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Advantages and Disadvantages of a Voluntary Supervisory Board for Medium-Sized Limited Liability Companies

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published on 12 April 2021 | reading time approx. 5 minutes

  

Whereas in stock corporations the supervisory board supervises corporate policy, in a limited liability company this task generally falls to the shareholders' meeting. In times of economic and technological challenges, it is quite common that the members of the shareholders' meeting alone cannot or do not want to determine the corporate policy, decide on important measures of the management and supervise it. The question of setting up a supervisory board then arises, especially for medium-sized companies.

 

  

  
 

      

Supervisory Board as an element of good corporate governance

Good corporate governance is not only an essential element of good corporate governance geared to the interests of listed companies, but also serves as a guide for non-capital-market-oriented companies (cf. Preamble of the German Corporate Governance Codex (DCGK), as of December 16, 2019). In this context, corporate governance refers to the legal and factual regulatory framework for the management and supervision of a company with the aim of aligning the interests of the groups associated with the company ("stakeholders"). The relationship between owners, management and supervisory bodies is a basic prerequisite for "good corporate governance”. A voluntary supervisory board can play an important role in this respect (cf. lit. A. II. and lit. D DCGK).
 
In contrast to the stock corporation, the GmbH [limited liability company under German law] does not have to establish a mandatory supervisory board by law. If it is not subject to a co-determination statute (Sec. 4 (1) in conjunction with Sec. § Sec. 1 (1) Sentence 1 No. 3 DrittelbG (more than 500 employees), Sec. 6 (1) in conjunction with Sec. § 1 para. 1 MitbestG (more than 2,000 employees), Montan-Mitbestimmungsgesetz (companies in the coal and steel industry and more than 1,000 employees), § 18 para. 2 KAGB (capital management company)), the shareholders are free to decide on the establishment and structure of a voluntary supervisory board in the articles of association. For the voluntary GmbH supervisory board, the reference in Sec. 52 (1) GmbH comes into play, which applies the provisions of the Stock Corporation Act cited therein, unless and insofar as the shareholders, within the scope of their statutory autonomy, determine the competences and internal organization of the supervisory board differently in the articles of association.
 

Tasks of a voluntary GmbH supervisory board

Whereas in the case of a mandatory supervisory board the shareholders' scope for action is clearly limited due to reference to mandatory provisions of the German Stock Corporation Act (cf. Sec. 1 (1) Sentence 1 No. 3 DrittelbG or Sec. 25 (1) Sentence 1 No. 2 MitbestG), in the case of a voluntary supervisory board the shareholders are free to define its competences in the articles of association. Clear provisions in the articles of association are recommended for this purpose, whereby the competence for fundamental decisions must remain with the shareholders' meeting.
 
The voluntary supervisory board forms an organ of the company to which, in the sense of internal work relief, partial tasks of the shareholders' meeting as the decisive decision-making and supervision organ are transferred, without deviating from the dualistic structure of the GmbH consisting of shareholders' meeting and management.
 
The voluntary supervisory board has a fundamental duty to supervise the management of the company (§ 52 Paragraph 1 GmbHG [German Act on Limited Liability Companies] in conjunction with § 111 Paragraph 1 AktG [German Stock Corporation Act]), even if the supervisory competence with regard to the management of the company is assigned to the shareholders as a whole (§ 46 No. 6 GmbHG). An essential component of supervision is the right of the supervisory board to obtain reports from the management, to examine the ongoing cash management and accounting and to inform the shareholders' meeting. It is the responsibility of the supervisory board to specify the scope and frequency of the provision of information by the management.

In principle, a key task of the supervisory board beyond the wording of Section 111 (1) AktG is to advise the management. This is because the supervisory board's supervisory task includes not only the monitoring of completed and ongoing processes, but also the preventive monitoring of the management's intended projects from the point of view of correctness and legality as well as economic efficiency and expediency (see also GS I DCGK). Another important aspect is the future-oriented consultation of the supervisory board with the management on its business policy as a continuous discussion process.
 
In the supervisory board under stock corporation law, the supervisory board relies primarily on the reporting of the management, for which comprehensive formalized reporting obligations are laid down in Sec. 90 (1) and (2) AktG. Since Section 52 (1) GmbHG refers solely to Section 90 (3) and (4) AktG, such ongoing reporting is not mandatory for the GmbH; instead, it is the supervisory board's own responsibility to determine the provision of information by the management. Moreover, it is a cardinal duty of the managing directors to inform the supervisory board of significant circumstances and events in the development of the company.
 
Furthermore, the review of the annual financial statements and, if applicable, the consolidated financial statements (Section 52 (1) GmbHG in conjunction with Sections 170, 171 AktG) is a typical component of the supervisory task, at least with regard to the review of the figures as an accountability report on the past financial year with regard to its compliance with the law and the articles of association. As part of its report to the shareholders' meeting, the supervisory board must provide information on its findings from the review of the financial statements in order to provide the shareholders' meeting with a sufficient basis of information for the approval of the financial statements. By contrast, the shareholders' meeting formally adopts the annual financial statements or consolidated financial statements on its own responsibility without being bound by the version prepared by the management or the vote of the supervisory board (Section 46 No. 1 GmbHG).
 
