Background
No explicit conflict of interest rules
Duty to observe secrecy
Comment
In Spring 2010 a well-known former Austrian politician stepped down from his supervisory board seat at a major Austrian stock company (A AG). A few days later, it became known that he had been elected chairman of the supervisory board of another Austrian stock company (B AG). As both companies were intense rivals, the move was met with fierce criticism at A. The main concern was the potential disclosure of confidential information that the former supervisory board member had collected through his activities on the supervisory board. This led to lively public debate about the circumstances under which the acceptance of a supervisory board mandate might be inappropriate or even illegal.
No explicit conflict of interest rules
Despite the fact that such situations might occur more often than is publicly known, the Stock Corporation Act does not provide any explicit rules governing such conflicts. The Corporate Governance Codex also omits such explicit rules, although it does contain several on conflicts of interests. For example, under Rule 44 of the codex, supervisory board members may not pursue their own interests or those of associated companies or persons in conflict with the interests of the company for which they are responsible. If a conflict of interests arises, the supervisory board member must immediately disclose such conflict to the chairman of the supervisory board. Case law and doctrine have outlined several instruments to overcome such conflicts of interest, including:
- voting bans;
- information restrictions;
- shifting to committees; and
- dismissal of the supervisory board member (in case of a structural or permanent conflict of interests).
However, it is questionable whether these considerations could be applied to the case at hand. Rule 44 is intended to protect the company for which the supervisory board member is presently active. In the above case, only A was worried about a potential conflict of interests; in contrast, B could only benefit from its new supervisory board member's knowledge.
In general, supervisory board members must be guided by the interests of the company and enterprises connected therewith. They must apply the standard of care of a diligent manager. The duty not to disclose confidential information (or trade secrets) is one of the key obligations to which a supervisory board member is bound. The task of the supervisory board is to advise regularly and supervise the management board in the management of the enterprise. It must be involved in decisions of fundamental importance to the enterprise. Therefore, good corporate governance requires an open discussion between the management and supervisory boards, as well as among the members within the supervisory board. As such, the comprehensive observance of confidentiality is of utmost importance.
This obligation outlasts membership in the supervisory board. In the case at hand, at first (and as a matter of principle) an adequate cooling-off period of six to 12 months would be indicated. However, this still cannot guarantee that any potential conflict will be eliminated in future. Therefore, the supervisory board member would still be bound to strictly observe the following:
- not to utilise any information obtained during his supervisory activities for A to the detriment of A;
- in case of a conflict, to report the conflict to the chairman or vice chairman of the supervisory board - depending on the specific facts of the case, the member might be prevented from taking part in the respective meeting and from exercising his or her voting rights; and
- to surrender the mandate (or refuse to accept it in the first place), but only as a last resort and on the precondition that the strict observance of confidentiality would harm B.
Supervisory board members must comply with the rules of proper corporate management. If they violate the duty of due care and diligence of a prudent and conscientious supervisory board member, they are personally liable to the company for damages. Any company that suffers a loss through the misconduct of a supervisory board member may be entitled to claim damages.
Several further consequences are also conceivable. For example:
- the member may be recalled; or
- resolutions passed with the conflicted member's involvement may be considered void and subject to actions for a declaration of nullity.
A supervisory board member should therefore check, prior to accepting a mandate, whether a conflict of interest with any prior supervisory board memberships is likely. If so, the potential member must decide whether the conflict affects only single issues or the function as a whole. In the latter case, the mandate should not be accepted. If conflicts arise only sporadically, appropriate steps must be assessed on a case-by-case basis.
For further information on this topic please contact Stephan Frotz or Clemens Spitznagel at Schoenherr by telephone (+43 1 534 370), fax (+43 1 534 376 100) or email ([email protected] or [email protected]).