Austria: Business Judgement Rule now Incorporated in Austrian law

As of 1 January 2016, the Austrian legislator followed the German legislator and incorporated the Business Judgement Rule into Austrian law. This change of the Corporate Law was part of the 2015 law to change the Criminal Law in which also the definition of misappropriation (sec. 153 StGB (Austrian Criminal Law)) was updated.

New definition of misappropriation (sec. 153 StGB (Austrian Criminal Law))

With the 2015 law to change the Criminal Law, the legislator reacted to the controversial legislation of the highest court in the past years (cf. Libro decision) and clarified that the constituent element of misappropriation assumes a financial damage, however, the mere risk of the assets is not sufficient anymore. Furthermore, it is explained in sec. 153 Abs 2 StGB (Austrian Criminal Law) that it is a misuse of authority to violate in an unjustifiable way such rules that serve to protect the assets of the beneficiary.

Business Judgement Rule

The Business Judgement Rule, which has its origins in US Corporate Law, regulates the prerequisites under which the management or director is free from liability despite an objectively wrong decision: Impartiality, expertise, good faith, and belief to have acted in the best interest and for the benefit of the company. If the business managers meet these requirements, it is assumed that their actions were appropriate. It is in the responsibility of the plaintiff in a liability case, i.e. the company or the shareholders/partners, to invalidate this assumption.

The German legislator already incorporated the rule into German law in 2005 by adding sec. 93 para. 1 s. 2 of the German Stock Corporation Act (Aktiengesetz – “AktG”), without, however, adopting the management-friendly burden-of-proof regulation.

Codification in Austrian Stock Corporation and Limited Liability Companies Act

As of 1 January 2016, this regulation has been incorporated into the Austrian Stock Corporation Act (sec. 84 para. 1a AktG) and the Austrian Limited Liability Companies Act (sec. 25 para.1a GmbHG): The business management acted in any case with the care due from a prudent businessman, “if he is free from outside interests when making business decisions and can assume based on appropriate information that he acts for the benefit of the company.”

This regulation is not entirely new in its content as theory and legislation already assumed a latitude for decisions, however, this ex ante view from the legal side facilitates for the management to free themselves from liability in discretionary business decisions which are usually subject to a considerable amount of uncertainty. If the management meets the legally determined requirements, i.e. a decision free from outside interests, based on appropriate information and for the benefit of the company, it acts within a “safe harbour” and does not have to fear adverse consequences in terms of liability and criminal law. Unfortunately, the question of how to allocate the burden of proof has not been addressed in Austria either. It remains to be seen whether the Supreme Court of Justice will clarify this issue.

Even if the requirements of the Business Judgement Rule are not met, the management is not necessarily liable, however, it will see itself in a considerable need to explain itself as it would have to prove that, ex ante, it had acted with due care despite violating the Business Judgement Rule.

Conclusion for the legal practice

Management should use the guidance provided through codification by the legislator to prevent any liability. Management and directors should therefore document as precisely as possible which information they had when they made a decision and why this decision was for the benefit of the company. In case of a criminal investigation, the management members could then additionally prove easier through the Business Judgement Rule why they have not acted in a misappropriate way.

Nora Michtner, Singer Fössl Rechtsanwälte OG, Wien, www.sfr.at