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Germany: minimising exposure thanks to the flexibility of the GmbH09/11/2005. Source: SJ Berwin. Sebastian Gronstedt
 In order to monitor their investment in a German portfolio company, private equity investors usually appoint an investment manager to the 'board' of the company, says SJ Berwin. As portfolio companies are often structured as a limited liability company (GmbH), investors take advantage of the flexibility that the GmbH offers to reduce appointees' exposure.
Whilst German stock companies (AGs) have a compulsory two-tier structure with a board of directors and a supervisory board, the shareholders of a GmbH can establish an administrative council, a shareholders' board or committee or even an optional supervisory board.
Whilst supervisory boards are governed by the Stock Corporation Act, administrative councils and the like are subject to rules set by the shareholders. These range from an advisory role to close supervision of directors, and from reporting obligations to approval requirements for certain transactions. The more administrative councils resemble supervisory boards, the more the duties and liabilities of individual members resemble those required under the Stock Corporation Act.
Core duties
Council members owe a duty of loyalty to the company and must act with the due care expected of a prudent and diligent council member. If they are obliged to approve transactions, their duty is limited to supervising rather than managing. Council members are therefore not subject to the same liability as directors, but are measured against the standard expected of members of supervisory boards.
In order to assess whether directors' actions are legal, sound and economically well-founded, council members must ensure that they are adequately informed about the company's affairs. They must also consider the company's accounts, and in particular review the annual report before it is submitted for shareholder approval, compare figures to those of the previous year and review auditors' reports.
Council members should attend all council meetings and maintain appropriate records that show they have discharged their duties correctly. Although nominated by a shareholder, council members must have regard for the interests of the company and of all shareholders, and should also use their independent judgment at all times. If they wish to dissent from a unanimous council decision they should ensure that fact and, if possible, the reasons are recorded in the minutes.
Finally, council members are also bound by a duty of confidentiality. This duty exists vis-à-vis third parties, but not in respect of shareholders who are entitled to information related to the GmbH.
Strategies for limiting exposure
Council members' exposure can be limited further by amending the articles of incorporation so that they are only liable in the event of intentional and grossly negligent misconduct. Furthermore, council members will be totally exempt from liability if directors' harmful action was in accordance with a shareholders' resolution instructing them to act in a particular way.
Finally, council members should ensure that they are formally released and exonerated by a shareholders' resolution at the annual general meeting. Due to the flexible two-tier structure of a GmbH, the exposure of investors' appointees can be substantially limited in Germany.
Sebastian Gronstedt is a partner in the corporate department of the Frankfurt office of SJ Berwin LLP. His specialist areas include M&A, MBOs and venture and development capital investments. He can be contacted on: T +49 (0)69 50 50 32 500 E sebastian.gronstedt@sjberwin.com
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com
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