German Stock Corporation Act ruling limits special representative powers

Out-Law Analysis | 30 Sep 2019 | 4:02 pm | 3 min. read

The German Stock Corporation Act does not provide 'special representatives' with rights to bring legal action against shareholders, and those special representatives can be held liable for breaching their legal duties if they do so, a court has confirmed in a landmark ruling.

In the case before it, the Regional Court of Heidelberg ordered a former special representative at a German stock corporation, to pay €1.5 million in damages and legal fees to the company. It reached its decision after determining that legal proceedings that the special representative had brought against the company at the request of minority shareholders would not have taken place, at cost to the company, had he complied with their legal duties in his post.

While the decision is the subject of appeal, it provides clarification on the liability of 'special representatives' under the Stock Corporation Act and suggests their powers are more limited than previously thought.

Role of the special representative under the German Stock Corporation Act

The German Stock Corporation Act (Aktiengesetz) applies to stock corporations. The Act provides scope for shareholders to have a 'special representative' appointed to act on their behalf and review the actions of both the management board and supervisory board.

The position of the special representative is a personal, non-transferable position that is established by resolution through the annual shareholder meeting of a stock corporation.

The legal proceedings

The case before the Regional Court of Heidelberg involved a German stock corporation with over 2,400 employees, and its former special representative – an attorney and managing partner of a Düsseldorf-based law firm.

In 2015, the business held its annual shareholder meeting at which minority shareholders pushed through the appointment of the special representative. It was the shareholders' instruction to press charges on behalf of the company against two shareholders and several members of the company's management and supervisory boards over alleged unlawful dividend payments.

Following his appointment, the special representative acted as instructed and initiated proceedings, claiming approximately €15.5 million in damages.

In spring 2018, the Karlsruhe Higher Regional Court (Oberlandesgericht) decided that the appointment of the special representative at the annual shareholder meeting in 2015 was null and void and that his appointment therefore had been unlawful.

The special representative did not pursue an appeal against the ruling before the Federal Court of Justice (Bundesgerichtshof) and instead resigned from his position. However, in tandem with his law firm, the special representative maintained their claims for fees against the company both for his assignment as well as for work carried out by the firm's attorneys. In November 2018, the company filed a counterclaim in which it claimed damages it had incurred as a result of paying the special representative's fees.

Ruling of the court

On 12 September 2019, the Regional Court of Heidelberg issued its judgment in this matter. The court awarded the company damages in the amount of €1.5 million against its former special representative.

The court held that the special representatives' filing of an action against the company constituted a breach of duty, as it should have been "obvious that there was no sufficient chance of success". In particular, the court noted that the German Stock Corporation Act does not provide the special representative with the possibility to bring an action against shareholders.

According to the Heidelberg court, the special representative should have foreseen that he "had gone beyond the limits of the relevant provision of the German Stock Corporation Act". The court held that if he had observed his duties as special representative, he would not have brought forward the claims he did and that, as a result, the company would have not incurred costs in attorney and court fees in the amount of €1.5 million.

The former special representative to the company has confirmed that he will appeal the decision to the Higher Regional Court (Oberlandesgericht) of Karlsruhe.

Consequences of the ruling

While the judgment is not yet final, it is the first time that a German court has imposed a penalty on a special representative based on the grounds that his actions were in breach of duty under the German Stock Corporation Act.

The decision in favour of the company is a landmark decision, as members of management and supervisory boards have repeatedly complained that the position of the special representative is often abused by minority shareholders to pursue their agenda instead of using it to the benefit of the corporation, to hold directors to compliance with their duties and address misconduct.

The case has been followed closely by experts. Many view the decision of the Heidelberg court as a first step towards a more restrictive approach to the broad power of special representatives under the German Stock Corporation Act.

Moritz Maaßen is an expert in dispute resolution at Pinsent Masons, the law firm behind Out-Law.