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2.2 Internal Organization
2.2.1 Governance Structure and Bodies of the AG
The AG has three mandatory corporate bodies: the stockholders’ meeting, the supervisory board and the management board. These bodies have the following competencies and functions:
Firstly, the stockholders as the owners of the AG are responsible for appointing the supervisory board and for passing resolutions on the most fundamental issues regarding the corporation, whereas the management board has the task of strategic alignment and operational management of the AG (principle of separation of ownership and control). Consequently, in contrast to the shareholders’ meeting of the GmbH, the stockholders’ meeting of an AG has comparably little influence on the day-to-day management of the company. In turn, the power and responsibilities of the management board are much broader than those of the managing directors (Geschäftsführer) of the GmbH.
Secondly, with regard to the management of the AG the German stock corporation law provides for a strict separation of executive and supervisory functions, each of which need to be carried out in separate institutional bodies. This mandatory two-tier board system is a characteristic of German corporate law shared only by a handful of other European continental jurisdictions9, whereas other legal systems provide for only one board of directors, including both executive and non-executive managers at the same time.10 A frequent criticism of the German model is that the mandatory two-tier structure is rather bureaucratic and hinders time-efficient deci- sion-making. Furthermore, the German model has been criticized as it can enable some manipulations by the management board, since the latter typically provides most of the information upon which the supervisory board’s decisions are based.11 The possibility to ‘escape’ the mandatory two-tier structure in favor of a one-tier management board system is apparently one of the reasons for German entrepreneurs to choose the business form of the European Company (SE ), which will be explained in more detail later on.12
9 See e.g. Sec. 111 Danish Companies Act (lov om aktieog anpartsselskaber); Art. 2:158 Dutch Civil Code (Burgerlijk Wetboek); Secs. 70 et seq., 86 et seq. Austrian Stock Corporation Act (Aktiengesetz).
10 See e.g. Sec. 1 subsec. A no. 3 UK Combined Code; Art. 707, 716, 716a Swiss Code of Obligations (Obligationenrecht); in France the two-tier board system is only applicable if provided for in the company’s articles of association, see Art. L225–7 French Commercial Code (Code de Commerce).
11 In more technical terms: separate legal bodies for executive and non-executive managers may well amplify the asymmetric distribution of information between both, worsening the inherent principal-agent-problem. Of course, one-tier board structures are no guarantee for proper information sharing either, and in turn may well lead to a stronger factual influence on the non-executive board members, thus impairing their supervisory power.
12 See infra, Sect. 5.2.
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2.2.2 Management Board (Vorstand)
2.2.2.1 Composition and Appointment
The management board of the AG may consist of one or more persons. In case of larger companies (i.e. the corporation’s stock capital exceeds 3 million Euros), the management board must consist of at least two persons, unless the articles provide otherwise. It goes without saying, that due to the size and complexity of stock corporations, management boards in practice typically comprise a much higher number of members.
A member of the supervisory board is not allowed to be a member of the management board at the same time. In case of vacancies, however, individual members of the supervisory board may act as a stand-in for a period of time to be fixed in advance, but not exceeding one year. During this term of office as a deputy to the management board, they are temporarily barred from exercising their functions as supervisory board members.13
The supervisory board appoints the members of the management board for a period not exceeding five years.The appointment may be renewed or the term of office extended as long as the term of each such extension or renewal does not exceed five years.14 If the management board (as it usually does) consists of more than one person, the supervisory board may appoint one of the members as chairman of the board (Vorstandsvorsitzender).
As part of its supervisory function the supervisory board also has the authority to revoke appointments of individual members of the management board (or the appointment as chairman of the board) for ‘good cause’.15 Such good cause in particular includes a gross breach of duties or the inability to manage the corporation properly. Furthermore the appointment may be revoked after a vote of lack of confidence by the stockholders’ meeting. In this case, however, the supervisory board may abstain from a revocation if the vote of lack of confidence took place for manifestly arbitrary reasons.16
2.2.2.2 Functions and Responsibilities of the Management Board
The management board is the executive board of the AG, responsible for its operative management,17 as well as the representation of theAG in and out of court.18
13 See Sec. 105AktG.
14 See Sec. 84AktG.
15 See Sec. 84 (3)AktG.
16 This authority is not to be taken for granted, since the supervisory board therewith decides against the explicit will of the corporation’s owners. It is but one example of the institutional principle of separating ownership and control in public liability companies.
17 See Sec. 76AktG.
18 See Sec. 78AktG.
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Management of the AG
The management board is exclusively responsible for the management (Geschäftsführung) of the AG. ‘Management’ is meant in its broadest sense and includes any legal or factual actions or measures carried out in order to realize the purpose of the company.
