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Compliance Management Structures in Germany: An indispensable tool for release from liability

Compliance-Management-SystemeDevelopments in recent years regarding directors’ and officers’ liability make it clear: The personal – otherwise unlimited – liability risk of

  • general managers,
  • supervisory bodies and
  • executives

is omnipresent. It is quite conceivable that one or the other has restless nights because, in addition to civil law consequences, he must also have a growing fear of criminal prosecution.

Business judgement rule as the basis for corporate decisions

In order to avoid such restless nights and to be able to effectively counter accusations of non-compliant conduct, general managers, supervisory bodies and executives must be able to demonstrate compliance with a comprehensive set of supervisory, fiduciary and legality duties.

The “business judgement rule“, which, among other things, is standardised in the German Stock Corporation Act, regulates a possibility of a release from liability regarding the liability risks created by these obligations – with the exception of the mandatory legal obligations – in favour of the management bodies: For example, general managers are not liable if they have acted

  • within the framework of corporate decisions, and thus far removed from the statutory legality duties
  • in good faith,
  • without special interest or extraneous influences,
  • in the interest of the corporation and
  • on the basis of reasonable information.

Legal expertise is required specifically for a correct interpretation of the individual requirements. In addition to the observation of these guidelines, care must also be taken to document the decision criteria as stringently and precisely as possible in order to be able to prove proper compliance with the business judgement rule in the event of a dispute.

Release from liability via a comprehensive compliance management structure

In addition to adherence to the business judgement rule, a comprehensive compliance management structure can also lead to a release from liability. It certifies the efforts of the general managers, supervisory bodies and executives to ensure that the corporation management complies with regulations.

When deciding on a course of implementation for a compliance management system (CMS), general managers (in a corporate decision) have extensive discretionary powers which may, however, be reduced in order to ensure a minimum standard regarding their own compliance with the regulations. This is particularly the case for those companies that generate a high risk and liability potential by maintaining a considerable employee base and international activities in regions or focal points of activity that are occasionally sensitive to compliance violations.

The risks associated with this, which can lead to criminal prosecution or often to liability risks threatening the existence of the company even in the case of slight negligence, can be reduced to a minimum by means of an adequate CMS.

Individual design of a compliance management system for each company

But when can a CMS contribute to such a reduction and thereby to a release from liability? To answer this question, a CMS must always be viewed as an individual reflection of the essential requirements for the company: In this context, individual risks (such as the industry environment) as well as the business orientation and objectives play an important role in the ability to ensure a sufficient level of supervision. Furthermore, a sensible organisational system is required which, on the one hand, must also be adapted to the company and, on the other hand, requires constant (re)examination and adaptation following the implementation. As past but also recent developments show, this affects numerous sectors of the economy, from the financial sector to the manufacturing industry as well as associations, foundations or non-profit organisations.

A one-size-fits-all solution by means of a rigid, prefabricated compliance concept is therefore not feasible on grounds of the differentiated requirements – due to the individual corporate objectives. However, at least in approach, CMS often have similar basic structures and procedures. Thus, after an initial analysis to identify individual risks by means of due diligence and a review of any existing measures for compliance-compliant behaviour, the result is a CMS designed to necessitate constant monitoring after implementation in order to ensure company-specific adaptation.

Directors and officers insurance (D&O) is not an exemption from all liability risks

Contrary to frequent assumptions, taking out D&O insurance (also known as directors’ and officers’ liability insurance) does not exempt you from all personal liability risks and only suffices to a limited extent as a tranquilliser for managers. Practice shows that many insurance companies essentially refuse to settle claims that arise. Frequently, considerable effort is required to persuade the pecuniary loss liability insurers to at least make a partial payment.

In order to avoid having to pay out the insured amount, the insurers often make the accusation that the persons concerned had deliberately caused the financial losses. Furthermore, it is often questionable whether the liability limit of the concluded D&O insurance is at all sufficient to cover potential risks and damages. Any amounts exceeding this insured sum (in addition to the compulsory deductible) will then be borne personally by the relevant persons. It should also be noted that incidental costs – such as consultant fees – are not covered by the insurance.

It is therefore advisable not to take the conclusion of a D&O insurance policy and the associated details lightly and to inform oneself, as a potentially affected general manager as well as a member of the supervisory board or an executive, whether and how such an insurance policy is in place and whether it provides comprehensive coverage of all risks.

Functioning compliance management structures are essential

Functioning compliance management structures are also indispensable beyond any existing legal obligations in order to effectively counter personal liability risks, to effectively avoid damage to reputation in the long term and, not least, to be able to make transaction processes significantly more transparent and more legally secure for the management bodies involved. It is undisputed that maintaining intact compliance structures is a cardinal point of any corporate management.

The implementation, functional reliability and adaptation of compliance management structures is also required of the jurisdiction and the authorities. No manager, no supervisory board member and no executive would like to find himself in court facing the fact that in his case a personal liability in civil or even criminal terms exists and thus, under certain circumstances, his own and his family’s existence is threatened because the compliance with regulations and the structural processes indispensable for this have not been sufficiently monitored.

Nor does anyone in their company want to address questions about why inadequate measures were implemented to protect employees or customers. If one realises the negative effects, both personal and company-related, in this context, it becomes clear that adhering to old tenets such as “we have always done it this way”, as one often hears in practice, can no longer be acceptable.

WINHELLER advises on compliance management structures

Our experienced compliance attorneys can help your company establish a functioning CMS to successfully minimise liability risks. Don’t hesitate to reach out to our compliance experts with any questions!

Continue reading:
Compliance Management Systems in Germany

Dr. Constantin Goette

Dr. Constantin Goette

Dr. Constantin Goette specializes in corporate law and advises on corporate governance, directors' and officers' liability and compliance issues.

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