Concept and Fundamentals of the Supervisory Board
Der Supervisory Board is a central body of many corporations and other legal entities in German and European law. Its main function is to oversee and monitor the management, thus forming an essential element of corporate governance. Its legal structure, composition, rights, and duties are primarily set forth in the German Stock Corporation Act (AktG), the Co-determination Act (MitbestG), and other relevant legal regulations.
Significance and Function of the Supervisory Board
The primary responsibility of the Supervisory Board is to supervise and advise the management board or executive management. Its central task is to control management, provide strategic guidance, and approve strategic decisions where required by law. This supervisory function particularly serves to protect the company, its shareholders, as well as other stakeholders, such as employees or creditors.
Legal Bases of the Supervisory Board
Supervisory Board Requirement and Statutory Embedding
The requirement to establish a Supervisory Board is primarily governed by the German Stock Corporation Act (AktG). According to § 95 AktG, every stock corporation must have a Supervisory Board. Other legal forms, such as GmbH & Co. KGaA, cooperatives, and large GmbHs that are subject to the One-Third Participation Act (DrittelbG) or the Co-determination Act (MitbestG), are also required to establish a Supervisory Board.
Overview of Legal Regulations
- Stock Corporation Act (AktG): Sections 95 et seq. AktG govern the appointment, composition, rights, and duties of the Supervisory Board.
- Co-determination Act (MitbestG): Governs the equal representation on the Supervisory Board in companies with 2,000 or more employees.
- One-Third Participation Act (DrittelbG): Provisions for workplace-related co-determination for companies with at least 500 employees.
- Cooperative Societies Act (GenG): Provisions regarding the Supervisory Board in registered cooperatives.
- European Company Law: The Societas Europaea (SE) offers both the dualistic system (with Supervisory Board) and the monistic system.
Composition and Appointment of the Supervisory Board
Size and Composition
The number of Supervisory Board members depends on the size of the company and statutory requirements. According to § 95 AktG, the Supervisory Board generally consists of at least three members. However, the articles of association may provide for a higher number, divisible by three. In co-determined companies, the Supervisory Board consists of one half (MitbestG) or one third (DrittelbG) employee representatives, who are elected in specific procedures.
Election and Term of Office
Supervisory Board members are generally elected by the general meeting. Employee representatives on the Supervisory Board are elected in special procedures per the Co-determination Act, One-Third Participation Act, or Works Constitution Act. The term of office is a maximum of four years under § 102 AktG, with re-election permitted.
Requirements and Incompatibilities
According to § 100 AktG, certain persons may not be appointed as members of the Supervisory Board. Incompatibilities exist particularly for members of the management board of the same company, close family ties, or simultaneous membership in too many company organs. Special requirements also apply to the chair of the Supervisory Board.
Duties, Rights, and Obligations of the Supervisory Board
Supervisory and Control Duties
The main task of the Supervisory Board is to monitor and supervise the management bodies (§ 111 AktG). It is required to keep itself informed about business development, planned strategies, and significant business transactions. Key decisions, such as major investments or large corporate contracts, often require the Supervisory Board’s approval, provided this is stipulated by the articles of association or the rules of procedure.
Appointment and Removal of the Management Board
The Supervisory Board appoints and removes the members of the management board (§ 84 AktG) and sets their remuneration. It also decides on possible removals for special reasons, such as gross breaches of duty or loss of confidence.
Reporting Obligations and Audit of Annual Financial Statements
The Supervisory Board reviews the annual financial statements and management report and prepares its own report (§ 171 AktG), which is to be presented at the general meeting. In listed companies and companies of public interest, this also includes oversight of accounting, risk management systems, and compliance measures.
Calling a General Meeting
According to § 111 subsection 3 AktG, the Supervisory Board may call an extraordinary general meeting in the company’s interest. This ensures the company remains capable of acting in exceptional situations.
Obligations of Participation
The Supervisory Board is obliged to regularly hold meetings and pass resolutions. Compliance with the duty of care (§ 116 AktG), confidentiality, and independence are of key importance. Members are personally liable for breaches of duty, especially in the case of insufficient supervisory activity.
