Contracts with Senior Executives and Supervisory Board Members

Contracts with Senior Executives and Supervisory Board Members

Edificia Rechtsanwälte have frequently advised Company Directors as well as Supervisory Board Member of German Companies in order to protect and defend them against Company claims.

Such advice includes:

  • Drafting Services Agreements for Directors and/or Supervisory Board Members
  • Assisting in disputes with the Company either in court or by way of alternative dispute resolutions
  • Setting up conduct rules for Company Directors
  • Registering appointments and/or resignations with the Court Register

The German rules and regulations of which a Company Director or Supervisory Board Member should be aware, are innumerable. The risk of a liability of any such individual for unlawful corporate governance has increased significantly over the last 20 years.

It is worth having a general look at the German system of Corporate Governance, which varies between countries. In a one-tier board-system such as in the U.S. or the UK, all the directors (both executive directors as well as non-executive directors) form one board (the Board of Directors).

In contrast, there are countries such as Germany which prefer a two-tier board system. German corporation rules for public companies (Aktiengesellschaften) require a two-tier- board system: a Board of Company Directors (Vorstand) and a Supervisory Board (Aufsichtsrat). In a private limited company (GmbH) such supervisory board (advisory committee) may be created voluntarily. The Board of Executive Directors is in charge of running the company affairs in a daily basis. The Supervisory Board consists of individuals who are elected by the shareholders in order to appoint the Executive Company Directors, and to regularly monitor their actions. In a second role, the members advise the Company directors on long-term strategies and issues of fundamental importance to the Company, such as e.g. a take-over or merger.

It is fair to say that the appointment of supervisory board members has in the past not been an overly transparent process in Germany. More often than not, former Company Directors uninterruptedly continue to act as supervisory board members, who decide on the appointment of future company directors. For this and other reasons, there is often an implicit bond or understanding between the Supervisory Board members and Company Directors, which may stand in the way of proper – at arm’s length – monitoring. This practice has undoubtedly led to inefficient monitoring and poor corporate governance in some cases. There is an increasing number of Company Directors and Supervisory Board members being sued in court for negligent conduct. The quantum of damages is on the increase.

In such situation, it is of vital importance that such individuals seek proper legal advice before taking up such positions. Often, the financial reward of a Supervisory Board Member does not truly compensate for his or her responsibility and potential liability.