Corporate Governance Models: Anglo-American, German corporate
governance models
Corporate form of business is generally managed by the Board of Directors
and the board members are elected by shareholders. The board in turn
appoints the professional managers to manage the business. Different
countries have different regulations and corporate governance models differ
based on these differences.
Corporate Governance Models
The Corporate governance models are broadly classified into following
categories:
Anglo-American Model
The German Model
The Japanese Model
Social Control Model
Anglo-American Model
Under the Anglo-American Model of corporate governance, the shareholder
rights are recognised and given importance. They have the right to elect all
the members of the Board and the Board directs the management of the
company. Some of the features of this model are:
This is shareholder oriented model. It is also called Anglo-Saxon approach to
corporate governance being the basis of corporate governance in Britain,
Canada, America, Australia and Common Wealth Countries including India
Directors are rarely independent of management. Companies are run by
professional managers who have negligible ownership stake. There is clear
separation of ownership and management. Institution investors like banks
and mutual funds are portfolio investors. When they are not satisfied with
the company’s performance they simple sell their shares in market and quit.
The disclosure norms are comprehensive and rules against the insider
trading are tight. The small investors are protected and large investors are
discouraged to take active role in corporate governance.
German Model
This is also called European Model. It is believed that workers are one of the
key stakeholders in the company and they should have the right to
participate in the management of the company. The corporate governance is
carried out through two boards, therefore it is also known as two-tier board
model. These two boards are:
Supervisory Board: The shareholders elect the members of Supervisory
Board. Employees also elect their representative for Supervisory Board
which are generally one-third or half of the Board.
Board of Management or Management Board: The Supervisory Board
appoints and monitors the Management Board. The Supervisory Board has
the right to dismiss the Management Board and re-constitute the same.
Japanese Model
Japanese companies raise significant part of capital through banking and
other financial institutions. Since the banks and other institutions stakes are
very high in businesses, they also work closely with the management of the
company. The shareholders and main banks together appoint the Board of
Directors and the President. In this model, along with the shareholders, the
interest of lenders is recognised.
Social Control Model
Social Control Model of corporate governance argues for full-fledged
stakeholder representation in the board. According to this model, creation of
Stakeholders Board over and above the shareholders determined Board of
Directors would improve the internal control systems of the corporate
governance. The Stakeholders Board consists of representation from
shareholders, employees, major consumers, major suppliers, lenders etc.
Indian Model
In India there are mainly three types of companies’ viz. private companies,
public companies and public sector undertakings. Each of these companies
has distinct kind of shareholding pattern. Thus the corporate governance
model in India is a mix of Anglo-American and German Models.
GERMAN MODEL
In
this
model,
also
known
as
the two-tier
board
model,
corporate
governance is exercised through two boards, in which the upper board
supervises the executive board on behalf of stakeholders. This approach to
governance is typically more societal-oriented and is sometimes called the
Continental European approach, being the basis of corporate governance
adopted in Germany, Holland, and to an extent, France.
Fig. 14.1 The Anglo-American Model
Fig. 14.2 The German Model
The
Corporate
Germany
Governance
Review:
Carsten van de Sande and Sven H Schneider
Hengeler Mueller
17 March 2022
Print article
Overview of governance regime
Germany has one of the most solid corporate governance systems in the world
owing to both its well-balanced control mechanisms and capital preservation and
market transparency rules, but also because of the equal opportunities it
guarantees to women and men.
Just as it has affected almost all areas of life and business, the covid-19
pandemic has also left its mark on the German corporate governance framework.
As in many other countries, Germany has enacted laws to mitigate the effects of
the pandemic. One such measure has been the ability of companies to hold
virtual general meetings. Many companies listed on the DAX and TecDAX stock
indexes successfully made use of this new feature of German corporate law.
