Germany: Corporate Governance

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Germany.

The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated.

This Q&A is part of the global guide to Corporate Governance. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/corporate-governance/

  1. What is the typical organizational structure of a company and does the structure typically differ if the company is public or private?

    German companies listed on an EU/EEA regulated market ("listed companies") are typically established as German stock corporations (Aktiengesellschaft, AG), but some have chosen the legal form of a partnership limited by shares (KGaA), which will not be discussed further in this Guide, or a German SE (Societas Europaea). The form of the SE is usually chosen by larger companies and most choose to incorporate as an SE with dual board system ("dualistic SE"). Both AGs and dualistic SEs have Management Boards that are appointed and supervised by a Supervisory Board.

    Private companies are mostly organized as a limited liability company (GmbH) or a limited partnership (Kommanditgesellschaft).

    The information in this Guide refers to German stock corporations and applies largely also to a German dualistic SE.

  2. Who are the key corporate actors (e.g., the governing body, management, shareholders and other key constituencies) and what are their primary roles? How are responsibilities divided between the governing body and management?

    The key corporate actors are the Management Board, the Supervisory Board and the shareholders (and, for certain business decisions, also the works council (Betriebsrat)).
    The Management Board is responsible for conducting the company’s business and representing the company opposite third parties. The Supervisory Board appoints, supervises and dismisses the members of the Management Board. A specific German particularity is co-determination in the Supervisory Board, which is discussed below.

    The shareholders hold reserve powers on a number of matters, including structural measures, at shareholder meetings (Hauptversammlung). However, they have minimal influence on the company’s day-to-day business decisions. For a number of business decisions, the works council is responsible for ensuring management consider employee interests in decision-making processes.

  3. What are the sources of corporate governance requirements?

    The main corporate governance requirements result mostly from the following sources:

    • Stock Corporation Act (Aktiengesetz);
    • Commercial Code (Handelsgesetzbuch);
    • Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz);
    • Securities Trading Act (Wertpapierhandelsgesetz); and
    • Stock Exchange Act (Börsengesetz).

    A further, albeit non-binding, source of rules is the German Corporate Governance Code (Deutscher Corporate Governance Kodex) ("GCGC"). Finally, the company’s articles of association (Satzung) as well as the rules of procedure (Geschäftsordnungen) of Management Board and Supervisory Board are of relevance.

  4. What is the purpose of a company?

    The object of a stock corporation (Unternehmensgegenstand), such as the production and sale of certain goods or services, is set out in its articles of association and any changes require a shareholder resolution with qualified majority. It must be distinguished from the purpose (Gesellschaftszweck) of the stock corporation that can be any permitted activity, including non-profit and idealistic purposes. The purpose of a stock corporation is typically not explicitly stipulated and its change will likely require a unanimous shareholder resolution.

  5. Is the typical governing body a single board or comprised of more than one board?

    A stock corporation has two boards, the Management Board and the Supervisory Board, see above (1) and (2). In rare cases of the German monistic SE, a company has only one board but only circa 100 such companies are active in Germany. These are typically companies with fewer than 500 employees in Germany, where the law does not require employee co-determination on the board.

  6. How are members of the governing body appointed and removed from service?

    Management Board members are appointed for a maximum period of five years by the Supervisory Board and reappointment is possible. The Supervisory Board may remove Management Board members only for good cause (aus wichtigem Grund). The Supervisory Board is also responsible for negotiating and entering into service contracts with the Management Board members.

    Supervisory Board members are elected by the shareholder meeting (or appointed by a court as an interim solution until the next shareholder meeting). Up to a third of Supervisory Board members can be nominated by specific shareholders, if the Articles so provide. Such appointments are limited to a maximum period which in practice leads to a five year term (or not more than three years according to a newly proposed GCGC recommendation) and a repeated appointment is possible.

  7. Who typically serves on the governing body and are there requirements that govern board composition or impose qualifications for directors regarding independence, diversity or succession?

