Approximately five years ago an illegal method of splitting up wages of employees in order to save tax and social security contributions by a security company at the Munich airport was detected. The discovery entailed several criminal and regulatory offense proceedings. Alongside the main stakeholders of the involved companies, the airport operator company, which held 71.6 % of the security company, and its executive secretary were involved as co-defendants in the associated proceedings. The general manager of the airport operator company was being accused of having breached his supervisory duty as manager of the group’s parent company. This is because he did not intervene nor did he seek for legal clarification, although he was knowing about the actions liable to prosecution.
The argument between prosecution and court arouse on the question whether Section 130 of the German Administrative Offense Act (Ordnungswidrigkeitengesetz or “OWiG”) is applicable to a group of companies or not. Section 130 para. 1 OWiG reads as follows:
“Whoever, as the owner of an operation or undertaking, intentionally or negligently omits to take the supervisory measures required to prevent contraventions, within the operation or undertaking, of duties incumbent on the owner and the violation of which carries a criminal penalty or a regulatory fine, shall be deemed to have committed a regulatory offence in a case where such contravention has been committed as would have been prevented, or made much more difficult, if there had been proper supervision. The required supervisory measures shall also comprise appointment, careful selection and surveillance of supervisory personnel.”
Section 9 OWiG extends Section 130 OWiG to directors and other representatives.
I. THE ISSUE
Quintessence of the decisions by the Higher Regional Court (Oberlandesgericht or “OLG”) in Munich is that Section 130 OWiG is generally applicable to cases concerning corporate groups of companies. Meaning that the parent company’s management can be held liable for actions of its subsidiaries due to a breach of their supervisory duty. The actual applicability in each case, however, has to be determined according to the circumstances and particularities of every single case.
In the case at hand the airport operator company held the majority of the security company’s shares. According to the OLG Munich yet decisive is primarily the actual handling of hierarchic structures in a group of companies. Hence, in how far the parent company takes influence on the subsidiary and governs the entire group.
The court sees two possible set-ups that result in an obligatory supervision on parent company level:
First, if the parent company of the group is enabled to issue instructions which influence the actions of the subsidiary company and if this right is contractually stipulated in the corporate group’s agreement (e.g. by a domination agreement). In this case the parent company has an obligation to supervise under company-law to the agreed extent, when the parent company actually uses its right.
Second, when such a right is not agreed upon but a factual corporate group is involved, meaning that for example the parent company of the group is the sole shareholder of the subsidiary company. In this case an obliagtion to supervise also exists to the extent that the parent company actually takes influence.
If the subsidiary company is enabled to act according to its free will and is not governed by parent company’s instructions, only the legally and factually self-dependent subsidiary company itself has an obligation to supervise.The parent company can not be held liable.
II. CONSEQUENCES IN PRACTICE
In the past the German Federal Court of Justice (Bundesgerichtshof) has left it unanswered whether Section 130 OWiG is applicable to the higher-level company within one group when only the lower-level company has violated the law. In conclusion, some scholars believe that Section 130 OWiG only applies to the management board of the company that committed the crime and cannot affect the rest of the group. OLG Munich has countered this opinion in its decisions and answered the question whether Section 130 OWiG can be applied beyond a single company with “Yes”. However no proposition can be found to the requirements which have to be met in order for Section 130 OWiG to apply and to the extent of its applicability.
It seems questionable that it should be sufficient in the future for members of the management board to rely on the fact that he or she has neither issued instructions nor taken factual influence on the subsidiary company. The District Court (Landgericht or “LG”) Munich had just decided in December 2013 to the contrary that the joint board of a group of companies has an obligation to ensure that the group is organized and supervised in a way that no laws are violated. According ot this decision, in the case of a certain risk of law infringements within the group, the management board is obliged to install and supervise a compliance organization in the group which is set out to prevent damages and to control risks.
It has to be taken into accout that the case decided by the LG Munich concerned civil liability. The liability provisions of German stock corporation law (here Sections 76, 91 (2) and 93 of the German stock corporation codeAktiengesetz) allow no conclusion as to Section 130 OWiG’s scope of application. Nevertheless these civil law duties, which apply to the entire group of companies, cannot be left out when interpreting Section 130 OWiG.
To sum up: If directors of the parent company of a group take legitimatized or factual influence on an affiliated company, e.g. when they impede the clarification of facts concerning a possible violation of laws by a subsidiary company, liability under Section 130 OWiG is imminent. Irrespective of grounds for suspecting the members of the management board of a group of companies’ parent company should be geared to the strict rules of civil law instead of experimenting with the limits of regulatory offense law.