Corporate governance and directors' duties in Germany: overview
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 Practical Law global guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-guide.
Corporate governance trends
The most notable trends in corporate governance are:
An increased focus on diversity, especially the promotion of women to board level. Recent legislation has implemented a fixed quota for women in supervisory boards of such companies which are listed and subject to employee representatives on the supervisory board under a principle known as co-determination.
The increased professionalism of supervisory boards.
A focus on risk and compliance.
Commitments to practices promoting environmental sustainability.
The most important legal form of private corporate entity is the German limited liability corporation (GmbH).
Public or listed companies
The German stock corporation (AG) is the most usual form for public or listed companies. Studies on corporate governance tend to focus on the AG, as it is the standard legal form for listed companies and therefore subject to the most detailed legislative and self-binding regulation.
The European Stock Corporation (SE) is becoming increasingly popular as a form for listed companies in Germany. Most rules for AGs also apply to a SE.
The main source of rules regarding the corporate governance of a listed company (AG) is the German Stock Corporation Act (AktG). The AktG contains mandatory rules especially regarding the composition and duties of the three corporate bodies found in an AG:
The management board (Vorstand).
The supervisory board (Aufsichtsrat).
The shareholders' meeting (Hauptversammlung).
The Co-determination Act (MitbestG) is another source of corporate governance rules. The MitbestG regulates the composition and some of the special duties of the supervisory board. Different and more flexible rules for employee co-determination apply to a European stock corporation (SE).
Additional regulations apply to listed companies and their shareholders under the Securities Trading Act and the Takeover Act. The Federal Financial Supervisory Authority (BaFin) supervises listed companies and enforces securities legislation.
The German Banking Act (Kreditwesengesetz) (KWG) and EU legislation (Capital Requirements Regulation and Directive – CRR/CRD) provide additional regulation for financial institutions.
Non-legislative guidance and rules
Corporate governance rules in the Corporate Governance Code (DCGK) supplement legislation. The DCGK contains recommendations and suggestions that go beyond the legislative requirements for listed companies.
A commission (Regierungskommission) revises the DCGK annually. The commission consists of managing and supervisory board representatives of listed companies and various stakeholders. The stakeholders include institutional and retail investors, academics in economics and jurisprudence, auditors and a trade union representative. The Federal Minister of Justice and for Consumer Protection appoints the members of the Commission.
Following trends in the US market, shareholder activism has increased in recent years. The spectrum of shareholder activism in Germany is rather broad, ranging from US special opportunity funds, international corporate governance activists to private corporate raiders. This has led to the European Securities and Markets Authority encouraging the development of the Best Practice Principles for Shareholder Voting Research by a group of experts.
The Corporate Governance Code (DCGK) was adopted for listed companies in 2002. It is influential, but not legally binding. The DCGK contains recommendations and suggestions on internationally and nationally accepted standards for successful and responsible business management. A complete English translation of the DCGK is available online at www.dcgk.de/en/home.html.
The DCGK includes guidance on all significant matters for good corporate governance, including:
The management board.
The supervisory board.
The interaction of the different boards in the company.
Transparency and accounting.
The DCGK applies to listed companies and contains:
Provisions restating binding legislation, mostly taken from the Stock Corporation Act (AktG).
The DCGK follows the principle of "comply or explain". The management board and the supervisory board are obliged to issue an annual declaration of the AG's compliance with the code. The declaration must be permanently accessible to the public on the AG's website.
The declaration must state the extent to which the company complied with the code in the previous year. Any full or partial non-compliance with the code must be explained. There are no legal consequences for non-compliance, but a false representation on the company's compliance in the declaration can, in some circumstances, result in legal challenges to shareholders' resolutions and to board members being held liable.
Despite some criticism, the DCGK is widely accepted. Blue chip companies tend to fully implement the DCGK, whereas medium-sized companies more often partially deviate from certain rules.
Corporate social responsibility and reporting
Board composition and restrictions
A listed company (AG) has a two-tier board structure consisting of the management board and the supervisory board. This two-tier structure is mandatory for AGs.
