Management Board Liability in Germany

Liability, Liability Action in the AG (Enforcement and Defense of Damages) in Germany

In recent years, there has been a veritable flood of cases in Germany in which claims have been brought against management board members for (alleged) breaches of duty. The background to this development was not changes in legislation. Rather, a landmark decision by the German Federal Court of Justice (BGH) and the introduction of D&O insurance in Germany have had a decisive influence on this development.              

Enforcement and defense of claims for damages against the Management Board by the Supervisory Board, General Meeting and shareholders under the German Stock Corporation Act (AktG) 

In the ARAG/Garmenbeck decision, the BGH once again expressly wrote the following into the duties of the supervisory board members: "You must assert any liability claims of the company against members of the management board. If you fail to do so, you will be liable yourself." This has had an effect. In addition, the introduction of financial loss liability insurance for managers has created a solvent potential liability debtor for the stock corporations concerned, who - unlike the not infrequently personally connected ex-board member - can be called upon without hesitation.

However, it is not only the supervisory board as the primary supervisory and control body that is called upon to assert claims in Germany. The annual general meeting and, finally, individual shareholders with a corresponding minority shareholding can also take legal action to assert (alleged) claims against the management board. The hurdles vary.

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Overview of Management Board Liability in Germany

In the event of an intentional or negligent breach of duty, a member of the management board of the stock corporation concerned in Germany is personally liable for the damage incurred with his or her personal assets. Classic areas of liability and liability risks for board members are:

• Economically disadvantageous transactions, e.g. classic bad investments
• Lack of or inadequate organization of the internal structure of the company ("compliance violations")
• Disregard of approval reservations in favor of the supervisory board or the shareholders' meeting
• Violations of mandatory law (data protection, prohibition of corruption, unfair competition UWG / restraints of competition GWB, tax law)
• Violation of non-competition clauses, misuse of trade secrets and business opportunities of the Company
• Breach of trust and fraud to the detriment of the company
• Breaches of duty relevant under criminal tax law
• Late filing of insolvency of the company

As a rule, the management board in Germany is exposed to claims on the part of the company (so-called internal liability). However, direct liability towards third parties is also possible. Possible claimants are creditors of the company, investors, shareholders and the tax authorities in the corporate crisis.

The so-called overall responsibility of the management board is also of particular practical relevance for the liability of the management board. In principle, each member of the management board in Germany is responsible for the actions of every other member of the management board. This gives rise to a wide range of liability scenarios.

Duties of the Management Board in Germany

The central duty of the management board in Germany is the careful management of the company ("duty of care"). Which concrete individual duties result from this can only be determined in the specific individual case. The decisive factor here is the large number of varying and situation-dependent factors. These include

1. Type and size of the company;
2. Economic and financial situation of the company;
3. Economic, political, cyclical and industry-specific environment of the company
4. Particular standard of duty based on company-specific regulations: articles of association, rules of procedure and/or employment contract
5. Special standard of duty based on other regulations: supervisory law, Corporate Governance Code (GCGC)
6. Allocation of duties within a multi-member board of management;
7. Nature. Scope significance of a specific measure for the company.

The above-mentioned factors do not form a rigid set of duties in Germany, but rather influence each other - depending on the situation. This makes a case-by-case analysis unavoidable.

An initial orientation is provided by the distinction between

     (a) concrete obligations arising from legal norms ("Price or territorial agreements in violation of antitrust law are prohibited."),

     (b) duties which are determined by entrepreneurial discretion, and

     (c) duties relating to the supervision of fellow board members and subordinate employees.

With regard to entrepreneurial discretion in Germany, it must be emphasized that not all business measures which subsequently prove to be a wrong decision necessarily lead to liability. If the management board makes an informed and well-considered decision, it cannot automatically be held liable for any resulting damage ("business judgement rule"). However, the management board cannot invoke the business judgement rule in all matters. This only applies to entrepreneurial (commercial) decisions, but not, for example, to the question of whether the applicable laws are being complied with (duty of legality).

Another essential duty of the management board in Germany is the so-called "duty of loyalty". This obliges the individual member of the management board to always act in the interests of the company and to protect it from any disadvantages. In particular, a member of the management board may not place his own interests or the interests of third parties above the interests of the company: In simple terms, the interests of the company simply take precedence. Thus, the duty of loyalty prohibits the management board member from competing with his or her own company, from taking advantage of business opportunities for the company in a self-serving manner, and from disclosing business/operating secrets and know-how.

Finally, the German Stock Corporation Act (AktG) provides for a number of cases in which the management board is directly liable to pay damages to the stock corporation. These special cases regulated in the AktG relate to violations of capital maintenance rules, compliance with which is one of the core duties of the management board. This applies in particular to the sharp liability of the management board for all payments made by the stock corporation after insolvency maturity, which is relevant in practice.

Prerequisites for the Liability of the Management Board in Germany

However, the liability of the management board in Germany does not only require a breach of any duties (cf. Art. 93 AktG).

It is also necessary that the management board has acted at least negligently. The negligent action may consist of a negligent act or a negligent omission. Furthermore, it is necessary - at least in the case of assertion - that the damage was actually caused by the breach of duty in question by the management board member concerned.

