A guide for directors of subsidiary companies in Germany. August 2011

Transcription

1 A guide for directors of subsidiary companies in Germany August 2011

2 Welcome to our guide for directors and prospective directors of subsidiary companies in Germany. While the duties of a subsidiary company s directors often coincide with the strategy and requirements of the parent company, this is not always the case. Depending on the jurisdiction or the circumstances, a subsidiary company s directors may need to act independently of the parent. The directors may also risk personal liability. Increasingly, for example, regulators and enforcement agencies around the world are taking a much tougher line on bribery, corruption and cartel abuses. So directors will wish to know the extent to which they can be protected against these risks, for example through being indemnified and/or insured. We hope you find this guide useful as an introduction to your role as director. Barry O Brien Co-chair Corporate governance client solutions group Andreas Fabritius Co-chair Corporate governance client solutions group

3 Contents The regulatory framework for directors duties and corporate governance 1 What is the regulatory framework for unlisted private companies incorporated in Germany? 1 General duties 2 Where do these duties come from, and whom do I owe them to? 2 What are my general duties? 2 Do these duties apply if I am a non-executive director? 5 What are the consequences if I breach these duties? 8 Conflicts 10 What are my duties relating to conflicts? 10 What are typical situations in which conflicts arise? 12 Are only my interests taken into account? What about connected persons? 12 Am I expected to be aware of conflicts? 13 How does authorisation work? 13 What practical steps can I take to deal with conflicts? 13 The environment, health and safety, competition, taxes and social security 14 What are my obligations concerning the environment? 14 What are my obligations concerning health and safety? 14 What are my obligations concerning competition law? 15 What are my obligations concerning taxes and contributions to social security? 15 Restricted transactions 17 Are there restrictions on particular transactions between the company and me? 17 What about the company giving me a loan? 18 Insolvency 19 Who do I owe my duties to in an insolvency situation? 19 What is the position with respect to continued trading after insolvency is assured and so causing loss to creditors? 19 How can I incur liability for wrongful trading? 19 When should my company stop trading? 19 What practical steps can I take if my company s solvency is in question? 20 What if I sit on the board of two companies within the same group and one of those companies is in financial trouble? 22 Indemnification, insurance and ratification 23 What do I need protection from? 23 Is it possible for the company to indemnify me against liabilities? 23 Where should the indemnity be given? 24 What about insurance? 24 Is it possible for shareholders to ratify a breach of duty that I committed? 24 Have there been any recent developments or are there any upcoming developments that may impact my duties as a director of a subsidiary? 26 Restructuting Act extended manager liability for listed companies 26 OLG Dusseldorf on duties of board members of a bank (IKB) 26 Director remuneration 28 Contacts For further information please contact Andreas Fabritius T E andreas.fabritius@freshfields.com This material is for general information only and is not intended to provide legal advice. Freshfields Bruckhaus Deringer LLP 2011

4 The regulatory framework for directors duties and corporate governance What is the regulatory framework for unlisted private companies incorporated in Germany? Constitutional documents. This includes the articles of association (Satzung or Gesellschaftsvertrag) and any rules of procedure (Geschäftsordnung) for the management board, the managing directors or the supervisory board. Your service agreement may also contain guidelines for your work. Shareholders resolutions. In the case of a GmbH ( Gesellschaft mit beschränkter Haftung, limited liability company), shareholders resolutions and instructions also form part of the framework. In the case of an AG (Aktiengesellschaft, stock corporation), the ability of the general meeting to regulate your work is much more limited. If the company is dominated under a domination agreement 1, managing directors of a GmbH and members of the management board of an AG must follow instructions of the dominating company. AktG ( Aktiengesetz, Stock Corporation Act), GmbHG (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, Act on Limited Liability Companies). The AktG and the GmbHG set out the general duties you owe as a member of the management board or the supervisory board and as a managing director, respectively. The DCGK (Deutscher Corporate Governance Kodex, German Corporate Governance Codex) provides principles of good governance. It applies on a comply-or-explain basis to listed companies only, but may also influence the interpretation of your duties as board member of an unlisted company. Other statutory law and case law. HGB ( Handelsgesetzbuch, Commercial Code), AO (Abgabenordnung, Fiscal Code), MitbestG (Mitbestimungsgesetz, Co-determination Act), DrittelbG (Drittelbeteiligungsgesetz, One-third Participation Act) and InsO (Insolvenzordnung, Insolvency Act) contain other important duties. Depending on your company s business, you are likely to be subject to additional duties under general civil law, intellectual property laws, UWG (Gesetz gegen den unlauteren Wettbewerb, Unfair Competition Act), competition laws, environmental laws, employment-related laws and duties related to product liability. The courts have shaped and supplemented many of these duties. 1 A domination agreement (Beherrschungsvertrag) is a contract provided for under German corporate law. It establishes control of the dominating company over the dominated company (even in case of, eg, a minority shareholding though rare in practice) and gives a right to the dominating company to give binding instructions to the managing directors or the management board of the dominated company. To balance this, the dominating company has to bear any annual losses the dominated company makes during the term of the contract. 1 Freshfields Bruckhaus Deringer LLP, August 2011

