Supervisory Board Duties and Liability

Supervisory board liability in Germany: the framework

Supervisory board liability has moved to the centre of German corporate governance. In the two-tier system of the German stock corporation (AG), the supervisory board (Aufsichtsrat) appoints and dismisses the management board, monitors its management, approves significant transactions and represents the company towards the management board. Its members are subject to the same standard of care as management board members: § 116 of the Stock Corporation Act (AktG) applies the duty of care and the liability rules of § 93 AktG to supervisory board members "accordingly", with the exception of the mandatory D&O deductible.

Members who breach their duties are jointly and severally liable to the company for the resulting loss, and the burden of proving that they acted with due care lies with them.

In practice, claims arise mostly after a corporate crisis, when an insolvency administrator, a new majority shareholder or a new supervisory board examines what went wrong.

This briefing explains the main duties of the supervisory board, the duty to pursue claims against the management board, limitation periods and D&O cover for supervisory board members. The same principles apply largely to mandatory supervisory boards of GmbHs under the co-determination acts.

Core duties of the supervisory board

The intensity of monitoring depends on the company's situation. In normal times, the supervisory board may rely on the management board's reports, provided they are complete and plausible, and focuses on strategy, risk management, compliance and major transactions.

In a crisis, the duty intensifies: the supervisory board must obtain more detailed information, meet more frequently and, if necessary, intervene by refusing consent, by giving advice or by replacing management board members. In particular, it must ensure that the management board complies with its insolvency filing duties and does not make prohibited payments after the company has become illiquid or over-indebted; § 116 AktG expressly refers to § 15b of the Insolvency Code in this respect.

Members must have the minimum knowledge and skills needed to understand and assess ordinary business transactions without outside help. For public-interest entities, at least one member must have expertise in accounting and another in auditing. Members are entitled to rely on experts, but they must check that the expert is qualified, properly instructed and that the advice is plausible.

Decisions and the business judgment rule

Where the supervisory board takes entrepreneurial decisions, for example on approving a major acquisition or on the remuneration system, the business judgment rule applies: there is no breach of duty if the members could reasonably assume that they were acting on the basis of adequate information for the benefit of the company (§ 93(1) sentence 2 with § 116 AktG). Decisions should therefore be prepared with appropriate information, conflicts of interest disclosed and deliberations minuted.

Where the supervisory board does not have discretion, for example when it must enforce statutory requirements or monitor the legality of management's conduct, the business judgment rule offers no protection, and the members must act on the basis of the correct legal position, if necessary after obtaining legal advice. Our briefing on the business judgment rule explains the elements.

Excessive remuneration is a specific risk. § 116 sentence 3 AktG states that supervisory board members are liable in particular if they set inappropriate remuneration for management board members. Remuneration decisions should be supported by horizontal and vertical comparisons and, where necessary, independent advice.

The duty to pursue claims against the management board

A central and often underestimated source of supervisory board liability is the duty to examine and pursue the company's damages claims against management board members. Because the supervisory board represents the company towards the management board, only it can decide whether to bring such claims.

The Federal Court of Justice established in its ARAG/Garmenbeck case law in the 1990s that the supervisory board must examine on its own responsibility whether claims exist and whether they can be enforced, and must in principle pursue them. It may refrain only in exceptional cases where important interests of the company outweigh enforcement, such as serious harm to the company's reputation or operations, and personal considerations in favour of the management board member carry little weight.

If the supervisory board fails to pursue a claim and the claim becomes time-barred, its members may themselves be liable. The Federal Court of Justice has held that limitation of the company's claim against a supervisory board member for allowing claims against a management board member to become time-barred begins only when the claim against the management board member becomes time-barred (BGH, judgment of 18 September 2018 – II ZR 152/17). This extends the exposure of supervisory board members considerably in time.

