Stock Corporation Law: The (In)admissibility of effecting Staff Cutbacks at Management Board Level

While the managing directors of German limited liability companies (Gesellschaft mit beschränkter Haftung; “GmbH”) are subject to and bound by the instructions of the  shareholders’ meeting, the management boards of German stock corporations (Aktiengesellschaft; “AG”) act independently (nicht weisungsabhängig). The dismissal of a management board member is accordingly permissible only for important reasons. According to the Regional Court of Frankfurt am Main (Landgericht Frankfurt), a decision by the supervisory board (Aufsichtsrat) of an AG to cut back / reduce the number of members of the management board does not constitute an important reason.

The Decision of the Regional Court of Frankfurt am Main of 22 April 2014 (Case No. 3-05 O 8/14)

The plaintiff had been a management board member of Commerzbank AG, with a term of appointment until 31 May 2017. As part of certain restructuring and staff reduction measures, Commerzbank AG decided to retrench approximately 3 000 employees by 2016. In this context, the supervisory board decided to also reduce the number of management board members of Commerzbank AG, and thus retrenched the plaintiff.

The plaintiff believed this retrenchment to be unlawful; in his view, the need to reduce the number of management board members did not constitute an important reason to effect a dismissal. Commerzbank AG responded that the reduction of the size of the management board was a sensible and necessary measure, which had been effected in the course of general staff retrenchments. After all, the retrenchments had to extend to all levels of employment.

The Federal Court agreed with the plaintiff that the retrenchment was unlawful. Pursuant to § 84 para. 2 of the German Stock Corporation Act (Aktiengesetz), a member of the management board may only be dismissed for important reasons. Such an important reason had not been present in the current matter. Although operational reasons (betriebsbedingte Gründe) may generally constitute an important reason for a dismissal, special care must be taken in order to ensure the management board’s independence. As is being maintained by legal writers, even extensive staff reductions do not constitute an important reason for purposes of effecting a dismissal. Although it is the case that, in the present matter, Commerzbank AG’s articles of association did entitle the supervisory to reduce the size of the management board, the supervisory board could not make use of this right in order to dismiss a management board member that had already been appointed. The management board could only be reduced in size by way of positions remaining vacant after the resignations of board members, or if a generally accepted important reason existed, such as a material breach of duty by a member of the management board.

Comment

The court decision clearly illustrates the independence of the management board of an AG. While the managing directors of a GmbH are subject to and bound by the instructions of the shareholders' meeting, and may be dismissed at any time, the management board of an AG acts independently, and the dismissal of its members is only permitted for important reasons. The corporate structure of an AG is therefore suitable for, and is often chosen by, companies wanting or needing their management board to act independently. This may be in the company’s best interests where, for example, a company’s shareholders are at odds with one another, or where external funds are being procured for a company. On the other hand, the legal structure of an AG would be inappropriate if the (majority or sole) shareholder wishes to be involved in operational decision-making, or wishes to otherwise ensure that it can exercise an influence at management level.

Supervisory boards should accordingly bear in mind that it may not always be prudent to appoint members of the management boards of AGs for the legal maximum duration of five calendar years.