Austria: Management And Supervisory Board Liability Under The New Business Judgment Rule

Modelled on Sec 93 para 1 of the German Stock Corporation Act, a 2015 reform of the Austrian Criminal Code introduced a "Business Judgement Rule" (BJR) into the Austrian Stock Corporation Act (AktG) and the Limited Liability Companies Act (GmbHG). The rule applies to management and supervisory board members and became effective at the beginning of 2016.

The BJR establishes a "safe harbor" for management and supervisory boards from liability for their actions when taking business decisions, provided that the following conditions are met:

  • board members must act free from conflicts of interest;
  • a decision must be based on all (material) information reasonably available; and
  • board members must have (justifiably) believed that the decision was in the best interests of the company.

The limitation to business decisions means that the BJR will only protect board members and managing directors in areas where they legitimately have discretion and room for deciding between alternative options. This is not the case if the law or the articles of the company require specific conduct. For instance, whether to seek approval of the supervisory board or the shareholders for an important matter or whether to file for the opening of insolvency is not a question left to the discretion of management.

The new BJR will bring about changes in the decision making process of boards, in particular for complex, risky, far-reaching, resource-consuming, and strategically important matters.

What does it change in practice?

Experience and case law in Germany (where the BJR was introduced into the German Stock Corporation Act already in 2005) provide a number of practical implications for the way in which management and supervisory boards will need to approach key matters under the new rules:

  • If anything is (or could be seen) to constitute a conflict of interest, be sensible, transparent and proactive: (i) disclose it (as early as possible); and (ii) at the very least, abstain from getting involved in the matter when decisions are taken;
  • The more a matter requires deviation from "standard procedure", the better documented and the more thorough arguments must be made as to why this particular approach is in the best interest of the company;
  • Boards may need to retain their own external advisers in order to bring in independent expertise and know-how as a basis for their decisions, certainly on complex matters;
  • Whatever you do and however you decide may be subject to scrutiny of shareholders at the next general meeting. The benefit of hindsight, whilst often unfairly applied, may in reality turn out to be very difficult to counteract unless a decision has been prepared and taken on a very solid basis.

Unsurprisingly, the requirements for the board will be higher the more strategically relevant, complex and/or risky a certain matter is.

Specific examples

Specific situations which may arise include:

  • whether to proceed with an M&A transaction without conducting due diligence;
  • whether to sell an asset at less than an appraised value;
  • whether to grant a loan or provide security (at certain terms);
  • whether to commence or continue litigation, enter into a settlement – or whether to appeal a court decision;
  • whether to grant a bonus or raise to a (senior) employee;
  • whether to file a leniency application in case of a violation of competition law;
  • whether to act as sponsor or make a donation;
  • whether to terminate a contract early or for cause; or
  • whether to waive a debt or pursue a claim.

These examples show that not only "high exposure" or one-time decisions, but also matters arising on a day-to-day basis, may require a more nuanced and refined approach under the new rules.

When the BJR was introduced in Germany, the goal was to recognize that incurring risk is inherent in taking management responsibility and to protect managers and supervisory board members who were prepared to do just that – provided certain criteria were met. This is clearly the right goal. Hopefully, the BJR will be applied and interpreted this way in Austria. In their own interest, management and supervisory boards should adapt quickly to the new framework.

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.

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