The German stock corporation is the common legal form among listed
companies. Its corporate governance regime is determined by the following
statutes and non-binding best practice rules:
a.
the Stock Corporation Act, which sets out the (largely mandatory)
framework for the organisation of a stock corporation as well as the rights and
duties of the corporate bodies, the management board, the supervisory board
and shareholders' meeting, including those of the shareholders;
b.
the EU Market Abuse Regulation (MAR), which prohibits market abuse and
market manipulation and governs the disclosure of non-public information and
directors' dealings;
c.
the Securities Trading Act, which, among other things, implements the EU
Transparency Directive and contains provisions on the enforcement of
violations of the MAR under German law;
d.
the Securities Acquisition and Takeover Act, which provides for rules on
mandatory and voluntary takeover offers and defensive measures;
e.
the Co-Determination Act and the One-Third Participation Act, granting
employees co-determination rights at the supervisory board level;
f.
the Commercial Code, which stipulates the general accounting rules for
German companies; and
g.
non-binding guidelines on non-financial reporting, which were published by
the European Commission in 2017 and last updated on 18 June 2019.
The German Corporate Governance Code is a collection of best practice rules
and non-binding recommendations for the corporate governance of stock
corporations and has had a growing influence on how corporate governance is
practised in Germany.
Although the rules and recommendations set out in the Corporate Governance
Code are not legally binding, a company must explain the extent of and the
reasons for its non-compliance (the comply or explain principle).
Corporate leadership
i Board structure and practices
Mandatory two-tier structure
The two-tiered board structure of German stock corporations requires a
management board and a supervisory board.
Composition of the management board
The management board must consist of natural persons who are appointed by
the supervisory board. The Corporate Governance Code requires that, when
appointing management board members, the supervisory board must consider
aspects of diversity and, in particular, aim for appropriate representation of
women on the management board. From August 2022, the management board
of a listed company obliged to ensure equal representation of employees
pursuant to the Co-Determination Act (see below) and consisting of more than
three members must be composed of at least one woman and at least one man.
Members of the management board may not be appointed for a period exceeding
five years. For first-time appointments, the Corporate Governance Code
recommends that members of the management board should not be appointed
for more than three years. The appointment may be renewed or the term of office
may be extended, provided that the term of each renewal or extension does not
exceed five years.
The supervisory board may dismiss members of the management board only for
good cause. Good cause is deemed to exist, in particular, in the event of material
breaches of duty, for example, if a management board member is not able to
properly fulfil his or her duties (e.g., owing to long-term illness or a lack of
required skills or knowledge) or when the general meeting passes a vote of no
confidence and the vote is not passed for apparently inappropriate reasons.
Composition of the supervisory board
The supervisory board must consist of at least three members, who are generally
elected by the shareholders' meeting. The maximum number of supervisory
board members permitted by law increases according to the amount of the stock
corporation's registered share capital.
When a stock corporation generally has more than 500 employees (without
taking into account any employees of group companies), one-third of the
supervisory board members must be employee representatives pursuant to the
One-Third Participation Act. In companies with more than 2,000 employees
(taking into account employees of group companies), pursuant to the CoDetermination Act, half of the supervisory board members must be employee
representatives. At least 30 per cent of the supervisory board members of a
listed company subject to the Co-Determination Act must be women and at least
30 per cent must be men. In addition, companies that are either listed or subject
to employee representation rules must adopt certain targets for the
representation of female members on their supervisory and management boards
and in their senior management.
In stock corporations listed on a regulated market, one member of the
supervisory board must have expertise in accounting and another member in
auditing. The members of the supervisory board must jointly be knowledgeable in
the business sector of their corporation. According to the Corporate Governance
Code, the composition of the supervisory board should be such that its members
jointly have the knowledge, ability and experience to properly carry out its tasks
and include an adequate number of independent members.
Supervisory board members are considered to be independent from the
company and its management board if they have no personal or business
relationship with the company or its management board that may cause a
substantial – and not merely temporary – conflict of interest. More than half of the
shareholder representatives are to be independent from the company and the
management board. The Corporate Governance Code defines a supervisory
board member as independent from the controlling shareholder if he, she or a
close family member is neither the controlling shareholder nor a member of the
executive governing body of the controlling shareholder and does not have a
personal or business relationship with the controlling shareholder that may cause
a substantial conflict of interest.
In practice, the supervisory board members are appointed for a period of five
years; renewed appointments are permissible.
ii Legal responsibilities and representation
Management board
The management board is responsible for managing the business of the stock
corporation and legally represents the corporation in relation to third parties.
According to the statutory concept, all members of the management board
manage and represent the corporation jointly. However, in practice, the rule is
that the corporation is represented either by each member of the management
board acting individually or by two members of the management board acting
jointly.
