The Supervisory Board as a Representative of Investor Interests in the Start-up Sector

In the case of a limi­ted liabi­lity company, it is common prac­tice for inves­tors to be able to influence manage­ment decis­i­ons via another corpo­rate body, the advi­sory board. For this purpose, an advi­sory board is imple­men­ted, which is usually desi­gned as a genuine corpo­rate body by ancho­ring it in the artic­les of asso­cia­tion. Certain compe­ten­ces for the control of the manage­ment are shifted to the advi­sory board by provi­si­ons in the artic­les of asso­cia­tion or by rules of proce­dure, as a result of which these are with­drawn from the share­hol­ders’ meeting which is actually respon­si­ble (cf. Sections 37, 46 No. 6 GmbHG).

The need of inves­tors to influence decis­i­ons of the manage­ment, in the case of the AG, the board of direc­tors, exists to the same extent in the case of the AG as in the case of a GmbH. Direct influence on the manage­ment of the company is, howe­ver, made consider­a­bly more diffi­cult by the prin­ci­ple that the Execu­tive Board is free to issue instruc­tions (Sec. 76 (1) AktG). The only effec­tive instru­ment of control can be reser­va­tions of consent by the Super­vi­sory Board (Section 111 (4) S 2–5 AktG), which are widely used in practice.

In prac­tice, the parti­ci­pa­tion or share­hol­ders’ agree­ment also assigns tasks to the super­vi­sory board that are not rela­ted to the manage­ment of the company but are of signi­fi­cance for the rela­ti­onship between the shareholders.

Of central importance for the exer­cise of influence, parti­cu­larly for inves­tors, is firstly to have a say in the compo­si­tion of the Super­vi­sory Board, and then to have a say in the Company’s super­vi­sory and control­ling body via the members concer­ned. Ther­e­fore, inves­tors will regu­larly demand the right to appoint or dele­gate members of the Super­vi­sory Board.

Inves­tors are usually inte­res­ted — if they do not control the super­vi­sory board anyway — in subjec­ting certain tran­sac­tions to the appr­oval of a quali­fied majo­rity of the super­vi­sory board or of the members nomi­na­ted by them (so-called inves­tor majo­rity). Such regu­la­ti­ons can also only be stipu­la­ted in the share­hol­ders’ agreement.

Further legal diffi­cul­ties arise for the ques­tion of whether and under what circum­s­tances Super­vi­sory Board members may pass on infor­ma­tion to the inves­tors they repre­sent. First of all, Super­vi­sory Board members may not, in prin­ci­ple, disc­lose or pass on any infor­ma­tion that comes to their know­ledge in the course of their board acti­vi­ties, unless such disclo­sure would be in the inte­rests of the company. In the event of a breach of this duty of confi­den­tia­lity, the members of the Super­vi­sory Board are not only obli­ged to compen­sate for the damage caused by the disclo­sure (cf. Section 116 in conjunc­tion with Section 93 (1) sentence 3 AktG). In addi­tion, in the event of unaut­ho­ri­zed disclo­sure of infor­ma­tion, they may even face a crimi­nal convic­tion (cf. Section 404 AktG).

Howe­ver, if this regime were to remain in place, it would fail to meet the needs of prac­tice and, moreo­ver, would plunge the super­vi­sory board members concer­ned into a conflict of inte­rest. In prac­tice, ther­e­fore, it is argued in legal lite­ra­ture that in such cases implied consent to the disclo­sure of infor­ma­tion is to be assu­med, espe­ci­ally since the disclo­sure of the infor­ma­tion to the inves­tors may even be in the company’s inte­rest for the afore­men­tio­ned reasons.

The inde­pen­dence of the Super­vi­sory Board prevents direct influence by share­hol­ders, and the requi­re­ment that the Artic­les of Asso­cia­tion be amen­ded by the Annual Gene­ral Meeting makes Artic­les of Asso­cia­tion regu­la­ti­ons unat­trac­tive. Howe­ver, this does not have to mean a disad­van­tage in the compe­ti­tion of legal forms for start ups. Howe­ver, with the requi­site prudence and know­ledge of the legal rest­ric­tions, prac­ti­cal solu­ti­ons can be ancho­red at the level of the law of obli­ga­ti­ons, which help to enforce the inte­rests of the donors.

Christof.Schneider@Arqis.com

Dr. Chris­tof Alex­an­der Schnei­der is a part­ner in the Tran­sac­tions team of ARQIS in Düssel­dorf. He advi­ses on all issues of corpo­rate and stock corpo­ra­tion law, in parti­cu­lar in the context of the board of direc­tors’, super­vi­sory board’s and advi­sory board’s activities.