Duties And Liabilities Of Management Board (MB) And Supervisory Board (SB) In Corporate Reorganizations

Cor­po­rate reor­ga­ni­za­tions are very com­mon in cor­po­rate prac­tice. The lia­bil­ity risks borne by MB and SB mem­bers in the con­text of cor­po­rate reor­gan­i­sa­tions should not be underestimated.

Duties of MB and SB

The MB and SB of com­pa­nies that are involved in cor­po­rate reor­ga­ni­za­tions, ie of the com­pany trans­fer­ring assets and the com­pany assum­ing these assets, must take legal actions accord­ing to the applic­a­ble legal regime¹. In the fol­low­ing, our focus is on merg­ers (Ver­schmelzung) and de-mergers for absorp­tion (Spal­tung zur Auf­nahme):

By enter­ing into a merger agree­ment or a de-merger agree­ment, respec­tively, the MB's of the trans­fer­ring com­pany and assum­ing com­pany, lay down the prin­ci­ples of such a trans­ac­tion. Occa­sion­ally, a due dili­gence of the trans­fer­ring com­pany or par­tic­u­lar assets to be trans­ferred is undertaken.

Fur­ther, the MB's of the involved com­pa­nies must describe and pro­vide rea­sons for the intended (de-)merger from a legal and eco­nomic view in their (de-)merger report. The SB must audit the (de-)merger based on the MBꞌs report and an inde­pen­dent audit report². The MB must also ful­fil some pub­li­ca­tion require­ments.³ Merger agree­ments and de-merger agree­ments are in prin­ci­ple sub­ject to the approval of the involved com­pa­nies' share­hold­ers.⁴ As a final step, the MB's of involved com­pa­nies have to reg­is­ter the merger or de-merger with the com­mer­cial reg­is­ter of the com­pe­tent court.

Lia­bil­i­ties of MB and SB of trans­fer­ring company

Legal basis

In the case of a merger, accord­ing to sec 227 AktG, mem­bers of the MB and the SB are jointly liable for any dam­ages to the com­pany, its share­hold­ers, or cred­i­tors caused by the merger, pro­vided that cor­po­rate bod­ies have acted neg­li­gently when prepar­ing and exe­cut­ing the merger. The val­u­a­tion of assets to be trans­ferred and  the estab­lish­ment of whether the cap­i­tal resources of the assum­ing com­pany are suf­fi­cient are par­tic­u­larly rel­e­vant in this respect.

In the case of a de-merger, accord­ing to sec 3 para 5 SpaltG, mem­bers of the MB and the SB are jointly liable for any dam­ages to the involved com­pa­nies (by appli­ca­tion of sec 41 AktG mutatis mutan­dis)⁵ or its share­hold­ers, pro­vided that mem­bers of these cor­po­rate bod­ies have acted neg­li­gently when prepar­ing and exe­cut­ing the de-merger.

In both cases, fault is pre­sumed, but the oppo­site can be proven by mem­bers of these cor­po­rate bod­ies. More­over, share­holder approvals for a merger or de-merger do not release the MB and SB mem­bers from such liability.

Par­ties enti­tled to a claim

In the case of a merger, the trans­fer­ring com­pany is, in prin­ci­ple, enti­tled to a claim. Share­hold­ers and cred­i­tors may only claim for fur­ther dam­ages, which are caused in addi­tion to the company's dam­ages. For the pur­pose of such claims, the trans­fer­ring com­pany is deemed to con­tinue exist­ing (sec 227 AktG).

In case of a 100% upstream merger, no lia­bil­ity of mem­bers of the MB and the SB exists towards the trans­fer­ring com­pany and the sole share­holder; how­ever, it still exists towards cred­i­tors (sec 232 AktG).

In the case of a de-merger, both the trans­fer­ring com­pany and the assum­ing com­pany are enti­tled to a claim. Share­hold­ers may only claim for fur­ther dam­ages, which are caused in addi­tion to their company's dam­ages. Cred­i­tors may not base their claims directly on sec 3 para 5 SpaltG.

Enforce­ment

In the case of a merger, the trans­fer­ring com­pany in fact ceases to exist with the merger's reg­is­tra­tion. Thus, lia­bil­ity claims must be asserted by a spe­cial rep­re­sen­ta­tive appointed by the com­pe­tent court upon request of a share­holder or a cred­i­tor (Sec 228 AktG).

In the case of a de-merger, the appoint­ment of such spe­cial rep­re­sen­ta­tive for the asser­tion of lia­bil­ity claims is not required, as the trans­fer­ring com­pany con­tin­ues to exist.

In gen­eral, such claims become time-barred five years after pub­li­ca­tion of reg­is­tra­tion of the (de-)merger (sec 227 AktG and sec 3 para 5 SpaltG).

Lia­bil­i­ties of MB and SB of assum­ing company

As to the lia­bil­ity of mem­bers of the MB and the SB of the assum­ing com­pany, the gen­eral lia­bil­ity regime of the AktG and GmbHG⁶ applies⁷. Con­se­quently, the MB and the SB become liable towards the assum­ing com­pany in case a merger is pre­pared and exe­cuted with­out the pru­dence of a care­ful and con­sci­en­tious busi­nessper­son. Such claims also become time-barred five years after pub­li­ca­tion of reg­is­tra­tion of the merger (sec 229 AktG).

Quote: The liability risks of the MB and the SB of involved companies should be taken into consideration when preparing and executing corporate reorganizations.

Footnotes

1 E.g. for merg­ers: sec 219 et seqq of the Aus­trian Stock Cor­po­ra­tion Act (Aktienge­setz; AktG) and sec 96 et seqq of the Aus­trian Act on Lim­ited Lia­bil­ity Com­pa­nies (GmbH-Gesetz; GmbHG); for de-mergers: Aus­trian De-Merger Act (Spal­tungs­ge­setz; SpaltG); for con­ver­sions: Aus­trian Con­ver­sion Act (Umwand­lungs­ge­setz, UmwG); and respec­tive arti­cles of the Aus­trian Reor­ga­ni­za­tion Tax Act (Umgrün­dungss­teuerge­setz; UmgrStG).

2 MB reports, an inde­pen­dent audit, and a SB audit are not required in case of a 100% upstream merger or can be waived by all share­hold­ers of the involved com­pa­nies (also in the case of a de-merger).

3 In the case of a merger, such require­ments can be waived by all share­hold­ers of the involved companies.

4 Share­hold­ersꞌ approvals are not required in the case of a 100% upstream merger or upstream de-merger.

5 Sec 41 AktG pro­vides for a lia­bil­ity claim in the case of neg­li­gent acts when found­ing a company.

6 See sec 84 and 99 AktG and sec 25 and 33 GmbHG.

7 In the case of a de-merger with new foun­da­tion (Spal­tung zur Neu­grün­dung), mem­bers of MB and SB are (only) liable when act­ing neg­li­gently in con­nec­tion with the foun­da­tion of the company.

This article was originally published in the schoenherr roadmap`14 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.