Corporate Governance and Directors' Duties: Germany

A Q&A guide to corporate governance law in Germany.

The Q&A gives a high level overview of board composition, the comply or explain approach, management rules and authority, directors’ duties and liabilities, transactions with directors and conflicts, company meetings, internal controls, accounts and audit, institutional investors and reform proposals.
To compare answers across multiple jurisdictions, visit the Corporate Governance Country Q&A tool.
The Q&A is part of the PLC multi-jurisdictional guide to corporate governance law. For a full list of jurisdictional Q&As visit
Markus S Rieder and Daniel Holzmann, Shearman & Sterling LLP

Corporate entities

In Germany, companies generally comprise partnerships, which are primarily used for small enterprises, on the one hand, and corporate entities, which are used by larger enterprises and are characterised by the limited liability of their shareholders, on the other hand. The major types of corporate entities are:

  • Limited liability company (Gesellschaft mit beschränkter Haftung, GmbH). The GmbH is the most common form of business entity for medium-sized enterprises since it is simple to establish and flexible to administer. Its shares cannot be listed. Shares can be traded privately, but notarisation is required. The GmbH must have an issued share capital of at least EUR25,000 (as at 1 April 2011, US$1 was about EUR0.7). A newly introduced sub-version of the GmbH named Unternehmergesellschaft (UG) requires a minimum share capital of only EUR1.

  • Stock corporation (Aktiengesellschaft, AG). AGs are the commonly used business entity for large enterprises. A stock exchange listing is possible but not required. AGs must have an issued share capital of at least EUR50,000. The regulatory framework is by far more complex than for the GmbH. For listed companies, stock market regulations must be complied with.

The answers below refer mainly to AGs.


Legal framework

1. What is the regulatory framework for corporate governance and directors' duties?

The general regulatory framework for all companies in Germany is contained in the following sets of rules:

  • German Civil Code (Bürgerliches Gesetzbuch, BGB). The BGB contains the basic principles for both partnerships and corporate entities on a very general basis.

  • German Commercial Code (Handelsgesetzbuch, HGB). The HGB focuses on the specific requirements regarding commercial law. It contains the main regulations for partnerships, for example, in relation to foundation and representation. In addition, the HGB provides rules concerning financial statements and reports which also apply in relation to corporate entities.

  • Constitutional documents. Each company must have articles of association. They contain the main provisions relating to, among others, share capital, principal office, members of the management and supervisory board. In addition, companies should have bye-laws regulating the allocations of duties.

Additionally, special regulations apply to corporate entities, as follows:

  • The regulatory framework for GmbHs is mainly set out in the German Limited Liability Company Act (Gesetz betreffend Gesellschaften mit beschränkter Haftung, GmbHG).

  • The regulatory framework for AGs is mainly set out in the German Stock Corporation Act (Aktiengesetz, AktG). In recent years, the AktG was subject to a constant flow of legal reform concerning transparency, remuneration and leadership issues.

  • Special rules apply to companies of the financial and insurance sector.

For AGs listed or traded on any stock market, the following rules and regulations apply in addition:

  • Capital markets regulations. Listed companies must comply with a large number of capital markets regulations such as:

    • the German Stock Exchange Act (Börsengesetz, BörsG);

    • the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG) with insider trading rules and disclosure rules (for example, concerning ad hoc announcements);

    • the German Securities Acquisition and Takeover Act (Wertpapierübernahmegesetz, WpÜG).

  • German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK). The DCGK is a non-binding set of rules summarising essential statutory regulations for the management and supervision of listed companies and includes recommendations for good and responsible corporate governance (see Question 2).

  • Case law. Another important source of corporate governance rules and directors' duties is case law, established particularly by the German Federal Court of Justice (Bundesgerichtshof, BGH).

2. Has your jurisdiction adopted a corporate governance code? If yes:
  • What is the name of the code? What areas are covered by it (for example, board composition and committees, remuneration, audit and risk)?

  • How is the code structured (for example, a set of rules or principles and provisions)? What type of companies must comply with the code?

  • Is the code based on the comply or explain principle? How are companies required to report their application and compliance with the code (for example, in their annual report)?

  • What are the consequences of non-compliance with the code?

  • What has been the general response of companies, regulators and shareholder groups to the comply or explain approach? Has it been popular or controversial? Are there plans to reform it?

The DCGK is published by the German Corporate Governance Code Commission and covers all areas of corporate governance, that is:

  • Shareholders.

