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Relevance of SARS-CoV-2 (Coronavirus) for Functional Management Specifications

Are management boards, managing directors, supervisory boards under special legal obligations with regard to SARS-CoV-2, i.e. the coronavirus? The question is becoming increasingly crucial: The coronavirus is spreading. Serious effects on the economy are becoming more and more apparent. For several weeks now, it has become clear that the countermeasures taken by the Chinese government could lead or will lead to considerable difficulties in the supply chains. Since the increased spread of the virus in Europe, there have also been effects on the demand side. With the recent gradual "coronavirus lockdown", many companies are experiencing a major drop in sales. Past crises can hardly be compared with this. For companies, it is no longer only coronavirus-related employment law issues that are of great importance (see blog post: Labour Law Immune System - Tips for Employers in the Time of Coronavirus). They also need to deal with the effects on the companies' contractual relationships (see blog post: Coronavirus: Consequences in Contractual Relationships). The focus now is on the package of measures recently adopted by the German government to cushion the effects of the coronavirus (see post: "BEITEN BURKHARDT supports companies with a task force in applying for state aid").

The storm approaches

Already on 28 February 2020, Deutsche Post AG had published an ad hoc announcement on the effects of the coronavirus: At that time, the corona crisis was expected to have a negative impact on the group's earnings of around 60-70 million euros for the month of February compared to the original internal plan. The impact on the annual result would be determined by various factors, which may also have an opposite, positive effect during the resumption of production. From today's perspective, it was not yet possible to foresee over which period, in which divisions and to what extent there would be negative effects, and to what extent these could be offset by positive effects (see Ad hoc: Impact of Coronavirus and decision on StreetScooter).

On 4 March 2020, BaFin declared that it takes the current risk situation caused by the coronavirus very seriously. It said to be "in close communication with banks and other financial market players on possible reactions and contingency plans". It "continuously analyses the further development and possible effects on the financial industry"(see declaration of BaFin with regard to coronavirus). According to press reports, BaFin President Felix Hufeld on 16 March 2020 said that corona currently represented a significant burden, but not a systemic risk, to the financial sector.

Following first declines in the DAX since 21 February 2020, 9 March 2020 was a "Black Monday" on the stock exchanges. Against the background of growing fears of recession and a price war looming over oil, the DAX suffered a historic slump of almost 8 percent on this single day. It shouldn't stop there. In particular on 12 and 16 March 2020 there were more serious setbacks.

All this is reason enough to briefly summarise the legal obligations to which management boards, managing directors and supervisory boards should pay particular attention in the current situation. Generally speaking, the triad of climate change/climate protection, digitalisation and geopolitics is already bringing about changes with unprecedented dynamism and posing major challenges for companies (see Walden, NZG 2020, 50 on fundamental aspects). The effects on the economy caused by the spread of the new coronavirus and by the countermeasures are both unforeseen and acute. These effects must be managed just as carefully as all other events and conditions that affect a company. A company - and thus its management - must undoubtedly deal with such an inward impact. In more detail:

Risk identification

The most important basis for management action in crisis situations is the identification, analysis and evaluation of risks for the company. As a mandatory legal minimum standard, the establishment of a monitoring system is prescribed for stock corporations, which at least recognises at an early stage those developments that endanger the continued existence of the company, s91(2) AktG (German Stock Corporation Act). This provision is intended to also have an impact on those German limited liability companies (GmbH) which, due to their size and structure, are comparable to a German stock corporation (AG) and, according to the prevailing opinion, even beyond them. According to the past decisions of the German Supreme Court (BGH), the managing director of a GmbH is also obliged to carry out a continuous economic self-assessment. The managing director must therefore create an organisation that enables such managing director to have an overview of the economic and financial situation of the company at all times; the specific requirements of this duty depend on the specific circumstances of each company (see below for the duties in the event of imminent or actual insolvency). A comprehensive risk management system adapted to the individual circumstances of each situation is therefore the normal procedure, irrespective of the disputed question of whether or not the management board or the managing director are under a mandatory legal obligation to establish such a comprehensive risk management system.
In order to create an adequate information basis for their entrepreneurial decisions, the management is always well advised to set up such a system in order to be able to identify risks for the company and take them into account.

With regard to the coronavirus, this means that the management should continuously analyse in which respect risks related to the coronavirus exist for their specific company, with what probability they could occur and what consequences this would have for their company. It is clear that, in view of the novelty of the situation and the uncertainty about future developments, there is considerable uncertainty with regard to assessment and forecast already at the level of risk identification.

