Germany: D&O Insurance In Germany - The New Legislation Arrives

Article by Anthony Menzies and Gunbritt Kammerer-Galahn

We described in our D&O insurance update of 2 June 2009 some of the recent legislative proposals in Germany on directors' and officers' liability insurance, in the wake of recent crises in the financial sector.

Unlike in many jurisdictions, directors' and officers' liability insurance is not compulsory under German law. Nevertheless, D&O coverage is expected as a matter of good practice, as set out in the German "Corporate Governance Kodex" ("the Code"). Furthermore, the Code has for some time recommended that listed companies agree in their D&O policies upon an "adequate" deductible to be borne personally by the directors protected by the policy. By imposing a personal interest on the part of the directors concerned, it was sought to motivate them to avoid claims arising, although the question of what constituted an "adequate" deductible has remained vague.

In practice, many German companies have circumvented the requirements altogether, relying upon a standard form of derogation from the Code in their annual filings, with a statement that a deductible "would not improve the consciousness of responsibility" of their directors, or otherwise motivate them to avoid damage arising.

The position has now changed for directors of German stock corporations. Following a period of debate in the Bundestag in the course of recent weeks, the new Act on the Adequacy of Managerial Salaries (Gesetz zur Angemessenheit der Vorstandsvergütung - VorstAG) was passed on 18 June 2009. The new provisions will come into force immediately following ratification by the federal house, the Bundesrat, on 10 July 2009, and subsequent publication in the German Federal Law Gazette (Bundesgesetzblatt).

The Act amends section 93 II 3 of the German Stock Corporation Act (Aktiengesetz – AktG), and requires that listed companies purchasing D&O insurance for their executives must impose a personal deductible to be borne by the directors equivalent to at least 10% of the relevant loss, up to an annual maximum figure calculated by reference to the fixed remuneration of the director from time to time. Practical guidance is to be found in the accompanying Reasons (Begründung, BT-Drs 16/13433) issued by the legislator, which states that the required personal deductible shall consist of at least 10% of each loss, subject to an absolute annual cap which must be set at not less than one and a half times the annual fixed remuneration of the director. The aggregate cap is to be reviewed annually to reflect movements in the fixed element of the director's remuneration.

The requirements are to be applicable to all stock corporations, whether in fact listed or privately owned, although, under Germany's two tier system of corporate governance for such companies, only members of the board of directors (Vorstandsmitglied) are affected, and not supervisory board members (Aufsichtsratsmitglied).

The provisions will apply with immediate effect to all newly concluded D&O insurance contracts, while those already in existence are to be amended with effect from 1 July 2010 at the latest. There is a transitional exception in the case of those companies already obliged under an existing service contract to provide D&O insurance cover to the director without deductible. In those cases, the policy terms may remain unchanged until the appointment of the director, and the underlying service agreement, expire. The statutory maximum appointment term of a board member is five years.

Interestingly, the legislation does not prohibit directors from insuring their deductible exposure separately, leading to speculation that the reforms will simply give birth to a new line of business in the form of D&O deductible insurance. While responsibility for the premiums for such a product would have to be borne privately by the directors, there is nothing to prevent them seeking a commensurate uplift in their remuneration to cover the outlay. Furthermore, any obligation to disclose such an arrangement in corporate filings would require an amendment to the Code as it stands.

At the same time, the new Act on the Adequacy of Managerial Salaries also brings about an amendment to section 87 I AktG, which will now oblige the supervisory board members to ensure that the total remuneration of members of the board of directors is a suitable reflection of their tasks and performance, and of the performance of the relevant company. It requires that the usual ("üblich") remuneration of a director is not to be exceeded without specific reasons. Furthermore, in the case of listed stock corporations, the directors' remuneration has to be consistent with the sustained ("nachhaltig") development of the company, and the performance elements of directors' remuneration are to be assessed on the basis of several years, up to the entire term of appointment. Short-term performance measures are no longer acceptable. The new provisions also stipulate that the responsibilities of the supervisory board with respect to directors' remuneration may not be delegated to the general meeting.

The new remuneration and D&O provisions expressly do not apply to a private Limited Liability Company (GmbH).

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.