  • Management board.

  • Supervisory board.

  • Remuneration.

  • Transparency.

  • Audit.

  • Risk.

The DCGK aims to make Germany's corporate governance rules transparent for national and international investors.

The DCGK contains mainly recommendations and suggestions, as well as descriptions of statutory regulations. It is directed at listed companies, but it may be used as non-binding guidance for private companies as well.

The DCGK is based on the comply or explain principle. Listed companies must declare in their annual reports whether they comply with or diverge from the recommendations of the DCGK. Disclosed non-compliance with recommendations is permitted. However, due to some unconfirmed theory, capital markets react negatively to such deviations. Non-disclosed deviations from the DCGK may also result in the voidance of the resolutions of the shareholders' meeting and personal liability of the directors.

The DCGK is an integral part of the corporate governance environment in Germany and listed companies generally comply with more than 90% of its recommendations. The comply or explain approach allows the companies to handle corporate governance issues in a flexible manner and according to the specific needs of the company. Currently, there are no plans to reform this approach. The DCGK is updated and amended annually (see Question 37).


Board composition and remuneration of directors

3. What is the management/board structure of a company? In particular:
  • Is there a unitary or two-tiered board structure?

  • Who manages a company and what name is given to these managers?

  • Who sits on the board(s)?

  • Do employees have a right to board representation?

  • Is there a minimum or maximum number of directors or members of the managerial and supervisory bodies?

  • Structure. Contrary to most corporate entities existing in Europe, German AGs have a two-tier board structure where the management board (Vorstand) conducts daily business of the company and the supervisory board (Aufsichtsrat) controls the management board. The influence of the shareholders' meeting is limited.

  • Management. The management board of an AG manages the company and conducts the daily business. The management board has extensive competences and is generally not subject to instructions by any third party, in particular the shareholders' meeting.

    In a GmbH, the managing directors conduct the daily business of the company while the shareholders' meeting supervises the directors and is competent for any decisions outside the ordinary course of business.

  • Supervisory board members. The supervisory board consists of board members that are strictly separate from the management board. They advise and supervise the management board.

  • Employee representation. The AktG generally provides that the supervisory board members are elected representatives of the shareholders. However, several co-determination regulations exist so that employees have numerous rights for representation on the supervisory board, depending on the size of the company and the industry it operates in. In companies with 500 or more employees, one-third of the supervisory board is staffed with employees' representatives. In companies with more than 2,000 employees, the supervisory board is staffed with the equal number of the employees' and the shareholders' representatives.

  • Number of directors or members. The management board can consist of just one person, with no maximum number defined. If the registered capital of the company exceeds EUR3 million, the management board must comprise at least two members. The DCGK recommends that the management board should have several members and one chairman (Vorstandsvorsitzender). The minimum number of supervisory board members goes from three up to 21, depending on the registered capital of the company and, for co-determined companies, on the number of employees.

4. Are there any age or nationality restrictions on the identity of directors?

Age restrictions

Members of the management or supervisory board cannot be less than 18 years old. There is no maximum age limit. However, the DCGK recommends an age restriction for both boards. Although the DCGK does not contain any specific age limit, age restrictions between 60 and 65 years for the management board and between 70 and 75 years for the supervisory board are common in practice.

Nationality restrictions

There are no legal nationality restrictions. On the contrary, the DCGK recommends that diversity should be considered when appointing the members of the management and supervisory boards.

5. In relation to non-executive, supervisory or independent directors:
  • Are they recognised?

  • Does a part of the board have to consist of them? If so, what proportion?

  • Do non-executive or supervisory directors have to be independent of the company? If so, what is the test for independence or what makes a director not independent?

  • What is the scope of their duties and potential liability to the company, shareholders and third parties?

  • Recognition and board composition. As German AGs have a two-tier board structure (see Question 3, Structure), members of the supervisory board cannot form part of the management board while they serve on the supervisory board. The AktG requires a cooling-off period according to which members of the management board can only become members of the supervisory board of the same company after two years, except if the shareholders vote otherwise.

  • Board composition. The supervisory board is separate from the management board (see above, Recognition and board composition).

  • Independence. During the recent legal reform, there have been several efforts to strengthen the independence of the supervisory board members. In 2009, the AktG introduced the financial expert as a compulsory independent member of the supervisory board. The DCGK recommends a "sufficient amount" of independent supervisory board members to ensure objective advice to and supervision of the management board. According to the DCGK, independence means the absence of any business, financial or personal relationship with the company or its management board which could give rise to a conflict of interest. However, there is no specific test for independence.

