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Supervisory duties

To what extent does the supervisory board of a group parent company also have to exercise its supervisory duties in the group with regard to the activities of a group subsidiary?To what extent does the supervisory board of a group parent company also have to exercise its supervisory duties in the group with regard to the activities of a group subsidiary?

The Supreme Court (Oberste Gerichtshof) answered this question in the following case: A manager was a board member of a holding company while simultaneously also being a board member of its subsidiary. Both companies were stock corporations. On behalf of the subsidiary, the manager signed a letter of comfort in favour of a lower-tier subsidiary. The issuance of this letter of comfort would have been subject to the approval of the supervisory board of the parent company. The subsidiary and the lower-tier subsidiary subsequently fell into insolvency. The parent company brought an action for damages against the manager, arguing that if he had submitted the letter of comfort to the supervisory board for approval, the supervisory board would have refused to give its approval and that the insolvency of the subsidiary and lower-tier subsidiary could have been avoided in this case (because without the letter of comfort from the subsidiary, the lower-tier subsidiary would have lacked the financing to implement a project the failure of which triggered the insolvencies).

The Supreme Court ruled that the manager's failure to submit the issuance of the comfort letter to the supervisory board of the group parent company for its consent constituted a breach of duty and gave the following reasons for this:

- The executive board of the group parent company has a certain duty to manage not only the parent company, but also the group.

- The business judgement rules allows a certain degree of discretion regarding exactly what form this group management should take (tighter or looser management).

- The supervisory board of a stock corporation has a duty to supervise the company's management. Within a group, this task also includes supervising the executive board's management of the group.

- Section 95 para. 5 of the Stock Corporation Act specifies which transactions may only be carried out with the consent of the supervisory board. Generally, this provision only applies to the respective stock corporation itself. However, for the parent company of the group, transactions relevant to the group can be added to this list. Such additions can be made expressly or by way of interpretation.

- Additions to the list can be made expressly by the supervisory board itself. The board must extend the consent requirement to cover measures taken by subsidiary companies if the measures in question have a significant effect on the group as a whole, in particular on the parent company.

- Even if no explicit addition is made to the list of transactions subject to approval, it may be necessary to extend the consent requirement to group matters by way of interpretation. The interpretation must be oriented towards the purpose of the consent requirement on the one hand and the significance of the measure on the other. What is decisive for the significance of the measure is whether it has direct economic effects or other relevant effects on the parent company and the group.

- As a result, a transaction relevant to the group that requires approval at the level of a group company must also be approved by the supervisory board of the group parent company. A matter is generally assumed to be relevant to the group if the measures taken by a subsidiary also have an effect on the assets and financial position of the parent company that is not considered to be of minor significance. The supervisory board must keep an eye on what is happening in the group and in the group companies to the extent that what is happening is relevant to the assets, financial position and results of operations of the parent company of the group.

- If the supervisory board of the parent company refuses to approve a transaction, the executive board of the parent company must take steps to ensure that the subsidiary does not take the measure in question. If the consent requirement also extends to group companies, either expressly or by way of interpretation, then the executive board of the parent company must ensure that any measure taken by the subsidiary that is subject to the approval of the supervisory board of the parent company can actually only be carried out with its approval.

It is also interesting to note what the Supreme Court ruled on the question of instructions within a group. If a group company is organised as a stock corporation (Aktiengesellschaft), by law its executive board is not bound by instructions from the shareholders. However, the Supreme Court correctly states that it is nevertheless common practice for instructions to be issued to the executive boards of such group companies by the group management, and these instructions are de facto also followed. In this regard, the Supreme Court notes that such instructions are certainly not null and void in a group so long as they do not prevent the executive board of the subsidiary from safeguarding the corporate interests of the controlled company.