Business Judgment Rule

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The Business Judgment Rule (predominant spelling Judgment ; partly Business Judg e ment Rule) ( German  rule, the commercial appraisal ) describes the scope of the corporate decision-making discretion of managers and boards of directors, which is not subject to judicial review. The rule comes from the US legal system, where it has regulated and limited the liability of managing directors and board members to the owners of the company since 1994. Since 1997 it has also been applicable in Germany. According to this, managing directors and board members are not liable for negative consequences of business decisions if the decision was made on the basis of appropriate information, without taking into account irrelevant interests, for the good of the company and in good faith.

background

In view of cases of serious wrong decisions by company management, as reported again and again in the business press, the legislature in numerous countries has introduced personal liability for company managers (board members, managing directors, etc.). The causes for these wrong decisions are manifold. Not only are illegal acts such as fraud and corruption the trigger for such a situation, but also often missing information or unforeseeable events in the future.

Accordingly, the legislators are required to create an environment which, on the one hand, enables corporate management to be used in the event of inadequate exercise of the duty of care, but also guarantees the management / board of directors the security of being able to make decisions with inherent risks, without negative ones To be held personally accountable for developments. Since ex-post, every decision that has not undoubtedly led to success can be interpreted as a wrong decision, it is necessary to give the company management a margin of discretion, since otherwise a liability for success would arise and the avoidance of all opportunities and risks as the main criterion of every entrepreneurial decision The basis would be.

In order to balance these interests, jurisprudence and teaching quickly came to the conclusion that liability is only given in the event of a breach of the diligence of a prudent and conscientious company manager. This limitation of liability to protect business leaders is known as the Business Judgment Rule.

Due to its great importance for administrators / holders, the Business Judgment Rule based on the American concept has since been introduced in a large number of countries. The implementation in the German-speaking area should be examined in more detail below:

Germany

In German company law, the Business Judgment Rule is a principle for interpreting  corporate body liability , according to which the management board or  supervisory board is  personally liable for culpable breaches of duty and must compensate for any damage. Although the Business Judgment Rule is anchored in the law by Section 93 (1) Sentence 2 AktG, its application is not limited to shares only for stock corporations and limited partnerships. In this context, the government draft explicitly states that the application can also be transferred to other legal forms.

Development of the Business Judgment Rule

The  Business Judgment Rule  is based on the  Principles of Corporate Governance of  the  American Law Institute  from 1994 and the German supreme court case law of the  BGH . In its ruling of April 21, 1997, the BGH decided that a company manager had a certain amount of leeway with regard to the entrepreneurial decisions to be made. "He is not personally liable if he is sufficiently well informed and has made a decision that is understandable in the best interests of the company," ruled the BGH.

Individual provisions of the AktG were  changed in November 2005 through the “Law on Corporate Integrity and Modernization of the Right to Avoid” (UMAG)  . The Business Judgment Rule now results from the newly introduced Section 93 (1) sentence 2 AktG.

According to this, a breach of duty does not exist "if the board member could reasonably assume in a business decision that he was acting on the basis of appropriate information for the benefit of the company". This provision defines non-liability, duty-compliant behavior of the board of directors.

Decision-making basis according to the Business Judgment Rule

Based on the negative wording of Section 93 (1) AktG, there are four quality criteria which are required for an appropriate management decision (“lack of a breach of duty”) and which, in case of doubt, must be proven by management. In addition, the facts must clearly show that an entrepreneurial decision has been made.  

