This content is from: Local Insights


Any takeover, acquisition of, or investment in a German stock corporation (Aktiengesellschaft) can lead to a situation in which the majority shareholder does not have 100% control of the corporation, be this for a period of transition, or be it for a longer or indefinite period of time. This raises the issue of how a majority shareholder can control the boards of such a corporation.

Unlike boards of directors of American or UK companies, which comprise internal as well as non-executive directors that both directly manage as well as oversee the business and affairs of their corporations, German law, in the case of stock corporations, makes a distinction between the two responsibilities by providing for a board of management and a supervisory board. The management board of a German stock corporation manages the day-to-day business and affairs of the corporation, while the supervisory board supervises the actions of the board of management. A majority shareholder in a German stock corporation has no direct means of determining the composition of a corporation's board of management. Like other shareholders, the majority investor is entitled only to elect certain or all of the candidates for the supervisory board, depending on whether the particular corporation is large enough to have a co-determined board. (In large stock corporations, a portion of the supervisory board members, which can run up to half of the total number of board members in cases of the largest German corporations, is installed by the corporation's labour force.) It is the supervisory board that, in turn, appoints the members of the corporation's management board. Understandably, a majority shareholder will be interested in getting its designees on both boards.

A majority shareholder's ability to achieve this is restricted in some respects, both by labour co-determination law, as mentioned above (which will not be further detailed in this report), and German stock corporation law. The function of overseeing the actions of the board of management can only credibly be performed by the supervisory board if none of its members are identical to those that serve on the board of management or other company representatives that hold senior offices. For this obvious reason, section 105, subsection 1 of the German Stock Corporations Act provides that a member of the supervisory board may not also hold office as a member of the board of management or otherwise be authorized to represent the corporation in a continuing capacity (as a Prokurist or Generalbevollmächtigter).

However, it is permissible, though not generally practiced (with the exception of labour representatives on co-determined supervisory boards), for employees below such senior executive levels to serve on the supervisory board. The German Corporate Governance Code, which has been drawn up under the auspices of a government commission, further recommends that no more than two former members of the management board should sit on the supervisory board. This recommendation addresses a widespread practice on the part of both large German corporates as well as former Neuer Markt companies of retiring management board members into positions on the supervisory board. A prominent example of this is Rolf Breuer's move from chairman of the Management Board to chairman of the Supervisory Board of Deutsche Bank.

Another possible limitation on installing shareholder designees on a supervisory board is the general rule limiting the number of directorships a board member may have, which is found in section 100, subsection 2, sentence 1, item 1 of the Stock Corporations Act and provides that a supervisory board member may not hold more than a total of 10 supervisory board mandates in German companies. In addition, the Governance Code recommends that a member of a management board of a publicly listed German corporation should hold no more than five supervisory board mandates in other companies. However, section 100, subsection 2, sentence 2 of the Stock Corporations Act makes an exception for group companies by providing that in applying the supervisory-board-mandate restriction an exception is made for up to five mandates that a management representative of the controlling shareholder may have in German affiliates of that company.

Supervisory boards of German stock corporations that are affiliated with a company group, but neither wholly owned nor party to a corporate controlling agreement with the majority shareholder (Beherrschungsvertrag), have the same fiduciary duty to act in the interests of the company that they serve as do supervisory boards without a controlling shareholder. If members of such supervisory boards are to perform their duties in the interests of the de facto controlled German corporation as required by German law, then even the designees of a majority shareholder must be in a position to act independently when acting in their board capacities regardless of the operational reporting lines that may exist within the company group.

For these reasons, and in accordance with the general underlying principle that no German management board member should be able to supervise his own acts, section 100, subsection 2, sentence 2, number 2 of the Stock Corporations Act provides that no supervisory board member of a German stock corporation may also be a member of management of a majority-owned German or foreign subsidiary of the stock corporation on whose supervisory board he serves. By the same logic, the converse situation is not an issue: a management board member or similar executive may sit on the supervisory board of a majority-owned subsidiary. Since these rules on directorships are limited to supervisory board mandates in German stock corporations, a member of a German management board is not restrained from sitting on the board of a foreign parent.

The concern for the independence of supervisory boards of de facto controlled German corporations has caused some to raise the idea of putting either a minority shareholder representative or a neutral member on the supervisory board. These proposals, however, have remained isolated and have never been enacted into law, among other reasons, because in fully co-determined boards (that is, where labour holds 50% of the seats on the board) this could lead to the untenable result that a majority shareholder would have less than 50% representation on the supervisory board.

As well as these horizontal limitations on directorships among affiliates, section 100, subsection 2, sentence 1, number 3 of the Stock Corporations Act contains certain restrictions on interlocking directorships. Although these rules apply regardless of company group affiliations, they do become relevant in such groups. Thus, a member of a management board may not take on the office of a supervisory board member in another company (for instance, a group affiliate), if any member of the management board of the affiliated company in turn sits on the supervisory board of the company in which the first director serves as a management board member. Those directors that are intended to supervise cannot in turn be the subject of supervision by the individuals whose acts they must oversee. Although it is the prevailing opinion among German legal scholars that these rules do not apply to interlocking directorships with foreign companies, because few jurisdictions have two-tiered boards, this has not yet been tested in the German courts.

Dr H Elizabeth Kroeger and Dr Peter Etzbach

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