5 General duties Where do these duties come from, and whom do I owe them to? The duties come from the applicable statutory laws, mainly the AktG and the GmbHG, as interpreted and supplemented with case law by the courts. You owe your duties to the company, not individual shareholders, a group of shareholders or other group companies. When exercising your discretion, you must act in the company s interest, which especially in the case of an AG not only consist of the shareholders interests but also the interests of the employees as well as the public interest. What are my general duties? Members of the management board of an AG (stock corporation) The management board (Vorstand) manages the AG under its own responsibility. It is not bound by orders or instructions from the supervisory board (Aufsichtsrat) or the general meeting (Hauptversammlung). As a member of the management board, you must perform your duties with the care of a prudent and diligent business manager. What is required will depend on the size of the company and type of its business. As a control question, you may ask yourself how a prudent, independent manager of a company of this type would have acted in a given situation. The standard of care is an objective one and does not account for individual shortcomings. You cannot avoid liability by pleading that you did not have the necessary skills or were insufficiently qualified for your office. 2 On the other hand, you are expected to use special capabilities or knowledge available to you. Duty of legality You have to manage the company s affairs within the framework of the law, the articles of association, the applicable rules of procedure and any resolutions of other corporate bodies binding on you. You must adhere to all statutory provisions applicable to the company, including general civil law, commercial law, tax law and criminal law. A breach of the law is also a breach of your duties towards the company. Further, you need to act within your powers; ie, adhere to the order of competence under corporate law, in particular consent requirements 3 and the limits provided by the objective of the company. Where the legal situation is unclear, you should seek advice from legal counsel unless you have sufficient expertise yourself. Some of the particularly relevant statutory obligations you must adhere to include the duty to: 2 Therefore, if you do not have sufficient command of the German language, you should have reports and other relevant documents provided to the board translated into your native tongue. 3 While acting without the required consent of the supervisory board manifests a breach of duties, the consent of the supervisory board does not shield you from liability. Even if the supervisory board has granted the required consent, the management act in question remains the responsibility of the management board and may be contrary to its duties. 2 Freshfields Bruckhaus Deringer LLP, August 2011

6 report to the supervisory board on both a regular and an event-driven basis; 4 keep the necessary books and make the necessary fillings with the commercial register; ensure that the company pays its taxes and social security contributions; and file for insolvency on time under the relevant prerequisites. Duty to manage, monitor and organise properly You must duly and properly manage and control the company. This includes a duty to take such measures as needed to identify at an early stage any developments that could endanger the company. Such measures, in particular, comprise a sufficient controlling and monitoring system with a clear allocation of competences, sufficient documentation and efficient reporting duties. If you delegate your responsibilities, you must ensure that the company fulfils its tasks through sufficiently qualified people and that those people report to you appropriately. If the management board consists of several people, the rule is that you manage the company jointly. If in your company, as is common practice, individual members of the management board are responsible for a business division or a function, you are responsible for all decisions pertaining to your division or function. In addition, each member of the management board is obliged to monitor activities in the other departments and to intervene if anything detrimental to the company is happening in any of the other departments. As the chairman of the board, you are under a more onerous duty to monitor the entire management. You have a duty to base your decisions on an adequate level of information. Hence, you need to use all sources of information available to you in a given situation, assess the costs and benefits and allow for the risks. The attention and information required grows with the complexity of a transaction and the risks concerned. Duty to economise As an agent, you must manage the company economically, and management decisions must be appropriate. As part of this, you may not waste the company s assets, take disproportional risks or disrespect procedural safeguards. Also, you need to assert and enforce claims of the company, including claims against members of the supervisory board. That said, it can be advisable or in the best interest of the company not to assert a claim in a given case. 4 Regular reporting obligations encompass: the business policy and principal questions of the future management (in particular financial, investment and personnel planning); the profitability of the company, especially the return on equity; and the state of business, particularly of revenues, and of the company. Event-driven reporting obligations exist for business transactions of material importance for the profitability and the liquidity of the company as well as for other important causes. 3 Freshfields Bruckhaus Deringer LLP, August 2011