  • Duties and liabilities. As the supervisory board is not involved in the day-to-day management of the company, the duties of its members focus on the supervision and consulting of the management board. Generally, all members of the supervisory board owe the same duties to the company. However, with the ongoing discussion regarding the professionalisation of the supervisory board, different duties evolve with the introduction of more specialised members such as the financial expert (see above, Independence). The supervisory board members that breach their duties are liable to the company with respect to the damages incurred. Liability towards the shareholders and third parties arises only in exceptional circumstances that usually require wilful misconduct.

6. Are the roles of individual board members restricted? For example, can one person be the chairman and chief executive?

The AktG restricts the roles of individual board members. Members of the supervisory board cannot be members of the management board at the same time and vice versa. In addition, legal representatives of controlled companies cannot be members of the supervisory board of the controlling company.

7. How are directors appointed and removed? Is shareholder approval required?

Appointment of directors

Management board. Under the AktG, the supervisory board elects the members of the management board. Only the entire supervisory board can elect the management board members; a delegation to a committee of the supervisory board is not permitted. In addition to the appointment, the execution of a service contract is necessary (see Question 9, Directors employed by the company).

Supervisory board. Supervisory board members are generally elected by the shareholders' meeting unless they are appointed by certain shareholders named in the articles of association (for example, minority shareholders) or are elected as representatives of the employees under co-determination rules (see Question 3, Employee representation).

Removal of directors

Management board. Members of the management board can be removed by a decision of the supervisory board. Reasons for the removal of a management board member are:

  • A gross violation of duties.

  • Inability to properly manage the affairs of the company.

  • Withdrawal of confidence by the shareholders' meeting.

The removal of a management board member does not automatically terminate his service contract.

Supervisory board. Supervisory board members elected by the shareholders' meeting can be removed by a shareholders' resolution with a majority of three-quarters of the votes cast. Supervisory board members that are appointed by certain shareholders according to the articles of association can be removed by these shareholders. The removal of representatives of the employees from the supervisory board is determined by the respective co-determination regulations.

8. Are there any restrictions on a director's term of appointment?

Management board. Management board members can be appointed for a maximum term of five years. Reappointment and extension of the term are permitted but require a further decision of the supervisory board. The DCGK recommends that the initial appointment to the management board should not be for the maximum of five years.

Supervisory board. The term of a supervisory board member depends on the periods of shareholders' meetings (see Question 7, Appointment of directors, Supervisory board). Generally, the term is about five years. Reappointment is permitted.

9. Do directors have to be employees of the company? Can shareholders inspect directors' service contracts?

Directors employed by the company

Management board members generally have a service contract with the company in addition to being appointed to the management board. However, they are not considered as employees of the company as they provide independent services. Supervisory board members elected or appointed by the shareholders generally do not have service contracts with the company besides their appointment to the supervisory board. Employee representatives serving as members of the supervisory board generally continue to be party to their regular employment agreements.

Shareholders' inspection

Shareholders generally cannot inspect the service agreements of the management board members (see also Question 11).

10. Are directors allowed or required to own shares in the company?

Management board members are not required to own shares in the company. They are, however, allowed to own shares in the company and the articles of association can determine that they have to own a certain amount of shares. If they own company shares, they are subject to disclosure obligations and restrictions concerning insider trading under the WpHG. The same applies for members of the supervisory board (see Question 21).

11. How is directors' remuneration determined? Is its disclosure necessary? Is shareholder approval required?

Determination of directors' remuneration

The entire supervisory board is in charge of determining the remuneration of the management board. The supervisory board must follow certain criteria for the appropriateness of the remuneration, such as:

  • Performance appraisals.

  • Duties of the specific member.

  • The economic situation.

  • The company's success and future prospects.

  • The trends for remuneration in comparable companies.

The remuneration of the supervisory board members is determined by the articles of association and the shareholders' meeting.


The total remuneration of both the management and the supervisory board must be disclosed (HGB). Listed companies must disclose the individual remuneration of the management board members. This disclosure must provide the success-related and non-success-related components of the remuneration. The shareholders' meeting can opt out of these disclosure rules. The DCGK recommends that the individual remuneration of the supervisory board members should also be disclosed.