In managing the business of the corporation, the members of the management
board must apply the care of a prudent and diligent businessperson. Under the
duty of loyalty, each management board member is obliged to give the stock
corporation's interests priority over their personal interests. Failure by a
management board member to meet these duties may lead to personal civil
liability for damages owed to the company.
In making an entrepreneurial decision, a member of the management board
cannot be held personally liable if he or she had adequate information and
believed they were acting in the best interests of the stock corporation. This
business judgement rule applies in the context of decisions that are not
predetermined by law, the articles of association or resolutions of the
shareholders' meeting. The management board is considered to have had
adequate information for making its decision if it consulted all sources of factual
and legal information reasonably available to it in the specific situation and, on
that basis, weighed the advantages and disadvantages of its decision. However,
it is not required that all conceivable information be obtained and every
conceivable effect quantified before making the decision.
The management board is subject to a duty of legality. This means that the
management board may not itself commit, and may not order third parties to
commit on behalf of the company, any violations of the law. In an unclear legal
situation, the board members may also rely on the advice of a third-party expert
if:
a.
they have provided the expert with the necessary documents and a
comprehensive description of the facts to be examined;
b.
the expert is independent and professionally qualified to advise on the
issue; and
c.
they carry out a diligent plausibility check of the advice provided by the
expert.
Members of the management board have the right to request from the
supervisory board a revocation of their appointment if they are temporarily unable
to fulfil their duties during parental leave, while caring for a family member or due
to illness. In the case of maternity leave, the supervisory board must ensure
reappointment after expiry of certain statutory protection periods under the
Maternity Protection Act. In other cases, the member of the management board
has a right of reappointment only if the period of leave does not exceed three
months, and the supervisory board may only refuse to revoke an appointment if
there is good cause. For longer periods from three to 12 months, revocation and
reappointment are at the discretion of the supervisory board. A member of the
management board whose appointment has been so revoked is not subject to
any legal responsibility or any liability arising from decisions taken by the
management board during his or her absence.
The management board must ensure that all employees of the company act in
compliance with the law when acting within the scope of their operational
activities. This entails that the management board must establish an appropriate
system of organisation and control to prevent violations of law from happening
within the company.
The management board is obliged to manage the stock corporation
independently. It is not bound to any instructions given by the supervisory board
or the general meeting. However, the shareholders' prior consent is required for
transactions of outstanding importance, such as selling the most valuable parts
of the company, or if the by-laws of the management board stipulate the
shareholders' consent.
Apart from the foregoing, material transactions with related parties are subject to
prior approval of the supervisory board or, if the supervisory board refuses to
grant its approval, of the general meeting. A transaction constitutes a material
related-party transaction if its economic value is at least 1.5 per cent of the
company's total fixed and current assets. No approval is required for transactions
that are concluded in the ordinary course of business and on customary market
terms, or for transactions with directly or indirectly wholly owned subsidiaries.
Companies must announce related-party transactions publicly no later than when
the transaction is concluded, which is when the transaction documents are
signed.
Supervisory board
The supervisory board is responsible for supervising and monitoring the
management board. To that end, the supervisory board is entitled to inspect the
corporation's books and records and may, at any time, request the management
board to report on the corporation's affairs.
Like members of the management board, members of the supervisory board
must act in the best interests of the stock corporation and must demonstrate the
care of a prudent and diligent businessperson. They are obliged to keep
confidential all non-public information that they receive in their capacity as
supervisory board members. One of the notable responsibilities of the
supervisory board is enforcing claims for damages on behalf of the stock
corporation against members of the management board. In the wake of the
global financial and economic crisis of 2008 there has been a significant increase
in the number of lawsuits brought by corporations against former members of
management boards.
The supervisory board's responsibility to supervise the management equates to a
duty to prevent any actions by the management that may be detrimental to the
corporation and that do not fall within the ambit of the business judgement rule. A
supervisory board member may even be subject to criminal liability if, by
consenting to certain transactions, her or she has permitted management
conduct that is not covered by the business judgement rule.
iii Delegation of board responsibilities
All members of the management board manage the stock corporation collectively
and are jointly responsible for their actions.
In practice, responsibility for the management of certain business divisions or
certain functions (e.g., finances, accounting, controlling, human resources, tax,
legal, compliance) is delegated to individual members of the management board.
