25.11.2014Downsizing the Board of Management in a German AG pursuant to the Articles of Association does not constitute Good Cause for the Revocation of a Board Member
The Regional Court Frankfurt am Main decided in its ruling dated April 22, 2014 that downsizing the board of management of the Commerzbank Aktiengesellschaft (AG) as resolved by the supervisory board pursuant to the articles of association, does not constitute a good cause for the revocation of one of its board members. Nor would good cause exist if the board of management was to be downsized in the course of extensive cutbacks in staff.
The Regional Court (Landgericht - LG) Frankfurt am Main decided in its ruling dated April 22, 2014 (Case No.: 3-05 O 8/14) that downsizing the board of management of the stock corporation Commerzbank Aktiengesellschaft (AG) as resolved by the supervisory board pursuant to the articles of association, does not constitute a good cause for the revocation of its board member pursuant to Section 84 Subsection 3 of the German Stock Corporation Act (AktG). Nor would good cause exist if the board of management was to be downsized in the course of extensive cutbacks in staff. An appeal was filed with the Higher Regional Court (Oberlandesgericht - OLG) Frankfurt am Main (Case No.: 5 U 111/14) against this ruling of first instance.
I. Fact of the Case
Commerzbank AG was planning considerable cutbacks in staff in which approximately 10 % of the jobs in Germany were to be axed. As a consequence, it was also intended to downsize the board of management. Since the supervisory board had to determine the size of the board of management pursuant to the articles of association of the company, the supervisory board resolved, among other things, to revoke the plaintiff as a board member; the employment relationship under the law of obligations was not terminated. The plaintiff then applied to the LG Frankfurt for declaration that the revocation of his appointment was null and void and further applied for continued employment under the same conditions at Commerzbank AG.
II. Decision
The LG Frankfurt partly allowed the legal action. The resolution of the supervisory board revoking the plaintiff's appointment as a member of the defendant’s board of management was declared null and void but the claim for continued employment was dismissed as hitherto unfounded.
The defendant was not justified to revoke the plaintiff's appointment since there was no "good cause" for the revocation in accordance with Section 84 Subsection 3 Sentence 1 AktG. Pursuant to the prevailing opinion in literature, good cause for revocation would exist if it were unreasonable for the stock corporation to continue the executive relationship until the end of the term of office due to, for example, gross violation of duty, inability to carry out proper management activities or withdrawal of trust by the annual general meeting (cf. Section 84 Subsection 3 Sentence 2 AktG); all the circumstances of the individual case should be taken into consideration here and weighed up against each other. Operational good cause can also justify the revocation of a board member if it were unreasonable to continue the appointment until the end of the regular term of office. The LG Frankfurt did not consider the extensive cutbacks in staff, restructuring of business sectors and cutting back of divisions as well as downsizing the board of management which had been duly resolved pursuant to the articles of association, as an operational good cause to revoke the plaintiff. The defendant had not demonstrated that the revocation took place due to harsh economic reasons and that it was unreasonable to continue the employment until the end of the term of office. Nor would the regulation in the articles of association according to which the supervisory board was authorized to downsize the board of management, suffice to revoke the plaintiff as a board member. This authorization in the articles of association would only empower the supervisory board to determine the number of board members but not to revoke the appointed board members without good cause, thereby contradicting Section 84 Subsection 3 AktG. It is precisely the purpose of Section 84 Subsection 3 AktG to secure that the board member has a free hand in the corporate management and not to make him/her a puppet of the supervisory board by threatening with revocation of his/her appointment. If the statutory resolution of the supervisory board to downsize the board of management were to be sufficient as good cause for the revocation, the supervisory board would thus be in a position itself to create good cause for a revocation at any time. The independence of the board of management would therefore be at risk.
The LG Frankfurt considered the plaintiff's application for continued employment as a board member to be unfounded since revoking an appointment of a board member remains valid pursuant to the wording of Section 84 Subsection 3 Sentence 4 AktG until its invalidity is ascertained in a final and absolute court ruling. The executive relationship ends even if good cause does not exist for the revocation. The board member's executive relationship only revives if the revocation is ascertained in a final and absolute ruling to be invalid. At the last oral hearing, however, it was not yet ascertained in a final and absolute ruling that the revocation was invalid. The revocation would therefore only then be invalid ex nunc if the ruling by the Regional Court allowing the action became final and absolute.
III. Practical Advice
Unlike managing directors of limited liability companies (cf. Section 47 Subsection 1 of the German Limited Liability Companies Act (GmbHG)), the board members of a stock corporation are not subject to instructions but act independently and on their own responsibility (Section 76 Subsection 1 AktG). Therefore, their appointment can only be revoked by the supervisory board for good cause which exists if it is unreasonable for the stock corporation to continue the executive relationship with the respective board member until the end of the regular term of office (Section 84 Subsection 3 Sentence 1 AktG). Good cause for revocation can also include operational reasons which were acknowledged by established court practice for cases of revocation under pressure from third parties (see BGH, NZG (Neue Zeitschrift für Gesellschaftsrecht - new magazine for corporate law) 2007, 189). However, this presupposes in the individual case that not revoking the board member would result in serious harm to the stock corporation.
The LG Frankfurt is of the opinion that the supervisory board’s resolution to downsize the board of management does not constitute an operational good cause for the revocation of the appointment of a board member. In view of the ruling by the Regional Court, the supervisory board can only reduce the number of board members either through an amicable termination of the executive position or, if an amicable solution fails, simply by waiting for the end of the board member’s term of office and not re-appointing the vacant position on the board of management. Prior to an appointment, repeated appointment or extension of the term of office of a board member, the supervisory board could in certain cases also stipulate a shorter term of office than the maximum of five years as permitted in Section 84 Subsection 1 Sentences 1 and 2 AktG.
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