Risk management options

On the basis of the coronavirus-related risks identified for a specific company, the next step is to ask whether and how each risk can be avoided, reduced or diversified and what advantages and disadvantages are associated with this for the company in each case. At this point it becomes even clearer that the estimates can have a considerable forecasting impact. This is because mitigation measures in response to an identified risk may include further uncertainties. There may, for example, be the question of the economic and legal consequences when existing contracts cannot be fulfilled and the risks with potential alternatives. It is also clear that mitigation measures can sometimes be very costly.

Principle: Business decision

The management is generally entitled to broad entrepreneurial discretion (called the business judgement rule). A breach of duty - and thus liability - on the part of the management board is definitely excluded if the management board (i) could reasonably assume, when making a business decision, (ii) to act on the basis of appropriate information and (iii) in the best interests of the company, s93(1) 2nd sentence AktG. This applies not only to stock corporations, but basically also to other companies. However, in the event of difficult discretionary decisions, the management of a GmbH, for example, is obliged to a much greater extent than the management board of an AG not to make the decision itself, but to leave it to the shareholders' meeting. This follows from the fact that the management is bound by the instructions of the shareholders' meeting.

The management will therefore be on the safe side if it creates an appropriate information basis with the help of the aforementioned steps of risk identification and management and then makes decisions on this basis for the benefit of the company. Mere inaction is not regarded as a business decision. Rather, the management should actively consider whether and, if so, what risk management measures will be taken. In doing so, it must take particular account of the effects of the mitigation measure or failure to take such measures on the company. Obvious aspects are: costs, operational risks, effects on existing and future contractual relationships, in particular risks in connection with possible legal disputes, as well as effects on the design of the business model, effects on the company's reputation (especially with business partners, but also generally with the public) and official requirements and sanctions. At this point, the pronounced forecasting character is accompanied by a broad entrepreneurial discretion. A duty would be breached only if the limits of responsible action oriented towards the well-being of the company and based on a carefully determined basis for decision-making were clearly exceeded. A recent ruling of the Higher Regional Court (OLG) of Cologne once again underlined the central importance of the aspect of the appropriateness of the information basis. In particular, the adequate scope of the information basis depends on the degree of importance of the decision for the company (see blog post: Higher Regional Court of Cologne on Management Board liability: Adequate Information Basis is Essential).

According to the prevailing opinion in stock corporation law, the management board may take into account the interests of the shareholders as well as the general public (stakeholders) in its decisions. Depending on the circumstances of the individual case, it is quite possible, for example, to refrain from certain business activities for the purpose of preventive health protection or to offer goodwill solutions, even if this (initially) has a negative financial impact on the company.

Limitation I: Obligation to secure the existence of the company and avert damage

The above-mentioned broad entrepreneurial discretion with regard to dealing with the consequences of coronavirus finds its first limitation in the general obligation to secure the existence of the company and to avert damage. The management is legally obliged to ensure, as far as possible,

the long-term existence of the company and its sustained profitability. Furthermore, it is generally obliged to avert damage to the company as far as possible.

Limitation II: General legal obligation

In addition, the management is obliged to ensure compliance with the law. In the present context, this obviously means in particular compliance with obligations under employment and occupational safety law, administrative cooperation obligations and official directives. But there are also many other legal questions that arise:

Listed and over-the-counter companies must examine whether the individual effects of the coronavirus on the company constitute inside information which must generally be published ad hoc, unless there is a legitimate interest in a delay of disclosure, see Art. 7, 17 MAR. According to the BAFin consultation version on Module C of the 5th edition of the Issuer Guidelines, circumstances that only indirectly affect the issuer may also qualify as inside information. This may include, for example, market data or market information, which in individual cases may also affect the situation of issuers or financial instruments. This can be the case, for example, with natural disasters.