  • entrepreneurial action: a conscious, purposeful decision to act or not to act; Inactivity as a neglect of duty is not a decision and therefore cannot be justified with reference to Section 93 (1) sentence 2 AktG.
  • Entrepreneurial decision : due to its future-oriented nature, it is shaped by forecasts and non-justiciable assessments. This distinguishes them from the observance of statutory, statutory, employment contract or organizational decision-making obligations, for which there is no scope for action ("mandatory decisions").
  • Good faith : The decisions must be made   in good faith and  based on the company's interests ex ante (in this case processes that have expired later and were not known at an earlier point in time are disregarded)  .
  • Action without special interests and irrelevant influences : Action must be unaffected by conflicts of interest, outside influences and without direct self-interest. The board of directors must therefore act impartially and uninfluenced.
  • Acting for the good of society : Decisions must serve the long-term increase in earnings and competitiveness of the corporate group and its products / services. This requirement does not apply, for example, to a performance bonus granted retrospectively that does not provide the company with any future-related benefit. If the risk associated with the decision was incorrectly assessed in a completely irresponsible way, the criterion “reasonable” is not fulfilled.
  • Acting on the basis of appropriate information : In addition to objective facts, an entrepreneurial decision is often based on  instinct ,  experience ,  imagination  and a feeling for future developments. However, since these are always decisions made under uncertainty , it is important that carelessness and recklessness are not encouraged, but at the same time the company management is encouraged to make this decision. According to Section 93 (2), action must therefore be based on appropriate information. This is an indefinite legal term, which is why there are no specific regulations that define the process of obtaining information. Rather, in this regard, trust is placed in the expertise of corporate management. However, the requirement applies that the recognized state of science and technology must be taken into account. From the point of view of legislation, the information in the context of decision-making can never be complete, but has business priorities. This means that the costs associated with the acquisition of new information must be in proportion to the resulting profits. However, certain minimum requirements can be derived from Section 91 AktG (2) in connection with the specifying regulations of the KonTraG , according to which the information basis must exclude a threat to the company's continued existence. In order for the management to be able to unequivocally identify these decision options, however, a functioning risk management system is required , which includes the identification, prognosis and evaluation of potential risks.

Requirements for internal liability according to § 93

Requirements for an internal liability of the board of directors towards its company are:

  • Breach of duty:  is a violation of the general obligation to conduct business properly and conscientiously (Section 280 BGB, Section 93 Paragraph 1 Sentence 1 AktG, Section 43 Paragraph 1 GmbHG and Section 34 Paragraph 1 GenG) and
  • Fault : in the case of board members, even simple negligence  in the care of a proper and conscientious body is sufficient  (Sections 116 and 93 AktG)
  • Damage : is any impairment of the company's assets. This also includes expenses that fail to serve their intended purpose, loss of profit (Section 252 BGB) or the creation of corporate debts in breach of duty and
  • Causality : The breach of duty must be the cause of the damage, contributing to the damage is sufficient.

As already explained in detail, German legislation is based in particular on the American basic concept. While the American counterpart assumes that the management always observes the principles of careful decisions, the German legal system sees the Business Judgment Rule rather as a privilege of management, which excludes liability insofar as the decision meets the due diligence criteria. In Germany in particular, this difference can have a significant impact on corporate management. While in the USA the board of directors has to prove incorrect behavior, in Germany this burden is transferred to the board of directors as soon as there is a suspicion of the existence of criteria for internal liability.

consequences

In order to avoid improper use of the law in connection with internal liability of the organs, a preliminary judicial procedure (approval procedure) was introduced and freedom of liability was created in the area of ​​qualified entrepreneurial decisions, whereby no liability is assumed for errors within the scope of entrepreneurial decision-making freedom. The Business Judgment Rule is therefore a disclaimer. An entrepreneurial decision stands in contrast to legally bound decisions, for which there is no freedom of liability in the event of fault.

If the board of directors cannot be proven to have acted in breach of duty on the basis of the above conditions, the board of directors is irrefutably presumed to have acted in accordance with its duties. Since the scope of liability of the Business Judgment Rule is formulated as an exception and restriction of Section 93 (1) sentence 1 AktG, the burden of presentation and proof lies with the member of the Management Board concerned. If there is a breach of duty, a board member is personally liable to the company, without limitation and with all of his or her assets.

External liability

However , there is no self-contained legal regulation for liability to third parties ( shareholders or partners , suppliers , competitors , the state and also employees ). In case of doubt, general statutory liability rules such as tort ( § 823 BGB) apply.

Rating

The limitation of the liability of the company directors according to the principle of the Business Judgment Rule is certainly necessary in order to guarantee executive and supervisory boards a safe environment for entrepreneurial decisions that are associated with risks. However, the duty of proof of careful decision-making remains with the company manager. Traceability and transparency increase the requirements for documentation and involve the risk of increasing bureaucratisation of the economy. As a result, companies are encouraged to work in a more structured manner and to use uniform tools, which ultimately make documentation easier. At the same time, however, the ability of the company management to make decisions intuitively is restricted, which results in longer periods of time for decision-making and the company can lose flexibility.

In the context of the Business Judgment Rule, the understanding of “appropriate information” becomes an essential component. Although an all-encompassing level of information can never be achieved, it is the company's management's duty to generally exclude any threat to the company's existence. In Germany in particular, however, it has been shown that the risk management required for this has not yet been established across the board and that implementation is inadequate despite existing guidelines. In the future, this could lead to liability potentials according to Section 93 (2).

