Corporate Governance: GmbH, AG and SE

Corporate governance in Germany: the framework

Corporate governance in Germany is built on statute rather than on soft law. The Stock Corporation Act (Aktiengesetz, AktG) prescribes a two-tier structure for the stock corporation, the Limited Liability Companies Act (GmbHG) gives shareholders of a GmbH wide powers over management, and the SE Regulation together with German implementing law allows a European company to choose between two tiers and a single board. On top of this statutory core, listed companies apply the German Corporate Governance Code on a "comply or explain" basis, and employee co-determination places employee representatives on the supervisory boards of larger companies.

For boards and in-house lawyers, the practical questions are who decides what, what standard of care applies, when personal liability arises, how shareholder meetings must be prepared and conducted, and how group companies may be steered by a parent. This page answers those questions for the GmbH, the AG and the SE. It is addressed to managing directors, members of management and supervisory boards, general counsel and investors who appoint board members to portfolio companies.

German corporate governance distinguishes clearly between management and supervision. In the AG, the management board runs the company on its own responsibility and the supervisory board monitors it; the two bodies are separate and no one can be a member of both. In the GmbH, the managing directors are subject to shareholder instructions, so governance depends heavily on the articles and on any shareholders' agreement. Misunderstanding this difference is a frequent source of error in international groups that apply a single governance model to all subsidiaries.

Boards in the GmbH, AG and SE

GmbH

A GmbH is managed and represented by one or more managing directors (Geschäftsführer), appointed by the shareholders. The managing directors' power of representation towards third parties cannot be limited with external effect, but internally they must comply with restrictions set by the articles or shareholder resolutions (§ 37 GmbHG). Shareholders may give binding instructions on management matters, and many articles contain a catalogue of transactions requiring prior shareholder consent. A supervisory board is optional unless co-determination law requires one, which is the case above 500 employees under the One-Third Participation Act and above 2,000 employees under the Co-determination Act. Many GmbHs have a voluntary advisory board (Beirat) with powers defined in the articles.

AG

The management board (Vorstand) of an AG manages the company on its own responsibility (§ 76(1) AktG) and is not bound by instructions of shareholders or the supervisory board. In companies with share capital of more than EUR 3 million, it consists of at least two persons unless the articles provide otherwise (§ 76(2) AktG). Members are appointed by the supervisory board for a maximum of five years, with reappointment possible (§ 84(1) AktG). The supervisory board (Aufsichtsrat) monitors management (§ 111(1) AktG), may inspect books and records, approves the annual accounts, and sets management board remuneration in line with the appropriateness requirement of § 87 AktG.

Certain transactions can be made subject to its consent, but it cannot take over management itself.

SE

A European company based in Germany can choose a two-tier system like the AG or a one-tier system with an administrative board and executive directors. Employee participation in an SE is determined primarily by negotiation with a special negotiating body of employees, with statutory fallback rules if no agreement is reached. The SE is therefore used by some groups to fix the size of the supervisory board and the level of employee participation at the time of formation.

Duties, the business judgment rule and liability

Managing directors and management board members owe the company a duty of care and a duty of loyalty. The standard of care in an AG is that of a "prudent and conscientious manager"; in a GmbH, that of a "prudent businessman". Members who breach their duties are jointly and severally liable to the company for the resulting damage. In an AG the burden of proving that they acted with due care lies on the board members (§ 93(2) AktG), and the same reversal is applied in the GmbH.

The business judgment rule protects entrepreneurial decisions. Under § 93(1) sentence 2 AktG there is no breach of duty if the board member, when taking an entrepreneurial decision, could reasonably assume to be acting on the basis of adequate information for the benefit of the company. The rule applies by analogy to GmbH managing directors. It does not protect decisions that breach the law, the articles or binding instructions (so-called legality duty), and it requires the board to show the information on which it relied. Documentation is therefore a governance tool in its own right: board papers, external advice where appropriate, minutes recording alternatives considered and the reasons for the decision.

Specific statutory liability provisions add to the general duty. Payments in breach of the capital maintenance rules make GmbH managing directors liable under § 43(3) GmbHG. In a crisis, payments after the company has become illiquid or over-indebted can create personal liability under § 15b of the Insolvency Code, and the filing deadlines in § 15a InsO apply; see our page on directors' duties in a crisis.

Board members of an AG must also set up a system to detect developments that threaten the company's existence (§ 91(2) AktG), and those of listed companies an appropriate and effective internal control and risk management system (§ 91(3) AktG). Liability for compliance failures follows from the general duty to organise the company lawfully; see compliance management systems.

Supervisory board liability and enforcement

Supervisory board members are subject to the same standard of care, applied to their monitoring function (§ 116 AktG). A distinctive feature of German law is that the supervisory board is in principle obliged to examine and, where claims are likely to succeed, pursue damages claims against management board members; it may refrain only for weighty reasons of company welfare. This makes claims against former board members a realistic risk after scandals or failed investments. Claims against supervisory board members are pursued by the management board or, on request, by shareholders through a special representative.

