Prevention Duty of the Supervisory Board
Press reports show that cases in which shareholders, managers or third parties claim indemnification by members of the supervisory board become more and more often. These plaintiffs state that managers have neglected their duty to prevent certain decisions of former managers. At present, such reproaches are imminent with Volkswagen, Porsche, ThyssenKrupp etc.
The subject hits the central understanding of the functions of a supervisory board and its competences and liabilities. As a matter of fact, the German Corporation Code (CC) empowers the management to lead the company, which the supervisory board has to respect. According to sec. 111 CC the supervisory board shall only control the management but not replace it. The tool for this control is especially the audit of the books, sec. 111 para. 2 CC. Difficulties rise when the supervisory board wants to call for an (extraordinary) shareholders’ meeting in order to control the management, sec. 111 para. 3 CC. The supervisory boards might risk then to be held responsible for indemnification itself. Also, the shareholders’ meeting is not competent for management issues. Absolutely complex is the question whether the supervisory board can refuse its consent to management projects or whether it can withdraw the management in order to prevent management decisions. The German Corporate Governance Code demands the effective control of deals with fundamental impact. Therefore, professionals derive from this a constant duty to adjust a catalogue of deals which cannot be carried out without the consent of the supervisory board. If there is a case of unacceptable action of the management professionals even demand that the supervisory board shall forbid the management to act without the consent of the supervisory board. This can be called a duty of prevention. It has to be examined closely then whether such a case is given.