    The stock corporation law provides certain criteria for reliability that a Management Board member must have. The articles of association can provide for limited further requirements such as a certain qualification.

    The GCGC provides for a number of recommendations:
    The Management Board shall consist of several members and shall have a chair or spokesperson, and rules of procedure shall govern the work of the Management Board, in particular the allocation of duties among individual members, matters reserved for the Management Board as a whole and the required majority for resolutions (unanimity or resolution by majority vote). When appointing Management Board members, the Supervisory Board shall take diversity into account. The Supervisory Board determines targets for the share of female Management Board members (but there is no mandatory minimum percentage), and shall inform the shareholders what it deems to be a sufficient number of independent members on the Supervisory Board (no mandatory minimum number). Together with the Management Board, it shall ensure that there is long-term succession planning.

    The Supervisory Board of a company with more than 500 German employees must consist of one third of employee representatives. The Supervisory Board of a company with more than 2,000 German employees must consist of an equal number of shareholder representatives and employee representatives ("Parity Co-determination"). Companies which focus on political, religious, academic and artistic purposes as well as media companies are excluded from these rules.

    The Supervisory Board of a listed company subject to Parity Co-determination must consist of at least 30% women and at least 30% men. The Supervisory Board of companies that are listed or subject to Co-determination must set targets for the proportion of women on both the Management Board and the Supervisory Board.

    The stock corporation law provides certain criteria for reliability that a Management Board member must have. The articles of association can provide for limited further requirements such as a certain qualification.

    The GCGC provides for a number of recommendations:
    The Management Board shall consist of several members and shall have a chair or spokesperson, and rules of procedure shall govern the work of the Management Board, in particular the allocation of duties among individual members, matters reserved for the Management Board as a whole and the required majority for resolutions (unanimity or resolution by majority vote). When appointing Management Board members, the Supervisory Board shall take diversity into account. The Supervisory Board determines targets for the share of female Management Board members (but there is no mandatory minimum percentage), and shall inform the shareholders what it deems to be a sufficient number of independent members on the Supervisory Board (no mandatory minimum number). Together with the Management Board, it shall ensure that there is long-term succession planning.

    The Supervisory Board of a company with more than 500 German employees must consist of one third of employee representatives. The Supervisory Board of a company with more than 2,000 German employees must consist of an equal number of shareholder representatives and employee representatives ("Parity Co-determination"). Companies which focus on political, religious, academic and artistic purposes as well as media companies are excluded from these rules.

    The Supervisory Board of a listed company subject to Parity Co-determination must consist of at least 30% women and at least 30% men. The Supervisory Board of companies that are listed or subject to Co-determination must set targets for the proportion of women on both the Management Board and the Supervisory Board.

    The proposed language of the reformed GCGC places a much higher emphasis on the independence of Supervisory Board members from their governing bodies, a controlling shareholder or any personal or business interest of the members. The Supervisory Board shall screen each member against a (non-exhaustive) list of indicators of non-independence. Moreover, certain proportions of independent Supervisory Board members shall be met. For example, no more than two former members of the Management Board shall be members of the Supervisory Board, more than half of the shareholder representatives shall be independent from the company and the Management Board, and at least two shareholder representatives shall be independent from the controlling shareholder (unless the Supervisory Board is composed of only three members).

  8. What is the common approach to the leadership of the governing body?

    The Management Board and Supervisory Board members are obliged to perform their service with the care and diligence of a prudent and conscientious manager. A business decision meets this standard if the relevant board member could reasonably assume to have gained sufficient information before making the decision, is not conflicted and considers that it is acting in the company’s best interests (under the business judgement rule).

  9. What is the typical committee structure of the governing body?

    The Management Board of a public company usually consists of several members. Each Management Board member is assigned with certain area of responsibility. However, each Management Board member is responsible and therefore liable for the business of the company as a whole and not limited to its own area(s) of responsibility.

