27.01.2015Attempts to Reform Manager Liability
There is often the impression among the wider public that the liability of board members or managing directors is too lax in Germany. But contrary to public opinion manager liability in Germany is actually very strict. This article assesses the current liability scheme and outlines reform considerations.
1. Introduction
There is often the impression among the wider public that the liability of board members or managing directors is too lax in Germany. The former chairman of the board of Arcandor was recently given a custodial sentence without probation for embezzlement because he had charged private helicopter flights, among other things, to the company. The press commented in this context with incomprehension that although he received a sentence for the violations, he was not called to account due to Arcandor's insolvency. In contrast the Regional Court (Landgericht – LG) Munich I sentenced the former CFO of Siemens AG in December 2013 to pay damages in the amount of EURO 15,000,000.00 to his former employer for violations of compliance (Case No.: 5 HKO 1387/10). The court believed it was within his responsibility to insure to the best of his endeavors that Siemens AG and its employees "adhere to all regulations which concern the company as a legal entity". This decision is unusual because of the amount of damages but it is otherwise unspectacular. Contrary to public opinion manager liability in Germany is very strict. It is for this reason that discussions about the need for reforms were also held at the German Jurists Forum (Deutscher Juristentag) this year.
2. Current Manager Liability
It is less known in this connection that managers – and also members of supervisory boards by the way – bear the burden of proof that they have acted with the diligence of a prudent and conscientious businessman (cf. § 93 Subsection 2 Sentence 1 German Stock Corporation Act (Aktiengesetz – AktG)). This stipulation is compulsory in law and it must therefore be included in the employment agreement or in the articles of association. Unlike other claims for damages this regulation clearly tightens up liability – such as the liability of consultants, for example. It is justified by the manager being closely involved with the interests of the company. It also applies to former members of the board of management although they generally do not have any documentation to release themselves from liability.
Departmental responsibility is an effective way to avoid liability in practice. Each member of the board of management is responsible here for his/her own department and is not generally liable for his/her colleagues' breaches of duty. However, it is unclear where the line is drawn for the remaining overall responsibility of the board of management. Can a board member always rely on his/her colleagues to act in accordance with the law and run their departments appropriately?
The articles of association or an agreement with the company cannot restrict the liability of a board member nor can it be limited to cases of intent and gross negligence. Certain circumstances (such as particularly risky management measures) cannot be excluded nor can the amount of damages be limited. The board member can at best make an agreement with a third party (parent company, major shareholder, major creditor) to be released from liability.
3. Reform Considerations
Various reform considerations appear sensible assuming this situation with respect to manager liability. First and foremost the reversal of the burden of proof should be abandoned for former board members. A corresponding statutory modification also appears sensible because the grounds for the reversal of the burden of proof – namely the manager being closely involved with the interests of the company – simply do not apply to former board members.
Furthermore the so-called "Business Judgment Rule" (BJR) in § 93 Subsection 1 Sentence 1 AktG should be extended. Pursuant to BJR a board member acts with diligence if he/she can reasonably assume when making corporate decisions that he/she is acting in the interest of the company on the basis of adequate information. The alleviation therefore only occurs for corporate decisions. It is not relevant for violations of competence or organizational or other legal regulations meaning for a variety of measures at least greater uncertainty for the manager whether BJR applies in his/her favor in the event of damages. Major issues such as designing a functioning compliance management system or implementing bank regulation requirements are not corporate decisions meaning that the manager cannot assert BJR.
Finally it should be considered to limit the scope of liability. The company could be authorized by a corresponding modification of the stock corporation law to include a liability limit in its articles of association. This could foresee being able to demand only a limited amount of damages for slightly negligent violations, for example. A link to the salary – i.e. five times the gross annual salary, for example – would insofar appear self-explanatory.
Contact