Each management board member is primarily responsible for her or his
delegated tasks, but the other board members still monitor and oversee the
performance of other members. As a general rule, carefully, continuously and
appropriately observing developments in the delegated divisions or functions as
well as the performance of other management board members' duties is deemed
sufficient.
iv Roles of chair of the management board and chair of the
supervisory board
If the management board consists of more than one person, the supervisory
board may appoint one of them as chair. The chair is responsible for
administrative tasks relating to the work of the management board, such as
preparing and chairing meetings and keeping minutes, and for coordinating and
supervising the work of the management board. He or she typically is in charge
of liaising with the supervisory board and represents the management board in
public, and thus has a prominent position among the members of the
management board. The manner in which many chairs of management boards
discharge these responsibilities in practice has given rise to the perception that
the position is comparable to that of the chief executive officer of a US
corporation. However, from a legal perspective, this is not the case. In particular,
the chair has no right to give instructions to other management board members
and is not entitled to decide matters against the wishes of a majority of the other
members of the management board.
The members of the supervisory board must elect a chair and a deputy chair.
The chair of the supervisory board is a largely administrative role that is not
endowed with any particular powers. The chair calls, prepares and leads
meetings of the supervisory board. Typically, the articles of incorporation provide
that the chair of the supervisory board also chairs the general meeting.
v Compensation of members of the management board and the
supervisory board
In accordance with the German Act implementing the EU Shareholder Rights
Directive (SRD II)2 and the German Corporate Governance Code, the
compensation of each member of the management board (e.g., fixed salary,
variable salary components and pensions) must be clear, comprehensible and
reasonable in light of the responsibilities and individual performance of that
management board member as well as the situation of the company. The
supervisory board must determine the target total remuneration for achieving all
agreed goals and the maximum amount that each management board member's
remuneration cannot exceed. In addition, for listed stock corporations, the
compensation structure is to take into account sustainable corporate
development as well as social and ecological aspects, and short-term variable
remuneration is to be made subject to a multi-year assessment.
The compensation of members of the management board is determined by the
supervisory board, usually following a recommendation by a committee
established for that purpose. Pursuant to the German Act implementing SRD II,
the general meeting of a listed stock corporation must vote on the company's
remuneration policy in the event of a material change at least every four years.
Since the two-tiered board structure in Germany still requires that the supervisory
board determine the management board's compensation, the general meeting's
vote has an advisory function and is only non-binding. The general meeting
cannot change the management board remuneration policy, but it has the right to
vote against the management board's maximum remuneration (cap) as set by the
supervisory board.
The compensation of the supervisory board is determined in the articles of
incorporation or by the general meeting. Pursuant to the German Act
implementing SRD II, the general meeting of a listed stock corporation is obliged
to resolve on the supervisory board's compensation once every four years. As
with the management board members' compensation, it must take into account
the duties of the supervisory board member and the condition of the company.
The Corporate Governance Code suggests that the remuneration of supervisory
board members should be fixed. However, it may also comprise variable
components based on the corporation's long-term performance.
Listed stock corporations must disclose the aggregate and individual
remuneration granted to members of the management board and the supervisory
board in their financial statements. In addition, the German Act implementing
SRD II and the Corporate Governance Code require that the management board
and the supervisory board prepare an annual remuneration report. The
information in the remuneration report is extensive and includes a five-year
comparison of a member's compensation, the company's earnings performance
and employee compensation. The remuneration report must be formally
reviewed by the auditor and made available to the public on the company's
website.
vi Committees
The supervisory board is not required to, but may, form committees, in particular
for the purpose of preparing for its deliberations and supervising the
implementation of its resolutions.
If the supervisory board is composed of both shareholder and employee
representatives, the supervisory board must form a reconciliation committee
composed of the chair of the supervisory board, his or her deputy and two
members of the supervisory board, one elected by the shareholder
representatives and the other by the employee representatives.
The supervisory board may establish an audit committee to deal with matters
relating to the preparation of the corporation's financial statements and the
effectiveness of the internal audit and risk management systems. The audit
committee is also responsible for monitoring the accounting process and the
efficacy of the internal control system. The Corporate Governance Code
recommends that the chair of the audit committee should have specialist
knowledge and expertise in the application of accounting principles and internal
control processes.