    Supervisory Boards have typically certain area-specific committees as provided for in its rules of procedure or the company’s articles of association. These include an audit committee, a personnel committee and a nomination committee. The latter generally proposes new Supervisory Board members to the shareholder meeting for election. Each committee must have a chair, shall prepare decisions, may in certain cases even make decisions and must report to the Supervisory Board which is ultimately responsible for any resolutions.

  10. How are members of the governing body compensated?

    Compensation of Supervisory Board members is regulated in the Company’s articles of association or follows specific resolutions of the shareholder meeting. It must be appropriate to their tasks and the financial status of the company. Pursuant to the GCGC, if members of the Supervisory Board are granted performance-related remuneration, it should be linked to sustainable growth of the company. Remuneration is disclosed individually in the annexes to the financial statements or the management report of the Company.

  11. Are fiduciary duties owed by members of the governing body and to whom are they owed?

    The Management Board acts as trustee of the company's assets and owes fiduciary duties of loyalty to the company. It must always act in the best interests of the company and not take into consideration personal interests. As part of its fiduciary duties, each member of the Management Board must:

    • strive to avoid conflicts of interest or at least disclose them;
    • adhere to its statutory non-competition obligation;
    • protect confidential information of the company;
    • exploit business any opportunities for the company, and not for itself of third parties (corporate opportunities doctrine); and
    • cooperate with the Supervisory Board and the shareholder meeting in a spirit of trust.
  12. Do members of the governing body have potential personal liability? If so, what are the key means for protecting against such potential liability?

    A violation of the duty to perform their service with the care and diligence of a prudent and conscientious manager including the breach of applicable legal provisions results in personal liability for the Management Board and Supervisory Board members, unless the relevant member can prove that no breach of duty has occured. Management and Supervisory Board members are jointly and severally (gesamtschuldnerisch) liable for any violation by any member of the relevant board.

    The company may arrange for a D&O insurance for its Management Board and Supervisory Board members to protect them from such liability. The insurance policy must include a deductible (Selbstbehalt) of the Management Board members of at least 10% of the loss up to at least 150% of the fixed annual salary of the relevant board member.

  13. How are managers typically compensated?

    Under the German Stock Corporation Law, remuneration must be adequate in relation to the management board members' duties and responsibilities, their performance and the economic situation of the company; it should not exceed the customary remuneration that is granted at comparable companies without good reason.

    For financial institutions, a specific regulatory regime (AIFMD and Capital Requirements Directive IV) governs the rules of management compensation.

    The amended European Shareholder Rights Directive of 17 May 2017 stipulates that the companies have to establish a remuneration policy concerning its directors and that shareholders have the right to vote on the remuneration policy at shareholder meeting.
    A clear and understandable remuneration report must be presented. The remuneration policy as well as the remuneration report has to be published on the website of the company. Member States may provide (as done in Germany) for the shareholder vote at the shareholder meeting to be only non-binding. However, a shareholder vote rejecting the policy triggers an obligation to amend the remuneration policy and to present it again at next year's shareholder meeting.

    Management Board members typically receive a mix of fixed remuneration, (short term) variable remuneration and long term incentive plans (LTI). According to the "CEO pay landscape in Europe's Top 100 companies", German CEOs receive the third highest remuneration in Europe. In contrast to most other European countries, in Germany, LTI plans are in many cases "Long Term Cash" plans or Performance Share Plans, which are usually settled in cash.

  14. How are members of management typically evaluated?

    Evaluation will typically include measuring the performance of the Management Board members against the indicators set by the performance-related compensation components.

    The GCGC recommends that the Supervisory Board shall assess, at regular intervals, how effective the Supervisory Board as a whole and its committees fulfil their tasks. This self-assessment should be supported by external resources after not more than three years.

  15. Do members of management typically serve on the governing body?

    The German Stock Corporation Act requires a dual board system. A Management Board member may never serve on the Supervisory Board at the same time. However, Management Board members may be elected as Supervisory Board members after their service at the Management Board.

    Members of the Management Board of a listed company have a two year cooling-off period before they may become a Supervisory Board member unless shareholders holding more than 25% of the voting rights propose their election.