7 Business judgement rule No breach of duties occurs if you take a management decision and can reasonably assume to act on the basis of sufficient information, in the company s best interest and without private interests or off-topic influences (the so-called business judgement rule). Only business decisions (projections concerning the business and requiring a valuation of future events) are privileged. The business judgement rule does not apply to measures required by law or to decisions violating a legal provision or the articles of association. Duty of loyalty You have a duty of loyalty towards the company. You must place the company s interests over yours and those of third parties, and you may not pursue any personal interest in your decisions or use business opportunities intended for the company for yourself. You must disclose conflicts of interests (see What are my duties relating to conflicts? below). Without the consent of the supervisory board, you may not run your own mercantile trade business (Handelsgewerbe), compete with the company or hold office as a managing director, member of the management board or director of another company. Duty of confidentiality You are bound by a strict duty of confidentiality under which you may not disclose any confidential information of the company, in particular trade or business secrets that you have acquired as a result of your office. Other duties Among other duties, the management board must provide a recommendation with respect to all items on the agenda on which the general meeting has to decide. Managing directors of a GmbH (limited liability company) In a GmbH the shareholders meeting (Gesellschafterversammlung) is in a significantly stronger position than in a stock corporation and can directly influence the managing directors (Geschäftsführer). The corporate governance of a GmbH is more flexible than that of an AG and can differ significantly among different GmbHs. For example, a supervisory board is not a mandatory feature of a GmbH (unless the co-determination laws so require). As a managing director, you must perform your duties with the care of a prudent and diligent business person. Again, this is an objective standard that does not allow for individual shortcomings. Duty of legality You have a duty of legality similar to that of a member of the management board of an AG. However, a noteworthy difference that follows from the stronger position of the shareholders meeting in a GmbH is that you must comply with lawful instructions from the shareholders meeting. 4 Freshfields Bruckhaus Deringer LLP, August 2011

8 To the extent you follow such instructions, there is no breach of duties even if you act without the required consent of the supervisory board. You also need to inform other corporate bodies involved in the decisionmaking process adequately, and for extraordinary measures, you need the shareholders consent even without an explicit consent requirement. Various duties protect the company s share capital. For example, you may not pay the shareholders or grant a loan to other managing directors or authorised representatives (Prokuristen), in each case, out of the assets required to maintain the share capital. Duty to manage, monitor and organise properly; duty to economise; and the business judgement rule You must manage, monitor and organise the company s affairs properly and manage economically (similar to a member of the management board of an AG). In the case of business decisions (and unless you have received binding instructions from the shareholders meeting), you also benefit from the business judgement rule. As for an AG, the law assumes that several managing directors have a common overall responsibility for managing the company, but in practice responsibilities will often be allocated along divisions or functions. In this case you will be fully responsible for your division or function and must monitor your peer directors and their areas. Duty of loyalty As you are entrusted with the company s interests, you have a duty of loyalty. You may not use the company s resources for your personal benefit, and when acting as a managing director, you may only act for the benefit of the company, not for your benefit or third parties benefit. Further, unless the shareholders meeting dismisses you, you may not compete with the company, including as a managing director, member of the managing board or general partner of a competing enterprise, or use the company s corporate opportunities. You must disclose conflicts of interests (see What are my duties relating to conflicts? below). Duty of confidentiality You must not disclose confidential information of the company, in particular trade or business secrets, which you have acquired as a result of your office. Do these duties apply if I am a non-executive director? The distinction between executive and non-executive directors is unknown in German law. All managing directors of a GmbH and all members of the management board of an AG are subject to, and must abide by, identical duties and obligations. Under the two-tier board structure system in Germany, non-executive directors rather resemble supervisory board members. A supervisory 5 Freshfields Bruckhaus Deringer LLP, August 2011

