The advisory board as a steering committee for PE investments
With the advisory board — also known as the board of directors or shareholders’ committee — a body can be set up “between” the shareholders’ meeting and the portfolio company’s management. On the one hand, this results in an acceleration of decisions at shareholder level. On the other hand, the Advisory Board members are more intensively involved in the activities at the level of the portfolio company and therefore concentrate to a particular extent on their tasks, which increases the quality of their activities. Furthermore, in the event of differences between the management and the shareholders, there is an additional escalation level to bring about arbitration.
In addition to assuming control and monitoring tasks and the possibility of transferring management functions, the advisory board also regularly has an extensive advisory and sparring function in private equity practice. In addition, an advisory board can provide valuable input in the development and preparation of strategic business planning.
How the advisory board should be legally anchored depends first and foremost on the rights and duties to be assigned to it. As a rule of thumb, it is advisable to include more detailed provisions in the company’s articles of association the more intensively the “normal” organizational constitution of the GmbH is interfered with.
Thus, an advisory board that is to have exclusively advisory functions can even be set up without even having to be anchored in the articles of association, the so-called advisory board under the law of obligations. In this case, a corresponding shareholder resolution and the agreements with the designated advisory board members are sufficient. If, however, the advisory board is to be granted powers that go beyond merely advising the management, the articles of association must contain an opening clause authorizing the shareholders’ meeting to implement such an advisory board by resolution. In the case of more far-reaching encroachments on the rights of the management and the transfer of tasks that are actually the responsibility of the shareholders’ meeting, it is advisable to regulate this explicitly in the articles of association.
The conceivable powers of the advisory board also depend on the specific functions it is to perform. A rough distinction can be made as to whether the advisory board is intended to advise the management, to control and monitor it, or even to partially manage the company.
An advisory board which, according to the intention of the financial investor, is to act exclusively in an advisory capacity should, in particular, be endowed with sufficient information rights in order to be able to perform its advisory duties in a reasonable manner. Even if there is a general duty of the managing directors to provide the advisory board with all information essential for its activities, it would make sense to provide for an explicit duty of the management to report to and consult with the advisory board in certain situations. In addition, it is generally recommended to set up a regular reporting system. On the other hand, the right to information is accompanied by the duty of the members of the Advisory Board to treat the information received confidentially.
An advisory board that is also to perform control and monitoring tasks may be vested with a variety of additional rights. for example, the possibility of issuing instructions to the managing directors or also issuing personnel powers to the managing directors.