If the articles of association grant the supervisory board reservations for approval, it can have a significant influence on the management of the company by deciding whether to grant or withhold approval. It thus also performs management-like tasks which go beyond the core of its function as a supervisory body. If the Articles of Association do not provide for such approval rights, the supervisory board has the right to order reservations of approval vis-à-vis the management board and therefore to examine at its due discretion which transactions shall be subject to such approval (Sec. 52 (1) GmbHG in conjunction with Sec. 111 (4) sentence 2 AktG). However, this right can generally be denied to the voluntary supervisory board in the articles of association. If the supervisory board has refused to give its approval to the management, then the shareholders' meeting may overturn this negative decision (Sec. 52 (1) GmbHG in conjunction with Sec. 111 (4) Sentence 4 AktG).
 
In principle, the supervisory board does not have any rights to issue instructions to the management. This is because, on the basis of its supervisory function, the supervisory board is principally prohibited from taking management measures (Sec. 52 (1) GmbHG in conjunction with Sec. 105 (1) and Sec. 111 (4) sentence 1 AktG). However, the shareholders' meeting, which has rights of instruction vis-à-vis the management regarding individual management measures, can delegate these rights of instruction in whole or in part to the supervisory board, so that the latter can exercise direct rights of instruction vis-à-vis the management. This only leads to a displacement of the authority of the shareholders' meeting to issue instructions if a corresponding provision is expressly made in the Articles of Association. Otherwise, the shareholders' meeting retains at least a competing right to issue instructions. It is disputed whether the members of the supervisory board are solely subject to the interests of the company and not subject to any instructions, or whether the articles of association can generally stipulate dependence on instruction by the shareholders' meeting.
 
Pursuant to Sec. 52 (1) GmbH, the supervisory board is not granted any personnel competence with regard to appointments to the management; in this respect, the competence remains with the shareholders' meeting pursuant to Sec. 46 No. 5 GmbHG. However, the shareholders are free to transfer the personnel competence to the supervisory board and also to grant it the right of representation of the GmbH vis-à-vis the managing directors in accordance with § 112 AktG.
 
Fundamental decisions belong to the inalienable core area of association sovereignty and may not be transferred to supervisory boards. These include, for example, the power to amend the articles of association, to dissolve the company or to convert it.
 

Constitution of a voluntary GmbH supervisory board

Pursuant to Sec. 52 (1) GmbHG in conjunction with Sec. § 95 p. 1 AktG, a supervisory board requires three members. The articles of association can deviate from this principle. The term of office is to be fixed by the shareholders and can be determined by the articles of association or a shareholders' resolution.

Natural persons with unlimited legal capacity can be appointed as members of a supervisory board (§ 52 Paragraph 1 GmbHG in conjunction with § 100 Paragraph 1 AktG). Active managing directors, authorized signatories or persons authorized to act on behalf of the company (§ 52 para. 2 GmbHG in conjunction with § 105 para. 1 AktG) and legal representatives of subsidiaries (§ 52 para. 2 GmbHG in conjunction with § 100 para. 2 sentence 1 AktG) cannot be members. The Articles of Association may not deviate from these requirements.

The internal organization of the supervisory board and the passing of resolutions are to be regulated by the shareholders, as Sec. 52 (1) GmbHG does not refer to Secs. 107-109 AktG.  
    

Advantages and disadvantages of a voluntary GmbH supervisory board

Studies suggest that a voluntary advisory or supervisory body is viewed positively even in the SME sector and results in increased corporate success. While the specific advantages and disadvantages of a voluntary supervisory board are closely linked to its specific design in individual cases, in particular the definition of its tasks and its internal organization, the following tendencies can be identified:
 
A voluntary GmbH supervisory board enables the inclusion of knowledge, opinions and assessments of experts in a phase of entrepreneurial challenges for the management team by way of a permanent and regularly meeting supervisory body. In addition, the supervisory board can be used for "strategic early warning" of impending changes in the market environment.
 
The voluntary supervisory board as a sparring partner for the management allows a neutral and differentiated discussion of entrepreneurial issues through professional design and moderation. It results in the adaptation of decision-making processes within the company and the professional preparation of decision-making documents. Due to the voluntarily chosen institutionalization, it enables an improvement of working methods and decisions. However, the establishment of a well-functioning and effective supervisory body also means an additional organizational and financial outlay, and the supervisory board must be involved in internal decision-making processes.
 
In performing their task, namely the duty to monitor the management of the company, the members of the supervisory board must exercise the care of a prudent and conscientious "supervisor". In the event of culpable disregard of the individual duty of care, they are liable to the company for damages. It is advisable to counter the liability risk by taking out D&O insurance.
 

Conclusion

A voluntary supervisory board can be a useful instrument for a GmbH with a medium-sized structure to meet entrepreneurial challenges by providing substantive and specialist advice on the one hand and monitoring management on the other, and to professionalize corporate management. The right composition of the supervisory board and the willingness of the owners to share power and influence with external experts or experienced managers are crucial. Stakeholders should have a common understanding of the role of the voluntary supervisory board, especially of the degree of its influence on management. If there is mutual trust between the management, supervisory board and the group of shareholders, enabling a professional and ongoing discussion process, a voluntary supervisory board can develop its full effect.

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