As mentioned above, the management must permanently monitor the economic situation of the company and, if there are signs of any crisis developing, obtain an overview of the asset situation by preparing an interim balance sheet or asset status. In view of the duty to ensure liquidity, solvency forecasts must also be prepared regularly. This is based in particular on the following legal obligations:

  • If the annual balance sheet of an AG or an interim balance sheet is drawn up, or if it can be reasonably assumed that there is a loss equalling half of the share capital, the management must convene an annual general meeting without any delay and must notify this situation to the meeting, s92(1) AktG. A GmbH must convene a shareholders' meeting not later than at the point where the annual balance sheet or balance prepared during the course of the financial year shows that half of the share capital is lost, s49(3) GmbHG (German Act on Limited Liability Companies). It may also be advisable for a GmbH to convene a shareholders' meeting earlier when a crisis emerges.
  • In the event of insolvency (i.e. if the company is unable to meet the due liabilities) or over-indebtedness (i.e. if the assets no longer cover the existing liabilities and there is no positive going concern forecast), the management must file for insolvency within three weeks, ss15a, 17, 19 InsO (German Insolvency Code). If a company still makes payments after insolvency has occurred or after over-indebtedness has been established, the executive board or the managing director may be held personally liable under s92(2) AktG or s64 GmbHG. In addition, the question of a punishable delay in filing for insolvency often comes "as a reflex" in such constellations.

The current package of measures already adopted by the German government (see above) includes in particular support instruments for short-term liquidity requirements in the event of a crisis. It is therefore essential to check, if necessary, whether insolvency can be avoided with the help of these support instruments. The risk of widespread insolvency of companies is therefore likely to have fallen significantly. It is unclear, however, whether the aid will reach the companies concerned in time. The German government's current package of measures also does not yet offer protection against over-indebtedness. However, it has already been discussed that the three-week period for filing an insolvency petition should be temporarily extended or suspended, at least in the case of over-indebtedness. The aim of such a measure would be to rescue healthy companies that would find themselves over-indebted simply due the results of the spread of the coronavirus. On 16 March 2020, the German Federal Minister of Justice announced that the obligation for affected companies to file for insolvency within three weeks is planned to be suspended until 30 September 2020 - similar to what was done in the event of flood disasters. Prerequisite for the suspension of the filing period is said to be that the reason for insolvency results from the impacts of the coronavirus epidemic and that due to the application for public support or serious financing or restructuring negotiations of an applicant there are good prospects for recovery.

Unless the company is a small company as defined in s267(1) HGB (German Commercial Code), there also is the question of how the management will deal with the effects of the coronavirus in the forecast report in the current reporting season. Pursuant to s289(1) 4th sentence HGB, the management report must, among other things, assess and explain the expected development with its material opportunities and risks; underlying assumptions must be disclosed (see also DRS 20). Forecast reporting is particularly important in times of crisis.


Finally, the question arises as to when and how AGs and GmbHs will hold their general meetings and shareholders' meetings this year. An ordinary annual general meeting (in the case of an AG) or the shareholders' meeting (in the case of a GmbH) must take place within the first eight months of the financial year, s175(1) AktG and s42a(2) GmbHG. Some large, listed stock corporations have already announced a postponement of their annual general meeting this year due to the coronavirus. In the case of limited liability companies and unlisted stock corporations, the risk situation is significantly lower due to the typically much smaller circle of shareholders. Non-compliance with these requirements may result in the imposition of a fine or a claim for damages; in the current situation, however, the question is to what extent non-compliance with s175(1) AktG can be justified. Official assembly bans must be observed in all cases. For example, it can be assumed that the temporary ban on events and meetings issued in Bavaria on 16 March 2020 by general decree pursuant to s28(1) 1st sentence InfSG (German Protection Against Infection Act) also applies to general meetings and shareholders' meetings (see Coronavirus: Prohibition of Events and Business Operations).

The practical consequences of postponing larger general meetings are certainly relevant. Suitable venues are rare and alternative dates are often difficult to obtain. There may also be cancellation costs for rooms already booked. Last but not least, the dividend can only be paid out after the annual general meeting has approved the appropriation of profits. On the other hand, shareholders may be able to participate in the annual general meeting online or vote online (s118(1) and (2) AktG in conjunction with the articles of association) or instruct the company's proxy. The question of how to conduct the 2020 annual meeting is therefore a good example of how many different aspects sometimes need to be taken into account in decision-making.


The role of the supervisory board

As always, the supervisory board is called upon to monitor the management of the company (s111(1) AktG) and to examine the annual financial statements, the management report and the management board's proposal for the appropriation of profits (s171(1) AktG). In addition to periodic reporting to the supervisory board (s90(1) 1st sentence 1 AktG), the management board, for its part, is obliged to promptly report to the chair of the supervisory board "on other important occasions". This may in particular be the case with events that adversely affect the company from outside.

Dr Daniel Walden


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Dr. Daniel Walden T   +49 89 35065-1379 E   Daniel.Walden@bblaw.com