The Corporate Governance Code further recommends forming a nomination
committee that is composed exclusively of shareholder representatives and that
is tasked with identifying suitable candidates for the supervisory board to
recommend to the general meeting for election to the supervisory board.
vii Board and company practice in takeovers
In the event that a company has become the target of a takeover offer, the
management board and the supervisory board must publish online a reasoned
statement regarding the offer. The statement is to enable the shareholders to
make an informed decision on whether to accept the offer and must, in particular,
contain the management board's and the supervisory board's assessment of the
consideration offered by the bidder; the expected consequences of a successful
takeover offer for the company, its employees, the employee representatives
(i.e., the works council), the terms and conditions of employment, the company's
production sites and other locations; the goals pursued by the bidder and
information about whether the members of the management board and the
supervisory board intend to accept the offer.
Disclosure
i Regular reporting and disclosure requirements
Stock corporations must disclose their annual financial statements (consisting of
the corporation's balance sheet and profit and loss statement, as well as the
notes thereto) by publishing them electronically in the German Federal Gazette.
In addition to the annual financial statements, the management reports of listed
stock corporations and other companies must contain a corporate governance
statement that includes:
a.
statements regarding compliance with the Corporate Governance Code;
b.
information on any practices and standards applied by the corporation in
addition to those required by law, such as codes of conduct;
c.
information regarding the composition of boards and committees as well as
the manner in which they conduct their affairs; and
d.
information about the company's diversity targets, its achievement of
statutory diversity requirements and its diversity plan addressing specific
aspects such as age, gender and educational or professional background.
Either as part of the management report or in a separate declaration, large
capital market-orientated corporations, as well as certain credit institutions and
insurance companies, are also obliged to submit a non-financial declaration (see
Section IV).
Within the first three months of each financial year, the management board of a
stock corporation on which another enterprise can exercise a dominating
influence must prepare a report on the corporation's relations with affiliated
companies.
Disclosure of inside information
As a general rule, any issuer that has securities admitted to trading (or that has
requested admission of its securities to trading) on a regulated market or
multilateral trading facility in Germany must disclose, without undue delay, any
information directly relating to the issuer that is not publicly known if the
information could have a material effect on the market price of the relevant
securities.
Disclosure of this information must be made using a system for the electronic
dissemination of information in the European Economic Area, as well as on the
issuer's website. Prior to disclosure to the public, the issuer must inform:
a.
the management of each trading venue on which the securities or
derivatives thereof are traded; and
b.
the Federal Financial Supervisory Authority.
An issuer may, on its own responsibility, delay the disclosure of inside
information if:
a.
immediate disclosure is likely to prejudice the issuer's legitimate interests;
b.
the delay is not likely to mislead the public; and
c.
the issuer ensures the confidentiality of the inside information.
Upon the eventual disclosure, the issuer must inform the Federal Financial
Supervisory Authority of the disclosure and why it was delayed.
ii Directors' dealings
Persons discharging managerial responsibilities (i.e., members of an issuer's
management board and supervisory board and all other senior executives with
regular access to inside information) and persons closely associated with them
(i.e., owned or controlled legal entities, trusts or persons closely associated with
the issuer's board members or senior executives, such as spouses, registered
partners or dependent children) are obliged to notify both the issuer and the
Federal Financial Supervisory Authority within three business days of
transactions conducted for their own account relating to (1) shares or debt
instruments of the issuer that are traded on the financial markets or (2) financial
instruments linked thereto (e.g., derivatives). Relevant transactions include the
purchase, sale, pledging and lending of the relevant financial instruments.
The disclosure obligation does not apply if the total value of all transactions
conducted by a single person within a calendar year does not exceed €20,000.
The issuer is responsible for ensuring that information regarding the relevant
transactions is published without delay, that is, no later than two business days
after receiving a transaction notification, in media suitable for dissemination
throughout the European Union. In addition, the issuer is required to submit the
published information to the German company register and notify the Federal
Financial Supervisory Authority.
iii Disclosure of shareholdings in listed companies
Any person holding shares in a company for which, inter alia, Germany is the
home member state and whose shares are listed on a German regulated market
must notify the issuer and the Federal Financial Supervisory Authority without
undue delay (within four trading days) if its shareholding reaches, exceeds or
falls below the thresholds of 3, 5, 10, 15, 20, 25, 30, 50 or 75 per cent of the
voting rights of the issuer. The issuer must publish the information without undue
delay (but no later than three trading days) after receiving the notification.
