Following ruling against top manager – Compliance becoming increasingly important It is clear following the spectacular ruling against a former top manager that case law is becoming tougher and compliance increasingly important for businesses and corporations.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – conclude: It has hitherto been the exception rather than the rule for a former top manager to be sentenced to a term of imprisonment due to supposed or actual misconduct. A recent case clearly illustrates that case law is now becoming tougher. It concerned, inter alia, the convergence of private and business interests to the detriment of the company. It also demonstrates that compliance within a company is becoming increasingly important, as this convergence might not have been possible in the first place had there been a functioning system. Moreover, if there is no compliance system in place or it is inadequately equipped then the executive board or management may be liable for this.

The compliance system facilitates compliance with contractual provisions and statutory regulations so that no criminal offences arise from within the company. The executive board or management of a company is responsible for setting up a functioning compliance system. Failure to integrate an appropriate system into the company can have substantial consequences. Enormous economic losses may be incurred and damages claims arise against the company as well as those responsible for it, since companies, including legal persons, are obligated in accordance with the German Administrative Offences Act (Ordnungswidrigkeitengesetz) to ensure that legal infringements do no arise from within the business itself. Accordingly, corporate bodies also bear liability.

To this extent it is in the interests of corporate management to integrate a functioning compliance system. It is also necessary in doing so to ensure that the system is consistently assessed for effectiveness and, where appropriate, expanded. Having said that, the content and structure as well as the implementation of a suitable compliance system represent a major challenge for a lot of businesses, especially since many laws, regulations and rules have to be observed in the process. Lawyers competent in the field of commercial law and corporate criminal law can create, supervise and integrate a secure compliance system into your company.

D&O liability: Recourse claims against executive board, managing directors or supervisory board Recourse can be taken against governing entities such as managing directors, executive boards or supervisory boards where mistakes are made in managing the company. The extent of recourse claims is disputed.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – conclude: Even in the case of simple negligence, a company can take action against its governing entities such as managing directors, executive boards or supervisory boards. However, the extent of this internal liability of entities vis-à-vis the company and to what extent recourse claims are justified is debateable.

By its decision of January 20, 2015, the Düsseldorf Regional Labour Court recently rejected unlimited liability for members of company entities with respect to recourse claims of a company and in so doing largely confirmed the case law of the Essen Labour Court of December 19, 2013 (1 Ca 657/13). The case concerned recourse claims brought by a company against a managing director due to violations of competition law. The company demanded compensation from the managing director in the amount of 193 million euros, justifying this by saying that the latter knew of the agreements on price and quotas and tolerated them, or at least breached his duty of supervision. The Essen Labour Court and Düsseldorf Regional Labour Court dismissed the claim.

The Regional Labour Court held that the fine imposed by the German Federal Cartel Office (Bundeskartellamt) on the company was not recoverable in relation to the defendant as a natural person. In its view, this follows from the function of the company fine, as the company also obtained an advantage from the cartel infringement. It must therefore be extracted from the company and not the person who acted. Furthermore, competition law also makes a distinction in cases involving financial penalties between companies and natural persons. Fines for natural persons are limited to one million euros, whereas for companies they can amount to up to ten per cent of turnover, which is another reason why the fine could not be passed on to the managing director. Additionally, the Essen Labour Court had pointed out that evidence of the cartel in the context of a compliance review was not sufficiently pursued. To this extent, the superior bodies are partially to blame.

The governing entities of a company can protect themselves against liability claims with measures such as a compliance management system or by taking out D&O insurance. For further measures to enforce and fend off claims, they can turn to lawyers who are experienced in the field of company law.

D&O insurance: Carefully inspect content and scope of policy Governing corporate bodies such as executive boards, executive directors or supervisory boards are liable for careless mistakes with their private assets. D&O insurance is meant to afford protection against any claims.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – conclude: The governing bodies of a company (executive boards, executive directors, supervisory boards) bear a great responsibility and can have actions raised against them even if merely careless mistakes are made in managing the company if they have breached their required duty of care. If this occurs then they are liable without limitation with their private assets. In order to protect them against damages claims, companies can take out D&O insurance (directors and officers). This is a type of pecuniary damage liability insurance for executives.