  16. What are the required corporate disclosures, and how are they communicated?

    Basic information, including the names of the members of the Management Board and the articles of association, on every German corporation is online available from its commercial register.

    German stock corporations (and SEs) have to prepare and publish their annual reports and, if any, group financial statements within certain time limits after the end of a fiscal year.

    For listed companies, a number of other reporting and disclosure obligations apply.

    Financial reporting. Companies must publish yearly and half-yearly financial statements, and interim management statements in the middle of each financial year (or alternatively, quarterly reports) in accordance with IFRS. Non-EU/EEA issuers can prepare financial statements in accordance with their respective national laws.

    Ad hoc publicity. Under Art. 17 of the Market Abuse Regulation, any listed company must promptly publish, in a so-called “ad hoc” announcement, any new fact which has occurred in its field of activity and which is not publicly known, if it is likely to have a substantial influence on the exchange price of its shares.

    Voting rights notifications. A listed company must publish any voting rights notifications it has received from any of its shareholders exceeding or falling below 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the voting rights in the company. In addition, notifications on certain transactions in derivative financial instruments relating to shares as well as certain transactions of persons discharging managerial responsibilities have to be published.

    Information on shares and shareholders' rights. In general, listed companies must provide shareholders with all information necessary to exercise their rights. Specific publication obligations exist, for example, relating to information on shareholder meetings, dividend payments, the total number of issued shares, the issue of new shares and changes in the rights attached to the shares.

    The GCGC. German stock corporations listed on the regulated market must publish a yearly declaration on whether they comply with the recommendations of the GCGC and explain any non-compliance with such recommendations.

  17. How do the governing body and the equity holders of the company communicate or otherwise engage with one another?

    Members of the Management Board usually participate in Supervisory Board meetings and report there on the status of the company. Between meetings, the chairman of the Supervisory Board shall regularly keep contact with the chairman/speaker of the Management Board (CEO) to discuss strategy, planning, risks and risk management and the development of the company. The CEO must regularly report on important events.

    In stock corporations, whether listed or not, shareholders are only entitled to ask questions to the management at shareholder meetings, which have to be answered by the management unless the questions relate to business secrets of the company or the answer is otherwise detrimental to the company.

    Outside of shareholder meetings, as part of its investor relations efforts, the Management Board may engage in discussions with shareholders at its discretion as long as management keeps business secrets secret and follows the general rule of equal treatment of shareholders. By contrast, the chairman of the Supervisory Board has only a very limited competence as regards Supervisory Board-specific topics to also engage in discussions with shareholders in order not to intervene with the communication policy/strategy set by the Management Board.

  18. Are dual or multi-class capital structures permitted and how common are they?

    Some German stock corporation have, besides ordinary shares, also non-voting preference shares, which usually entitle the holders to an add-on dividend distribution. German stock corporation law does not permit shares with multiple voting rights.

  19. What percentage of public equity is held by institutional investors versus retail investors?

    According to a study by EY, institutional investors held on average 63% of the shares in all DAX companies in 2017.

  20. What matters are subject to approval by the shareholders and what are the typical quorum requirements and approval standards? How do shareholders approve matters (e.g., voted at a meeting, written consent)?

    The shareholders have very limited influence on the conduct of the company’s business. The supervision of management remains with the Supervisory Board. The company’s articles of association or the Supervisory Board at its own discretion are required by German law to provide a list of certain transactions that require the Supervisory Board’s prior written approval.

    A number of transactions that are fundamental to the company’s corporate structure or interfering with the legal positions and financial interests of the shareholders require a 75% majority vote.