9 board is a mandatory corporate body of an AG. In a GmbH a supervisory board is required if the company is subject to co-determination, otherwise the articles of association can provide for a supervisory board to be established. A GmbH may also have an administrative board or another corporate body whose members may have duties more or less similar to those of a supervisory board member. The details, however, depend on what rights and obligations such a body has. Members of the supervisory board of an AG Standard of care The standard of care expected from you (the care of a diligent and prudent supervisory board member) corresponds to that of a member of the management board, adjusted for the specific functions of the supervisory board. Again, this is an objective standard of care for all members, the level of which will be influenced by the size and type of the business. Each board member must possess minimum skills and sufficient qualifications in light of the tasks and duties of the supervisory board. You must apply your individual skills as well as you can; specific skills or knowledge or a specific function might demand a higher standard of care. Duty to supervise and consent requirements The main duty of the supervisory board is supervising the management board on all past and future business activities. This encompasses examining both the legality of the measures taken by the management board (including its adherence to the order of competence under stock corporation law) and of the business discretion exercised by it. In particular, the supervisory board must act to prevent violations of duties by the management board. The supervisory board s main tools for its supervision are reports from the management board, both regular reports and those requested by the supervisory board 5. In addition, the supervisory board has a right to review and inspect the company s books and assets. Finally, consent requirements are an important part of pre-emptive supervision. Unless the articles of association contain a catalogue of business activities that the supervisory board deems sufficient, it must determine a catalogue of business activities that are subject to its consent and review such catalogue regularly. As part of its duty to supervise future business activities, the supervisory board must make projected business transactions that may have a material effect on the company subject to its consent on an ad hoc basis, if they are not already covered by existing consent requirements. When you 5 You have the right to ask the management board to prepare a report on a specific matter, which must then be presented to the supervisory board as a whole. As a member of the supervisory board, you have a right to review reports from the management board to the supervisory board; there is no right of the chairman of the supervisory board to withhold such reports or to only share a summary with the other members. 6 Freshfields Bruckhaus Deringer LLP, August 2011

10 assess whether a transaction that is subject to the supervisory board s consent is in the best interest of the company, you have an entrepreneurial discretion and will benefit from the business judgement rule. The business judgement rule only applies to business decisions (eg, appointment of members of the management board), not to any retrospective control measures. With respect to the information you need to have, the law takes into account that you are not engaged in the day-to-day affairs of the company. You may rely on the information provided by the management board, unless there are indications that this information is inadequate. Duty of confidentiality You are bound by a strict duty of confidentiality under which you may not disclose any confidential information of the company, in particular trade or business secrets that you have acquired as a result of your office. Duty of loyalty As the office of a supervisory board member is typically a part-time job, the standard for the duty of loyalty depends on whether you act in your capacity as a supervisory board member or outside that office. The interests of the company take priority whenever you act as a supervisory board member. Outside your office, the company s interest is not imperative, but you may not actively act against it, and you may not use corporate opportunities of the company for your own benefit. On the other hand, you also need not act against your own interests or those of third parties to whom you owe fiduciary duties. Other duties The supervisory board has the sole power to appoint and dismiss the management board and to enter into and terminate service agreements with each member on behalf of the company. It must review and pursue claims for damages against members of the management board. Where you become aware, even unrelated to your capacity as a board member, of any risks possibly causing a loss or damage to the company, you must tell the supervisory board in due course. The supervisory board must examine the consolidated financial statements and the group management report. It must submit a written report about its examination to the general meeting and, more generally, give a recommendation with respect to all items on the agenda on which the general meeting has to decide. Supervisory board members in a GmbH If the GmbH has a mandatory supervisory board due to co-determination laws, your duties as a member are similar to those of a supervisory board member in an AG. However, in the case of a voluntary supervisory board or an administrative board, you also need to consult the articles of association and the rules of procedure to assess how your obligations and duties may differ. 7 Freshfields Bruckhaus Deringer LLP, August 2011

11 What are the consequences if I breach these duties? Members of the management board, managing directors If you (wilfully or negligently) breach your duties, you are liable to the company for the resulting damage unless, in the case of managing directors of a GmbH, you have followed lawful and binding instructions from the shareholders meeting. If more than one member or managing director violates his duties for the same matter, such members or managing directors are jointly and severally liable towards the company. With respect to the standard of care, the burden of proof is shifted to you; ie, you have to prove that you acted with the care of a diligent and prudent business person. In the case of the management board of an AG, these claims are not precluded even if the board has been discharged, whereas a GmbH is generally precluded with its claims for damages against its managing directors once it has discharged them. If you are a managing director, you can be dismissed from your office at any time, irrespective of any breach of your duties. If you are a member of the management board, you can be dismissed for cause only. Severe breaches of duties, incapability to properly manage the company or a withdrawal of confidence by the general meeting establishes such a cause. Further, the shareholders may refuse to discharge you. Your service agreement may be terminated for cause or you may be suspended for the remaining term of your service agreement. Additional liability may arise in tort. In addition, criminal liability may exist in the case of embezzlement, fraud, bribery or similar offences. The duty of confidentiality is also enforced by criminal penalties. It is an administrative offence and you can be subject to fines if you wilfully or negligently fail to supervise, as required, to prevent breaches of the company s duties that are sanctioned with fines or penalties. An offence will be committed where such duty is breached and the breach could have been avoided in the case of due supervision. Members of the supervisory board If you (wilfully or negligently) breach your duties, you are liable, potentially in addition to members of the management board or the managing directors, to compensate the company for all losses caused. If more than one member violates his duties for the same matter, such members are jointly and severally liable towards the company. With respect to the standard of care, the burden of proof is shifted to you; ie, you have to prove that you acted with the care of a diligent and prudent supervisory board member. To be excluded from liability, if you consider an act or omission of the management board illegal, you must do whatever is needed to convince the supervisory board to object to such act or omission, and in 8 Freshfields Bruckhaus Deringer LLP, August 2011

