Director’s Duties and Liabilities under German Law

What are the Duties of Directors of German Companies (GmbH) and Corporations (Aktiengesellschaft)?

Obviously, pretty much all over the world, company directors and CEO’s have a general duty to be loyal, diligent and conscientious in managing the affairs of their company. This is also the case under German law. Directors and CEOs have to bear in mind what is best for the business and act accordingly. In this regard, German courts do apply an objective standard that does not, as a rule, depend on the specific knowledge, education, experience and abilities of the individual director. In other words: If someone takes on the job of a company director, he or she must be up to the requirements. In practice this means, that – depending on the size of the company – the director must hire and supervise qualified staff or outside consultants.

According to German case law, a company director has wide-ranging discretionary powers with regard to how to manage the company. This includes the power to take entrepreneurial decisions, even daring ones (entrepreneurial risk). Always provided, however, that the director carefully assesses the related risks before making such decisions. Under German law, actions (or inactivity) outside the limits of reasonable entrepreneurial conduct or violation of specific director’s duties may result in personal liability of the company director. The major difference between the director of a German Gesellschaft mit beschränkter Haftung (GmbH) and the CEO of a German Aktiengesellschaft is that the GmbH director must always obey the instructions of the shareholders. A vote of the shareholders (Gesellschafterbeschluss) is binding on the company director. In contrast, a CEO (Vorstand) of a German Aktiengesellschaft has much more leeway. The CEO (or the board of executors) manages the corporation as they themselves deem is best:

Section German 76  para. 1 German Stock Corporation Act states: 
Management of the stock corporation: The management board is to manage the affairs of the company on its own responsibility.

 

For example, directors (CEO’s) have an obligation under the German Stock Corporation Act (Aktiengesetz) to protect the company from financial penalties, losses and other financial harm. In their function as trustees of the company’s assets, company directors owe strict fiduciary duties. The Stock Corporation Act also provides for a number of specific duties, including those relating to the maintenance of registered share capital, bookkeeping, and the organization of the company. Finally, directors are also subject to numerous reporting requirements (including a duty to keep the securities market informed and updated) as well as strict confidentiality obligations.

Directors’ Liabilities under German Law

As a rule, only the company is liable towards outside parties, not the individual director or CEO. In other words: Third parties can rarely sue a company director directly for damages or compensation. The company is responsible for the (illegal or damaging) actions or omissions of their dirctors and CEOs. As a consequence, if a director causes financial damage by deliberately or negligently breaching their duty, the company can (and in most cases must) take internal recourse (Regress) against the director / CEO. A simple majority at the annual general meeting can force the company to seek internal recourse against a director. In such recourse proceedings (Regressanspruch), the director must prove that he or she has obeserved the relevant standard of care (Sorgfalt eines ordentlichen Geschäftsführers). The company only needs to demonstrate that it has suffered damages as a result of the actions of the director.

In exceptional circumstances, creditors of the company may bring a direct claim against a director. German statutory law permits bringing direct actions against a director where:

  • a company is unable to satisfy a claim arising from a violation of a duty by a director;
  • a company becomes insolvent and a director delayed the initiation of insolvency proceedings causing damage to the creditor; or
  • he is liable under tort law for a serious breach of duty or for a violation of legal provisions that protect certain individuals of groups of people, such as criminal provisions concerning fraudulent or false representation of the company’s affairs.

In German courts, successful direct claims have been brought against directors based on tort law where, for example, directors have deliberately published incorrect inside information. German court decisions of the last 10 to 15 years show a tendency by the courts to expand the scope of direct tort liability of directors.

For more on German business and corporate law see these posts:

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