Shareholder approval

Shareholder approval of the remuneration of management board members is not legally required. In listed companies, the shareholders' meeting has the right to approve the remuneration system for the management board ("say on pay" resolution). However, this approval or the refusal of an approval has no legal effect.


Management rules and authority

12. How is a company's internal management regulated? For example, what is the length of notice and quorum for board meetings, and the voting requirements to pass resolutions at them?

The usual way for a management board to carry out business is by written resolution passed at a board meeting and signed by all members. As an alternative, oral, telephonic or electronic resolutions, as well as resolutions by circulation, are possible. If the management board consists of more than one member, a unanimous decision is required in relation to all issues, unless the articles of association or the bye-laws provide for different requirements, (for example, majority requirements or conferring certain management powers on one management board member).

All other aspects of board meetings are subject to the bye-laws of the management board, which are also recommended by the DCGK but are not legally required.

13. Can directors exercise all the powers of the company or are some powers reserved to the supervisory board (if any) or a general meeting? Can the powers of directors be restricted and are such restrictions enforceable against third parties?

Directors' powers

Management board members are responsible for the management of the company's business and can generally exercise all the powers of the company for that purpose. However, the AktG reserves certain powers to the shareholders' meeting, particularly in relation to fundamental decisions of the company (for example, changes to the articles of association and decision on the company's liquidation) (see Question 23). The AktG also reserves certain powers to the supervisory board in relation to the appointment of the management board members (see Question 7, Appointment of directors) or actions that the company takes against the management board. In addition, the supervisory board has approval rights in relation to certain transactions as specified in the articles of association or determined by the supervisory board (for example, transactions of a certain size or importance to the company).


A restriction of the powers of the management board of AGs is not valid in relation to third parties. However, their powers can be restricted internally. Violations of these internal restrictions can give rise to damages claims for the company and dismissal. Shareholders' meetings of GmbHs can issue specific instructions to their management to restrict the management board's powers.

14. Can the board delegate responsibility for specific issues to individual directors or a committee of directors? Is the board required to delegate some responsibilities, for example for audit, appointment or directors' remuneration?

Bye-laws of the management board often contain a broad power of delegation, permitting the management board to delegate any of its powers to individual members or committees. However, the supervisory board committees play a more important role. Depending on the size of the supervisory board (see Question 3, Number of directors or members), audit committees and nomination committees are recommended by the DCGK. A nomination committee can also prepare remuneration issues, but the final decision must be taken by the full supervisory board (see Question 11, Determination of directors' remuneration).


Duties and liabilities of directors

15. What is the scope of a director's duties and personal liability to the company, shareholders and third parties? Please distinguish between civil and criminal liability under each of the following (if relevant):
  • General duties.

  • Theft and fraud.

  • Securities law.

  • Insolvency law.

  • Health and safety.

  • Environment.

  • Anti-trust.

  • Other.

  • General duties. The general duties of the management board members arise out of their managerial responsibilities as well as their fiduciary duties towards the company. The management board of AGs is responsible for the management of the company and is not bound by the instructions of third parties. The management board can use wide discretion and is protected by the business judgement rule, but it must act with due care and diligence for the benefit of the company. In addition, the management board must convene the shareholders' meeting, inform the supervisory board about the developments in the company and prepare the annual report. The management board must comply with all statutory regulations and the articles of association.

    Under the AktG, the management board members are liable towards the company if they are in breach of one of their duties. This generally is an internal liability; an external liability to third parties only exists in exceptional circumstances and usually requires wilful misconduct. Management board members in breach of their duties must compensate the company for incurred damages. The supervisory board is in charge of enforcing this liability.

  • Theft and fraud. Since most of the duties of the management board are fiduciary duties, a breach may also attract criminal liability. Management board members in breach of trust are subject to criminal prosecution and can be fined or imprisoned. In addition, the Criminal Code (StGB) forbids theft and fraud by company bodies. Members of the management or supervisory board generally can be liable according to criminal and civil law if they fail to establish an effective compliance monitoring system that would prevent criminal behaviour. If crimes were committed by employees with the consent or connivance of the management board members, both can be punished. The company can be subject to the disgorgement of profits.

  • Securities law. The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) monitors compliance with the WpHG (WpHG). Management boards of listed companies can be liable if they do not disclose or wrongfully disclose insider information. In addition, criminal penalties and fines can be imposed on the management board members for insider trading or market manipulation.