12 exceptional cases, take the matter to a judicial review of the supervisory board s decision. As a consequence of a breach of duty, you may be dismissed from office by the shareholders meeting, the shareholders may refuse to discharge you and additional liability in tort and criminal liability, including criminal liability for breaches of the duty of confidentiality, may exist. Procedural aspects If a member of the management board breaches his duties, the supervisory board is obliged to claim damages on behalf of the company unless there are no sufficient prospects for success, or a lawsuit would cause more damage to the company than compensate the loss already suffered by the breach of duty. Vice versa, the management board is obliged to claim damages against members of the supervisory board who breached their duties. In theory, the duty to claim damages is strict and may, if not complied with, result in the negligent corporate body being liable for any damages caused by its failure to act. In the past, enforcing damage claims against board members was, in practice, mainly limited to exceptional situations (insolvency, change of control, change of management). However, more recently, liability cases have become more frequent. This is reinforced by the ability of minority shareholders to force companies through court proceedings or by shareholders resolutions to pursue damage claims against their boards for severe violations of their duties, and by a changing general climate with respect to management responsibility. In the case of a GmbH, the shareholders meeting is responsible for claims against both managing directors and members of the supervisory board. 9 Freshfields Bruckhaus Deringer LLP, August 2011

13 Conflicts What are my duties relating to conflicts? Members of the management board (AG) and managing directors (GmbH) General duties relating to conflicts When dealing with conflicts of interest, the interests of the company should take priority. You must tell the supervisory board and the other members of the management board/managing directors about (potential or actual) conflicts of interest. If you have a conflict of interest, you must abstain from voting and must not participate in board discussions on the relevant topic. 6 If the conflict is material, you may be required to resign. Non-compete obligation As a member of the management board or as managing director, you are subject to a non-compete obligation (see What are my general duties? above) unless you are discharged from this obligation by the supervisory board (in the case of an AG) or the shareholders meeting (in the case of a GmbH). Accepting benefits from third parties You must not ask for or accept benefits or other advantages from third parties for yourself or for others in connection with your office or grant unjustified advantages or benefits to others. Duty of loyalty You have a duty of loyalty towards the company (see What are my general duties? above). You must not pursue your personal interest in connection with management decisions or use business opportunities of your company for yourself. Self-dealing In relation to self-dealing, if you are member of the management board of an AG, your company should be represented by the supervisory board in transactions between you and the company. All dealings must be at arm s length. Loans by the company to you require a resolution of the supervisory board. If you are managing director of a GmbH, you must not represent the company in transactions between you and the company unless you have been exempted from the prohibition of self-dealing in the articles of association or by the shareholders based on an authorisation in the articles of association. If the GmbH has a supervisory board, your company is represented by the supervisory board in all dealings between you and the company. In addition, both as member of the management board and as managing director, you must not represent your company when entering into an agreement with a third party also represented by you (multiple representation), unless you have been exempted from this 6 You are allowed to vote if your conflict relates to intra-corporate actions; eg, your election as chairman of the board or election as member of a board committee. 10 Freshfields Bruckhaus Deringer LLP, August 2011