It is possible to implement a one-tier structure for a SE. However, a one-tier structure is not common for listed companies in which the rules for co-determination apply. In such case, the (one-tier) board of directors would be subject to co-determination and, as a consequence, an SE would end up with employee representatives at management board level.
The management board (Vorstand) independently manages an AG and is responsible for the day-to-day business of the company. The supervisory board (Aufsichtsrat) appoints, controls and advises the management board, but cannot take executive decisions.
Supervisory board members
The shareholders in the shareholders' meeting elect the members of the supervisory board (other than employee representatives).
Employees' representation in the supervisory board
The co-determination system gives employees a significant influence on matters of corporate governance:
Companies with more than 500 employees are legally required to have one-third employee representatives on the supervisory board (One-third Participation Act).
For companies with more than 2000 employees the requirement is increased to one-half employee representatives (Co-determination Act).
The relevant number of employees is calculated as follows:
Employees of foreign subsidiaries are not counted.
For determining the relevant number under the One-third Participation Act, the employees of subsidiaries of a company are only included if a domination agreement is in place between the parent and the relevant subsidiary, or the controlled company is integrated into the parent company. A domination agreement is an agreement entitling the dominating enterprise to issue instructions to the dominated enterprise.
For purposes of the Co-determination Act, the employees of all enterprises belonging to a group of companies must be included.
Number of directors or members
Supervisory board. A supervisory board must have at least three members. This number can be increased by the articles of association, but generally has to remain divisible by three. The maximum number of supervisory board members depends on the nominal share capital. The absolute maximum of 21 members is reached with a nominal capital of EUR10 million. Under the Co-determination Act, the supervisory board consists of the same number of shareholder representatives and employee representatives and has 12, 16 or 20 members, depending on the aggregate number of employees of the group.
Management board. The management board consists of one or more members depending on the articles of association. There must be at least two members if the registered share capital is more than EUR3 million.
There are no binding restrictions on the age of members of the management or supervisory board. However the Corporate Governance Code (DCGK) recommends an age limit for the members of each of these corporate bodies.
There are no legal requirements on the nationality of members of the management board and the supervisory board. Non-German members from certain countries must obtain a work permit in Germany to act as members of the management board.
Anticipated legislation will require some listed companies (AGs) to ensure that women hold 30% of supervisory board positions by 2016. There is, however, no quota for the management board.
The legislation is expected to apply to AGs that are both:
Subject to the Co-determination Act.
A person must not be a member of the supervisory board and the management board at the same time.
Management board members may not become members of the supervisory board of the company within two years after the end of their term as management board members. There is an exception if the former management board members are appointed upon a motion presented by shareholders holding more than 25% of the voting rights in the company. This is known as "cooling-off".
The maximum number of supervisory board positions that one person can hold is limited to ten. The articles of association can contain further restrictions and requirements.
A person cannot be member of the supervisory board if he is:
A legal representative of another company controlled by the company that employs him.
A legal representative of another company on whose supervisory board a management board member of the employer company is holding a seat.
The two-tier structure of a listed company (AG) mandates a non-executive supervisory board (see Question 6).
Board composition, Independence
Supervisory boards of listed companies must have one independent financial expert with expertise in either auditing or accounting.
The Corporate Governance Code (DCGK) also recommends an adequate number of supervisory board members be independent.
Independence in this context generally means the lack of any business, family or other relations to the company, its majority shareholder or its management that could result in a conflict of interest that impairs the member's judgment.
The two-tier structure of a listed company (AG) means that members of the management board cannot be members of the supervisory board and vice versa. Also, supervisory board members cannot be permanent substitutes of directors, procuration officers or otherwise authorised to represent the company. Specific restrictions apply for supervisory board positions in banks and insurance companies.
Appointment and removal of members of the management board
The supervisory board appoints the members of the management board. The supervisory board also has the power to remove members of the management board for:
Gross breach of duty.
An inability to manage the company properly.
A no-confidence vote of the shareholders' meeting, unless the vote was made for obvious arbitrary reasons.
The shareholders' meeting cannot directly appoint or remove members of the management board.
