Reduction of executive board compensation in the event of a deterioration in the economic situation of the stock corporation

If the economic situation of a stock corporation deteriorates after the compensation of the executive board has been determined, the supervisory board shall reduce the total compensation of the members of the executive board to an appropriate level if the continued granting of the full compensation would be inequitable for the stock corporation. However, high standards are set for this. This follows from a ruling by the Karlsruhe Higher Regional Court ("OLG").

Facts

The ruling of the OLG Karlsruhe is based on the following facts: The retired member of the executive board of a stock corporation (hereinafter: "AG") sought payment from the AG of the outstanding compensation for the period from January 2014 to March 2016 inclusive under his employment contract as a member of the executive board.

From January to August 2014, the executive board member received only EUR 10,000 gross instead of the agreed EUR 15,000, and subsequently from September to March 2016 only EUR 6,000 gross. Due to the tense economic situation, the AG invoked Section 87 (2) sentence 1 of the Stock Corporation Act ("AktG"). According to this, the compensation of the Board of Management may be reduced unilaterally in the event of a deterioration in the economic situation and if it would be inequitable to continue granting the compensation. A resolution of the supervisory board is required for this. The executive board member did not agree to the reduction in his compensation and therefore filed a lawsuit.

The Mannheim Regional Court upheld the payment claim in full in the first instance. The stock corporation appealed against this ruling.

Judgment of the OLG Karlsruhe of February 7, 2022 - Ref. no.: 1 U 173/20

The appeal before the OLG Karlsruhe was only partially successful.

The OLG ruled that the claim for payment of executive board compensation existed on the merits. The supervisory board had not validly resolved to reduce the compensation for the periods in question. Nor was the court able to decide retrospectively pursuant to Section 87 (2) sentence 1 alt. 2 AktG, as the supervisory board had not passed a motion required for this purpose.

However, the compensation claims for the years 2014 and 2015 were already time-barred because the action was initially served - incorrectly - on the chairman of the executive board of the AG. Instead, the supervisory board was responsible for representing the AG in dealings with the management board, so that the statute of limitations was not suspended in the absence of service of the action. The AG was therefore only (still) obliged to pay the outstanding remuneration for 2016.

Practice note

Pursuant to Sec. 87 (2) Sentence 1 AktG, the remuneration of the executive board may be reduced to an appropriate level. The supervisory board is responsible for this and decides unilaterally by (express) resolution. The decision shall be communicated to the executive board member concerned. The approval of the executive board is not required. However, the executive board member concerned may be heard as a precautionary measure.

However, the requirements for reducing compensation are high. Compensation may not be reduced solely because of disappointing performance by executive board members. This is because the continued granting of the compensation has to be inequitable for the AG. Inequity exists in particular if the insolvency of the AG would otherwise be unavoidable or if there is a cumulative effect of loss of dividends, mass redundancies and wage cuts.

Whether and up to what amount the remuneration can be reduced shall always be examined for the individual case. The current compensation can be reduced, but not pensions, surviving dependents' benefits or benefits of a related nature. The compensation must be reduced to the "highest possible compensation". The extent of the deterioration in the situation of the company since the date of the compensation agreement, any fault on the part of the executive board member for the deterioration and the personal circumstances of the executive board member shall be taken into account in the assessment decision. It should also be noted that in the event of a reduction, the executive board has a special right of termination in accordance with Sec. 87 (3) Sentence 4 AktG.

The supervisory board may only refrain from reducing the remuneration in exceptional cases. If the supervisory board fails to reduce the compensation in breach of its duties, it may even be liable for damages pursuant to Sec. 116 Sentence 1, Sec. 93 (2) AktG. For the supervisory board it may therefore be expedient in some cases to make use of the possibility to request a decision on the reduction of the executive board compensation by the competent court.

According to prevailing opinion, the principles for reducing the remuneration of the executive board of the AG are not transferable to the managing director of the limited liability company ("GmbH"). Section 87 (2) AktG is also not applicable, as according to case law the provision represents a "foreign body within the legal system" and must therefore be interpreted restrictively. Unlike in the AG, a remuneration adjustment in the GmbH always requires the consent of the managing director. Only in blatant exceptions is the managing director obliged to agree to the adjustment on the basis of his fiduciary duties under company law as an organ of the company.