  • Insolvency law. The management board must file for insolvency proceedings without undue delay if the company is unable to repay its short-term debts (that is, debts due in about the next three weeks) or is over-indebted. In these circumstances, the management board is prohibited to settle payments except for payments that a diligent, prudent and conscientious manager would settle. Management board members in breach of their duty to file for insolvency can be liable towards the company and creditors for damages and can be subject to criminal liability. Whether there is liability towards the shareholders is uncertain. An administrator can challenge payments settled after the insolvency of the company. Management board members allowing such payments are liable towards the company and its creditors.

  • Health and safety. Generally, management board members can be liable if health and safety offences are committed by the company with their consent and connivance. In addition, they can be liable (also under criminal law) if a health offence is based on the management board's failure to provide safe and effective organisational structures (for example, for monitoring of the safety of products).

  • Environment. A company's business may be affected by a large number of environmental regulations under civil, public and criminal law (for example, emission control, soil conservation, waste management and water pollution control). These rules are generally directed at the company. The management must ensure compliance with these regulations. If these rules are breached, the management board members can be liable internally towards the company and externally towards third parties if the actions of the management board are the cause of damages incurred by third parties. In addition, the StGB provides several rules relating to the protection of the environment. Violation of these rules may result in criminal prosecution, fines and imprisonment.

  • Anti-trust. Considering a growing trend of high fines against companies in breach of anti-trust regulations, the management board must exercise particular care in this field. Cartel activity such as the abuse of a dominating position or price-fixing can result in civil and criminal liability for the company as well as the management board. Management board members primarily face an internal liability against the company.

  • Other. In addition to the above, there is a wide number of regulations providing for potential liability of the management board, for example, in relation to violations of anti-bribery, anti-money laundering, tax and social security laws.

16. Can a director's liability be restricted or limited? Is it possible for the company to indemnify a director against liabilities?

Internal liability. The liability of a management board member is excluded if the breach of duty is based on a previous resolution of the shareholders' meeting (AktG). In addition, the liability of a management board member may be waived after three years once the claim has arisen by a resolution of the shareholders' meeting.

External liability. A management board member can be indemnified against claims by third parties and fines, provided the acts giving rise to such claims or fines did not constitute a breach of duty towards the company (which rarely applies).

17. Can a director obtain insurance against personal liability? If so, can the company pay the insurance premium?

Companies can purchase directors and officers liability insurance (D&O insurance) for the management board members. These insurance policies cover breaches of fiduciary duties and liability for negligence. They usually exclude damages, penalties and fines arising from wilful behaviour. The D&O insurance compensates the financial losses of the company. Under the AktG, the insured members of the management board must carry an excess of at least 10% of the incurred damages up to 1.5 times their fixed yearly remuneration. The DCGK suggests the same rule for supervisory board members.

18. Can a third party (such as a parent company or controlling shareholder) be liable as a de facto director (even though such person has not been formally appointed as a director)?

Jurisprudence introduced the liability of a third party (a natural person but not a legal person) as a de facto director. A de facto director is a natural person who acts like a director also in relation to the outside world even though such person has not been formally appointed as a director. In relation to liability, this person is treated by law as if he has been formally appointed as a director. However, this doctrine is rarely applied in practice.


Transactions with directors and conflicts

19. Are there general rules relating to conflicts of interest between a director and the company?

Management and supervisory board members must act in the best interests of the company. This rule is expressed through the fiduciary duties of the board members and a no-competition clause in the AktG. Major guidance about the treatment of conflicts of interest comes from the DCGK. The DCGK's provisions are based on transparency and recommend the following:

  • Management board. All management board members must disclose conflicts of interest to the supervisory board without delay and inform the other members of the management board of any conflicts. All transactions between the company and management board members as well as persons they are close to or companies they have a personal association with must comply with standards customary in the sector. Important transactions must require the approval of the supervisory board.

  • Supervisory board. Each supervisory board member must inform the supervisory board of any conflicts of interest which may result from a consultant or directorship function with clients, suppliers, lenders or other business partners. The shareholders' meeting must be informed of any conflicts annually. Material conflicts of interest may result in the termination of the mandate. Advisory and other service agreements between a supervisory board member and the company require the supervisory board's approval.

20. Are there restrictions on particular transactions between a company and its directors?

There are restrictions on certain transactions, for example, loans and quasi-loans.

