Boycotting the Supervisory Board by Permanent Absence? – Federal Court of Justice Rejects Appointment by Court

The German Federal Court of Justice (BGH) takes the stance that a supervisory board member boycotting the board by repeatedly being absent does not give rise to the right to have an additional member appointed to the supervisory board by a court, even if that means that the supervisory board therefore permanently lacks quorum. By decision of 9 January 2024 (case no. II ZB 20/22), the BGH upheld the judgment of a registration court. The BGH argues that it is indeed possible to pass a valid resolution on filing a petition for a court to remove a boycotting supervisory board member from office pursuant to s 103 (3) German Stock Corporation Act (AktG) with the votes of the two remaining supervisory board members even when the permanently boycotting board member is not present. It seems highly questionable whether this measure is enough to stop a supervisory board member passively stalling the process in practice.

Background

If one member of a three-person supervisory board is absent for a meeting, the supervisory board does not have a quorum. This may render the supervisory board unable to operate. While the shareholders have the right to remove such supervisory board member - even without good cause - at any time, this mostly requires qualified majorities as prescribed by law or by-laws in this context. When there is good cause relating to this supervisory board member (the member permanently being absent should constitute good cause), the supervisory board itself may file the petition for removal from office by court if the board has a quorum and the required majorities are reached. The appointment of an additional supervisory board member by a court, however, is only possible if the supervisory board has been understaffed for a certain period of time due to not having the required number of members.

As a result of this decision, the BGH put an end to a discussion in legal literature whether and to which extent a supervisory board member boycotting the work of the board by being absent may be equated to a resigned supervisory board member and an additional board member may be appointed by court. As much as a clarification on this matter may seem welcome, it may also pose immense difficulties in practice and render the affected corporation permanently incapable of taking action.

Background

A stock corporation with a three-person supervisory board had two shareholders (two companies), each holding a 50% interest. One supervisory board member was the mother of one of the shareholders' partners and therefore a related person. These partners and the supervisory board member formed a community of heirs (Erbengemeinschaft). When the stock corporation meant to assert claims against this community of heirs for which the management board required the approval of the supervisory board, the supervisory board member failed to attend the board meetings. As a consequence, the supervisory board lacked quorum and the corporation was unable to take action.

Quorum

According to s 108 (2) 2nd sentence AktG, the supervisory board has a quorum only if at least one half of the members of which it must be comprised, according to the law or the by-laws, participates in the adoption of the resolution, where no quorum has been stipulated by law or in the by-laws. At first glance, two members would therefore suffice to reach a resolution. However, sentence 3 of said provision prescribes that in any case at least three members must participate in adopting the resolution. In other words: a single member may stall any resolution of the supervisory board by not taking part in the adoption of the resolution, in particular by failing to attend board meetings.

Even when it comes to larger boards, supervisory board members who are permanently absent may boycott the adoption of resolutions when by-laws or rules of procedure provide for participation or majority requirements which exceed statutory requirements or are very particular.

Weaknesses of Remedies in Practice

1. REMOVAL BY GENERAL MEETING

A supervisory board member who does not fulfil his or her duties, in particular participating in meetings and adoptions of resolutions, may be removed from office by the general meeting at any time, s 103 (1) AktG. In this context, it does not even depend on the failure to act; the removal does not require a cause. What constitutes an - often insurmountable - obstacle, however, is the fact that while supervisory board members are elected by a simple majority, they may only be removed from office by a majority of three quarters of the votes cast unless the by-laws provide for a different majority or further requirements which hardly ever is the case; this is to prevent an arbitrary "coming and going". While it is true that seats on the supervisory board may be allocated as a shareholder or a group of shareholders sees fit subject to a simple majority, the removal of a member is only possible with the corresponding support of other shareholders. However, it is very rarely the case, especially in small stock corporations, that the supervisory board is appointed only in accordance with the intentions of the majority shareholder holding the simple majority. It is much more common that the shareholders attempt to reflect the proportions of equity interests or family lines or something similar.

When there are two shareholders with equal shares, two representatives of these shareholders are often complemented by a neutral supervisory board member; as an alternative, the two shareholding parties divide the appointment of the supervisory board, on the one hand, and the appointment of the management board, on the other hand, between themselves according to corresponding agreements. Boycotting the supervisory board by not participating in its meetings seriously disturbs this very balance of power and this cannot be resolved (anymore) in the event of disputes by removing such members on the basis of a resolution adopted by the general meeting due to a majority of three quarters of the votes being required by law.

