The Business Judgment Rule Under § 93 AktG

The business judgment rule under § 93 AktG in short

The business judgment rule is the statutory safe harbour that protects German board members from liability for entrepreneurial decisions that turn out badly. Under § 93(1) sentence 2 of the Stock Corporation Act (AktG), there is no breach of duty if a management board member, when taking an entrepreneurial decision, could reasonably assume that they were acting on the basis of adequate information for the benefit of the company. The rule was introduced in 2005 and codified case law of the Federal Court of Justice.

It applies to management board members directly, to supervisory board members through § 116 AktG, to cooperative board members under the Cooperatives Act, and by analogy to managing directors of a GmbH. It does not protect decisions that breach legal duties, and it does not apply where the board member has a conflict of interest.

The rule matters because German law otherwise places the burden of proof on the board member: in a dispute, the director must show that they acted with the care of a diligent and conscientious manager (§ 93(2) sentence 2 AktG). The safe harbour gives directors a structured way to demonstrate that their decision was made properly.

This briefing explains the elements of the business judgment rule, the information basis, conflicts of interest, legal duties and reliance on advice, and how the rule applies to GmbH managing directors.

Elements of the safe harbour

If all elements are met, the decision itself is not reviewed by the courts for correctness, even if it causes losses. If one element is missing, the business judgment rule does not apply, but that does not automatically mean the director is liable: the court then examines whether the director acted with due care in the ordinary way, with the burden of proof on the director.

The information basis

The adequacy of the information basis is the element most often disputed. Board members must gather the information that is reasonably available and relevant in the circumstances. The required depth depends on the significance of the decision, the time available and the costs of gathering further information. A board approving a large acquisition is expected to rely on financial, tax and legal due diligence; a board making a routine pricing decision is not.

Courts have sometimes been demanding, expecting boards to exhaust available sources of information in significant decisions, while legal commentators emphasise that the statutory standard is reasonableness, not completeness. In practice, directors should document what information they had, what they asked for, which risks they identified and why they considered the information sufficient. Time pressure can justify a narrower information basis, but the reasons for acting quickly should be recorded together with the risks accepted.

Conflicts of interest

The safe harbour presupposes that the director acts for the benefit of the company without being influenced by personal interests. A director who has a personal financial interest in the decision, who acts for a related party or who is subject to undue influence cannot rely on the business judgment rule. In collective decisions, a conflicted member should disclose the conflict and abstain from deliberation and voting. Whether the conflict of one member taints the decision of the whole board depends on the circumstances, in particular whether the conflicted member influenced the others.

In companies with a controlling shareholder, conflicts often arise in transactions with that shareholder's group. Separate rules apply to related party transactions of listed companies; see our briefing on related party transactions.

Legal duties and reliance on advice

The business judgment rule does not cover breaches of legal duties. Board members must comply with the law, the articles and the rules of procedure (Legalitätspflicht); there is no discretion to break the law, even if it seems profitable. Compliance with cartel law, anti-corruption rules, sanctions, tax law and insolvency filing duties is therefore outside the safe harbour. Where the legal position is unclear, however, a decision on how to act under legal uncertainty can involve judgment.

Directors who lack the expertise to assess a legal question can protect themselves by obtaining advice. The Federal Court of Justice has held that a board member who does not have the necessary knowledge can meet the strict requirements for examining the legal position only if they obtain advice from an independent professional qualified for the question, after fully explaining the company's circumstances and disclosing the necessary documents, and subject the advice to a careful plausibility check (BGH, judgment of 20 September 2011 – II ZR 234/09, ISION).

The same decision held that a supervisory board member with professional specialist knowledge is subject to a higher standard of care in that area. Advice should be obtained before the decision, in writing where possible, and the board should record how it checked the advice for plausibility.

Collective decisions, delegation and monitoring

Most significant decisions in German companies are taken by the management board as a collective body. Each member is responsible for the decision, but members may rely on colleagues for matters within their departments, provided the allocation of responsibilities is clear, documented in rules of procedure and the other members monitor the department heads. A member who has doubts about a proposal must raise them, request information and, if necessary, vote against it and have the objection minuted. Simply relying on the competence of the responsible colleague is not enough where there are warning signs.

Delegation to employees and advisers works in a similar way. The board may delegate preparatory work, analysis and implementation, but it must select suitable persons, instruct them properly and supervise them. A board that approves a transaction on the basis of a due diligence report it has not read, or of a valuation whose assumptions it has not questioned, will find it difficult to show an adequate information basis.

Monitoring duties outside individual decisions, such as the duty to set up an appropriate compliance and risk management system, are not themselves entrepreneurial decisions in the narrow sense. However, the design of the system, its scope and the resources allocated to it involve judgment, and the safe harbour can apply to these design choices as long as the system meets the legal minimum standards. For listed companies, § 91(3) AktG requires an appropriate and effective internal control and risk management system.

The business judgment rule for GmbH managing directors

The GmbH Act does not contain an express safe harbour, but courts and commentators apply the principles of the business judgment rule to managing directors under § 43 GmbHG. There are two important differences. First, managing directors are bound by lawful instructions of the shareholders' meeting: if they follow an instruction, they are generally not liable to the company for the decision, unless the instruction is void or concerns payments prohibited by capital maintenance or insolvency rules. Second, shareholders can approve or later ratify decisions and grant discharge, which in the GmbH generally precludes known claims, subject to creditor protection rules.

Managing directors should therefore consider submitting significant or risky decisions to the shareholders for approval. In groups, an instruction from the parent can provide protection, but managing directors must still check whether following it would endanger the subsidiary's existence or breach mandatory law. See our briefing on managing director liability in the GmbH.

Decisions frequently reviewed after the fact

Liability disputes tend to cluster around a limited number of decision types: acquisitions and joint ventures that fail to deliver expected synergies; investments in new plants or technologies that are abandoned; financing and hedging transactions that cause losses; credit extended to customers who become insolvent; settlements of legal disputes; and restructuring measures in a crisis.

In each case, the reviewing court or tribunal asks the same questions: was it a genuine entrepreneurial decision, was the information basis adequate in the circumstances, were conflicts absent, and was the decision taken for the company's benefit? Directors who can answer these questions with contemporaneous documents are in a strong position, regardless of how the decision eventually turned out in hindsight.

Applying the rule in practice

The business judgment rule is most relevant in post-mortem liability disputes after a failed acquisition, a failed investment, a hedging loss or a crisis. Typical questions are whether the board considered alternatives, whether it relied on due diligence findings, whether it reacted to red flags, and whether it was free from conflicts. D&O insurers and insolvency administrators examine board documentation closely; see our briefing on D&O insurance.

Illustration: a hypothetical management board approves the acquisition of a foreign competitor after financial, tax and legal due diligence, a fairness opinion and two board meetings discussing integration risks. Two years later, the target's main customer terminates its contract and the company writes off much of the goodwill. A claim against the board would likely fail under the business judgment rule if the minutes show that the customer concentration risk was identified, discussed and priced, and that no board member had a personal interest in the deal.

By contrast, if the same board had approved the deal in a single meeting without due diligence on the customer contract, despite clear indications of the risk, the safe harbour would probably not apply, and the directors would have to prove that they nevertheless acted with due care.

How TRW & Co helps

We advise management and supervisory boards and GmbH managing directors on structuring decisions so that the business judgment rule applies: board papers, information processes, conflict management, legal opinions and minutes. When decisions are challenged, we defend board members against claims by companies, insolvency administrators and shareholders and work with D&O insurers. Our corporate governance team advises on board organisation generally. Contact us to discuss a decision or a claim.