Appointment and removal of members of the supervisory board
The shareholders' meeting, except for employee representatives, elects supervisory board members. The employees elect representatives according to the provisions in the relevant act on co-determination. A removal by the shareholders' meeting before the end of the term is possible provided a majority of three-quarters of the votes in the general meeting decides to do so.
Directors employed by the company?
Neither the members of the management board nor the members of the supervisory board are employees of the company with the exception of the employee-representatives on the supervisory board. Typically, the members of the management board have a service contract with the company, which is, however, not subject to employee protection rules.
Shareholders are not entitled to inspect the service contracts of management board members.
The supervisory board determines the remuneration of the members of the management board. The total compensation (remuneration and benefits) of each management board member has to be disclosed in the annual financial report on an individual basis, unless the shareholders' meeting adopts a resolution not to disclose the compensation in that way. The Code on Corporate Governance (DCGK) includes several additional recommendations on the disclosure of the remuneration. Shareholders also can pass a "say on pay" vote (see Question 14).
The remuneration granted to the members of the supervisory board and the remuneration for membership in committees has to be determined in the articles of association or resolved by a shareholders' meeting (Stock Corporation Act (AktG)). Therefore, the remuneration of the members of the supervisory board is publicly available and must be disclosed in the annual financial report.
Determination of directors' remuneration
The supervisory board determines the remuneration for members of the management board. The supervisory board has to ensure pay is proportionate to the duties of individual members, the economic situation, the performance and prospects for the company. Total remuneration must be consistent with the need for the business to be sustainable.
Compensation under the corporate governance code
Monetary compensation under the corporate governance code (DCGK) comprises fixed and variable elements. The amount of compensation is capped, both overall and for individual elements of compensation.
Variable pay is based on an assessment of performance over more than one year. Both positive and negative changes are taken into account when determining variable compensation.
For pension schemes, the supervisory board establishes the target level of provision. In each case it considers the length of time for which the individual has been a management board member and takes into account the resulting annual and long-term expense for the company.
There is a severance pay cap under the DCGK. Payments made to a management board member on the premature termination of a contract, including fringe benefits, must not exceed the value of either of the following:
Two years' compensation.
The compensation arising in from the remaining term of the employment contract.
There is a general duty to disclose the remuneration for the board of directors as an attachment to the financial statements. In addition, listed companies (AGs) have to disclose the remuneration of individual board members, unless the general meeting votes against that disclosure with a three-quarters majority of the represented nominal capital. Similar regulations apply to assure transparency in financial institutions and insurance companies.
The shareholders' meeting may vote on the remuneration package for the management board. This vote is non-binding and does not result in any rights or obligations.
General issues and trends
Recent attempts to include a binding "say-on-pay" decision by the general meeting have caused debate. However, these attempts have not been successful. There still remains a trend to strengthen shareholder influence on questions of board member remuneration, particularly pension entitlements. Continued efforts to increase transparency and further attempts to create binding legislation in such matters are likely in the near future.
Management rules and authority
The management is responsible for independently conducting the business of the company. There are few statutory requirements for the internal conduct of the management board regarding notice periods and quorums that cannot be modified by the articles of association or the rules of procedure for the management board. Meetings of the management board and supervisory board are convened and chaired by the respective chairperson.
The articles of association may transfer the power to unanimously pass rules of procedure to the management board. The articles of association themselves may contain binding provisions regarding procedural rules. The corporate governance code (DCGK) recommends enacting procedural rules to ensure the efficient operation of the management board.
In general, the principle of unanimous and joint management applies, but the articles of association and procedural rules can modify this principle. However, it is never possible to permit a minority of management board directors to decide against the majority view.
The supervisory board requires the management board to ask for prior consent on important business matters.
In a limited company (AG), powers are split between the management board, the supervisory board and the shareholders' meeting.
The management board. The management board has the power to run independently the business of the company. It must, however, comply with restrictions specified by statute, the articles, a general meeting of shareholders and the internal rules of the management and supervisory boards. The management board's authority to represent the company cannot be restricted in respect of third parties.