D&O insurance and indemnities

Directors' and officers' liability insurance is standard for German companies of any size. The company usually takes out the policy for the benefit of its board members and senior managers, on a claims-made basis. For management board members of an AG, the policy must provide for a deductible of at least 10% of the loss, up to at least one and a half times the member's fixed annual remuneration (§ 93(2) sentence 3 AktG). No mandatory deductible applies to supervisory board members or GmbH managing directors, although the Corporate Governance Code addresses the issue for listed companies.

Key policy issues include the definition of insured persons, exclusions for wilful breach and known circumstances, run-off cover after a change of control, the order of payments when the limit is shared, and whether the insurer covers the costs of defending claims brought by the company itself. Since D&O claims in Germany are often internal (company against its own former directors), the insured-versus-insured exclusion common in some markets is generally not acceptable. Indemnities by the company are limited: an AG cannot waive or settle claims against management board members until three years after the claim arose and only with the consent of the general meeting, which restricts informal settlements.

Shareholder and general meetings

In a GmbH, shareholder resolutions are passed at a meeting convened by the managing directors by registered letter with at least one week's notice (§ 51(1) GmbHG), or in writing or by other means if all shareholders agree or the articles allow. A meeting must be convened without delay if half of the share capital has been lost (§ 49(3) GmbHG). Resolutions amending the articles require notarisation and a three-quarters majority. Defective resolutions can be void or voidable; challenges must generally be brought within a reasonable period, often defined in the articles. Our insight on GmbH shareholder meetings and resolutions explains the procedure.

The general meeting of an AG decides on matters reserved to it by statute or the articles, including the appropriation of profits, the discharge of board members, the election of shareholder representatives on the supervisory board, the appointment of the auditor, capital measures, amendments to the articles and structural measures. It must be convened at least 30 days before the meeting (§ 123(1) AktG). Since 2022, the articles can provide, or authorise the management board to provide, for a virtual general meeting without physical presence, subject to conditions including full video and audio transmission and electronic voting (§ 118a AktG). Listed companies must also hold say-on-pay votes on the remuneration system and the remuneration report.

Shareholder actions against resolutions are an important element of governance in listed companies. Actions for annulment must be brought within one month of the resolution, and a release procedure (Freigabeverfahren) allows the company to register important structural measures despite pending actions where the action is clearly unfounded or the shareholder's interest is outweighed. See also our page on public takeovers for shareholder activism.

The Corporate Governance Code and group governance

The German Corporate Governance Code contains principles, recommendations and suggestions for listed companies. It is not law, but § 161 AktG obliges the management and supervisory boards of listed companies to declare each year whether the Code's recommendations have been and are being complied with, and which recommendations have not been applied and why. The declaration must be permanently available on the company's website. Recommendations cover, among other things, supervisory board independence, the composition and work of committees, limits on board mandates, management board remuneration and the handling of conflicts of interest. An inaccurate declaration can make the discharge resolutions voidable.

Corporate governance in Germany also has a group dimension. Without a domination agreement, a controlling company may not induce a dependent AG to take disadvantageous measures unless the disadvantage is compensated within the financial year (§ 311 AktG), and the dependent company's management board must prepare a dependency report. With a domination agreement, approved by a three-quarters majority, the parent may give instructions, but it must compensate annual losses and outside shareholders. In a GmbH group, instructions by the parent as shareholder are generally binding, but they cannot oblige managing directors to make payments in breach of capital maintenance or to cause the company's insolvency.

Related party transactions of listed companies are subject to a separate regime introduced with the second Shareholder Rights Directive. Transactions with related parties whose economic value, alone or aggregated over the financial year, exceeds 1.5% of the sum of fixed and current assets require prior supervisory board approval (§ 111b AktG) and publication. Board members with a conflict may not participate in the decision. Our insight on related party transactions under the AktG explains the thresholds and exceptions.

• Map, for each subsidiary, which body decides which matters under its articles and rules of procedure.
• Align group policies with the legal form of each company: an AG management board cannot simply be instructed.
• Document compensation for disadvantageous measures in dependent AGs.
• Review D&O cover and board rules of procedure after every reorganisation.

For employee representation on supervisory boards, see our page on board-level co-determination. Families that own larger businesses often supplement the corporate governance in Germany provided by statute with a family constitution and an advisory board; see our insight on family business governance.

How TRW & Co helps

We advise companies, boards and shareholders on corporate governance in Germany. We draft articles of association, rules of procedure for management and supervisory boards, catalogues of consent requirements and shareholder agreements; prepare and attend shareholder and general meetings, including virtual meetings; and advise individual board members on their duties and liability. We review D&O policies, support boards in documenting decisions under the business judgment rule, and advise supervisory boards on investigating and pursuing claims. For international groups we align group governance with the legal form of each German subsidiary. To discuss a governance question, please contact us.