2. SUPERVISORY BOARD FILING FOR A REMOVAL BY COURT

Apart from that, the law merely offers one other remedy. The court may remove a member of the supervisory board from office if grave cause is given in the person of that member pursuant to s 103 (3) AktG. The court removing a member, however, requires the supervisory board itself filing a corresponding petition. This begs the question, from a legal point of view, as to how the supervisory board is to decide on said petition when it does not have a quorum due to one member being absent. Regardless of this matter, the practical question arises as to how a majority within the supervisory board may be obtained in the above scenario when a corresponding part of the supervisory board members are partial to the boycotting member. Therefore, this sword, too, is probably too dull in most cases and does not qualify as an adequate remedy.

3. COURT APPOINTMENT IN CASE OF UNDERSTAFFING

Thus, the pivotal question is now whether and to which extent additional members may be appointed for the supervisory board by a court pursuant to s 104 (1) AktG. After all, a petition for this may be filed by, among others, the management board, a member of the supervisory board or by an individual shareholder. According to this view, it is assumed that the supervisory board does not have the number of members required - at least factually - for a quorum in case of a permanent boycott.

The BGH has now disagreed with this assumption. A member permanently being absent cannot be compared to a member leaving, for example due to death or resignation. Thus, the only options remaining are the removal of the member from office either by the general meeting or - if good cause is presumed and a petition of the supervisory board is reached - by a court. By means of teleological interpretation, the BGH extended the quorum of s 108 (2) 3rd sentence AktG beyond its express wording in its decision by granting the supervisory board the right to make a decision on filing a petition for removal from office by court for good cause even without the participation of the boycotting member, i.e. with just two members. Similarly pragmatic albeit dogmatically quite unconvincing solutions had already been created by the BGH in case of a voting prohibition of a supervisory board member (cf. BGH, decision of 2 April 2007, case no. II ZR 325/05).

Significance of the Decision in Practice

The opinion of the BGH is consistent and corresponds to the wording and the intention of the law. At the same time, it is hardly any help for the corporations affected which cannot simply vote out and replace a boycotting supervisory board member by a new one but are instead dependant on the assistance of a court.

In the end, there is a legal loophole in these cases which the BGH did not rectify with its judgment. It is unclear whether this was a conscious or unconscious decision but the latter cannot be excluded as the BGH expressly points out that the boycott of the supervisory board must be addressed by removing the relevant supervisory board member. According to the BGH, the remaining supervisory board members may file a petition with a court to remove the boycotting supervisory board member for good cause. In many cases, however, this is not an option because the proportions of the votes and interests amongst the shareholders or supervisory board members do not allow for it. To put it differently: the management board and the supervisory board generally only resort to the courts when the shareholders or the supervisory board as a body can indeed not agree on the removal of a boycotting supervisory board member or a petition to court for the removal for good cause. Filing a petition for an additional supervisory board member should usually be the last resort in case of a permanently boycotting supervisory board member. Contrary to what the BGH claims, the solution described by the BGH will in fact not be possible in a multitude of cases.

Very often, the power structures are very carefully balanced and each disturbance to this structure can result in substantial disputes and therefore cause damage. The one suffering from this is, first and foremost, the corporation, in particular the management board; there is a long list of business transactions that require the approval of the supervisory board according to the law, by-laws or rules of procedure. The BGH obviously did not consider the damages that can occur when a supervisory board is unable to take actions or pass important resolutions for a long period of time or when unpopular members of the supervisory board take advantage of the system pushing it to the very limits of legality.

Avoiding Disputes

Therefore and insofar as possible, precautions should be taken in the by-laws or - if this is not possible due to legal certainty - in a shareholders' agreement for the case that a supervisory board member boycotts the activity of the supervisory board by being absent, i.e. it should be possible for specific shareholders, in particular for the 'opposing' party, to remove this member in cases of doubt if good cause is given in the person. It should at least be agreed that the general meeting may remove a member and appoint a new one. It should also be considered to determine a provision deviating from the majority comprising at least three quarters of the votes cast pursuant to s 103 (1) 2nd sentence AktG.

Roland Startz

This blog post also appears in the Haufe Wirtschaftsrechtsnewsletter.