For many years, if a board member of a German public limited company (Aktiengesellschaft) broke the law, the matter was treated as an ‘internal matter’ for that company. The principle applied was that of a gentlemen’s agreement: discretion came before transparency. There were no firm rules in place that would have facilitated a working system for preventing such violations. The question of whether and how to deal with statutory violations by members of the management board (Vorstand), including that of whether to initiate legal proceedings, was in effect left to the discretion of the supervisory board (Aufsichtsrat).

The so-called ARAG decision of the Federal Court of Justice of 21 July 1997 (NJW 1997, pp 1926 et seq.) changed this fundamentally. The Court held that the supervisory board, as representative of the public limited company, is obligated to seek redress from members of the management board for any statutory violations, if need be by way of litigation proceedings, provided there is a reasonable chance of success. The company will, in its turn, have a cause of action against members of the supervisory board should they fail to do so.

This seminal judgment of the Federal Court of Justice has played a pivotal role in establishing the term ‘compliance’ in German law. That term stands for the duty of the management board to ensure that the company complies with legal norms and rules, a duty that has long been enshrined in German corporate law, arguably even prior to the introduction of a compliance section into the German Corporate Governance Codex – at No. 4.1.2.

Oct-Dec 2014 issue

White & Case