Management liability in public-sector undertakings
By Dr. Sven-Joachim Otto
The results of a PwC study on crime in the public sector (Salvenmoser, Weise, Heck, Bussmann and Krieg: “Kriminalität im öffentlichen Sektor – Auf der Spur von Korruption & Co.,” October 2010) indicate there are substantial arguments for approaching the subject of compliance in a long-term, comprehensive and strategic manner. Depending a public company’s scope of activity, there is a wide range of obligations (Otto and Fonk: “Haftung und Corporate Compliance in der öffentlichen Wirtschaft” in Corporate Compliance Zeitschrift, 2012, pages 161 and 166) that sometimes cannot be clearly determined.
Obligations of management bodies for municipal undertakings
Management of the company
In a municipal private company, management is responsible for making most business and leadership decisions. Management has to create an organizational structure that ensures the company meets its obligations and acts in a manner that conforms to the law (in principle, regulated by federal company law but also complementary in state communal law). All public companies have to observe the rules of competition and procurement as well as communal, company and group labor and tax law. Depending on their particular market activities, public utility companies also have to observe laws pertaining to energy and grid regulation. In principle, managing directors or CEOs have to be informed of all relevant decisions made by the company general meeting or the stockholders’ meeting, and they must execute these decisions.
Management has to establish a company strategy to ensure the owners’ targets are met and public missions are fulfilled. A risk-management system has to be implemented that includes communication and frequent reporting of possible risks to the supervisory board (Römermann: Münchener Anwaltshandbuch GmbH-Recht, third edition, 2014, § 16, marginal number 70 ff.; Grützner and Jakob: “Vier-Augen-Prinzip” in Compliance von A-Z, second edition, 2015; Hellmann and Beckemper: Wirtschaftsstrafrecht, second edition, 2015, § 15).
The supervisory board is the company’s most important controlling and monitoring body. Its main tasks comprise appointment, dismissal and supervision of the management board (section 84, 111  of the German Stock Corporation Act [Aktiengesetz, AktG]). The supervisory board has to make sure it receives all relevant company information at all times (Westermann and Maier: “Berichtspflichten der Geschäftsleitung kommunaler Unternehmen” in KommJur, 2011, pages 169 and 171; Hoppe and Uechtritz: Handbuch Kommunale Unternehmen, third edition, 2012, § 9, marginal number 30 ff.). Prevailing case law of the highest German courts requires that all members of a supervisory board have the necessary basic business, organizational and legal qualifications for making proper business decisions without further assistance.
Another primary task of the supervisory board is to ensure that management implements a risk-management system and complies with it. If a company is owned by a municipality, further information and reporting obligations to the city council and its committees apply (for example, those regulated in Article 93, paragraph 2, page 2 of the Bavarian municipal code [BayGO]; § 113, paragraph 5, page 1 of North Rhine-Westfalia municipal code (GO NW) and § 104 paragraph 1, page 3 of Baden-Württemberg municipal code [GO BW]; see Hoppe and Uechtritz: Handbuch Kommunale Unternehmen, third edition, 2012, § 9, marginal number 33 ff.).
Municipal companies are advised by the consulting business to introduce periodic information commitments. Completion of these commitments should be documented transparently and systematically as part of an internal monitoring system. When applicable, a company compliance trustee (Hüffer and Schneider: ZIP, 2010, page 55) or an external ombudsperson should be appointed as a contact person for all staff members.
Personal management liability is governed by section 43 (2) of the German Limited Liability Companies Act (GmbH-Gesetz, GmbHG) for managing directors of limited liability companies and in section 93 (2) of the stock corporation statute (AktG) for members of the managing board of a stock corporation. It is a tortious liability. Directors are liable for negligent breach of the duties incumbent upon them. Director’s duties are defined in section 43 (1) of the GmbHG as “the due diligence of a prudent businessperson” (see Oetker in Henssler and Strohn: Gesellschaftsrecht, second edition, 2014, § 43 of the GmbHG, marginal number 18).
Obligation of confidentiality
In practice, most problems related to the obligation of confidentiality (section 116 and 93 of the AktG) occur when members are delegated to the supervisory board of a municipal stock corporation or to a limited company with a compulsory supervisory board. (For companies with a facultative supervisory board, an obligation of confidentiality is not mandatory; see § 52, paragraph 1 of the GmbHG.) These delegated members often think they are allowed to report company secrets to the public entity (for example, the city council) that appointed them to the supervisory board. In principle, the obligation of confidentiality applies to all supervisory board members. It does not, however, apply in terms of the company management or other members of different parties. What company secrets does the obligation of confidentiality apply to? Secrets are all facts whose disclosure could lead to damage to the company (for example, trade secrets; finance, investment and, strategy planning; lists of customers; consumption; marketing; calculations; and staff-related decisions). There is no obligation of confidentiality if a legal obligation of disclosure exists.