In general, the law deals with the risk inherent in these "self-dealings" by:

  • The requirement that these transactions must be at arm's length.

  • The statutory provision that the supervisory board must represent the company in transactions with the members of the management board.

In addition, these transactions must comply with the rules relating to conflicts of interest (see Question 19).

21. Are there restrictions on the purchase or sale by a director of the shares and other securities of the company he is a director of?

Everyone, including directors, can be guilty of the criminal offence of insider dealing if the person (WpHG):

  • Deals, or encourages others to deal, in the company's shares when in possession of insider information.

  • Discloses insider information other than in the proper exercise of his profession.

In addition, management or supervisory board members and other persons executing managerial responsibilities and related persons must notify the company of any transaction by them in the company's shares within five days. The company must immediately make a public announcement of those transactions. Violations of these provisions can result in fines up to EUR50,000.

The DCGK calls for the disclosure of the shareholding of a member of the management or supervisory board if such member holds more than 1% of the company's issued shares.


Disclosure of information

22. Do directors have to disclose information about the company to shareholders, the public or regulatory bodies?

The AktG and the HGB contain various disclosure obligations of the management board towards shareholders, the public or regulatory bodies. Major sources of information for shareholders are the company's annual accounts and the right to raise questions during the annual general meeting.

Listing on a stock exchange results in additional requirements to provide certain information to public bodies (for example, the Federal Financial Supervisory Agency) and capital markets participants, such as:

  • Declaration of conformity with the DCGK.

  • Corporate governance declaration.

  • Ad hoc announcements regarding price-sensitive information.

  • Obligation to publicly announce details of shareholders holding 3% or more of the company's shares.

  • Subject to certain exceptions, any company offering shares to the public must produce a prospectus containing specified information.


Company meetings

23. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved?

AGs. An AG must hold an annual shareholders' meeting at the latest within the first eight months of the fiscal year. The annual general meeting has the following typical agenda items (to be approved by shareholders' resolutions):

  • Election of members of the supervisory board and external auditors.

  • Distribution of profits.

  • Discharge of the acts of the management and supervisory board members.

  • Changes in the articles of association.

  • Capital increases or decreases, statutory mergers or transformations, the issuance of convertible bonds and the authorisation to purchase own shares.

GmbH. A GmbH must hold an annual shareholders' meeting. Depending on the size of the company, a shareholders' meeting must be held within the first eight to eleven months of the fiscal year. Several shareholders' resolutions are required, including in relation to:

  • Changes in the articles of association.

  • Capital increases and decreases.

  • Approval of the annual financial statements and distribution of profits.

  • Appointment and removal of the managing directors as well as formal approval of their conduct of the business.

24. Can shareholders call a meeting or propose a specific resolution for a meeting? If so, what level of shareholding is required to do this?

The management board must call a shareholders' meeting once they have received a request in writing from shareholders holding at least 5% of the company's issued share capital, stating the purpose and the reasons of such meeting. The articles of association may provide that shareholders holding a lower proportion of the company's shares have the right to demand a shareholders' meeting.

Similarly, shareholders whose shares amount in the aggregate to not less than 5% of the company's share capital or the pro rata nominal value of EUR500,000 can demand that items be put on the agenda for resolution by the shareholders' meeting.


Minority shareholder action

25. What action, if any, can a minority shareholder take if it believes the company is being mismanaged and what level of shareholding is required to do this?

Irrespective of the level of shareholding, every shareholder has the right to ask detailed questions in the shareholders' meeting and to challenge shareholder resolutions by contestation action in court on the basis of alleged violations of the law or the articles of association.

In addition, the shareholders' meeting can, by simple majority, appoint special auditors for the examination of matters relating to the management of the company's business. If the majority rejects the appointment, shareholders holding at least 1% of the issued share capital or a pro rata nominal value of at least EUR100,000 may ask the court to appoint a special auditor.

The shareholders' meeting also can, by simple majority, decide that claims of the company for compensation of damages against members of the management or supervisory board will be asserted either by the company itself or a special representative acting on behalf of the company. Similarly, shareholders holding at least 10% of the issued share capital or a pro rata nominal value of EUR1 million can request the court to appoint a special representative. Shareholders holding at least 1% of the issued share capital or a pro rata nominal value of at least EUR100,000 can ask for leave of court to bring a derivative action on behalf of the company against directors for damages.