    The following list comprises of typical topics for shareholder approval:

    • the distribution of profits (simple majority);
    • election of supervisory board members and the auditor (simple majority);
    • removal of supervisory board members from office (75% majority vote, unless reduced to simple majority in the articles of association);
    • issuance of new shares for cash without exclusion of pre-emptive rights (75% majority vote, unless reduced to simple majority in the articles of association)
    • the sale of all or significant parts of the company’s assets (75% majority vote);
    • the issuance of shares with exclusion of the statutory pre-emptive rights of the shareholders (75% majority vote);
    • the issuance of convertible bonds and bonds with warrants (75% majority vote);
    • the conclusion of profit and loss transfer agreements (75% majority vote); and
    • acquisition of own shares by the company (75% majority vote).

    Furthermore, any transactions under the German Transformation Act, e.g. mergers (Verschmelzung), demergers (Spaltung) and form-changing conversions (Formwechsel) require a 75% majority vote.

  21. Are shareholder proposals permitted and what requirements must be met for shareholders to make a proposal?

    Shareholders whose combined shares amount to 5% or represent EUR 500,000 of the company’s registered share capital may request that certain items shall be added to the agenda of a shareholder meeting.

  22. May shareholders call special meetings or act by written consent?

    Shareholders whose combined shares amount to 5% or represent EUR 500,000 of the company’s registered share capital may demand that a special meeting is invoked.

    Shareholders may not act by written consent as any resolution by the shareholders requires a shareholder meeting, but in case of a company having only a few shareholders, such a meeting can be conducted on the basis of powers of attorney.

  23. Is shareholder activism common and what are the recent trends?

    While there has always been a certain number of shareholder agitators (so-called predatory shareholders) who sought to enjoin shareholder resolutions for their own benefit, i.e. to settle these claims against compensation by the company, a new type of US-style shareholder activism has been playing an increasingly important role since around the year 2000. Since then, hedge funds and specialized activist funds have started to make demands of CEOs of German listed companies. The activist playbook is often similar: first demands are usually discussed behind closed doors. If management does not appease the activist, public letters to the CEO or the chairman of the Supervisory Board follow. Next, activists launch a PR campaign and search for fellow investors with whom they share common interests in order to exert further pressure on management. Finally, the activists use their legal tools in their capacity as minority shareholders, for example to amend agenda items, call for an extraordinary shareholder meeting or deny a vote of confidence (Entlastung) for certain members of the Management Board and/or the Supervisory Board.

    Recently, Germany has seen an increased trend by activists to request a special audit to investigate potential violations of law (e.g. Elliot/Uniper) and thereby prepare damage claims against members of the Management Board and/or the Supervisory Board. In the face of strong criticism, companies have even in some cases considered to commence a "voluntary" special audit (e.g. ThyssenKrupp).

    Another trend is the blurring of the lines between activist (hedge) funds and more regular investment funds like pension funds. They often work hand in hand, with more regular funds backing activist funds and supporting activists in their demands of management.

    A recent decision of the German Federal Supreme Court provided more clarity regarding the question when investors are "acting in concert" regarding a company. Activists are keen to avoid this situation, because all shareholdings in a company of investors "acting in concert" must be aggregated and publicly notified, in the absence of which the investors lose, inter alia, their right to vote the shares. The increased legal certainty following the court decision should make it easier for investors to coordinate their behavior in respect of single events (as opposed to the general strategy of a company) and should thereby foster activist acting in so-called "wolfpacks".

  24. What is the role of shareholders in electing the governing body?

    Shareholders are responsible for electing Supervisory Board members in shareholder meetings.

  25. Are shareholder meetings required to be held annually or otherwise, and what information needs to be presented?

    Shareholder meetings of a company are convened by the Management Board at least annually, usually within the first six months of a calendar year. In urgent cases, the Management Board may convene extraordinary shareholder meetings.

    In various cases, the law requires the presentation of written information at the shareholder meeting. Apart from the regular report of the Supervisory Board, this includes reports for certain measures, such as capital increases, repurchase and sale of treasury shares, mergers, spin-offs and the change of legal form. It may also include certain other reorganization measures such as the contribution of 80% of the business to a subsidiary.