There are many small city council groups who, because of their size, are not represented in the supervisory boards of municipal companies. These groups are very much interested in gaining information about the company. The legal literature reflects different opinions about whether the obligation of confidentiality also applies to members of the city council (van Kann and Keiluweit: Der Betrieb [DB], 2009, pages 2,251-2,252). Prevailing case law (Strobel in Die Öffentliche Verwaltung, 2004, page 479) finds the obligation of confidentiality applicable to city council members and to city council groups. To ensure that its members comply with the obligation of confidentiality, the supervisory board should adopt explanatory decisions, guidelines or annotations.
For companies with a facultative supervisory board, section 52 (1) of the GmbHG provides more leeway for regulating the obligation of confidentiality in the articles of association.
Duty of consideration
Each member of the supervisory board has to individually consider if a certain fact has to be kept secret. According to sections 116 and 93 of the AktG, the benchmark for this consideration is “the due diligence of a prudent businessperson and not just “diligentia quam in suis rebus.”
Liability of the supervisory board
In terms of the supervisory board’s liability, differentiation is made between private law and criminal law.
Liability under criminal law
Breach of the obligation of confidentiality is punishable under section 85 of the GmbHG for limited liability companies and under section 404 of the AktG for stock corporations. The punishment can be up to one year imprisonment. There is no punishment if the management board has waived the obligation of confidentiality.
Liability under private law
There is no differentiation made among members of the supervisory boards of limited companies with a facultative supervisory board, limited companies with a compulsory supervisory board and stock corporations. In all cases, sections 116 and 93 of the AktG apply (Brandenburgisches Oberlandesgericht, Urteil [verdict], 17.2.2009 – 6 U 102/07; Brandenburgisches Oberlandesgericht, Beschluss [court order], 09.04.2014 –  53 Ss 39/14 [21/14]).
Ordinary negligence is sufficient for establishing the liability of a supervisory board member. As already stated above, each member of the supervisory board has to individually consider if a certain fact has to be kept secret. In addition to the criterion of “negligence,” a breach of the obligation of confidentiality has to create a “violation of duty.” A disclosure is not a violation of duty if it doesn’t disadvantage the company or, in other words, if it serves the well-being of the company (see section 93 chapter 1 of the AktG). This “business judgment rule” is only applicable to management decisions or facts related to management decisions. Should a disclosure take place, the burden of proof is shifted to the supervisory board member. He or she has to prove that the disclosure was not a violation of duty. The company has to state the facts of the case, including a disclosure, and the damage to the company as well as prove causality between them.
Municipal utility companies today are often looking to create joint ventures, found new companies and participate in or try to take over other companies. These kinds of transactions are usually very liability sensitive. On the one hand, the city council has a right to information; on the other hand, however, most transaction information has to be kept strictly secret. There is always the risk of millions of euros in damages if a projected M&A transaction cannot be executed because of early disclosure of information.
Criminal law and misdemeanors – corruption and bribery
Offenses committed by public officials are regulated by chapter 30 (sections 331-358) of the German Criminal Code (Löw: “Korruptionsdelikte im Lichte der Compliance Funktion – ‘Aber Sie wissen doch, wie es läuft,’” JA, 2013, page 88 ff.). There are further special offenses and misdemeanors regulated by environment, tax, competition, company and accounting law (Hellmann and Beckemper: Wirtschaftsstrafrecht, fourth edition, 2015).
Public companies that sponsor regional events and institutions face an increasing number of liability and reputation risks (see “PwC Public Services,” September 2013 issue, page 21 ff.). In January 2011, the Higher Administrative Court of Saxony (Sächsische Oberverwaltungsgericht, Aktenzeichen [file number]) 4 B 270/10) upheld a decision made by the Dresden Administrative Court (Verwaltungsgericht Dresden, Aktenzeichen [file number] 7 L 391/10), which ruled that the sponsoring of sports events by public water companies is illegal.
Another very important issue concerns the criminal prosecution of invitations extended to public officials to participate in sports and entertainment events. In its Claassen case, the Federal Court of Justice (BGH, decision 14.10.2008,1 StR 260/08) ruled that providing football tickets to representatives of the state of Baden-Württemberg is a “benefit to a public official” (section 333  of the German Penal Code) punishable by imprisonment of up to three years or a fine. The court ruled that providing tickets would not be a “benefit” if visiting the football game was part of the official and representative duties of the public official (for example, when the public official is the minister of sports). If the visit to the game is made in a representative function and the public official also has a personal interest in visiting the game, the circumstances constitute a “benefit” and the basis of an offense.
There are also potential legal risks in public-private partnerships between municipalities and private companies. It is illegal and punishable if a city council demands the creation of a citizen’s foundation and regular payments from a wind-farm operator in exchange for passing a zoning law.
Public companies and appointed board members are not acting in political and legal limbo anymore. In recent years, municipal undertakings underwent significant professionalization. Development of compliance structures plays an important role in this. Damages and liability cases are causing tremendous reputation risks, especially for public undertakings. Management has to give top priority to compliance as a consistent and well-structured prevention measure.