This causation is in particular in question if the actions are based on decisions of the entire management board ("collegial decisions") and individual members of the management board have voted against the measures in question. Cases of so-called lawful alternative behavior ("The damage would also have occurred if I had acted lawfully.") also usually cause difficulties in german practice.

Damages are also often in question or difficult to prove. For example, any profits from transactions in Germany that are in themselves illegal may be offset against any losses. In individual cases, this can lead to a complete elimination of liability despite serious breaches of duty (the breach of duty can nevertheless be the basis for dismissal/termination.

What does the AG have to prove in Liability Proceedings in Germany?

Irrespective of the question of what the prerequisites are for liability on the part of the management board, the question always arises in liability proceedings as to who has to prove what.

Here, the legal burden of proof for the board member concerned is particularly awkward. The company in Germany only has to explain and prove the damaging action (act/omission), the amount of the damage incurred and the causal connection between the damaging action and the damage incurred.

The management board member in Germany, on the other hand, must show and prove that he or she did not act in breach of duty or at least that he or she was not at fault in order to avoid liability. In the event of a dispute, however, a member of the management board is usually cut off from any information relating to the alleged facts, so that proving that he or she acted in accordance with his or her duty, despite any claims for information against the company, is in practice a difficult undertaking after leaving office on the management board.

Limitation of Liability and Exclusion of Liability in Germany

For the management board and consequently also for the company concerned in Germany, the question arises in german practice under which conditions and prerequisites a liability of the management board can be partially or completely excluded or is excluded.

German stock corporation law tends to be cautious with regulations that (may) lead to a partial or total limitation of the liability of the management board. The courts have taken up this basic legislative tendency and show a tendency to rule against the management board even in borderline cases.

A limitation or exclusion of the board of management's liability in Germany is conceivable above all under the following aspects:

1. (permissible) limitation of liability in the employment contract (degree of fault, maximum liability amount);
2. approval by the annual general meeting of the relevant business measure § 93 para. 4 sentence 1 AktG
3. (permissible) waiver or settlement § 93 para. 4 sentence 3 AktG;
4. Limitation or restriction of the statute of limitations
5. Not: discharge of the management board § 120 AktG

In german practice, however, the strict provisions of stock corporation law on exoneration often lead to problems that are almost impossible to solve, as the courts in particular take a critical view of restrictions on management board liability. For example, the drafting of management board contracts and consensual agreements in connection with the (premature) dismissal and cancellation of management board contracts requires particular care. The same also applies in the event of a shareholder dispute / shareholder dispute in companies with a small group of shareholders, which usually involve disputes about the board activities of the "shareholder board".

Who asserts Claims against the Management Board in Germany?

When it comes to enforcement, a distinction must be made between who asserts claims against the board of management in Germany. This results in different obligations and rights, but also different hurdles for asserting claims. For more information on the respective requirements, click on the following constellations:

Business Judgment Rule and Personal Liability of the Board of Management in Germany

In connection with the liability of the management board for damages in Germany, the question of breach of duty is of crucial importance. In this context, it should be noted that not every decision of the management board which in retrospect turns out to be economically disadvantageous constitutes a breach of duty by the management board. The management board is allowed to "miss the mark" once in a while when making a business decision.

A member of the management board in Germany is therefore always not liable if he or she has made the business decision in question on the basis of appropriate information, without taking into account extraneous interests, for the benefit of the company and in good faith. This so-called business judgment rule is intended to protect the entrepreneurial discretion of the management board: If the management board must fear liability for any economic disadvantage to the company, it will no longer take even economically reasonable risks.

For the management board in Germany, the business judgment rule is therefore also an instruction to avoid or reduce personal liability. If the management board

1. on the basis of appropriate information and
2. weighing up alternative courses of action
3. it makes a factually appropriate decision,

this has a significant liability-preventing/reduction effect.

Can the AG waive Damages in whole or in part?

Art. 93 (4) sentence 3 AktG is relevant in practice in connection with potential liability actions. According to this provision, a stock corporation in Germany may only waive or settle claims for damages against the management boardthree years after the claim for damages has arisen and only if the annual general meeting agrees. In addition, it is required that shareholders whose shares together amount to one tenth of the capital stock do not object to the waiver/settlement of claims.

In german practice, this rule not infrequently prevents pragmatic solutions (such as the "general receipts" customary in GmbH law). This applies in particular if the prospects of success of a claim are rather uncertain or the amount of any claims for damages is rather low. The german stock corporation and the management board are left with only "workarounds". No permissible workarounds are provisions in the management board contract which directly provide for a limitation of liability or as such only have an indirect effect. In this respect, it is surprising - at least at first glance - that the permissibility of clauses guaranteeing the board of directors the conclusion of a D&O insurance policy in its favor has never been seriously questioned.

When do Claims for Damages become time-barred in Germany?

The assertion of claims for damages against members of the management board in the context of a liability action must take into account the special provision on the statute of limitations in Section 93 (6) AktG.

Under this provision, claims against the management board in Germany are generally subject to a limitation period of five years, or ten years in the case of companies listed on the stock exchange at the time of the breach of duty. This limitation period applies irrespective of whether the company is aware of the breach of duty in question or not. In contrast to the usual practice, the limitation period begins with the performance or omission of the act in question.