That being said, the duties performed by executive boards, executive directors or supervisory boards within a company are different in nature. D&O insurance should therefore be individually tailored to the respective individual and their risk and cover the key factors in the event of damage or loss.

In order to guarantee this personal protection, the content and scope of the D&O insurance policy ought to be carefully drawn up, for instance, concerning issues pertaining to the insured sum, retroactive coverage or run-off insurance. The policy must safeguard the governing bodies against internal and external liability risks.

Internal liability can be a precarious matter because it concerns claims made by the company against its governing bodies. These claims can arise from the misconduct of a governing body in its management of the company through act or omission. While D&O insurance is meant to protect the governing bodies against these claims, it is the company that takes it out. For this reason, the policy ought to be carefully reviewed to ensure both sides are satisfied. External liability concerns damages claims by third parties outside of the company. Issues regarding coverage and recourse thus need to be clarified within the framework of the policy. Insurance covering the costs of criminal proceedings should also be included in case of a criminal trial.

The D&O insurance policy should therefore be very accurately and carefully prepared to ensure that it does in fact afford protection against all conceivable types of damage and loss. Of course, if loss or damage occurs then it is also possible that the insurer will refuse to indemnify. That is why it is advisable from the outset to consult lawyers experienced in the field of company law who are able to thoroughly assess the policy and enforce claims.

Market entry for foreign investors: Consider legal and tax aspects The German market is of interest to many foreign investors. However, there are a lot of legal and tax aspects that need to be considered when entering the German market.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – conclude: In the context of ongoing globalisation, entering the German market is becoming increasingly interesting for foreign investors, but it is not only foreign customs that apply in foreign countries but also, in particular, different laws. For this reason, foreign investors who wish to establish or take over a company in Germany ought to obtain the assistance of competent lawyers and tax advisors from the outset. When setting up or acquiring a company, particular attention must be paid to aspects of national and international company law, national and international commercial law and tax law.

Even the choice of where to locate the registered office can influence the company’s commercial success. There are various rates of trade tax and different promotional measures which one can partake in when establishing the company. While cities and municipalities are generally interested in the creation or retention of jobs, environmental protection requirements also have to be observed on site where applicable. Good transport links are also usually crucial.

Furthermore, one has to select the corporate form which best suits the expectations of the company. Each type of company entails different legal and fiscal consequences.

Similarly, national and international regulations need to be taken into account when drafting contracts to ensure expensive legal disputes do not arise at a later date. Qualified legal representation is vital in order to avoid falling foul of national and international commercial law and thus prevent costly litigation in advance.

If legal disputes nevertheless emerge, lawyers who are competent in national and international law should be charged with safeguarding and enforcing interests. They are able to pursue and defend rights domestically and abroad as well as assume responsibility for representation in national and international litigation.

Reform of inheritance tax – Sort out company succession at an early stage Inheritance tax must be reformed by mid-2016. That was a ruling of the German Federal Constitutional Court (Bundesverfassungsgericht) at the end of 2014 based on the view that company heirs presently enjoy excessive favourable treatment.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – conclude: On December 17, 2014, the Bundesverfassungsgericht found the favourable treatment enjoyed by company heirs compared with private heirs to be unconstitutional in its current form. The legislature must now implement appropriate reforms by mid-2016. Yet the Bundesverfassungsgericht also stated that it is legitimate as a matter of principle to provide favourable tax treatment for company heirs in the context of company succession so as to preserve jobs.

It is debateable, however, how far this privileging extends. Criticism was thus voiced, for example, that small firms with up to 20 workers do not need to furnish evidence of the retention of jobs. Furthermore, it was discussed whether large family businesses can continue to expect to benefit from tax privileges. They may have to demonstrate based on a needs test that they would suffer economically because of inheritance tax. It has yet to be decided how inheritance tax will be reformed.

That being said, the German Finance Minister has already announced that the new arrangements are to be swiftly implemented and manageable in scope. Handelsblatt reports that the head of his tax department presented their initial considerations at an event held by “Stiftung Familienunternehmen” (Foundation for Family Businesses). One of the considered proposals, for instance, is that all businesses with a payroll of more than one million euros should in future have to demonstrate that this payroll has been maintained over a period of seven years for them to be able to claim tax concessions. The point at which a family business is considered to be large is completely unclear at the moment. One possibility would be to define this based on turnover. The cabinet is to be presented with an appropriate inheritance tax reform bill shortly after Easter.