The supervisory board. The two-tiered system reserves some rights for the supervisory board. The supervisory board:
Supervises the actions of the management board.
Is responsible for the appointment and revocation of management board members,
Reviews the financial statements of the company, passes a resolution of approval or disapproval of the report and reports the results to the shareholders' meeting. The report has to contain details about the type and scope of control the supervisory board exercised over the management board during the business year.
The supervisory board has the following rights and duties to exercise control over the management board:
The right to examine the accounting and any assets of the company.
The right and duty to consult the management board in important matters
The right and duty to call for a shareholders' meeting if the interest of the company requires it.
The articles of association or the supervisory board determine certain matters that require the consent of the supervisory board (for example: material acquisitions and divestments, budgets, increase of financial indebtedness, contracts with important strategic implications, opening or closing of branches).
Shareholders' meeting. The shareholders' meeting is responsible for:
The appointment and revocation of appointment of members of the supervisory board (unless they are employee representatives).
The discharge of the management board and supervisory board.
The appointment of the auditor.
Resolutions on the distribution of dividends.
In addition, in matters of exceptional importance for the company, the courts recognise an unwritten requirement to ask for the prior approval by the shareholders' meeting. The exact nature of the matter requiring a consultation of the shareholders' meeting has to be determined on a case-by-case basis and requires careful legal consideration.
Management board members are jointly responsible for managing the company.
The articles of association or, more commonly, the rules of procedure for the management board may assign different areas of responsibility or business sectors to individual management board members. The members can run these business sectors autonomously representing the entire management board. However, the allocation of individual responsibilities does not limit the individual board member's responsibility. Board members remain responsible and accountable for the management of the entire business of the company.
Board members have a duty to exercise general control. This means they have a right to be informed by other board members and a duty to inquire and conduct random examinations. If there is a crisis or if grounds for suspicion exist, the duty on board members increases to require complete examination and inquiry. An information system is therefore advisable to enable management board members to easily access information needed to fulfil their duties effectively.
The supervisory board may create committees, namely to prepare its sessions and resolutions. The corporate governance code (DCGK) recommends creating committees to increase the effectiveness of the supervisory board's work. At large companies it is common, as a minimum, to establish a nomination committee and an audit committee. The audit committee supervises the accounting procedures, effectiveness of internal control, risk management and audit systems and the audit of the financial statements. The power to delegate to committees to ability to pass resolutions is restricted. Committees are obliged to keep the full supervisory board informed about their activities.
Directors' duties and liabilities
The members of the management board must observe duties of care and loyalty in relation to the company. The standard of care is that of a diligent and prudent businessman.
The duty of care includes the duty to comply with applicable law.
A breach of these duties leads to a personal and joint liability of the members of the management board towards the company. Generally, management board members cannot be held liable for acts of the company to individual shareholders or to third parties. The business judgment rule applies. Directors are not liable to the company for entrepreneurial decisions, if they acted on the basis of diligently prepared information in good faith and with due care.
Management board members face civil liability and criminal liability if they intentionally make false statements to deceive creditors or for false accounting.
The criminal provisions of the German Criminal Code (Strafgesetzbuch, StGB) include crimes such as theft (Diebstahl), fraud (Betrug), bribery (Vorteilsgewährung, Bestechung), embezzlement (Unterschlagung, Untreue) and insolvency-related crimes.
There are various disclosure obligations and a duty not to engage in insider trading.
Market manipulation, false ad-hoc information, misstating the economic situation of the company and untrue or material misleading information in securities prospectuses are criminal offences. These acts also expose directors to personal liability towards the company. Only in special circumstances can a breach of those duties lead to civil liability towards shareholders or third parties.
The management board is obliged to file for insolvency promptly (and in any case not later than three weeks) if and when either of the following events occurs:
The company becomes unable to make payments when due.
The company's liabilities exceed its assets.
Members of the management board face criminal and civil liability if they fail to file for insolvency in these circumstances.
On insolvency, the management board is prohibited from making any payments except for payments that diligent management would expect to make. A breach of this duty may lead to civil liability. Generally, the members of the management board are not allowed to favour certain creditors to the detriment of other creditors in a pre-insolvency situation.