14 prohibition either directly in the articles of association or by a resolution of the body responsible for your appointment based on an authorisation in the articles of association (see Are there any restrictions on particular transactions between the company and me? and What about the company giving me a loan? below). Incompatibility If you are a member of the supervisory board of a company, you cannot serve on the management board of such company or any subsidiary. You must tell your fellow board members and the supervisory board (in the case of an AG)/the shareholders (in the case of a GmbH) about offices in other companies. Members of the supervisory board General duties relating to conflicts The company must take priority when dealing with conflicts of interest and you must tell the supervisory board of any actual or potential conflicts, in particular those that may result from a consultant or directorship function with customers, suppliers, lenders or other business partners. The German Corporate Governance Codex recommends that the supervisory board tells the general meeting of any conflicts of interest that have occurred together with how they have been dealt with. If you have a conflict of interest, you must abstain from voting and must not participate in board discussions on the relevant topic. 7 If the conflict is material, you may be obliged to resign from the supervisory board. Duty of loyalty Members of the supervisory board are under a duty of loyalty towards the company. As the office of a supervisory board member is typically a part-time job, the exact scope of the duty of loyalty differs depending on the role of the supervisory board member in the situation at hand (see Do these duties apply if I am a non-executive director? above). You must not pursue your personal interest in connection with decisions of the supervisory board or use business opportunities of your company for yourself. Self-dealing In relation to self-dealing, advisory and similar agreements between you, as member of the supervisory board, and the company require the consent of the supervisory board. The company may grant a loan to you only with the consent of the supervisory board. (See Restricted transactions below.) Incompatibility You must not become a member of the supervisory board if you are already a member of the supervisory board of 10 German companies 7 Again, you are allowed to vote if your conflict relates to intra-corporate actions; eg, your election as chairman of the board or election as member of a board committee. 11 Freshfields Bruckhaus Deringer LLP, August 2011

15 (positions as chairman count double; up to five supervisory board memberships in subsidiaries are not taken into account), if you are a managing director or a member of the management board of a subsidiary of the company or you are managing director or member of the management board of another company, if a member of the management board of your company is also a member of the supervisory board of such other company (cross-directorships). You should tell the supervisory board about your other board memberships. What are typical situations in which conflicts arise? Conflicts may arise are if you: have multiple board memberships/positions as managing director; are a shareholder in a competing company or a company that is an actual or potential customer of, or supplier to, your company; have an advisory relationship (eg, financial, accountancy, legal or consultancy) with your company or have an interest in an advisory firm; self-deal with your company or are subject to claims to be brought against you by the company; are in a position to take up an opportunity that has been offered to your company even if your company has declined it or are in a position to make a profit as a result of your office; are offered a role by a potential buyer of your company; or are offered benefits by a third party in connection with transactions between the third party and your company. Conflicts can be relevant whether they are actual or potential. These examples are not exhaustive and you should only use them as a guide to consider the types of situations in which conflicts tend to arise. Are only my interests taken into account? What about connected persons? In certain cases; eg, granting of loans, other types of self-dealing or accepting benefits, the interests of persons connected to you may be regarded as causing a conflict of interest. This will be a question of fact. The categories of connected person include: family members, including a spouse or civil partner, anyone with whom you live as a partner in an enduring family relationship, children, brothers and sisters and your parents; and legal entities connected to you (eg, where you hold a majority shareholding or a board membership). 12 Freshfields Bruckhaus Deringer LLP, August 2011

16 Am I expected to be aware of conflicts? Whether or not a conflict exists is measured by an objective standard. However, you are not in breach of your duties relating to conflicts if you are not aware of a conflict. You will be treated as aware of all matters of which you ought reasonably to be aware. How does authorisation work? Under German law, there is no general concept of authorisation. However, certain types of conflicts can be authorised by different corporate bodies. If you are a member of the authorising body, you should abstain from voting and not attend the discussions leading to the authorisation. Non-compete obligation To be discharged from your non-compete obligation, you need an authorisation in the articles of association or by the shareholders (in the case of a GmbH) or by the supervisory board (in the case of an AG). Self-dealing If your company has a supervisory board, transactions between you, as member of the management board or as managing director, and your company require the company to be represented by the supervisory board in such transactions. As a member of the supervisory board, advisory and similar agreements between you and the company require the consent of the supervisory board. In an AG, for loans granted by your company to you as member of the management or the supervisory board, an authorisation by the supervisory board is necessary. To represent your company in dealings with another company also represented by you, you need an authorisation either directly in the articles of association or by a resolution of the body responsible for your appointment, based on a corresponding authorisation in the articles of association. What practical steps can I take to deal with conflicts? If you are aware of a conflict, you should tell the relevant company body (see What are my duties related conflicts? above). If a conflict of interest cannot be avoided, you may have to abstain from voting and, potentially, also from the discussions preceding the vote. Material conflicts of interest that are not merely of a temporary nature may require you to resign. 13 Freshfields Bruckhaus Deringer LLP, August 2011

