Corporate Law03.04.2020 Newsletter

Organisation and duties of corporate bodies during the corona crisis

(Status: 3 April 2020)

The corona crisis poses enormous challenges for medium-sized and large companies alike: companies and their corporate bodies must maintain their capacity to act and, despite the relief provided by the state packages of measures, managing directors, board members and supervisory board members remain obliged to avert economic damage to the company. The following overview identifies the most important organisational and substantive rules for the executive bodies of corporations during the corona crisis.
 

1. Ensuring the quorum of the corporate bodies

Personal meetings of corporate bodies are often not possible at present. First of all, there are internal measures that can be taken to maintain the quorum and, secondly, the legislator has provided remedies in certain areas through its Act to Mitigate the Consequences of the COVID 19 Pandemic in Civil, Insolvency and Criminal proceedings [Gesetz zur Milderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht].

 

Management of a GmbH[1] / board of directors of an AG[2]

There are no legal changes for the organisation of representative bodies.

If the rules of procedure of the board of directors/management do not yet provide for the adoption of resolutions by telephone or in writing, they need to be supplemented accordingly. The practicability of this depends on who is authorised to make changes according to the statutes or rules of procedure.

In addition to this, the usual safety precautions apply:

  • If necessary, further powers of attorney should be granted to employees in order to maintain capacity to act. To be on the safe side, we recommend their notarial certification and a time limit.
  • To the extent resolutions requiring notification to the commercial register have to be adopted, allowance should be made for the extended processing times at the commercial register at present.
  • Direct meetings of all board members/managing directors should be avoided, if possible, in order to avoid them infecting each other.

 

Shareholders’ meeting of a GmbH

Many GmbH statutes already provide for the adoption of resolutions at the shareholders' meeting via telephone or video conference. Should this not be the case, an amendment fundamentally should be considered. However, such amendment of the statutes needs to be notarised and entered in the commercial register - both of which are currently only possible with difficulty.

There is still the possibility of adopting resolutions by written procedure. According to the new legal regulation, this no longer requires the consent of all shareholders. The cooperation of the required majority of shareholders is sufficient. All shareholders must be given a reasonable period of time to cast their votes.

This legal facilitation does not apply to resolutions that require notarisation.

 

General meeting of an AG

The most extensive legal changes concern the general meeting. Under certain conditions, this can now also take place as a "virtual general meeting".

It also no longer has to take place within eight months of the end of the financial year, rather by 31 December 2020 at the latest. Due to the many general meetings that have doubtlessly now been delayed, there is a possibility of a - limited - advance payment on the dividend even without a corresponding authorisation in the statutes.  

 

Supervisory board / advisory board

The decision of the board of directors on the use of the statutory facilitations for the general meeting requires the consent of the AG’s supervisory board. The supervisory board can issue this consenting resolution by telephone or in writing, even if this is not stipulated in the statutes or the rules of procedure or if not all members agree to the procedure.

There are no further legal changes for supervisory boards of an AG or GmbH and advisory boards of a GmbH. Here, the rules of procedure will need to be checked and adapted insofar as they do not yet provide for the possibility of voting in writing or by telephone.

 

2. Duties of the corporate bodies during a crisis

The phrase "duties of the corporate bodies during a crisis” is generally understood by the legal literature as not referring to a general crisis such as the corona crisis, but to a situation in which the company can no longer obtain outside capital at normal market conditions. Such a "liquidity crisis" is the preliminary stage to insolvency.

However, the corona crisis can quickly lead to a liquidity crisis. It therefore seems sensible to already keep in mind during the general corona crisis what additional obligations the corporate bodies will gradually take on as the crisis develops.

 

Management of a GmbH / board of directors of an AG

The current corona crisis fundamentally does not change the scope of duties of the board of directors or management. The general rules on rights, obligations and the standard of care to be exercised continue to apply.

The following general obligations should be highlighted:

  • Obligation to install a monitoring system for the early detection of developments that could endanger the company's existence (legally standardised for the board of directors, but also applies to the managing director of a GmbH in a form adapted to the company’s size).
  • Duty of the management bodies to protect assets (preservation of the share capital or capital stock, caution with shareholder loans and cash pools).
  • Responsibility for the health of employees (protection against COVID-19 through hygiene measures, tracking of suspected cases and actual cases of illness, home office).

 

In the corona crisis, the following "initial crisis obligations" must also be observed:

  • General duty of the management bodies to monitor the economic situation of the company on an ongoing basis.
  • If there are signs of a crisis (i) they must draw up a statement of assets and liabilities in order to gain an overview of the company's financial situation and (ii) draw up a general restructuring plan.

If the company is heading towards a crisis, the following immediate measures must be taken to stabilise it:

  • In organisational terms, reporting and decision-making channels must be shortened, documentation and communication during crisis management must be defined and an information system must be set up to ensure that all information required to assess the economic situation reaches the management bodies.
  • From a financial point of view, besides the usual measures of liquidity management (e.g. freeze on investments, acceleration of invoicing, sale of receivables), the statutory relief measures recently created in the corona crisis in particular must be examined to see whether or not they can be exploited:

- Compensation for declining turnover by exploiting subsidies

- Cost reduction through short-time work; review of payment obligations in contracts (deferment/ suspension of rents, review of supplier relationships); tax deferral or adjustment of advance tax payments.

Further effects of the corona crisis / a possible subsequent liquidity crisis:

  • Depending on the severity of the crisis, abolition of the division of responsibilities and thus joint and several responsibility of all managing directors. The obligation to monitor the financial situation of the company is affirmed in the event of a critical escalation, regardless of the specific departmental responsibility.
  • Tasks that can be delegated under normal circumstances fall back into the original responsibility of the management
  • Shorter reporting intervals to involve the other corporate bodies are also recommended (see below).

 

General meeting / shareholders' meeting

There are no special obligations for general meetings or shareholders' meetings in the corona crisis. However, the shareholders’ meeting or general meeting must be convened by the management bodies at the latest when half of the share capital or capital stock has been lost. This should enable the owners to initiate a reorganisation. However, the time will regularly be too late to take measures to reorganise.

In a GmbH, with its typically smaller circle of shareholders, it is therefore definitely advisable to already convene a shareholders' meeting at an earlier date. A shareholders’ meeting also has to be convened, namely, when a crisis exists or when the company’s welfare demands it.

 

Supervisory board / advisory board

The supervisory board already has increased monitoring duties in the current corona crisis. Depending on the effects upon the company, monitoring gradually changes from accompanying to supportive monitoring, extending even to formative monitoring.

In exceptional situations such as the corona crisis, periodic information is not sufficient for the supervisory board. The regulation of information, or in the absence of this, a pertaining agreement between the board of directors and the chairman of the supervisory board, must provide for immediate reporting in special and urgent cases.

In times of crisis, it is advisable to make an oral report in advance and to submit a detailed written report afterwards. This ensures the necessary speed. When using electronic communication, security standards must be observed. Confidentiality is particularly important in a crisis.

In the case of large supervisory boards, the establishment of ad hoc committees is a good way of reacting more quickly.

A generally increased monitoring obligation in times of crisis also exists for the optional supervisory board (advisory board). However, the intensity of the monitoring of the management does not have to increase to the same degree as for the supervisory board of an AG.

 

[1] Translator’s Note: “GmbH”: Gesellschaft mit beschränkter Haftung - German limited liability company

[2] Translator’s Note: “AG”: Aktiengesellschaft – stock corporation

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Sarah Scharf

Sarah Scharf

PartnerAttorney

Konrad-Adenauer-Ufer 23
50668 Cologne
T +49 221 2091 408
F +49 221 2091 333

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