Special Regulations and Particularities
Co-determination in the Supervisory Board
In German companies with more than 500 or 2,000 employees, employee representatives are to be included in the Supervisory Board under the DrittelbG or MitbestG. Thus, the interests of employees are represented at company level; the MitbestG provides for equal representation (50% share of employee representatives).
Committees in the Supervisory Board
To fulfil complex supervisory tasks, the Supervisory Board may form committees (§ 107 subsection 3 AktG), such as audit, risk, or nomination committees. Particularly, listed companies are required to establish audit committees to monitor annual financial statements and internal control systems.
Remuneration of Supervisory Board Members
The remuneration of Supervisory Board members is stipulated in the articles of association or decided by the general meeting (§ 113 AktG). It depends on the scope of their duties and may include both fixed and variable components.
Responsibility and Liability of the Supervisory Board
Duties of Care and Responsibility
Members of the Supervisory Board are subject to special duties of care (§ 116 AktG in conjunction with § 93 AktG). In the event of a breach of duty, such as inadequate supervision or flawed resolutions, there is personal liability towards the company for compensation of the resulting damage.
Limitation of Liability – Business Judgement Rule
The so-called Business Judgement Rule (§ 93 subsection 1 sentence 2 AktG) also applies to the Supervisory Board. It protects members of governing bodies from liability when they make business decisions based on appropriate information in the best interests of the company.
International Context and Comparison
European Regulations and the German Dualistic System
By international comparison, the German dualistic system – separation of Supervisory Board and Management Board – is largely unique. Other countries, such as the United Kingdom, have the monistic system with a single board of directors. European company forms such as the SE (Societas Europaea) allow a choice between both models.
Literature and Further References
- Stock Corporation Act (AktG)
- Co-determination Act (MitbestG)
- One-Third Participation Act (DrittelbG)
- Cooperative Societies Act (GenG)
- German Corporate Governance Code
- European Directives on Corporate Governance
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This article provides a comprehensive and detailed overview of the legal foundations, duties, structure, responsibilities, and international aspects of the Supervisory Board in German and European corporate law.
Frequently Asked Questions
What legal requirements must members of a Supervisory Board in Germany meet?
Members of a Supervisory Board in Germany are subject to various legal requirements, which are mainly stipulated in the Stock Corporation Act (AktG), but also partly in the Co-determination Act (MitbestG), the One-Third Participation Act (DrittelbG), and other special laws. As a basic rule, a Supervisory Board member must have full legal capacity (§ 100 subsection 1 AktG). Under § 100 subsection 2 AktG, further requirements apply, in particular that members of the Supervisory Board may not simultaneously serve on the management board of the same company, and former management board members may generally only join the Supervisory Board two years after leaving the board, unless they are elected at the proposal of shareholders holding at least 25% of the shares. Additional exclusion criteria must be observed, such as a criminal conviction for insolvent trading, fraud, or embezzlement in a commercial context within the past five years. For certain companies (especially those that are capital market-oriented) further qualification requirements apply under § 100 subsection 5 AktG, such as the requirement that at least one member of the Supervisory Board must have expertise in accounting or auditing. Sections 105 and 107 AktG contain further incompatibility rules, e.g. auditors who have audit agreements with the company may not serve on the Supervisory Board. It must also be observed that a Supervisory Board member may hold a maximum of ten mandates, no more than five of which in co-determined companies (§ 100 subsection 2 sentence 1 No. 1 AktG).
What rights and duties does the Supervisory Board have under the Stock Corporation Act?
The Stock Corporation Act primarily regulates the rights and duties of the Supervisory Board in Sections 111 et seq. AktG. Core tasks include supervising the management by the management board (§ 111 subsection 1 AktG), whereby the Supervisory Board can inspect all relevant documents and require the management board to report regularly and as needed. The Supervisory Board also has decision-making rights, as in specific cases (e.g., for certain transactions requiring Supervisory Board approval by the articles of association) it must grant its consent. Appointment and removal of management board members is also the responsibility of the Supervisory Board (§ 84 AktG). Supervisory Board members are subject to duties of care; they must diligently and impartially perform their duties and may be personally liable for breaches (§ 116 AktG in conjunction with § 93 AktG). The Supervisory Board also has the right to convene a general meeting if the welfare of the company so requires (§ 111 subsection 3 AktG). Confidentiality obligations protect confidential company information, and breaches may even entail criminal consequences (§ 116 sentence 3 in conjunction with § 93 subsection 1 sentence 3 AktG).