The head of the tax department also announced that retroactive effect back to December 17, 2014 shall only apply to the new rules in exceptional cases. Family businesses that have to deal with company succession soon should therefore act promptly so as to benefit from the tax privileges. In order to arrange company succession in a way that is optimal from a tax perspective and not jeopardise the company’s existence, businessmen can turn to lawyers and tax advisors who are experienced in the field of tax law and are able to provide them with expert advice on company succession from the outset.

Executive board liable for inadequate compliance system The executive board of a stock corporation (Aktiengesellschaft (AG)) or the management of a German limited liability company (GmbH) bears responsibility and is liable for a functioning compliance system. This stems from a ruling of the Munich Regional Court.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – conclude: The Munich Regional Court delivered a spectacular judgment at the end of 2013. It sentenced a member of a stock corporation’s executive board to pay damages running into millions due to an inadequate compliance system (Az.: 5 HKO 1387/10).

A consequence of the inadequate compliance system was that “slush funds” had emerged within the company. The funds were used to bribe business associates and obtain orders for the company. Despite not being aware of this system, the executive board was sentenced to pay damages because among its responsibilities was to ensure a functioning compliance system.

It is clear from this ruling of the Munich Regional Court how important a functioning compliance system is for companies. It facilitates compliance with contractual regulations and statutory provisions. The body responsible for setting up an appropriate system and compliance with the rules is the executive board in the case of a stock corporation and the management in a GmbH. It is not sufficient to simply set up a compliance system; it has to be constantly reviewed for its functionality and, where appropriate, further developed. According to the German Administrative Offences Act (Ordnungswidrigkeitengesetz), businesses, including legal persons, are responsible for making sure that legal infringements do not arise and accordingly bear liability.

It is therefore essential for corporate management to set up a functioning compliance system and see to it that no legal infringements arise from within the company. If this does not happen, this represents a criminal breach of duty which may result in substantial damages claims by the company against those responsible.

The content and implementation of suitable compliance measures represent a great challenge for many businesses, particularly as statutory rules and regulations have to be observed here. In order to have a secure compliance management system and prevent the company from suffering economic losses as a result of legal infringements by employees, firms can turn to a lawyer who is competent in the fields of commercial law and corporate criminal law.

Weak euro can result in problems for foreign currency loans The ECB wants to purchase government bonds on a large scale. One consequence of this could be another collapse in the euro exchange rate. This might lead to problems for financial investments with foreign currency loans.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London – conclude: Investors and borrowers of loans denominated in Swiss francs have already felt the negative impact of the Swiss franc being decoupled from the euro at the beginning of the year. This resulted in the euro depreciating significantly against the Swiss franc, which led loan debt denominated in Swiss francs to dramatically increase. The Süddeutsche Zeitung reports that the resulting loss for private borrowers could amount to up to one billion euros. In the case of capital investments, e.g. closed funds, loans denominated in Swiss francs might also jeopardise the economic viability of investment companies.

The European Central Bank (ECB) has now begun purchasing government bonds with the aim of preventing deflation and stimulating the European economy. The euro might, however, continue to fall in value because of this – not only against the Swiss franc but also the US dollar and other currencies. Foreign currency loans may thus become an even greater burden as debts increase due to the collapse in the euro exchange rate.

It is nonetheless possible for borrowers and investors who have been affected by this to defend themselves, as they ought to have been comprehensively informed about the risk pertaining to foreign currency loans that can lead to the loans becoming more expensive. If the bank granting the loan concealed this risk then damages claims can be asserted, with the result that the bank must provide compensation for the loss incurred due to foreign exchange losses. Similarly, if stakes in closed funds with foreign currency loans were brokered and the risk pertaining to foreign exchange losses not explained, it is possible to assert damages claims on account of flawed investment advice.

In the case of consumer loans, e.g. for real estate financing, it may also be possible to play the so-called withdrawal card (Widerrufs-Joker). This becomes a possibility if the borrower has not been properly advised concerning the possibilities of withdrawal. In that case, the loan would be completely rescinded. The foreign exchange losses would be borne by the bank and the consumer could benefit from the current low rates of interest in the course of debt restructuring.


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