GERMANY Law and Practice Contributed by: Marc Löbbe, Michaela Balke, Oliver Schröder and Martin Kolbinger, SZA Schilling, Zutt & Anschütz
8. Duties of Directors 8.1 Principal Directors’ Duties
external advice, the business judgement rule will only apply if the boards’ decisions are based on appropri - ate information (see 8.3 Business Judgement Rule ). In public takeover situations, the boards of the target company are obliged to issue a reasoned opinion, which requires an in-depth assessment of the offer document (see 5.5 Definitive Agreements ). The boards of the target company should take par - ticular care to assess the appropriateness of the con - sideration and, at least if a listed target or a seller with minority shareholders is concerned, regularly obtain a fairness opinion on the company’s fair value. Apart from that, outside advice is usually required in the context of due diligence (see 5.3 Scope of Due Diligence ). 8.5 Conflicts of Interest Conflicts of interest of board members can affect takeover situations for a variety of reasons. It is not uncommon for board members to also hold a board position in another company; in a takeover situation, the interests of both companies can be conflicting. Furthermore, board members can be shareholders of the target company themselves and may therefore be inclined to support or oppose the transaction for personal financial reasons. A further reason for potential conflicts of interest of board members can arise if the bidder seeks to incen - tivise board members by granting or promising cash payments or non-cash benefits to them. In a public offer scenario, these potential conflicts of interest are directly addressed in the German Takeover Act. According to the Takeover Act, the bidder and per - sons acting in concert with the bidder are prohibited from granting or promising unjustified cash payments or other unjustified non-cash benefits to members of the management board or supervisory board of the target company in connection with the takeover offer. By contrast, shareholders are generally allowed to pursue their own interests in a takeover situation.
Many private companies in Germany are organised as limited liability companies or partnerships, and have one-tiered boards consisting of the management. Management is generally bound by the obligation to act in the target company’s best interest, and by the instructions of the shareholders or partners. Some - times (voluntary) advisory boards are also established. By contrast and with the exception of the one-tier SE, stock corporations in Germany have a two-tier board system. The same applies for co-determined legal entities. In these cases, while the management board runs the company and takes the main business deci - sions, the (mandatory) supervisory board acts as an advisory and supervisory body. Generally, both boards must act in the target company’s best interest. This applies irrespective of a listing of the shares of the company in question. For board decisions, business judgement principles generally apply (see 8.3 Business Judgement Rule ). 8.2 Special or Ad Hoc Committees To the extent stock corporations are concerned, take - over committees are sometimes established at super - visory board level in order to increase the efficiency of the decision-making processes if the target company has a large number of supervisory board members. However, it is very unusual to establish a takeover committee at management board level. 8.3 Business Judgement Rule In Germany, the business judgement rule applies to entrepreneurial decisions of the members of the management board, if the respective member of the management board could reasonably assume that they were acting in the company’s best interest on the basis of appropriate information. The business judgement rule does not apply in case of mandatory legal requirements, however. 8.4 Independent Outside Advice Although the German Takeover Act (for public offers) or general corporate law does not strictly require the management board or the supervisory board to seek
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