In a decision of 18 September 2018 the German Federal Supreme Court (Bundesgerichtshof/ BGH, Az: II ZR 152/17) confirmed a legacy decision (ARAG/Garmenbeck) of 1997 and tightened the liability of supervisory board members. Clients need to be aware of the increased liability for Supervisory Board members („Aufsichtsräte“).
Unlike in other jurisdictions (in the UK for example) Germany has a Two-Tier corporate management structure. Thus, in addition to the management board (i.e. Vorstand at AG or Geschäftsführung at GmbH) corporations may have a so-called Aufsichtsrat, a supervisory board. The supervisory board monitors the managing directors and has – as one of its key authorities – the right to appoint and withdraw members of the management board. The supervisory board is strictly separate from the management board of a company. Depending on the total headcount of the company, the supervisory board consists of representatives elected by the shareholders AND employee representatives elected by the staff (in most cases Works Council and Trade Union members), provided the company is subject to German co-determination laws.
In this remarkable decision the Supreme Court stressed the responsibility of the supervisory board, highlighting the increased risk for supervisory board members to be made liable by the company for damages caused by the management board if they have failed to bring damage claims before the Courts to ensure potential remedies on behalf of the company.
In the case at hand, the management board had violated its fiduciary duties vis-a-vis the company. Potential damages claims by the company against the management board were meanwhile statute-barred due to the failure of the supervisory board to bring such claims against the management in due time. The Court confirmed that the supervisory board‘s duty was to bring legal action against management and to pursue damages claims against them. Having failed to do so makes the supervisory board liable for such damages, even though the claims against management were by this point statute barred.
The implication of this is that the risk of liability for supervisory board members might therefore crystallise many years after the original wrongdoing as this form of damages claim against the supervisory board only arises when the statute of limitation of the damages claim against the management board member takes effect. To mitigate against this risk, supervisory board members are well advised to carefully analyze and evaluate whether they should bring legal actions against management promptly – and definitely well before the relevant statutes of limitations having expired.
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