For the purpose of calculating the relevant threshold amounts, voting rights
arising from shares held by a third party may be attributed to the person obliged
to disclose the shareholding. Voting rights are attributed, for example, if the third
party is a subsidiary of the person obliged to disclose the shareholding, or if the
person obliged to disclose the shareholding has a controlling influence by other
means on how the voting rights resulting from the shares are exercised. The
same holds true for shares held by third parties who act in concert with the
person obliged to disclose the shareholding.
In addition, similar notification and publication obligations apply to holdings in
certain financial instruments related to shares and combinations of holdings in
shares and such financial instruments. In each case, the initial notification
threshold is 5 per cent of the voting rights of an issuer.
Corporate social responsibility / ESG
Publicly listed and major privately held companies have adopted modern
compliance programmes and created compliance organisations that are headed
by chief compliance officers or a member of the management board to whom
responsibility for compliance has been delegated.
Nearly all compliance programmes emphasise the importance of the 'tone from
the top' for a corporation's compliance culture, and measures are taken to ensure
compliance manuals are distributed and employees are trained with respect to
compliance-related issues. Many companies have established whistle-blowing
hotlines, which employees can use to report misconduct anonymously (see
Section VI for further details).
In addition, companies subject to the Non-Financial Reporting Directive3 must
disclose non-financial information that has been deemed vital for a change
towards a sustainable global economy by combining long-term profitability with
social justice and environmental protection, either in their management reports or
in a separate non-financial declaration. Non-financial information comprises
information necessary for an understanding of a company's development,
performance, position and impact of its activity, relating to, among other things,
environmental, social and employee matters, respect for human rights, anticorruption and bribery matters, including a description of the business model,
policies relating to the aforementioned non-financial aspects and their outcomes,
principal risks and key performance indicators. If no particular policy is pursued
for one of these matters, this has to be justified in line with the comply or explain
principle. As part of the EU's goal of reaching climate and energy targets by 2030
and becoming a climate-neutral continent by 2050 (European Green Deal), the
EU has established a classification system for sustainable economic activities
under the Taxonomy Regulation.4 Companies subject to the Non-Financial
Reporting Directive must report on the extent their activities are associated with
environmentally sustainable economic activities in accordance with the
classification system and based on certain key performance indicators. At
present, this applies only to climate change mitigation, but further environmental
objectives will come into scope from 1 January 2023, such as sustainable use
and protection of water and marine resources, biodiversity and ecosystems and
pollution prevention.
Shareholders
i Shareholder rights and powers
As a general rule, all shares in a German stock corporation confer equal rights,
including equal voting rights, rights to receive dividends and information rights.
Voting rights are usually exercised per share or in proportion to the par value of
the share. The Stock Corporation Act prohibits the creation of shares with
multiple voting rights. With the approval of the general meeting, a stock
corporation may issue non-voting preferred shares in a nominal amount of up to
half of its registered share capital.
The shareholders of a stock corporation, unlike shareholders of German limited
companies, have no direct influence on the management board. Their influence
is limited to electing the members of the supervisory board, who in turn appoint
and remove the members of the management board.
Since a shareholder representing a majority of the voting rights or the share
capital of a corporation may de facto have a controlling influence on the stock
corporation's management because of its ability to elect and dismiss the
shareholder representatives on the corporation's supervisory board, a controlling
shareholder must compensate any disadvantage suffered by the corporation as a
result of its exercising its influence.
The controlling shareholder may legalise its influence on the stock corporation by
concluding a domination agreement with the stock corporation. Once a
domination agreement has been concluded, the Stock Corporation Act
recognises the shareholder's right to give instructions to the management board.
To become effective, the domination agreement must be approved by the
corporation's general meeting with a supermajority of at least 75 per cent of the
share capital represented at the meeting. The controlling shareholder is obliged
to compensate any loss incurred by the controlled company during the term of
the domination agreement and to acquire a minority shareholder's shares in
return for adequate compensation at that shareholder's request.