17 The environment, health and safety, competition, taxes and social security What are my obligations concerning the environment? The interest of the company, which needs to govern your exercise of discretion, encompasses the public interest to some extent. Hence, choosing an environmentally sound option can be in the interest of the company even if it exceeds the statutory minimum standards. Your duty extends to any environmental legislation applicable to the company and its business; ie, violating the standards established by applicable environmental legislation constitutes a breach of your duties. This is true irrespective of whether your company operates in an environmentally sensitive area or merely has to observe the generally applicable environmental standards. If you breach your duties, you may be subject to the consequences set out above in What are the consequences if I breach these duties? Many environmental provisions are protective laws, violating these results in personal liability in tort. In the case of pollution offences, depending on the nature and gravity of the offence, administrative fines and/or criminal liability may arise for those who are actively involved or failed to supervise as required. What are my obligations concerning health and safety? Obligations with respect to occupational health and safety are addressed in various statutes, such as the employee protection act (Arbeitssicherheitsgesetz), containing basic duties of the employer with respect to health and safety, and the working time act (Arbeitszeitgesetz), regulating the maximum working hours. As part of your duty, you must ensure compliance with these standards. While regulatory supervision of health and safety issues is relatively weak compared with other jurisdictions, this is an important area of cooperation between the so-called social partners; ie, management on the one hand and works council and unions on the other. Works councils have strong co-determination rights and rights of initiative with respect to health and safety issues, and you need to observe works council agreements (Betriebsvereinbarungen) establishing standards in this area as part of your duties. In addition to the consequences above in What are the consequences if I breach these duties?, administrative fines and/or criminal liability may arise, depending on the nature and gravity of the offence. Both employers and works councils take violations of health and safety standards seriously and, in the case of severe violations, they usually result in actions by the company against the responsible managers. 14 Freshfields Bruckhaus Deringer LLP, August 2011

18 What are my obligations concerning competition law? The German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB) establishes duties and obligations with respect to anti-competitive behaviour that is by now largely comparable to that under European competition rules, with the exception that the German rules on abuse of a dominant position are stricter. Hardcore offences include price-fixing, market-sharing, limiting production or supply, or bid-rigging. Anti-competitive behaviour is a particularly sensitive issue because regulatory enforcement is taken seriously and investigations are not limited to the companies taking part but regularly also directed against employees and managers of such companies; namely, managing directors or members of the management board. As an example, in June 2010, the Bundeskartellamt imposed fines totalling 115m on five leading manufacturers of ophthalmic lenses in Germany, seven employees responsible and the Central Association of Optometrists (ZVA) for their part in cartel agreements. If you suspect your company of breaching competition law, you should seek legal advice. If you breach your duties in relation to competition law, you may be subject to the consequences set out above in What are the consequences if I breach these duties? The main obligations under competition law are safeguarded by administrative offences, and you may be personally subject to fines if you violate competition laws or fail to supervise as required to prevent such violation (provided it could have been avoided with due supervision). While, other than for bid-rigging, there is no criminal liability under German competition law, administrative fines can be substantial (up to 1m for individuals). What are my obligations concerning taxes and contributions to social security? Special emphasis is placed on the company s obligations towards tax and social security authorities. As the company s legal representative, you must fulfil its tax obligations. Wilful or grossly negligent breaches of this duty that cause lower taxes or unjustified tax benefits will result in your being liable for such damages. You breach your duty if, for example, you file the company s tax return late, if you deduct too much input tax or do not pay enough wage income tax. In addition, the courts have introduced a duty for managing directors and members of the management board to manage the company s funds so that they are in a position to pay taxes in a timely manner, including future taxes. If you lack the necessary expertise, you should entrust the company s tax affairs to experts, provide them with all necessary information and constantly supervise them. 15 Freshfields Bruckhaus Deringer LLP, August 2011

19 Contributions to the German social security system are paid by both the employer and the employees. For compulsory insurance schemes, the employer pays both its own and the employees share of the social security contribution directly to the social security authorities, with the latter being deducted from the employees wages. If the company does not pay the employees share of the social security contributions, you can be personally liable in tort for these contributions and can become criminally liable. Again, the courts have extended this duty by prioritising paying the employees social security contributions over paying of other debts of the company (including its obligation to pay wages) as well as by introducing a duty for the managing directors and members of the management board to ensure that the company has sufficient funds to pay the employees social security contributions. There is also criminal and, as a consequence, personal liability for not paying the employer s social security contributions, but this liability is subject to increased, fraud-like requirements. These duties are of significant practical relevance, often litigated, and in particular in close-to-insolvency and insolvency scenarios there is a considerable liability risk for you. See also What practical steps can I take if my company s insolvency is in question? below. 16 Freshfields Bruckhaus Deringer LLP, August 2011