Since companies usually take out body liability insurance for members of their corporate bodies and for senior employees, this group of people is usually covered. However, depending on the country and the insurer, exclusions can be agreed in the insurance policies. Unless a precondition for the possibility of reduction in the case of gross negligence has been agreed, a gross violation of the criteria for the application of the Business Judgment Rule could at best be assessed as gross negligence and lead to a restriction of insurance cover.

Switzerland

In Switzerland, the liability of the board of directors and management for business decisions is regulated in Art. 754, Paragraph 1 of the Code of Obligations . The Federal Supreme Court defined criteria for a Business Judgment Rule in two leading rulings of June 18, 2012 and November 20, 2012.

Austria

In Austria, the liability of the board of directors is laid down in Section 84 (2), sentence 1 of the Austrian Stock Corporation Act (AktG). The Supreme Court (OGH) has applied the principle of the Business Judgment Rule in various decisions since 1998. According to recent case law, the Business Judgment Rule is also to be applied to GmbH managing directors and board members of a private foundation . With effect from January 1, 2016, Paragraph 1a was added to Sections 84 of the AktG and 25 GmbHG, which standardizes liability privileges within the meaning of the Business Judgment Rule.

literature

  • Dominik A. Hertig: The Business Judgment Rule in Switzerland, taking into account a legal comparison with the USA and Germany. Master thesis. University of St. Gallen, 2010.
  • Jan Göppert: The scope of the Business Judgment Rule in corporate decisions of the supervisory board of the stock corporation. Berlin 2009, ISBN 978-3-428-13191-4 .

Web links

To Germany

To Switzerland

  • Hans-Ueli Vogt, Michael Bänziger: The Federal Supreme Court recognizes the Business Judgment Rule as a principle of Swiss company law. A contribution to the classification of the Business Judgment Rule in the dogmatics of company law responsibility, on the occasion of the Federal Supreme Court judgment 4A_74 / 2012 of June 18, 2012 . Law Institute of the University of Zurich (PDF; 515 kB) accessed on December 4, 2013
  • Checklist for Switzerland on vr-haftung.ch; Retrieved December 4, 2013

To Austria

Individual evidence

  1. ↑ see wikt: en: judgment # Usage notes
  2. ↑ a b c Clifford Chance (Ed.): Business Judgment Rule . 2012.
  3. ↑ a b Graumann M .: The appropriate information base . In: WISU . 2014, p. 317-320 .
  4. ↑ a b c d draft law of the federal government . No. 3 , 2005.
  5. ^ Rittner: European and German commercial law: a systematic presentation . 2007.
  6. ↑ ARAG / Garmebeck decision . 1997.
  7. ↑ a b Shearman & Sterling LLP .: BGH specifies and limits the burden of presentation and proof . 2011.
  8. ^ A b Manz: The stock corporation . Haufe, 2010.
  9. ^ Audit Committee Institute eV: Checklist Business Judgment Rule . In: Audit Committee Quarterly . 2013.
  10. ↑ Gleißner, W .: Critical Analysis of Decision Papers - A practice-oriented approach to reducing the information asymmetry between the board of directors and the supervisory board . 2011.
  11. ^ Romeike, F .: Risk Management in the Context of Corporate Governance . In: The Supervisory Board . 2014, p. 70-72 .
  12. ^ Mannesmann trial . 2005.
  13. ↑ BGHZ , 135, 244, 253
  14. ↑ a b Gleißner, W .: “An overlooked liability trap? - Inadequate risk analysis before decisions by the board of directors and the supervisory board ” . In: BOARD . 2016, p. 52-54 .
  15. ↑ Graumann, Linderhaus, Grundei: When is the willingness to take risks in entrepreneurial decisions "overstretched in an inadmissible manner"? In: Business research and practice . 2009, p. 491-506 .
  16. ^ Witte, JJ: Liability and Responsibility of the Supervisory Board. (PDF) Retrieved December 27, 2016 .
  17. ^ Andreas Cahn: Business Judgment Rule and Legal Issues . Ed .: Institute for Law and Finance. WORKING PAPER SERIES NO. 144, p. 2015 .
  18. ↑ Gleißner, W .: The aggregation of risk: early detection of "inventory-threatening developments" . In: The Supervisory Board . 2016, p. 53-55 .
  19. ↑ Bänzinger, M .: The Federal Court recognizes the business judgment rule as a principle of Swiss company law . Ed .: GesKR. 2012.
  20. ^ Schima, G .: Reform of the infidelity offense and legal anchoring of the business judgment rule in company law . Ed .: RdW. 2016.