Certain decisions are reserved for the shareholders' meeting by statutory law:
this includes the appointment of members of the supervisory board, the
appropriation of distributable profits, the appointment of the auditor, any
amendments to the articles of association, measures to increase or reduce the
share capital or obligations to transfer significant assets of the company.
In addition, the shareholders' meeting must approve management decisions that
could fundamentally affect the shareholders' rights and economic position, such
as the sale or the hive-down of a business division into a subsidiary if the division
generates a significant portion of the corporation's revenue. Apart from these
exceptional cases, the management board can make business decisions
autonomously without the shareholders' consent. For example, the management
board can decide to delist the company from the stock exchange without the
consent of the general meeting (see Section II.v for further information about
general meetings voting on board compensation).
In response to the challenges posed by the covid-19 pandemic, Germany has
enacted laws that provide for virtual general meetings and the ability to adopt
shareholder resolutions without requiring the physical presence of the
shareholders or their proxies at a meeting. The most significant deviation from
the traditional in-person general meeting is that the obligation of the management
board and the supervisory board to provide conscientious and precise
information about the affairs of the company when responding to shareholders'
questions has been limited. In a virtual general meeting, the management board
has discretion over which questions it will answer and may require questions to
be submitted in advance of the general meeting.
Throughout the 2020 and 2021 general meeting season, virtual general meetings
have proven to have significant advantages for both companies and
shareholders. Shareholder participation is possible from anywhere in the world.
Virtual general meetings are also considered less costly to organise and
participation requires shareholders to devote less time and effort.
ii Shareholder duties and responsibilities
All shareholders are subject to a duty of loyalty to the company and other
shareholders. In particular, shareholders are prohibited from causing harm to the
company.
In principle, the duty of loyalty is defined by the articles of association and the
company's purpose. However, in exceptional circumstances, a shareholder may
even be obliged to exercise his or her voting rights in favour of a specific
measure that is deemed to be necessary for the avoidance of the collapse of the
company.
iii Shareholder activism
Germany has experienced several waves of shareholder activism. Thanks to
changes in the laws and restrictive court decisions, the practice of 'greenmailing'
companies through lawsuits by individual minority shareholders seeking to set
aside shareholder resolutions or to delay corporate transactions is largely a thing
of the past. Nowadays, activist shareholders are often hedge funds that seek to
influence the strategy and the share price of a company even though they hold
only a minority stake in the company. This is typically done through exercising
minority rights. Often, these attempts are accompanied by aggressive publicity
and media campaigns designed to put pressure on the company's management
to adopt the measures proposed by the activist shareholder. Another means by
which activist minority shareholders exercise a disproportionate influence on a
company is through proxy fights. Foreign and institutional investors, in particular,
increasingly follow the voting recommendations of proxy advisers. If an activist
shareholder succeeds in persuading a proxy adviser to favour the measures it
proposes, this will result in a significant increase in the activist shareholder's
factual voting power. Recently, Germany has also experienced campaigns of
activist short sellers.
iv Takeover defences
Once a bidder has published its decision to make a takeover offer, the
management board may no longer take any actions that could prevent the
success of the offer. However, there are some statutory exceptions to this
'prohibition of frustrating action'. The management board remains entitled to
solicit competing offers from third parties (white knights) and to take actions
approved by the supervisory board. Moreover, the management board continues
to be entitled to take all measures that are in the ordinary course of the
company's business and not a subject of the takeover offer or measures that are
intended to implement a business strategy on which the company had embarked
before the publication of the takeover offer.
The management board may also take defensive measures that were authorised
by the general meeting before the takeover offer was announced and approved
by the supervisory board, including:
a.
purchasing shares equalling up to 10 per cent of the registered share
capital;
b.
establishing increased majority requirements for shareholder votes;
c.
selling important assets of the corporation; and
d.
acquiring a direct competitor of the bidder.
Further, the general meeting may elect shareholder representatives to the
supervisory board at different points in time to create a staggered board and
increase the majority requirements for their dismissal.
v Contact with shareholders
Each shareholder may request the management board to provide information
regarding the affairs of the company. A shareholder's information right may only
be exercised, however, during a general meeting and is limited to information
that is reasonably required by the shareholders to appropriately assess the topics
on the agenda of the general meeting. The management board may refuse to
provide the requested information only for a limited number of reasons
enumerated in the Stock Corporation Act, in particular if providing the information
would, in the assessment of a reasonable business person, be harmful to the
company. To the extent the management board proactively communicates with
shareholders, it must observe the principle of equal treatment of shareholders
and the rules regarding disclosure of inside information.