20 Restricted transactions Are there restrictions on particular transactions between the company and me? Unless you are expressly allowed to do so, you may not enter into an agreement representing your company on the one side and yourself (selfcontracting) or a third party (multiple representation) on the other side. In a GmbH without a supervisory board, you can be released from either or both of these prohibitions generally or for specific matters. In an AG and in a GmbH with a supervisory board, you can be released only from the prohibition of multiple representation. The release needs to be either in the articles of association or issued by the body responsible for your appointment based on a corresponding authorisation in the articles of association. Legal acts and agreements based on self-contracting or multiple representation without the required release are provisionally ineffective but can be approved (and thereby become valid) by the company. If you are (or have been) a member of the management board or a managing director and your company has a supervisory board, your company must be represented by the supervisory board in all dealings with you. In addition, if you are a member of a supervisory board, there are strict limitations on how you can be compensated for your services. Any compensation for your work as a member of the supervisory board needs to be stipulated in the articles of association or approved by the general meeting, it cannot be compensated through additional service agreements. Only services in excess of what is owed as a supervisory board member can be compensated based on a service contract, provided such service contract (other than employment contracts) has been approved by the supervisory board. Any payment you receive based on a service contract that also covers services you owe as a supervisory board member or lacks supervisory board approval, needs to be repaid. These limitations also apply to services provided by an entity such as a consultancy company if you benefit from its profits and thereby indirectly from any compensation it receives from your company. Service or advisory contracts for supervisory board members and their exact scope are notoriously difficult, and advice should be sought when drafting such contracts. 17 Freshfields Bruckhaus Deringer LLP, August 2011

21 What about the company giving me a loan? In the case of an AG, the supervisory board needs to get involved before the company can give a loan to you or certain connected people or entities. If you are a member of the management board, a loan (including a delay of payment, advance payments on salaries and the granting of collateral for a third party loan) to you requires a resolution of the supervisory board. This does not apply to loans not exceeding your monthly salary. If you are a member of the supervisory board, loans to you require the consent of the supervisory board. Irrespective of whether you are a member of the management board or the supervisory board, loans to your spouse, your child (under the age of 18) or a third person acting on your behalf or any of the aforementioned persons, or to another non-affiliated company (if you are a legal representative or supervisory board member of such company), are also subject to the supervisory board s consent. The resolution can only be passed and the consent can only be given for specific loans or types of loans and only up to three months in advance. The resolution needs to provide for the interest rate and the details of repayment. If a loan violates these requirements, it must be repaid immediately unless the supervisory board approves the loan. In addition, you are liable to the company for damages. In the case of a GmbH, the only limitation on loans is that you may not be granted a loan out of the assets required to preserve the registered share capital of the company. 18 Freshfields Bruckhaus Deringer LLP, August 2011

22 Insolvency Who do I owe my duties to in an insolvency situation? In an insolvency or close-to-insolvency scenario the Insolvency Code (Insolvenzordnung) imposes various duties on managing directors and members of the managing board designed to protect the interests of the company s creditors. Members of the supervisory board of an AG do not generally bear any duty under the Insolvency Code. However, if the company does not have a management board (eg, because all members have resigned), the duties of the management board shift to the supervisory board. What is the position with respect to continued trading after insolvency is assured and so causing loss to creditors? Generally, a company may not make payments after it has become illiquid or over-indebted. The same is true for payments to the shareholders that had to result in the company becoming illiquid. How can I incur liability for wrongful trading? Managing directors and members of the management board may be personally liable for payments made after the company has become illiquid or over-indebted, unless making the payment is in line with the diligence of a prudent business person. They may also be liable for any payments to the shareholders that resulted in the company becoming illiquid unless, using the diligence of a prudent business person, such illiquidity was unknowable. When should my company stop trading? In principle, your company has to file for insolvency if it is overindebted and a going-concern projection is negative or if the company is illiquid. The company is over-indebted if its liabilities exceed its assets. To assess whether a company is over-indebted, a special balance sheet a so-called over-indebtedness status must be prepared. The valuation principles applied for this purpose differ from those used for the annual financial statements. Among other things, assets are stated at liquidation values and liabilities are disregarded if the debtor has agreed to subordinate its claim for the benefit of all other debtors of the company. If the over-indebtedness status reveals an over-indebtedness of the company, you must prepare a projection on whether it is more likely than not that the company will be able to continue its operations in the medium term, a so-called going-concern projection. As long as the going-concern projection is positive, the company does not have to file for insolvency even if it is over-indebted. In a close-to-insolvency 19 Freshfields Bruckhaus Deringer LLP, August 2011