Corporate / M&A

Defective (Re-)Appointment of Management Board Members

Management board members of a stock corporation (AG) must be appointed for a definite period of time. A renewal of the appointment requires an express resolution by the supervisory board. What happens if a management board member is not compliantly re-appointed upon expiry of their term but simply continues in his role?

The “rudderless” ship?

Close­ly held cor­po­ra­tions (eg fam­i­ly offices or com­pa­nies con­trolled by fam­i­ly trusts) may not see reg­u­lar changes to their man­age­ment boards. If all goes well, con­ti­nu­ity is, after all, very much in the inter­est of both sides. Since such pri­vate­ly held com­pa­nies will typ­i­cal­ly also require a less elab­o­rate cor­po­rate gov­er­nance sys­tem, it can­not be exclud­ed that a board mem­ber’s term may for­mal­ly expire with­out the super­vi­so­ry board imme­di­ate­ly tak­ing note. Even out­side fam­i­ly com­pa­nies, a man­age­ment board mem­ber may, for exam­ple, eg ini­tial­ly be appoint­ed for a short­er term than the five-year statu­to­ry max­i­mum that exists in Aus­tria – fol­lowed by an exten­sion under which the total term may exceed the five-year max­i­mum.

Why is this rel­e­vant? Con­sid­er the fact that the annu­al accounts are drawn up by the man­age­ment board before being sub­mit­ted to the super­vi­so­ry board. What impact does a defec­tive man­age­ment board appoint­ment have on their legal qual­i­ty? Or, does it mean that con­tracts signed by such a board mem­ber in the day-to-day busi­ness are no longer bind­ing?

The appoint­ment of a man­age­ment board mem­ber who sim­ply con­tin­ues to act in such capac­i­ty beyond the term of office with­out a com­pli­ant re-appoint­ment res­o­lu­tion of the super­vi­so­ry board is defec­tive.

To rem­e­dy all acts under­tak­en by a board mem­ber whose appoint­ment is defec­tive would result in con­sid­er­able dif­fi­cul­ties and legal uncer­tain­ty. Hence, the goal must be to find a more gen­er­al way out that leaves such acts intact and legal­ly valid.

Keep going

The solu­tion is to treat the board mem­ber con­cerned as a so-called de fac­to man­age­ment board mem­ber. This is pos­si­ble pro­vid­ed that there has been a valid orig­i­nal appoint­ment and fur­ther that the board mem­ber con­tin­ues to act in his capac­i­ty as a mem­ber of man­age­ment board beyond the orig­i­nal term. Typ­i­cal­ly, both cri­te­ria are met in the case of a defec­tive re-appoint­ment, because the orig­i­nal (com­pli­ant) appoint­ment is deemed to be suf­fi­cient to meet the first test and, at least in the exam­ples used in the begin­ning, the com­pa­ny is gen­er­al­ly fine with the board mem­ber con­tin­u­ing in his func­tion.

The core con­se­quence of this rem­e­dy is that mea­sures under­tak­en by the man­age­ment board mem­ber whose appoint­ment is defec­tive are valid both with­in the com­pa­ny con­cerned and vis-à-vis third par­ties.

A board member is a board member is a board member …

From the per­spec­tive of the man­age­ment board mem­ber, this approach means that they remain sub­ject to the same duty of care they were oblig­ed to pro­vide dur­ing their prop­er appoint­ment and which they would have owed had they been re-appoint­ed in a com­pli­ant man­ner.

At the same time, the gen­er­al con­sen­sus is that such a man­age­ment board mem­ber remains enti­tled to the agreed com­pen­sa­tion (and not “only” a more abstract form of eg “mar­ket lev­el” or “arms’ length” com­pen­sa­tion, which may well be low­er than what was agreed in a spe­cif­ic case).

Time to put it right

If and when the defec­tive appoint­ment comes to light, the super­vi­so­ry board must react. It may choose to recall the man­age­ment board mem­ber – in an excep­tion from the gen­er­al rules apply­ing to stock cor­po­ra­tions such a recall does not require a good cause (wichtiger Grund).

Or the deci­sion may well be that what tem­porar­i­ly “sur­vived” as de fac­to man­age­ment should be put on sound legal basis (again). In this case, the super­vi­so­ry board needs to pass a new (re-)appointment res­o­lu­tion – which must then com­ply with all statu­to­ry require­ments, in par­tic­u­lar the five-year max­i­mum appoint­ment term.

Mistakes in appointing of members of the management board may be rare. But the potential consequences are difficult to resolve. Thus, the solution developed and advocated primarily in German legal literature to treat the board member as a "de facto" manager and to uphold the validity of acts undertaken by it is a real lifeline and allows companies, their customers, creditors and other business partners to resolve such situations unharmed.