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Director and Officer Indemnification by Bank
Under German Law

By Dr. Anne Lehder *
First published April 3, 2006

A. Introduction

German law does not specifically address the liability of bank directors and officers. Rather, the liability of bank directors and officers complies with the general liability principles for board members of legal entities and those for employees, depending on the status of the indemnified person and the corporate form of the banking institution.

It is necessary, therefore, to distinguish between board members and employees on the one hand, and the different legal forms of companies on the other hand.

B. Liability of Employees

Usually, directors and officers of a bank are also its employees. As employees, directors and officers are responsible for their acts and omissions based on their employment contract and on tort law. As long as the employees are not board members, their liability is limited. Such employees are liable for gross negligence and intent, based on the principles of employment law.

For simplification, the terms "directors" and "officers" will be used in the following discussion only for those directors and officers who are formally appointed to the executive board or to the supervisory board, that is for those with a special legal status.

C. Liability of Directors and Officers With a Special Legal Status

More extensive, and therefore more important, than the liability rules under employment law is the liability of directors and officers towards their bank based on the regulations for the different legal forms.

Banks are usually run as corporate entities in one of the following forms:

- Gesellschaft mit beschränkter Haftung (limited liability company, GmbH)

- Aktiengesellschaft (stock corporation, AG)

- Genossenschaft (cooperative society, eG)

- Sparkasse (savings bank)

Separate statutes and liability rules exist for each of these legal forms:

Legal form	Statute	Main Liability Rule
GmbH	GmbH-Gesetz (GmbHG)	§43(2) GmbHG
AG	Aktiengesetz (AktG)	§93(2) AktG
eG	Genossenschaftsgesetz (GenG)	§34(2) GenG
Sparkasse	Sparkassengesetze (SpkG) of the Bundesländer	§93(2) AktG analog

Once again, the liability of the board members depends on the legal form of the bank.

Although the liability rules differ between these four legal forms, the main principles are exactly the same. That is why the principles applicable for all legal forms will be introduced first, and after that, the particularities of each legal form will be listed.

I. Principles of the Liability of Directors and Officers of GmbH, AG, eG and Sparkasse

1. Liability Based on Specific Liability Rules

§43(2) GmbHG, §93(2) AktG and §34(2) GenG establish the same requirements for the liability of directors and officers towards the entity:

1. Neglect of duty

2. Damage of the entity

3. Causality between the neglect of duty and the damage

4. Default

When those requirements are met, the responsible board member has to indemnify the entity for the damage caused. If there are several board members responsible, they are jointly and severally liable.

Before we examine closer these liability requirements, it is necessary to understand of what they mean. Their meaning is the same for every legal form with only a few exceptions.

a) Neglect of Duty

The duty of a director and an officer is to run the business with due diligence, that means like a proper businessperson (§43 (1) GmbHG, §93(1) AktG, §34 GenG). To fulfill this requirement directors and officers, among others, have to:

- Comply with all statutory provisions

- Comply with directives concerning the grant of credits

- Comply with the articles of the corporation and its by-laws

- Comply with their employment contract

- Cooperate in good faith with the supervisory board

- Organize the business properly

- Control the business organization

- Control the company's liquidity and financial status regularly

- Avoid inappropriate risks

- Be loyal, faithful and confidential

- Prepare entrepreneurial decisions carefully.

In addition to the behavior outlined above, directors and officers of the eG are also legally required to regard the members' interests and their promotion.

The directors and officers have a wide range of discretion for their entrepreneurial decisions as long as they have prepared their decisions carefully and as long as they have no personal interest at stake in the transaction.

b) Damage to the Entity

The director's or officer's neglect of duty must cause damage to the entity.

c) Default

The last requirement for liability is that the director or officer has acted with default. Default means every form of negligence or intent.

The above mentioned liability limitation from employment law is not applicable.

The requirements of default within the liability of directors and officers of Sparkassen (saving banks) are controversial. But the predominant part of the literature applies the liability rules of the AG accordingly to the Sparkassen, so that directors and officers may be held responsible for all kinds of negligence and intent. This is an adequate solution due to the nearly identical structure of both legal forms.

d) Limitations

The statute of limitations on claims is five years. This period begins with the neglect of duty.

e) Burden of Proof

In German law basically the plaintiff (here: the entity) has to prove that the requirements of the rule are met. The above mentioned rules contain a reversal of the burden of proof (§93 (2) (2) AktG, §34 (2) (2) GenG, for GmbH and Sparkasse: (§93 (2) (2) AktG, §34 (2) (2) GenG analog): The directors and officers have to proove that they have run their business with due diligence. The entity only needs to proove the damage and that the damage is caused by the conduct of the director.

f) Beginning and end of the Liability

The liability begins with the appointment and ends with the dismissal of the directors and officers. They can only be held responsible for conduct of duty during their term in office.

2. Liability Based on General Rules

Furthermore, directors and officers can be held responsible based on general liability rules and other specific liability rules.

3. Liability Towards Shareholders and Third Parties

Directors and officers can also be liable towards the shareholders for spending the registered capital or for immoral damage, just to give two examples. These cases are rare.

D. Specifics of the Different Legal Forms

The liability of the GmbH and the eG directors can be excluded by contract with third parties. Their liability is also excluded when the director acts because of an instruction issued by the shareholder, and when the shareholders discharge the directors.

For AG the discharge of the shareholders does not exclude the officers' and directors' liability (§120(2) (2) AktG; §34(4)(1) GenG). It is only an endorsement for the future. This can be also transferred to the Sparkasse. Specifics can be determined in the Sparkassen-Statutes of the Bundesländer (states of Germany).

The AG through its supervisory board can only waive its claim after three years with the approval of the shareholders (§93(4)(3) AktG). Furthermore, directors and officers of the AG are not liable when they act based on a resolution of the shareholders meeting.

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*   studied law at the Rheinische Friedrich-Wilhelms-University, Bonn, Germany, where she later worked as a research assistant at the Center for European Commercial Law. Her dissertation on "Vorrats- und Mantelgesellschaften" was published in 2005 by Peter Lang. She expects her admission to the German bar in January 2007.

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