Cartels are generally prohibited and anti-trust authorities in Germany enforce such regulations strictly. The members of the management Board are required to exercise special care complying with anti-trust laws as fines imposed by German and European anti-trust authorities against companies can be very high.
One member of a management board member faces civil and criminal liability for a breach of anti-trust laws.
A director's liability towards the company is generally unrestricted and unlimited. However, management board members cannot be liable if they act pursuant to a lawful resolution of a shareholders' meeting. The company itself must not indemnify any board members against civil law liabilities incurred in their capacity as board members.
Case law imposes on supervisory board and management board a general duty to enforce the liability of board members. In addition, a limited company (AG) can only waive or settle any liability claims against a member of the supervisory board or management board if both the following apply:
Shareholders pass a resolution that consents to the waiver or settlement of liability.
There is no objection by minority shareholders that jointly hold a minimum of 10% of the registered share capital.
If management board members are liable to third parties, the company can only indemnify them for their liability if their actions do not result in a liability to the company. Criminal penalties in general must be borne be the management board member personally.
Members of the management board and supervisory board can (and regularly do) obtain directors and officers' insurance. The company may pay and usually pays for the insurance premium. Any D&O insurance cover for management board members of a listed company must be subject to a deductible of up to 1.5 times the individual director's fixed annual salary.
The corporate governance code (DGCK) recommends a similar deductible or excess for supervisory board members.
A person who is not formally appointed as a management board member can only be liable as a management board member if he both:
Acts as a de facto management board member with the knowledge of the supervisory board.
Uses managing powers of the management board.
If a controlling company causes a controlled company to effect a transaction to the detriment of the controlled company, both it and its legal representatives can be liable to the controlled company and its shareholders for the damage suffered. There will be no liability if either:
There is a formal control agreement implemented between the entities.
The controlling company compensates the controlled company by the end of the financial year.
Transactions with directors and conflicts
Management board members must act in the best interests of the company. All board members have a duty to avoid situations in which their personal interests are in conflict with the interests of the company. A breach can lead to board members being liable.
There are many statutory provisions and the corporate governance code (DCGK) recommendations deal with the avoidance and disclosure of potential conflicts. In particular, supervisory board members must disclose material conflicts of interests in connection with their proposed election by the shareholders' meeting.
A loan to a board member by his company must be authorised in advance by a supervisory board resolution and is subject to additional limitations. Consultancy and similar agreements between the company and a supervisory board member require the consent of the supervisory board. The implementation of the revised EU shareholders' rights directive is expected to result in further restrictions.
Members of the management board or the supervisory board with insider knowledge are not allowed to acquire the company's securities for themselves or others.
A board member of the company or of its parent company and their related parties must promptly report to the company and the Federal Financial Supervisory Authority (BaFin) the purchase or sale of the following:
Shares in the company.
Related rights to sell or buy shares (for example options).
Rights that are directly dependent on the stock market price of the shares of the company.
Disclosure of information
Listed companies are subject to numerous disclosure obligations. The most important are:
The offer of shares or other securities to the public.
Events affecting the company directly that are:
unknown to the public; and,
if they became public, may have a material effect on the share price of the company due to their impact on the company's financial position or its general course of business.
All limited companies (AGs) must hold a shareholders' meeting every year. The annual shareholders' meeting deals with standard issues that must be discussed and voted on, including:
Appropriation of profits.
Ratification of acts of the management board and supervisory board.
Annual appointment of auditors.
Election of supervisory board members representing the shareholders (but not those who represent the employees appointed under the Co-determination Act).
Changes of the articles of association, including increases in share capital.
Transactions affecting the legal structure of the company, for example mergers or spin-offs.
The management board generally convenes the shareholders' meeting on one month's notice. Normally, shareholders must register for the shareholders' meeting. The shareholders may be present at the venue in accordance with the provisions in the articles of association, or there may be various options for voting, including:
Details of how to vote are described in the invitation to the general meeting.
A majority of at least 75% of the share capital present at the general meeting is required for passing resolutions to:
Increase share capital.
