What Is it About?
11 years after the so-called Siemens/Neubürger ruling, the Regional Court Munich I acknowledged recognized principles regarding the liability of board members in its ruling of 5 September 2024 (Wirecard – HK O 17452/21):
- The reversal of the burden of proof pursuant to Section 93 para. 2 sentence 2 of the German Stock Corporation Act (Aktiengesetz) also applies to former board members
- In principle, board members can rely on expert advice from the company's own legal department
- Relying on the principle of trust (Vertrauensgrundsatz) is precluded in case of indications of improper management
- Duty of the Supervisory Board to adapt the measures of supervision if the Board of Management ("BoM") previously violated its duties
and set new standards that are likely to lead to stricter requirements for the BoM's management of the company.
Limits to the Discretion of the BoM
- In principle, the BoM must be granted extensive discretion in the management of the company to support entrepreneurial decision-making which includes taking risks as well as potentially disadvantageous decisions
- However, the discretion is exceeded if a "high risk of damage is undeniable and there are no justifiable business reasons for taking the risk in question" (convenience translation)
- Granting a "completely unsecured loan to a financially weak business partner" (convenience translation) is an unreasonable risk and therefore constitutes a violation of duty by the BoM
- The general principle applicable within the banking sector that loans should not be granted without the usual securities also applies "outside the banking sector" (convenience translation).
Intensification of BoM Member Duties
- Before taking the decision to subscribe to bonds, a financial due diligence must be carried out to verify the value and existence of the securitized claims and the solvency of the collateral provider
- Approval of a loan agreement (with significant liabilities) "without knowledge of the wording" (convenience translation) is not compatible with the diligence and care of a prudent and conscientious manager
- Without knowledge of the agreement's content, it is impossible to perform a plausibility check regarding the content of the agreement and the resolution
- Consequently, simply raising concerns is not (or no longer) sufficient if the subject matter of the resolution is not transparent; rather, approval must be denied.
The Principle of Trust vs. "healthy distrust"
- Principle of joint responsibility (Grundsatz der Gesamtverantwortung): The BoM members are jointly responsible for the management of the company (Sections 76 para. 1 and 77 para.1 AktG)
- However, the BoM has broad discretion with regard to the horizontal (and vertical) delegation of responsibilities
- In general, members of the BoM may rely on the other members to perform their duties diligently and to duly inform the BoM (Vertrauensgrundsatz)
- Nevertheless, board members that are not directly responsible have a duty of supervision (Überwachungspflicht) for the areas of responsibilities allocated to other board members
- Board members that are not directly responsible can be precluded from relying on the principle of trust in case of indications of improper management by the directly responsible board member.
Exclusion of Liability through Reliance on Expert Advice?
- In principle, the liability of board members can be excluded through reliance on expert advice
- Requirements established by the German Federal Court of Justice
(ISION-Principles):
- Comprehensively informed expert
- Competent and independent expert
- Independent plausibility check by the BoM
- According to the Regional Court Munich I, a
company's legal department is generally also
suitable to conduct an independent review, provided that:
- an impartial review is guaranteed and
- no specifications or expectations regarding the result are imposed
Review of the Types of Business Transactions Requiring the Supervisory Board's Approval
- The principle of trust also applies to the relationship between the Supervisory Board and the BoM: Accordingly, the Supervisory Board may generally trust the BoM to perform its duties diligently and to duly inform the Supervisory Board
- However, the limits of the principle of trust are exceeded if the BoM or individual members have violated fundamental obligations under the German Stock Corporation Act
- The Supervisory Board's discretion to subject the implementation of certain management decisions to its approval turns into a corresponding obligation if the BoM has disregarded the requirement of the Supervisory Board's approval in the past.
Conclusion and Outlook
- Applying principles applicable within the banking sector to companies outside the sector could make it more difficult to establish business relationships and participate in start-up financing
- To impose a general obligation on the BoM to read the entire contract ("knowledge of the wording") is not feasible in many cases and also unnecessary
- The development of the principle of trust towards a
principle of distrust is viewed with scepticism:
- Negative spillover effects cannot be ruled out (increasing fear of liability and risk aversion)
- In any case, this ruling serves as a wake-up call for board members to treat their colleagues with healthy mistrust
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
