3 questions to smart minds

Manager liability in Germany

For this 3 questions to Dr. Constantin Goette

Sunday & Partner
Photo: C. Goette | S&P
28. Janu­ary 2015

The Middel­hoff case is on everyone’s lips and is promin­ently discus­sed in the media. Among other things, there is talk of entre­pre­neu­ri­ally incor­rect decis­i­ons, acts of embezz­le­ment and acts of fraud. This leads — in addi­tion to the alre­ady omni­pre­sent accu­mu­la­tion of liabi­lity risks for mana­gers — to incre­asing uncer­tainty among busi­ness mana­gers in the area of both limi­ted liabi­lity compa­nies and stock corpo­ra­ti­ons. What measu­res do mana­gers have to observe in order to avoid liabi­lity and under what circum­s­tances do they bene­fit from the exemp­ting provi­si­ons of the Busi­ness Judge­ment Rule?

For this 3 ques­ti­ons to Attor­ney at Law, Sonn­tag & Part­ner, Munich

1. What obli­ga­ti­ons do mana­gers have to observe in order to avoid liabi­lity and how can they best prevent claims by their company or third parties against them personally?
First of all, it should be noted that the majo­rity of liabi­lity cases only occur in the inter­nal rela­ti­onship between the company and the liable persons; only in excep­tio­nal cases is there also liabi­lity vis-à-vis third parties such as credi­tors or share­hol­ders of the company. In any case, busi­ness mana­gers must observe — in addi­tion to other gene­ral duties — duties of lega­lity, loyalty and super­vi­sion. This includes, on the one hand, the inter­nal obli­ga­tion (compli­ance with the law/ artic­les of association/ employ­ment contract/ rules of proce­dure) and, on the other hand, the exter­nal obli­ga­tion (“good inten­ti­ons” are not suffi­ci­ent). It should be clear that no one is allo­wed to “reach into the till” or other­wise obtain perso­nal bene­fits within the scope of his or her posi­tion on the board. Moni­to­ring of colle­agues and subor­di­nate employees is also essen­tial in order to exclude liabi­lity. Every (at least far-reaching) busi­ness decis­ion made by the mana­ger (e.g. carry­ing out due dili­gence when purcha­sing a company (yes/no) or e.g. conclu­ding a long-term and costly lease agree­ment) requi­res the mana­ger to thoroughly weigh up the advan­ta­ges and disad­van­ta­ges and to docu­ment the decis­ion-making process and the reasons leading to the decis­ion accor­din­gly. These are all recur­ring complex proces­ses that must always be taken into account.
2. Which areas of daily “social life” do liabi­lity facts mani­fest most frequently in practice?
In prac­tice, in addi­tion to crimi­nal offen­ses that have an impact on the public, problems arise parti­cu­larly frequently in the context of busi­ness decis­i­ons, i.e. decis­i­ons made in the course of daily busi­ness that do not fall under the obli­ga­ti­ons of lega­lity. Clients often approach us to clarify whether it is neces­sary to imple­ment a compli­ance system in their company, how detailed due dili­gence checks are to be carried out in the context of company acqui­si­ti­ons, or whether they are allo­wed to carry out a company acqui­si­tion even if we, as exter­nal advi­sors, have unco­vered veri­ta­ble risks. This is because seeking advice from a third party may, under certain circum­s­tances, elimi­nate a manager’s perso­nal liabi­lity, but it does not absolve him or her from making his or her own decis­ion after weig­hing all the pros and cons.
3. Which excul­pa­tory regu­la­ti­ons are essen­tial for busi­ness mana­gers and what requi­re­ments must they meet in order to bene­fit from corre­spon­ding exculpation?
The regu­la­ti­ons of the ‘Busi­ness Judge­ment Rule’, deri­ved from the U.S., which have mean­while been codi­fied in § 93 AktG (German Stock Corpo­ra­tion Act) and also apply to mana­ging direc­tors of a GmbH (limi­ted liabi­lity company), can lead to an exone­ra­tion of the acting mana­ging direc­tor if they are obser­ved. The main condi­ti­ons under which an appli­ca­tion of the rules of the Busi­ness Judge­ment Rule can give are (i) the exis­tence of an entre­pre­neu­rial decis­ion (not a decis­ion covered by the lega­lity requi­re­ment!), (ii) bona fide action of the affec­ted mana­ger, (iii) making an entre­pre­neu­rial decis­ion without any extra­neous or vested inte­rests, and (iv) acting in prin­ci­ple for the bene­fit of the Company; and (v) Acting on adequate infor­ma­tion. These cate­go­ries each yield a wide bouquet of “stumb­ling blocks,” and busi­ness leaders incre­asingly must learn to deal with them. Finally, it should be mentio­ned and stron­gly recom­men­ded to every busi­ness mana­ger that each of his (far-reaching) decis­ion-making paths must be docu­men­ted, because he is obli­ged to provide evidence in the event of a claim being made against him (keyword: rever­sal of the burden of proof). He will only be able to provide such evidence if he has docu­men­ted past details that led to a busi­ness decis­ion.

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