COVID-19 - Management without Supervision?

By Alfred Herda, Dr. Stefanie Orttmann

04-2020

Supervisory board meetings in German companies are generally held in person. This is generally possible and permissible even in times of the current pandemic. Nevertheless, there is an obvious need to avoid attending supervisory board meetings in person and travelling to and from them.

Supervisory boards as well as the management boards of stock corporations and managing directors of limited liability companies therefore ask themselves whether and how presence meetings can be replaced by video conferences. After all, it is precisely now that entrepreneurial decisions are required which demand a supervisory board that is capable of acting. Intended measures of executive boards and managing directors often require the prior approval of the supervisory board, personnel measures in the management body must be taken, general meetings and shareholders' meetings must be prepared, the auditor must be commissioned and the involvement of the supervisory board in the audit and approval of the annual financial statements cannot be delayed.

The "Act on Mitigation of the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Proceedings Law" ("COVID-19-PG"), which came into force on 28 March 2020, contains temporary facilitations for holding general meetings and shareholders' meetings of stock corporations and limited liability companies outside of face-to-face meetings. In addition, it contains a facilitation exclusively related to the decision of the management board of stock corporations in connection with general meetings without physical presence to pass the approval resolutions of the supervisory board required for this purpose outside of face-to-face meetings. COVID-19-PG does not contain any further facilitations for the work of the supervisory board.

Supervisory Board of the Stock Corporation

Section 108 of the German Stock Corporation Act (“AktG”) assumes for the stock corporation that the supervisory board is present at a meeting at which absent members of the supervisory board can only have their written votes submitted by participants in the meeting. Pursuant to section 108 para. 4 AktG, "written, telephone or other comparable forms of resolutions of the supervisory board" are also permissible. However, subject to more detailed provisions in the articles of association or rules of procedure, this only applies if no member objects to this procedure.

According to a correct view the video conference is to be considered equivalent to a face-to-face meeting and section 108 (4) AktG does not apply to it. Arguments that used to be put forward against this view are likely to have been finally overtaken by the technical development and the practical example of "state leadership by video switch" that can be observed today. Nevertheless, it remains to be noted that there is no established case law on this and thus the risk of nullity of resolutions passed in this way remains. This applies in particular if the articles of association and the rules of procedure do not contain any specific provisions in this regard.

The risk associated with this can therefore only be avoided in a legally secure manner by subjecting the passing of resolutions in a video conference to the regime of section 108 (4) AktG. In this case, in the absence of any provision to the contrary in the articles of association or the rules of procedure, resolutions of the supervisory board by video conference would only be permissible if no member of the supervisory board objects to this procedure. This would, however, give each individual member of the supervisory board the power to prevent resolutions from being passed outside a meeting in person.

All this also applies to the supervisory board's examination of the annual financial statements in accordance with sections 170 and 171 AktG. This includes not only the examination of the annual financial statements prepared and submitted by the management board, including the proposal for the appropriation of profits, but also the discussion with the mandatory auditors, the written report to the annual general meeting and, if applicable, the approval of the annual financial statements. Without the contribution of the supervisory board, the annual financial statements cannot be adopted. The annual financial statements are adopted either by approval of the supervisory board or by resolution of the annual general meeting on the basis of the resolutions of the executive board and supervisory board. This meeting of the supervisory board should consequently also be admissible by way of video conference. Nevertheless, there remains the risk that the corresponding resolutions of the supervisory board will be null and void if a member of the supervisory board objects to this form of resolution.

Supervisory Board of the Limited Liability Company

The statements on the supervisory board of a stock corporation also apply largely to the supervisory board of a GmbH which is subject to co-determination in accordance with the German Co-Determination Act or the One-Third Participation Act. In both cases, both, section 108 AktG and sections 170, 171 AktG are mandatory. However, the decisive difference is that although the supervisory board must examine the annual financial statements and report on the examination, the adoption of the annual financial statements is exclusively assigned to the shareholders' meeting. The provisions of stock corporation law on the adoption of the annual financial statements (sections 172, 173 AktG) and the appropriation of profits (section 174 AktG) do not apply to the co-determined GmbH. In the absence of any provision to the contrary in the articles of association, the general allocation of authority to the shareholders for the adoption of the annual financial statements and the appropriation of profits remains unchanged.

Section 108 AktG is generally not applicable to the GmbH with an optional supervisory board. Regulations concerning the actions and resolutions of the supervisory board outside of face-to-face meetings should therefore be regulated in the articles of association. In the absence of such provisions, the holding of supervisory board meetings by video conference should be considered permissible. Here too, however, there is a lack of established case law, so that here too a residual risk remains if a member of the supervisory board objects to this form of resolution.

In addition, individual supervisory board resolutions can be replaced by shareholder instructions in the case of both, the optional and the co-determined supervisory board of the GmbH. This possibility should be considered and examined in each individual case in order to minimize legal risks.

Forecast

It remains to be hoped that courts which have to deal with the admissibility of supervisory board meetings by video conference even if a supervisory board member objects, will regard this as an admissible variation of the presence meeting and not as a case of section 108 (4) AktG. This would correspond to technical progress and the need that has become apparent not least as a result of the pandemic. However, it would be desirable that the legislator makes a clear commitment to corporate governance through modern means of communication, and does so beyond the current crisis.