Internal controls, accounts and audit

26. Are there any formal requirements or guidelines relating to the internal control of business risks?

The management board must take suitable measures (in particular, it must establish a monitoring system) for the early recognition of developments endangering the continued existence of the company (risk management). The law specifies directors' general duties and leaves wide discretion to them as to the method of the establishment of the monitoring system.

For companies in the financial sector the Federal Financial Supervisory Authority has issued minimum requirements for the risk management. In relation to listed companies, the statutory auditor must evaluate whether the management board has taken such measures in a suitable form and whether the internal control system is fit for purpose. The DCGK states that the management board ensures the appropriate risk management and risk control throughout the company.

27. What are the responsibilities and potential liabilities of directors in relation to the company's accounts?

The management board is responsible for the preparation of the annual financial statements and the annual report within the first three months of the subsequent fiscal year. On completion, the management board must promptly submit them to the supervisory board. Following approval of the annual financial statements by the supervisory board, the management board must file them with the electronic Federal Gazette without undue delay. Failure to perform these duties on time can result in fines for the directors.

Management board members who falsely report or conceal the company's condition in the annual financial statements, annual report or interim financial statements are subject to imprisonment of up to three years or a monetary fine. An affidavit is required from the management board members in relation to the company's financial condition being accurately reflected in the annual financial statements. Investors who suffered losses as a result of any untrue or misleading statement in the annual financial statements can bring action against the management board.

28. Do a company's accounts have to be audited?

The accounts of all companies must be audited, with the exception of small companies. Small companies are those that do not exceed at least two of the following criteria:

  • A balance sheet total of EUR4,840,000 after deducting any deficit shown on the assets side.

  • Turnover proceeds total of EUR9,680,000 in the 12 months preceding the close of the fiscal year.

  • An average of 50 employees during the year.

29. How are the company's auditors appointed? Is there a limit on the length of their appointment?

Under the HGB, auditors of the financial statements are generally appointed by the shareholders. The auditor is appointed on a yearly basis and the appointment is always for one specific year. Auditors can be re-elected, subject to a seven-year limit in relation to companies listed for official trading.

In relation to AGs, auditors are appointed by shareholders' resolution unless special regulations apply (for example, to insurance companies). The supervisory board can suggest candidates. After the appointment of the auditor(s) by the shareholders, the supervisory board issues the specific audit assignment. The DCGK recommends the establishment of an audit committee with an independent chairman. In relation to GmbHs, the articles of association can provide different rules regarding the appointment of auditors.

The auditor can be removed only by court order on request of members of the management or supervisory board or shareholders holding a certain amount of shares if restrictions apply to the auditor (see Question 30). The court must hear both parties before it decides on the replacement of the auditor. The auditor can terminate the assignment for good cause (for example, conflict of interest in relation to the content of the audit certificate) in writing.

30. Are there restrictions on who can be the company's auditors?

Only auditors that are officially appointed by the German Chamber of Auditors and auditing companies recognised as such by the German Chamber of Auditors are eligible for the appointment as auditor. In addition, auditors and auditing companies must have an effective certificate of participation in quality controls. Auditors must fulfil certain requirements under the German Auditor's Code (Wirtschaftsprüferordnung, WPO), for example regarding independence and impartiality. A person cannot act as auditor for a company if, for example:

  • There is a suspicion of partiality due to business, financial or personal relations.

  • The person owns shares in the company being audited.

  • The person is a legal representative, member of the supervisory board or employee of the company being audited or an affiliate thereof.

  • The person played a part in the preparation of the annual financial statements.

There are further restrictions for auditors in relation to companies listed for official trading. Restrictions apply to auditors and audit companies who:

  • Provided legal or tax consultancy services to the company that is being audited in the year to be audited.

  • Have generated more than 15% of their revenue from the company that is being audited in each of the preceding five years.

The DCGK recommends that the supervisory board should obtain a declaration from the auditor in relation to its business, financial, personal or other relations with the company to determine its independence. The auditor must inform the supervisory board of any conflicts of interest arising during the audit.

31. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for?

Auditors are not subject to specific restrictions on non-audit work they can do for the company they audit accounts for. However, auditors cannot perform the following non-audit services if they are already appointed for the auditing of accounts:

  • Bookkeeping.

  • Preparation of annual statements.

  • Participation in internal audit.

  • Provision of financial services or actuarial services.

In addition, auditors of companies listed for official trading are not allowed to provide legal or tax consultancy services to the company concerned. Other non-audit services can be restricted as well if they resemble a participation in the preparation of the annual financial statements.

