Is the approval of board member actions an effective relief from liability or a mere formality?

Background

During the financial crisis we learned throughout Europe that the approval of actions of managing directors (Geschäftsführer), executive board members (Vorstandsmitglieder) and supervisory board members (Aufsichtsratsmitglieder) is not a matter of course. For example, in 2010, the shareholders of Swiss high street bank UBS denied to approve the supervisory board’s actions. And Austrian Volksbank AG’s general assembly refused to grant approval to its CEO and vice-CEO. Such denials often mean a vote of no confidence and not uncommonly come with a claim of damages.

Both supervisory and management board members thus attach high importance to such a decision. On the one hand, the approval demonstrates the shareholders’ confidence in the board member’s actions (this applies in particular to large publicly traded corporations where the annual general meeting is the single point of contact between shareholders and board members). Equally important, board members often assume that the approval of their actions releases them from potential liability claims raised by shareholders, the company, and/or third parties. This is not necessarily the case.

Legal effects of the approval of actions related to the corporation

The approval of management or supervisory board members’ actions is an integral part of every regular general assembly of a limited liability company (GmbH) or a shareholders’ meeting of a stock corporation (AG). The approval has two main effects: (i) it is a “lump authorisation” for past business activities of the company’s management and (ii) according to main doctrine and decisions of the Austrian Supreme Court, it is above all an act of faith for the future. To some extent the approval also hinders the enforcement of claims against board members.

The approval releases the company’s management from liabilities only to the extent the shareholders were able to recognise possible claims by the documents brought to their attention. Privately aggregated information has to be considered equivalent only if it was available to all shareholders.

Concerning the concrete effects of the approval, a limited liability company must be distinguished from a stock corporation.

Limited liability company

Under article 35 Limited Liability Companies Act (GmbHG), the approval precludes any claims against board members. So, as explained above, the preclusion covers only facts and circumstances comprised by the documents presented to the shareholders. Even in this case, an overruled minority may still allege their claims for the company and against the management.

Stock corporation

Article 104 of the Austrian Stock Corporation Act (AktG) seems to provide for the possibility of granting unlimited approval of board member actions, but the requirements for approval are more stringent. As a rule the approval concerns the liability of board members only in exceptional cases. In addition to the conditions indicated above (knowledge of all relevant facts and circumstances), articles 84 and 99 AktG state that the company can waive or settle claims against its executive and supervisory board members only on two more conditions: the elapse of a period of five years and no contradiction of at least 20% of the share capital is raised. Pursuant to a decision of the Austrian Supreme Court, the five-year limit does not apply only in case all shareholders agreed to grant approval.

Legal effects for corporate creditors

It is usually the creditors who vigorously pursue their (alleged) claims – primary against the company but also against individual members of the management, or even against the whole management team. The creditors are backed by articles 10 and 25 GmbHG and article 84 AktG, all of which greatly restrict the effects of the approval. According to these articles, the approval (as well as compromise agreements and renouncements) of the company towards its managing director(s), executive and supervisory board members does not take effect, or becomes ineffective, if the surrogate/refund is needed to satisfy the company’s creditors – a situation occurring mainly in insolvencies. This means that the approval is worth the least when it is most important for the individual management member or the entire management team. Indeed, it then may be worthless.

Conclusion

The approval of board members’ actions is a good indicator of whether the shareholders of a limited liability company or a stock corporation are pleased with the managing directors, executive board members and supervisory board members. But in very few cases is the approval well suited to exclude potential liabilities for business management measures. For third parties (such as creditors) the approach is even stricter. If the asserted claim is needed to satisfy third parties, even an effective approval does not produce the desired legal effects towards the third parties.

The approval might become worthless when it is most important for the individual management member or the entire management team - against third parties.