When is it mandatory to form a Supervisory Board in Germany?
Whether and under what circumstances a company must establish a Supervisory Board depends primarily on its legal form and size. For the Stock Corporation (AG), a Supervisory Board is mandatory under § 95 AktG, regardless of the company size or number of employees. In the case of a GmbH, a Supervisory Board is only mandatory if the company is subject to co-determination, which is generally the case with more than 500 or 2,000 employees (DrittelbG or MitbestG). For the SE (Societas Europaea), the European rules apply, requiring a supervisory or management structure as defined in the articles of association. Other company forms such as the GmbH & Co. KG may voluntarily establish a Supervisory Board if stipulated in the partnership agreement. Separate provisions apply to foundations and cooperatives. The specific structure of the Supervisory Board (size, composition, election of members) is determined by special legal provisions and the articles of association.
What liability risks do Supervisory Board members face?
The liability of Supervisory Board members is closely tied to the due care expected of a proper and conscientious governing body. According to § 116 AktG in conjunction with § 93 AktG, they are liable to the company for damages if they negligently breach their supervisory and monitoring duties, for example, by failing to supervise the management board, failing to review risk or compliance systems, or giving faulty approval to transactions requiring consent. The liability is generally internal, meaning compensation for damages incurred by the company, but gross breaches of duty may also result in external liability (e.g. for delaying insolvency filings under § 15a InsO). Once aware of damage, the burden of proof for compliance with duties generally lies with the respective Supervisory Board member. Liability cannot be limited or excluded by company resolutions. Discharge by the general meeting is only effective to the extent that the actual circumstances and known risks have already been disclosed. Directors and Officers liability insurance (D&O) is often taken out but may not cover gross negligence or intent.
How are Supervisory Board members appointed and removed under the law?
Appointments to the Supervisory Board are mostly made by the company’s general meeting, unless otherwise provided in the articles of association or required by co-determination laws (§ 101 AktG). The articles of association determine the cycle and duration of appointments, which in an AG may not exceed four years (§ 102 AktG). In co-determined companies, employees – depending on company size – elect a portion or half of the members (§§ 7, 16 MitbestG; § 4 DrittelbG). Removal is generally only permitted for good cause (§ 103 AktG), for example, in cases of gross breaches of duty or when trust has been irreparably damaged. Special procedural rules apply to co-determined Supervisory Boards, such as approval requirements from relevant election bodies. After removal, the vacancy must be promptly filled, especially if otherwise the minimum number of Supervisory Board members would be undershot.
What is the significance of Supervisory Board committees and how are they regulated in law?
According to § 107 AktG, the supervisory board may establish one or more committees. For stock corporations with more than 2,000 employees, a mandatory audit committee is required by law, primarily responsible for accounting and auditing (§ 107 para. 4 AktG; § 30 MitbestG). The composition and competences of the committees must be governed by the articles of association or rules of procedure. According to statutory provisions, committees may assume preparatory and supervisory functions and may be delegated certain decision-making authorities (e.g., personnel matters, audit and risk committees). Nevertheless, the full supervisory board remains responsible for all non-transferable control and oversight tasks (such as appointment and dismissal of the management board) and is jointly and severally liable.
What role do diversity and independence play in the supervisory board from a legal perspective?
Since the introduction of the Act on Equal Participation of Women and Men in Leadership Positions (FüPoG), quota regulations have applied to large listed companies (§ 96 para. 2 AktG). These require that at least 30% women and 30% men must be appointed to the supervisory board in new elections. The law provides for sanctions in the event of non-compliance with the quota (“empty chair”). Furthermore, according to §§ 100, 107 AktG, certain members are required to be independent, especially in the audit committee. The articles of association or rules of procedure may set further requirements regarding independence, expertise, or diversity, which must then be observed as mandatory. These regulations ensure objective and diverse oversight—violations may lead to invalid resolutions and liability risks.