Supervisory board liability in special situations

Certain situations carry an increased risk of supervisory board liability and deserve particular attention:

• Compliance failures. Where there are indications of cartel infringements, corruption, sanctions breaches or data protection violations, the supervisory board must ensure that the management board investigates and remedies them. Inaction in the face of red flags is a common basis for claims.
• Major transactions. Approval of acquisitions, disposals and financings requires a sufficient information basis, especially where the management board presents a transaction under time pressure.
• Conflicts of interest. Members who represent a shareholder or a business partner must disclose conflicts and abstain where necessary. Breaches of confidentiality towards the shareholder they represent can also create liability.
• Co-determined boards. Employee representatives have the same duties and liability as shareholder representatives. Their information rights and duties of confidentiality are identical.
• Crisis and insolvency. If the company becomes illiquid or over-indebted, the supervisory board must press for a timely filing and stop prohibited payments; failures here are routinely examined by insolvency administrators.

Illustration: a hypothetical supervisory board learns from an internal audit report that a subsidiary's managers may have paid bribes to win contracts. It commissions an external investigation, asks the management board for a remediation plan and reviews whether management board members breached their monitoring duties. It then decides to assert claims against one former management board member, documents why it is not pursuing claims against others and agrees with the remaining members a waiver of the limitation defence while settlement talks with the D&O insurer continue.

Limitation and enforcement

Claims against management and supervisory board members become time-barred after ten years for companies listed at the time of the breach and five years for other companies (§ 93(6) AktG). The company may waive or settle claims only three years after they arose and only with the approval of the general meeting, unless a minority holding one tenth of the share capital objects (§ 93(4) sentence 3 AktG). Creditors can pursue the company's claims if they cannot obtain satisfaction from the company, in cases of gross negligence or in the specific cases of § 93(3) AktG, and in insolvency the administrator exercises these rights (§ 93(5) AktG).

Claims against supervisory board members are asserted on behalf of the company by the management board. Shareholders holding 1% or EUR 100,000 of the share capital can apply for court admission of an action to pursue the company's claims in their own name (§ 148 AktG). In practice, most claims are brought by insolvency administrators or after a change of control, and they often end in settlements funded by D&O insurance. Where liability arises in connection with a dispute between the company and its board members, the new Commercial Courts may have jurisdiction for disputes of EUR 500,000 or more; see our page on Commercial Courts.

D&O cover for supervisory board members

Supervisory board members are usually covered by the company's D&O insurance policy, which the company takes out for all board members as insured persons. Unlike for management board members, the AktG does not require a deductible for supervisory board members (§ 116 sentence 1 excludes § 93(2) sentence 3 AktG). Members should nonetheless check the scope of cover, the policy limit, its allocation among insured persons, the treatment of claims by the company against its own board members (insured-versus-insured), the order of payments and the run-off period after leaving office.

Because the supervisory board may have to pursue claims against management board members that are covered by the same policy, conflicts can arise in claims handling. Our briefing on directors and officers insurance discusses policy design and coverage disputes.

Reducing supervisory board liability in practice

Supervisory board liability can be managed through good organisation:

• Information regime. Rules of procedure for the management board that define reporting duties, and a catalogue of transactions requiring consent that reflects the company's risks.
• Committees. Audit, nomination, remuneration and, where relevant, related party committees with clear mandates and reporting to the plenary.
• Documentation. Minutes that record the information considered, the questions asked and the reasons for decisions.
• Conflicts of interest. Disclosure and abstention rules, and the handling of related party transactions; see our briefing on related party transactions.
• Training and evaluation. Regular self-assessment and training, especially on new regulatory areas such as sustainability reporting, AI and cybersecurity.
• Crisis protocol. Escalation rules for early warning signs, including the monitoring of insolvency filing duties.

This briefing provides general information and does not replace advice on a specific situation.

How TRW & Co helps

We advise supervisory boards, committees and individual members on their duties and on supervisory board liability: rules of procedure, consent catalogues, internal investigations, the assessment and pursuit of claims against management board members, settlements and general meeting approval, D&O coverage, and defence against claims. Our corporate governance and litigation lawyers work together. Contact us for advice on your board's position.