Change the company's articles of association.
Approve domination or profit transfer agreements, mergers and other reorganisation matters.
Liquidate the company.
A shareholders' meeting must be convened if demanded by one or more shareholders who together hold at least 5% of the registered share capital (or less if stated in the articles).
One or more shareholders who together hold at least 5% or at least EUR500,000 of the registered share capital can ask for items to be included on the agenda.
Minority shareholder action
As a matter of principle, every shareholder is entitled to ask questions in the general meeting.
If a shareholder or a group of shareholders hold a certain number of shares (see Question 35), they can demand:
A shareholders' meeting.
Items be added to the agenda of a shareholders' meeting that has already been convened.
A shareholders' meeting to vote on the appointment of special auditors to examine matters relating to the formation or management of the company, particularly relating to increases and reductions in share capital.
A shareholders' resolution appointing a special independent representative to pursue claims on behalf of the company in court against the management for breach of duties of care.
Special auditors and special independent representatives are appointed by a majority vote of the shareholders' meeting or, if the vote does not succeed, by applying to a competent court.
If certain conditions apply, shareholders of at least 1% or EUR100,000 of the company's registered share capital can file a derivative action on behalf of the company against members of the management board and supervisory board for compensation for damage.
Internal controls, accounts and audit
The management board must ensure that appropriate risk management and control systems are in place. It is the duty of the management board to take all necessary measures to identify developments that could threaten the company, including setting up a monitoring system. There are no formal requirements or guidelines specifying the form or substance of an internal risk management system.
The supervisory board must approve the annual accounts as prepared by the management board. The supervisory board shares responsibility for the accuracy of the annual accounts with the management board. However, supervisory board members are only liable for ensuring that the annual accounts and the auditors' report are plausible. All supervisory board members must have sufficient knowledge to fulfil their duties in relation to the annual accounts. One member of the supervisory board is required to have special accounting expertise.
It is a criminal offence if a board member falsely reports or conceals the company's financial position in the annual accounts.
The shareholders' meeting appoints auditors. The supervisory board proposes candidates for appointment as auditors and a shareholders' meeting then votes on their appointment. The supervisory board must negotiate the auditor's fee and can decide if the audit should focus on additional items. The auditor's appointment usually ends with the performance of the audit. There is no limit on the reappointment of auditors.
The corporate governance code (DCGK) recommends that the supervisory board establish an audit committee. The main function of the committee is to manage accountancy and risk management issues and to ensure that the auditor is independent.
The DCGK also recommends that before nominating a person to be appointed as auditor, the supervisory board or the audit committee obtains a statement from the proposed auditor. The statement should declare which professional, financial and other relationships exist between the auditor and both the company and the members of the company's boards could affect the proposed auditor's independence.
Auditors must be members of a relevant professional body and also possess appropriate accounting skills.
Auditors must also be independent of the company. The Commercial Code and the Stock Corporation Act (AktG) conclusively set out situations in which an auditor will not be independent, for example where there is a conflict of interest. In these cases, the auditor is not allowed perform the audit.
It is currently not prohibited for a company's auditors to carry on non-audit work, for example, acting as legal counsel or as tax advisor for the company. However, there are European initiatives to restrict auditors carrying on non-audit work. A person is, however, prohibited from being an auditor and legal counsel in financial affairs for a listed company, at the same time. The Auditor's Code and the Commercial Code provide further restrictions.
Auditors who intentionally or negligently breach their duties must compensate the company and related companies for the damage incurred. Liability for negligent acts is limited to EUR4 million for audits of listed and EUR1 million for unlisted companies.
Liability to shareholders or third parties exists only in exceptional cases, for example if the circumstances mean shareholders or third parties can rely directly on the audit.
German Commission of Corporate Governance Code
Description. Official website of the German Corporate Governance Commission.
Steffen Carl, Partner
Professional qualifications. Germany
Areas of practice. Corporate law; M&A
Dr Jörn Wöbke LL.M. (Chicago), Partner
Professional qualifications. LL.M., Chicago
Areas of practice. Corporate law; M&A