With regard to the management of the corporation, the AktG vests the management board with a comprehensive and exclusive sphere of competence, which includes extensive discretionary powers (see Sec. 93 para. 1 sentence 2, so-called ‘business judgment rule’). In particular, the management board is, in general, not bound by any instructions of either the supervisory board or the stockholders’meeting, nor can the management board be compelled to take specific actions or enter into agreements against its own will.
However, in some cases the exclusive competence of the management board with regard to management decisions may be restricted in several ways:
Firstly, in practice, the articles of association (Satzung) of theAG or the internal rules of procedures (Geschäftsordnung) passed by the supervisory board typically provide for unusual, extraordinary business matters to require a prior approval of the supervisory board (e.g. entering into transactions beyond a certain financial limit).Any actions taken by the management board without such prior approval are on the one hand principally valid vis-à-vis third parties but will, on the other hand, constitute a breach of the duty of care owed by the management board to the AG and may lead to claims for damages by the AG and to the revocation of appointment of the management board members for good cause. The management board can, however, turn to the stockholders’ meeting to pass a resolution on whether or not a certain transaction may be carried out19, the resolution requiring a qualified majority, i.e. 75% of all votes cast. The incentive of the management board to do so can be derived from Sec. 93 para. 4 AktG, according to which, members of the management board cannot be held liable by the corporation for managerial decisions mandated by a resolution of the stockholders’meeting.
Secondly, according to the case law of the Bundesgerichtshof (German Federal Court of Justice) the management board also has to observe certain so-called unwritten competencies of the stockholders’ meeting when exercising its managerial power.
•In its landmark decision Holzmüller,20 the court held that with regard to certain restructuring measures, the management board was not only entitled but also obliged to obtain approval of the stockholders’meeting prior to carrying out the respective transaction. In this case, the management board of a stock corporation decided to carve out about 80% of the most valuable assets of the corporation and transfer them to a subsidiary. The court held that an obligation to obtain the approval of the stockholders’meeting, even though not provided for in the statutory law, applied automatically in respect of such measures which constitute a
19 See Sec. 119 para. 2AktG.
20 BGHZ 83, 122, 25 February 1982, II ZR 174/80—Holzmüller.
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‘material interference’. Furthermore, they have a ‘substantial impact’on rights of the stockholders.Thus, the management could ‘not reasonably assume that it was entitled to take decisions in the matter on its own responsibility’.
•In the Gelatine decisions21 the Federal Court of Justice specified the Holzmüller doctrine, laying down further quantitative and qualitative prerequisites. The court did not lay down a specific catalogue of measures which oblige the management board to request the approval of the stockholders’ meeting. However, the court clarified that an approval requirement only applies, where (1) the transaction in question touches upon the core of the business of the corporation and (2) approximately reaches the 80% threshold. Although an exact threshold cannot be concluded from the decision, the judgment considerably improved the position of managers as to legal certainty, since the court explicitly disapproved of an extensive interpretation of Holzmüller and clearly stated that unwritten requirements for approval of the stockholders’ meeting were strict exceptions.
•Finally, in its decision in the case of Macrotron22 the Federal Court of Justice acknowledged an inherent power of the stockholders’meeting with regard to the decision of whether or not to delist a listed stock corporation. In this case, however, the court did not base its reasoning on the Holzmüller doctrine but referred to the constitution, more precisely: the basic right protecting private property (Art. 14 GG).
Finally, the managerial powers of the management board will also be limited where the company is part of a corporate group structure. In this case, the management board will be subject to directions of the controlling enterprise.
Representation of the AG
The power of the management board to represent the company in and out of court (Vertretungsbefugnis) is comprehensive in scope and cannot be restricted in relation to third parties.23 The scope cannot be limited by way of an amendment to the articles of association, nor do obligations to procure the consent of another corporate body have effect vis-à-vis third parties.24
In certain exceptional cases, however, statutory law restricts the otherwise comprehensive power of representation of the management board. This applies in particular to certain agreements which entail a potential risk of embezzlement25 or
21 BGH, 26 April 2004, II ZR 154/02, NZG 2004, 575—Gelatine I; BGH, 26 April 2004, II ZR 155/02, NJW 2004, 1860—Gelatine II.
22 BGH, 25 November 2002, II ZR 133/01, ZIP 2003, 387. 23 See Sec. 82 para. 1AktG.
24 Aviolation of such obligations may, naturally, constitute a breach of duty and may entail the risk of personal liability vis-à-vis the company.
25 See Sec. 112 AktG: In transactions between the corporation and members of the management board only the supervisory board may represent the corporation.