  26. Do any organizations advise or counsel shareholders on whether to approve matters?

    Yes. An increasing number of institutional investors follow the recommendations of consultants on share voting rights (Stimmrechtsberater), such as Glass, Lewis & Co., Institutional Shareholder Services, Inc. and Hermes EOS. In addition, there are a number of German organizations acting as representatives in shareholder meetings or voting consultants for German retail investors (Aktionärsvereinigungen).

  27. What role do other stakeholders, including debt holders, employees, suppliers and customers and the government, typically play in the corporate governance of a company?

    Employees are typically represented by works councils, which employees may elect in companies with at least five employees, and so-called economic committees, which must generally be established in companies with more than 100 employees – so-called "operational co-determination" (betriebliche Mitbestimmung). Both bodies have numerous information and consultation rights regarding a wide range of decisions which affect the company's workforce or working conditions. The works council may have veto rights over certain matters. In principle, the works council's rights are strongest regarding social issues (like organization of work schedules and holidays) and weakest in respect of strategic business decisions. In companies with more than 500 employees, employees are also represented on the Supervisory Board – so-called "entrepreneurial co-determination" (unternehmerische Mitbestimmung) (cf. question 7).

    If a company has raised debt finance under, for example, a syndicated term loan, then the lending banks may also have an influence on strategic decisions of the company, which can sometimes be fairly far reaching. Loan documentation typically provides for frequent reporting obligations and a broad array of transactions typically require consent or waiver from lenders prior to consummation.

    Large customers, and in some cases even key suppliers, may also influence the corporate governance of a company by contractually requiring the company to adhere to numerous covenants regarding its organization and behavior. For example, some companies mandate that customers or suppliers agree to follow a "code of conduct".

  28. What consideration is given to environmental and social issues, including climate change, sustainability and product safety issues, and are there any legal disclosure obligations regarding the same?

    2017 Germany implemented EU Directive 2014/95/EU (non-financial reporting) to improve transparency with respect to social and ecological topics. The new reporting obligation further the sustainability commitment of companies.

    The law is applicable to so-called capital-market-oriented companies, as well as credit institutions and insurance companies which have more than 500 employees, a balance sheet of more than €20 million, or revenues of more than €40 million (approximately 550 companies in Germany).

    Companies need to provide information on environmental, employee-related and social issues, human rights and actions against corruption, related risks and non-financial performance indicators.

    An independent audit of the report is not mandatory.

  29. How are the interests of shareholders and other stakeholders factored into decisions of the governing body?

    Pursuant to section 4.1.1 of the GCGC the Management Board assumes full responsibility for managing the company in the best interests of the company, meaning that it considers the needs of the shareholders, the employees and other stakeholders, with the objective of sustainable value creation. This summarizes the prevailing view of the corporate governance literature, pursuant to which no individual stakeholder interest has priority over others, and that it is the task of the Management Board to come to decisions that appropriately consider all interests, including the interest of shareholders to maximize the share value.

  30. Do public companies typically provide earnings guidance on either a quarterly or annual basis?

    Most larger listed companies provide earnings guidance either in their half-year financial reports or their interim financial information during the year. Adjustments of the earnings guidance may be given during the year also on investor conferences or in interviews, unless their magnitude is price-sensitive, in which case the company has to publish an ad hoc notification (cf. question 16).

  31. May public companies engage in share buybacks and under what circumstances?

    Share buybacks are permitted under certain circumstances. Apart from in reorganization situations, the most relevant cases are buybacks on the basis of an authorization of the shareholder meeting. Such resolutions may be valid for a maximum of five years, and will determine the price range as well as the proportion of the registered share capital which may be bought back, subject to the following cap: The acquired shares together with any other treasury shares held by the Company must not exceed 10% of the Company’s registered share capital. The Company must be able to cover the consideration by free reserves, which is equity that would be distributable.

  32. What do you believe will be the three most significant issues influencing corporate governance trends over the next two years?

    • Increasing influence of shareholders (e.g. say on pay), shareholder activism and Supervisory Boards under scrutiny
    • Focus on sustainability
    • Artificial intelligence and its influence on management decisions and liability