Corporations must identify their shareholders (know your shareholder). In
particular, at the request of a company, financial intermediaries must provide the
information that is necessary to identify the shareholders, including names and
contact details.
Although fostering investor relations and communication with (potential) investors
and other stakeholders of the company generally falls within the remit of the
management board, the supervisory board and, particularly, its chair may, within
certain limits, also communicate with the company's stakeholders. The Corporate
Governance Code suggests that the chair of the supervisory board should be
available – within reasonable limits – to discuss supervisory board-related issues
with investors. The chair of the supervisory board, in particular, may also
converse with political representatives and the press.
However, investor communication by the (chair of the) supervisory board is
limited to issues that fall within the remit of the supervisory board. In particular,
these do not include corporate strategy and the management of the company,
which are the sole responsibility of the management board.
Outlook
i Digitalisation and other developments in company law
As in many other areas of life in general and with business activity in particular,
the covid-19 pandemic has driven developments in the use of technology that
seemed impossible some years ago. Many of the changes to corporate law that
were enacted to respond to the effects of the pandemic will probably remain in
force after the current crisis has ended. The positive experiences from using
digital technologies, in particular for virtual general meetings, will almost certainly
lead to permanent amendments of the Stock Corporation Act that will firmly
establish digitalisation as an element of corporate law and corporate governance,
which has already been underpinned by the intention to permanently permit
virtual general meetings expressed in the Coalition Agreement between the
parties backing the German government in office since December 2021 (Social
Democrats, Greens and Free Democrats).
ii Co-determination
With regard to employee representation at the supervisory board level, the
Coalition Agreement expresses the ruling parties' intention to extend the
attribution rules of the Co-Determination Act to the One-Third Participation Act for
the purpose of determining whether the 500-employee threshold has been
reached (see Section II.ii). In addition, the ruling parties intend to remove the
'freezing' effect that a conversion of the legal form from a German company to a
European company (societas Europaea) has on co-determination, whereby the
status quo pre-conversion continues to apply post-conversion regardless of
whether employee representation thresholds are crossed under the One-Third
Participation Act or the Co-Determination Act. The details of these proposals and
of the legislative timeline are not yet known.
iii Protection for whistle-blowers
Germany has yet to implement the Directive of the European Parliament and of
the Council on the protection of persons reporting on breaches of Union law
(2019/1937), which is aimed at better protecting whistle-blowers, improving law
enforcement and protecting freedom of speech and freedom of information.
The Directive has a wide scope as it protects EU citizens and third-country
nationals as well as company employees and other persons related to a
company, such as suppliers, interns and job applicants. It provides for rules that
deal with whistle-blower reports of serious concerns regarding unlawful actions or
abuses of law. In the Coalition Agreement, the ruling parties have stated their
intention to go beyond the scope of the Directive to achieve comprehensive
protection for whistle-blowers.
iv Corporate social responsibility
The European Commission has proposed to replace the Non-Financial Reporting
Directive with a new Corporate Sustainability Reporting Directive aimed at
reducing the costs of sustainability reporting and improving clarity and certainty
on mandatory non-financial disclosure items in a company's management report.
The proposal also extends the scope of non-financial reporting to all large and
listed companies.
Footnotes
1
Carsten van de Sande and Sven H Schneider are partners at Hengeler Mueller
Partnerschaft von Rechtsanwälten mbB. The authors thank Dr Pascal WF
Brandt, senior associate at Hengeler Mueller Partnerschaft von Rechtsanwälten
mbB, for his contribution to this chapter.
2
Directive 2017/828/EU of the European Parliament and of the Council of 17
May 2017 amending Directive 2007/36/EC as regards the encouragement of
long-term shareholder engagement.
3
Directive 2014/95/EU of the European Parliament and of the Council of 22
October 2014 amending Directive 2013/34/EU as regards disclosure of nonfinancial and diversity information by certain large undertakings and groups.
4
Regulation (EU) No. 2020/852 of the European Parliament and of the Council of
18 June 2020 on the establishment of a framework to facilitate sustainable
investment, and amending Regulation (EU) No. 2019/2088.