Supervisory board decision not always sufficient for the assumption of a board members's pecuniary penalty or fine by a stock corporation

In its judgement of 8 July 2014 (file no. II ZR 174/13), the Federal Supreme Court (Bundesgerichtshof, BGH) recently ruled that a decision by the supervisory board will only suffice in a limited number of cases where a stock corporation wishes to assume the payment of a pecuniary penalty or fine imposed on one of its board members. If, in perpetrating the act resulting in the pecuniary penalty or fine, the relevant board member has also violated an obligation towards the stock corporation, then – according to the decision by the Second Civil Senate – the agreement of the shareholders’ meeting is required pursuant to Section 93(4), sentence 3 of the German Stock Corporation Act (Aktiengesetz, AktG) for the effective assumption of the fine. A supervisory board decision on the basis of the “business judgement rule” set out in Section 93(2), sentence 2 AktG is thus not sufficient.

Clarification of disputed question

With this decision, the Federal Supreme Court (BGH) has now clarified previous uncertainties. It had been disputed in the literature whether a supervisory board was permitted to decide on the reimbursement of a pecuniary penalty or fine after duly weighing the effect of the reimbursement on the company’s public image, employee morale and the future legal compliance of the person involved and of the staff against the guilt of the person involved and the damage to the company, at least in line with the principles set out in the “ARAG/Garmenbeck” judgement (judgement dated 21 April 2007 – II ZR 175/95) on significant grounds of company welfare.

At the same time, the Federal Supreme Court (BGH) once again clarified that the reimbursement of a fine pursuant to Section 153a of the German Code of Criminal Procedure (Strafprozessordnung, StPO) does not fulfil the statutory definition of assistance after the fact and assistance in avoiding prosecution or punishment pursuant to Sections 257 and 258 of the German Criminal Code (Strafgesetzbuch, StGB).

Supervisory board has no discretionary power to assess a breach of duty

In the assessment of whether the act relevant under criminal law constitutes a breach of duty by the stock corporation, the supervisory board has no entrepreneurial discretion to act. The objective legal situation alone is definitive. According to the Federal Supreme Court (BGH) judgement, the supervisory board may – in cases where it has insufficient information on which to base an assessment – make provisional arrangements, such as a loan subject to the proviso of repayment.

Effects in practice

The Federal Supreme Court (BGH) judgement is likely to be of particular relevance where a board member is accused of embezzlement, fraud, balance sheet fraud or delayed filing for insolvency. The decision ultimately results in a greater risk of flawed decision-making by supervisory boards. Particularly in cases where criminal proceedings in which a breach of duty is not identified, are terminated in accordance with Section 153a StPO, the supervisory board or a subsequent legal dispute must establish for the stock corporation that no breach of duty existed if the shareholders’ meeting has not approved the assumption of the fine. Depending on the initial situation of the proceedings, the supervisory board may be required to bear the burden of presentation and proof to the stock corporation that the board member did not breach any duty. Additional questions also arise with regard to the reimbursement of fines to company employees, supervisory board members or members of the corporate bodies of associated companies, or in the case of companies with a different legal form.