Several high-profile corporate criminal investigations and prosecutions in Germany have led to the scrutiny of directors and officers for failure of controls and supervision. Several recent notable German enforcement actions against directors and officers under both private and criminal law demonstrate the challenges members of boards of directors face under German corporate law and highlight the potential need to change director’s liability rules. In addition, the German Federal Cartel Office (Bundeskartellamt) has significantly stepped up its efforts in cartel prosecution, culminating in the imposition of cartel fines exceeding €1 billion in 2014, an all-time high in Germany, putting companies, boards, and their directors and officers on high alert for increased scrutiny in these areas in 2015.
Actions Against Directors and Officers
Unlike U.S. corporate law, German corporate law provides for a two-tier board system, comprising a management board (Vorstand) and a supervisory board (Aufsichtsrat). The management board is directly responsible for day-to-day management and represents the company in and out of court. The supervisory board oversees the management board and represents the company in claims against members of the management board.
In December 2013, the Regional Court (Landgericht) Munich ordered Heinz-Joachim Neubürger, former CFO of Siemens AG, to pay €15 million in damages for failing to implement and monitor an appropriate compliance system for identifying and stopping corruption within Siemens. Even though the decision was appealed and the parties have settled, the judgment has been scrutinized closely by the legal community, as it addressed the important question of which requirements a compliance system must fulfill. The court stated that each member of the managing board had the duty to set up an effective compliance system that prevented and uncovered compliance violations and enabled the company to address them. The court ruled that the managing board also must monitor the effectiveness of the compliance system and, if need be, make necessary adjustments.
The Neubürger decision has fueled a discussion regarding the need to change the (rather strict) German director's liability rules. For example, German company law provides for joint and several liability of board members for full damages, even in cases of mere negligence, including some circumstances in which the alleged failure does not fall within the area of responsibility of the sued board member. Another much-debated rule is the burden of proof for diligent behavior, which lies with the board member, not the company.
In criminal law, three ongoing cases are likely to have a significant impact in the coming year:
Three current and former CEOs of Deutsche Bank AG (Rolf Breuer, Joseph Ackermann and Jürgen Fitschen) and other bank officers have been indicted for allegedly attempting to defraud the court in the civil litigation proceedings between the late Leo Kirch and Deutsche Bank. Kirch, a Munich-based film mogul, raised claims for damages against Deutsche Bank following a 2002 Bloomberg interview by Breuer that allegedly led to the collapse of Kirch’s film empire. Although the parties settled the civil litigation in early 2014, the dispute continues to command attention because Deutsche Bank and the law firms of Hengeler Mueller and Gleiss Lutz were raided by the prosecution, which is investigating whether the firms’ partners illicitly exerted influence on witnesses (as opposed to legally preparing them for trial). If the investigation leads to legal action against the law firms, it would likely have a substantial impact on how attorneys prepare witnesses. The Regional Court Munich’s decision on whether to try the current and former Deutsche Bank CEOs is expected in early 2015.
Five years after the near-collapse and nationalization of Hypo Real Estate (HRE), which led to the largest bank rescue in German history, former management board Chairman Georg Funke and other HRE officers face criminal charges. Funke is accused of falsely representing HRE's financial position in financial statements in 2007 and 2008. The decision as to whether to proceed with a trial currently rests with the Regional Court Munich.
In November 2014, Thomas Middelhoff, the former CEO of Arcandor AG, was sentenced to three years in prison for embezzlement and tax evasion in connection with the company′s insolvency. The judgment has not become final yet. Both the HRE and Arcandor situations demonstrate the increased risk of criminal prosecution that board members now face.
This past year marked the first time that the German Federal Cartel Office (FCO) imposed cartel fines exceeding €1 billion. (See "Insights Conversations: Cartels.") The key reasons for the record year include an expansion of the FCO's staff, newly effective key witness programs and so-called “leniency” programs. Dating back to 2000, the FCO has utilized leniency programs, granting immunity from or a reduction of fines to cartel participants whose cooperation contributes to uncovering a cartel. Almost 50 percent of cartels that have been found in that time were uncovered because of such leniency programs.
In addition, private "follow-on" claims for damages suffered from cartel law violations complement the increasing public antitrust enforcement activity. The effectiveness of private damages actions has been strengthened through legislative action in recent years, which has established Germany as a "claimant-friendly" country for such claims. Most notably, where damages are claimed for an infringement of competition law, German courts are bound by a finding that an infringement has occurred if such a finding was made in a final decision by the cartel authority. Furthermore, the individual damage does not have to be calculated precisely but rather can be estimated by the relevant court. Given the current state of antitrust enforcement in Germany, most of the requirements of the new Directive on Antitrust Damages by the European Union, which was signed on November 26, 2014, and has been a hotly discussed topic, already are fulfilled under German law. (See "EU Nonmerger Antitrust Enforcement Gets Stricter.")
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