On 8 July 2014, the German Federal Court of Justice handed down a recently published decision which clarifies under which circumstances a German stock corporation may pay for a fine imposed on one of its directors (BGH II ZR 174/13). In 2005, the German Public Prosecutor office in Stade investigated the director for allegations of breach of trust. The company and its former director subsequently entered into a termination agreement according to which the company was to reimburse the former board member for any potential monetary sanction imposed as a consequence of the criminal proceeding against him. Ultimately, the company granted the board member a EUR 50.000 loan to pay his fine. Later, the company terminated the loan agreement and sued its former director for repayment of the loan. The first two instances dismissed the claim. The final appeal to the Federal Court of Justice, however, was successful. The senate distinguished between criminal or administrative offences which at the same constituted a violation of the board members obligations towards the company and other offences. In general, the supervisory board is responsible for such agreements with directors. However, if the criminal or administrative offence also constitutes a violation of the director’s duties (e.g. breach of trust), the company may only agree to reimburse a board member if the general assembly approves of such agreement. A decision by the general assembly is not required if the offense did not constitute a violation of the duties as a member of the board of directors. In that case, the supervisory board is the competent organ. Often, the facts are not clear yet when a company enters into a termination agreement which contains a reimbursement clause. According to the Federal Court of Justice, this does not hinder the conclusion of such agreement. The parties may agree on an advance payment or the company may reserve the right to reclaim. Click here for the full text of the decision (in German).
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