social security contributions and payroll taxes
- Uninformed entering into transactions or taking business decisions (business judgement rule cases) or entering into excessive risks in business transactions
- Lack of or inadequate organisation of the internal structure of the respective entity the manager is responsible for
- Criminal behavior (such as fraud) at the expense of the entity
- Belated filing for insolvency of the company
On the other hand, non-executive directors, such as supervisory board members, are frequently accused of not fulfilling, or not fulfilling to a sufficient extent, their duty to supervise and control the executive directors.
In court proceedings before German courts, in case of claims against managers for a violation of their managerial duties, the usual procedural burden of proof is reversed. In the event of a dispute, it is not the company that has to prove that the manager has violated his duties. Rather, in Germany the manager must prove that he has properly fulfilled his duties. For the company, this facilitates the enforcement of claims for damages, for the manager it makes it extremely difficult to defend against such claims for damages. The manager, however, benefits from the application of the so-called Business Judgment Rule under German law to both stock corporations and limited liability companies in Germany. In simple terms, this means that the manager is not liable for the negative consequences of his business decisions if he made such decision on the basis of appropriate information, without consideration of unrelated interests, for the benefit of the entity and in good faith. Managers therefore can only be advised to always gather sufficient information before taking a management decision and to document the process of their decision making adequately.
D&O - Insurance
A personal liability as managing director, board member or supervisory board member can be covered by a directors and officers liability insurance (D&O). Such an D&O insurance policy is a financial loss liability insurance policy which insures the board members of a limited liability company, stock corporation or cooperative - in particular managing directors, board members, supervisory board members and advisory boards - in the event that a claim is made against them by the company or a third party due to a breach of duty. In some cases, executive employees may also covered by the insurance.
Usually, the company is the policyholder and concludes the D&O insurance contract with the insurance company as a preventive measure in the event of manager liability for the benefit of such managers. In this case, the board members are the beneficiaries ("insured") of the insurance contract. The costs for the insurance are borne by the company together with a deductible for the insured managers. However, there are also direct insurance coverage for managers available on the market where the manager concludes the insurance contract directly with the insurer. In practice, however, such direct insurance policies are the exception.
Our team of 11 corporate and M&A attorneys and tax advisors throughout our offices in Hamburg, Berlin, Frankfurt and Munich is available to advise on all matters regarding director’s liability, board members liability, D&O insurance policies and risk avoidance processes. We regularly are employed as counsel representing both companies and board members in matters relating to the topic of director’s liability both in court and outside of court. We offer hourly billing but are also open to alternative fee arrangements, such as caps of flat fees, depending on the particularities of the matter.
For a non-binding enquiry, please contact one of our senior attorneys directly via phone or e-mail or use the contact form at the bottom of this page.