Trust is good, control is better!

Trust is good, control is better!

The managing director is liable for all breaches of duty. Really for all of them? This question always arises when several managing directors manage the company and have different responsibilities – sales, production, finance, compliance, etc.? What about the liability of the managing directors for breaches of duty by another managing director? The BGH has once again commented on this in a recent decision (BGH, judgement of 9 November 2023 – III ZR 105/22). The decision contains some important implications for corporate compliance. Firstly, the BGH once again confirmed the general duty of legality (= duty of lawful behaviour of the company) of a company’s executive body and the resulting duties of care. On the other hand, the court explained that company bodies can fulfil their duty of legality by, among other things, delegating tasks – horizontally or vertically. As a result, responsibility is delegated. The judges in Karlsruhe emphasised that such a distribution of tasks is even necessary in larger corporate entities.

What is it all about?

The matter in dispute concerned the horizontal delegation of duties and competences to an individual member of the Executive Board or management. The plaintiff asserted claims for damages due to failed investments. The defendant, on the other hand, defended himself against a personal claim by arguing that, as an architect, he was solely responsible for the management and supervision of the construction projects from a technical perspective. He had not been entrusted with financial tasks. The Karlsruhe court ruled that internal responsibility regulations in the management of a company do not lead to a cancellation, but do lead to a limitation of criminal and liability law responsibility. However, the managing director who is not affected retains certain monitoring duties in any case by virtue of his general responsibility, which must prompt him to intervene if there are indications that the fulfilment of the tasks incumbent on the company by the responsible managing director is no longer guaranteed.

The court did not provide an answer to the question of the scope of such interdepartmental monitoring duties. Based on the case law, this article aims to show which monitoring and supervisory measures a board member must take. In particular, a number of cross-case patterns of reasoning have developed in case law, which give the monitoring duty sharper contours.

A general approach

he law is silent on the scope of monitoring obligations. In practice, the vague definition that the extent of the monitoring obligation depends on the circumstances of the individual case has become established. In essence, it is a question of how much trust a board member may place in his colleagues and how much distrust he must have in them. This case-by-case assessment can be concretised on the basis of company, task and personal parameters. The type, size and organisation of the company play a key role here. Further points of reference are the importance of the task assigned and any special circumstances relating to the person of the respective Management Board colleague, such as work experience. The shorter the period of time he or she has been performing the task assigned to him or her, the more careful the supervision will have to be; conversely, the requirements for supervision are lower in the case of proven long-term cooperation.

Principle: Ongoing monitoring

In general, ongoing monitoring as part of a functioning information system is sufficient, which can take place in particular as part of the periodic Executive Board meetings and general reporting systems. The respective member of the Executive Board must obtain information and follow the activities of neighbouring departments. As part of the reporting process, the information must be checked for completeness and plausibility; if necessary, questions must be asked and additions requested. If there are reports in the press that are relevant to the industry, e.g. about cartel investigations against competitors, it is regularly advisable to actively enquire about the possible consequences for your own company. This principle gives rise to a right to information on the one hand and an obligation to report on the other. As a result, claims for damages against a member of the management board will therefore be denied if undesirable developments in a neighbouring department were not recognisable even if the entire management had been carefully and critically monitored.

Case groups for more intensive monitoring obligations

Apart from the principle of ongoing monitoring, more intensive monitoring obligations may also arise for the member of the Executive Board in exceptional situations. In such situations, the company body must utilise further sources of information. If necessary, the Executive Board member must obtain certainty by questioning fellow members of the Executive Board or employees or by means of random checks and, if the suspicion is confirmed, take measures to end the irregularity.

Event-related monitoring obligations

Firstly, there is agreement that members of the Executive Board must immediately follow up on indications of undesirable developments or irregularities in an external department. In this respect, there is agreement in principle that the monitoring duties should be intensified on an ad hoc basis.

According to case law, this is particularly the case in times of financial crisis, namely in the event of non-payment of social security contributions and in the event of a significant deviation from budgeted figures. Furthermore, the monitoring obligations must be increased in the event of the risk of conflicts of interest and concealed profit transfers. If particularly high-ranking legal interests such as life and health are jeopardised, there is also an increased need for monitoring. The same standard must also be applied to significant business transactions that may be of existential importance to the company due to their volume or risk. In the case of possible breaches of regulations and unlawful behaviour, the criteria for initial suspicion under criminal law are applied. If there are concrete grounds for suspicion, the Executive Board colleague must take the necessary steps as part of investigative measures. Only if the head of department is unwilling or unable to clarify the facts are his employees and then, in exceptional cases, third parties to be questioned and relevant documents to be examined in a next step.

Task-related criteria

As is often discussed, there is no reason for more intensive monitoring obligations for a fellow board member with a „relevant“ area of responsibility or for the CEO.

Intervention and intervention obligations

If there are increasing signs that the member of the Management Board responsible for the department is not fulfilling their duties adequately, the duty to monitor and control becomes a duty to intervene and intervene as a last resort. However, the first step is to seek dialogue between the fellow managing directors. If the Executive Board member does not get through with their concerns at Executive Board level, the Supervisory Board must be informed in the event of serious incidents.

Conclusion

The horizontal delegation of management tasks through the formation of departments is a strategy recognised in practice for limiting liability. However, the managing director is not completely released from his responsibility. Rather, he is also subject to a duty of supervision with regard to the other departments. In general, he fulfils this duty through ongoing monitoring as part of a functioning information system. In the event of indications of undesirable developments and in times of financial crisis, the monitoring obligation is intensified. If the suspicions intensify, this duty can turn into a duty to intervene.

The author of this article is available to answer your questions on the limitation of liability of managing directors through internal rules of responsibility and to help you assert your interests.

Author: Dr. Andreas Menkel