Reduction of Management Board remuneration in the event of a deterioration in the economic situation of the stock corporation

Management board remuneration can be reduced in the event of a deterioration in the economic situation of a stock corporation. An individual causal contribution to the deterioration of the economic situation is not a mandatory requirement for this but must be taken into account as a significant circumstance in the consideration. The standard for the decision is an assessment of all circumstances based on equitable consideration. This follows from a ruling by the Federal Court of Justice.

Facts of the case

The ruling of the Federal Court of Justice (BGH) is based on the following facts: On November 14, 2019, a designated member of the executive board concluded a service contract with a stock corporation (AG) for the appointment as a member of the executive board. The service contract stipulated the commencement of management service on January 1, 2020, a fixed annual remuneration of 240,000 euros (20,000 euros per month) and a performance-related bonus. Due to the difficult economic situation, a minimum bonus was also agreed for the 2020 and 2021 financial years.

Before the board member's commencement of service, insolvency proceedings were initiated over the assets of the stock corporation, and an insolvency administrator was appointed. The insolvency administrator terminated the service contract as of March 31, 2020 and informed the executive board that there was no possibility of employment for him and that his remuneration would be reduced to 8,000 euros per month, with the bonus being forfeited.

The management board considered the reduction in remuneration to be unjustified and filed a lawsuit for payment of the agreed fixed remuneration and the bonus. The Darmstadt Regional Court dismissed his claim. The appeal lodged against this was also unsuccessful. The revision is directed against the unsuccessful appeal.

The ruling of the BGH of October 22, 2024 (Ref. II ZR 97/23)

The BGH overturned the decision of the Court of Appeal and remanded the case back. The Court of Appeal had applied an incorrect standard of review. In the context of the applicable Section 87 para. 2 of the German Stock Corporation Act (AktG), it depends on whether maintaining the original remuneration is unreasonable for the company. In contrast, the Court of Appeal examined whether the reduction of the management board remuneration was inequitable.

Furthermore, the BGH clarified that, in assessing fairness, all circumstances of the individual case must be taken into account and weighed against each other. It is not necessary for the board to be responsible for or to be attributed to the deterioration in the company's situation it. However, this fact must be considered as a significant factor in the balancing of interests.

Practical note

In the event of a deterioration in the economic situation of the company, the remuneration of the management board can be reduced to an appropriate level in accordance with Section 87 para. 2 sentence 1 AktG. The requirements for a reduction in management board remuneration are high and confirm the exceptional nature of the reduction claim. In principle, the supervisory board is responsible for this and decides unilaterally by resolution. However, the executive board member concerned can (and should) be consulted as a precautionary measure.

If the supervisory board fails to reduce the remuneration in breach of its duties, it may even be liable for damages towards the company pursuant to Section 116 sentence 1 and Section 93 para. 2 AktG.

Once insolvency proceedings have been opened, the authority to reduce the management board's remuneration lies with the insolvency administrator. The right to reduce remuneration pursuant to Section 87 para. 2 AktG is also not superseded by the insolvency administrator's special right of termination pursuant to Section 113 of the German Insolvency Code (InsO), whereby the administrator could terminate the entire management board contract with immediate effect. The BGH confirmed these principles in its decision.

The key point of the decision, however, is that the board does not need to be held responsible for the company's deteriorating situation. In the legal literature, it is argued that the reduction in management board remuneration is only equitable if the deterioration in the economic situation is also “attributable” to the management board. In addition, there is disagreement as to how this attribution is to be understood and whether this requires contributory negligence to the situation. The BGH has now ruled that such an attribution is not necessary. This is to be agreed with. The protection of the management board member has to be taken into account through correspondingly high requirements for the resolution. Both the supervisory board in its supervisory function, and the management board in its management function, should document the causes of a deterioration in the company’s situation in the minutes of the meeting in order to be prepared in the event of subsequent proceedings.