The European Commission is currently considering a prohibition of non-audit work in a Green Paper dated 13 October 2010.

32. What is the potential liability of auditors to the company, its shareholders and third parties if the audited accounts are inaccurate? Can their liability be limited or excluded?

Auditors are obliged to perform their services carefully, impartially and confidentially. If they are in breach of their duties they are generally liable to the company and have to compensate the company with regard to damages incurred. However, their liability is limited by the HGB to EUR1 million in case of acting negligently (EUR 4 million for companies listed for official trading) per audit. Further limitations or exclusions of the liability by contract are prohibited.

Auditors are liable to shareholders of the audited company and third parties if they damage them intentionally. With respect to negligent behaviour, auditor's liability to shareholders and third parties is in dispute in Germany: some lower courts have decided that liability to third parties is possible, other courts have decided otherwise.

Furthermore, auditors are liable under criminal law if they knowingly include information in the audit report that is misleading or false (for example, fraud and breach of trust).


Corporate social responsibility

33. Is it common for companies to report on social, environmental and ethical issues? Please highlight, where relevant, any legal requirements or non-binding guidance/best practice on corporate social responsibility.

It is quite common for companies to report on social, environmental and ethical issues. Directive 2003/51/EC amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings provides for the disclosure of such non-financial issues and has been implemented in Germany. Under the HGB, certain large public limited companies must include information regarding non-financial performance indicators (in particular environmental and employee issues) in the company's annual management report.


Company secretary

34. What is the role of the company secretary in corporate governance?

German corporate law does not recognise the office of company secretary.


Institutional investors and shareholder groups

35. How influential are institutional investors and other shareholder groups in monitoring and enforcing good corporate governance? Please list any such groups with significant influence in this area.

Institutional investors and shareholder groups are becoming more and more influential in Germany. International institutional investors currently own more than 50% of the shares of AGs listed on the German Index DAX. International and German institutional investors (for example, DWS) influence corporate governance not only with their voting rights but also through meetings with the management and supervisory boards. Investment associations such as DSW or SdK disclose their voting behaviour and therefore influence the decisions at shareholder meetings. The European Commission is currently considering the introduction of a code of conduct for institutional investors based on the model of the UK Stewardship Code 2010.



36. Is there statutory protection for whistleblowers (persons who disclose criminal activity or other serious malpractice within a company)?

Whereas some statutory provisions for civil servants exist, there is no general statutory protection for whistleblowers in Germany. However, draft laws are being discussed. Labour courts and the constitutional court have decided that whistleblowing should not have negative effects under civil law. Until a general statutory protection is issued the legal position remains unclear.



37. Please summarise any proposals for reform and state whether they are likely to come into force and, if so, when.

On statutory level, there are currently no pending reforms in relation to corporate governance. Draft laws to protect whistleblowers are being discussed (see Question 36).

The DCGK is reviewed and updated annually. However, no updates were issued by the German Corporate Governance Code Commission in 2011 to give enough time to companies to implement the latest amendments.

One of the most discussed issues is the necessity of a fixed women's quota for corporate bodies. The German Corporate Governance Code Commission is also following the developments regarding the Green Paper on the European Corporate Governance Code issued by the European Commission.


Contributor details

Markus S Rieder

Shearman & Sterling LLP

T +49 89 2388 8200
F +49 89 2388 82940

Qualified. Germany, 1999; New York, 1997

Areas of practice. Corporate law; corporate litigation; arbitration; and compliance.

Recent transactions

  • Advised Daimler with respect to the separation from Chrysler and in the Toll Collect arbitration against the German Federal government.
  • Advised IKB Deutsche Industriebank AG in relation to the subprime crisis and the prosecution of claims against the former board members.
  • Advised various US listed European companies in connection with anti-corruption investigations

Daniel Holzmann

Shearman & Sterling LLP

T +49 89 2388 8200
F +49 89 2388 82940

Qualified. Germany, 2008

Areas of practice. Corporate law; corporate litigation; arbitration; and compliance.

Recent transactions

  • Advised IKB Deutsche Industriebank AG in relation to the subprime crisis and the prosecution of claims against the former board members.
  • Advised Daimler in the Toll Collect arbitration against the German Federal government.
  • Advised a US listed European company in connection with anti-corruption investigations in Eastern Europe and Asia.

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