Corporate Compliance @ Tech Deals – The potential minefield of concluding consultancy agreements with supervisory board members and “their” consulting firms in Germany

Young tech companies established in the legal form of a stock corporation often conclude consultancy agreements with lawyers and tax advisors who have been given a seat on the supervisory board in the company precisely because of their professional expertise. To the extent that such companies have not yet set up their own legal or tax department, they regularly instruct consulting firms on the recommendation of the supervisory board member where such firm is actually the member’s “own” firm. Set out below is a guide on how to deal with this particular potential minefield, which was also the subject of two rulings by the German Federal Supreme Court (BGH) in 2021. The practical relevance is reinforced by the mis constructed tax law provision in section 10 no. 4 Corporation Tax Act, which provides for a 50% prohibition on tax deductions for supervisory board remuneration.

Not a blanket prohibition, but approval of the supervisory board is required

The law does not prohibit consultancy agreements as such, but requires transparency within the supervisory board through the requirement for the supervisory board’s consent (section 114 Stock Corporation Act (AktG)). If consent is not given, any remuneration already paid must be returned. The consultancy agreement must therefore be disclosed in order to avoid any hidden supervisory board remuneration.

Consultancy agreements with third-party companies also covered

To avoid circumvention of the consent requirement, consultancy agreements with certain third party companies are also covered. Two groups of cases are to be distinguished:

The first group concerns consultancy agreements concluded by the stock corporation with a third party company that has a special connection to a supervisory board member. In the past, the Federal Supreme Court ruled on this as follows: This firstly includes such consulting firms that are solely owned by a supervisory board member (BGH dated 3 July 2006 – II ZR 151/04, BGHZ 168, 188). Contracts with third-party companies in which the supervisory board member holds an interest and from which he or she indirectly receives benefits of a not insignificant amount are also covered (BGH dated 20 November 2006 – II ZR 279/05, BGHZ 170, 60; BGH dated 10 July 2012 – II ZR 48/11, BGHZ 194, 14).

In its decision of 29 June 2021 (II ZR 75/20, BGHZ 230, 203), the Federal Supreme Court extended the consent requirement to third-party companies of which the respective supervisory board member is the legal representative. An additional shareholding is therefore not required. Also, according to this ruling, there is no longer a limit to the minimum threshold value (“not insignificant amount”). The relationship between supervisory board remuneration and consultancy fees is therefore no longer relevant.

The second group of cases was developed by the Federal Supreme Court to prevent further circumvention of the above-mentioned constellation. Accordingly, it is not just consultancy agreements that the stock corporation concludes with a supervisory board member (or “his/her” consulting firm) which are covered by the consent requirement, but also where a third party company is interposed. In this case, the supervisory board member (or “his/her” consulting firm) concludes a consultancy agreement with a third-party company, which in turn advises the stock corporation (BGH dated 22 June 2021 – II ZR 225/20, BGHZ 230, 190).

The current case law of the Federal Supreme Court is therefore very rigid which underpins the Court’s resistance to the circumvention of sections 113 and 114 AktG.

For which consulting services is consent actually required?

In addition to the question of which contractual constellations are covered by the approval requirement, it must also be clarified which activities should actually be approved at all. In general, it can be said that activities that already fall under the responsibility of the supervisory board are not subject to approval. This is because these are already compensated by the supervisory board remuneration according to section 113 AktG.

Distinction between owed board activity and separate consultation

However, neither the scope and intensity nor the difficulty of the task prove to be suitable criteria for the necessary demarcation between section 113 AktG and section 114 AktG. Instead, the subject matter of the contract is to be used as the decisive criterion; thus, the type of activity in its individualised form through the concrete contract is to be considered.

According to the modern understanding of duties, good corporate governance requires not only downstream control of the executive board’s actions, but also future-oriented advice provided to the executive board by the supervisory board as a co-entrepreneurial body. Higher-level questions of corporate policy are also to be assigned to the supervisory board’s area of responsibility. These include the development of a long-term corporate strategy.

According to the restrictive case law of the Federal Supreme Court, general advice to the company on the conclusion of company and share purchase agreements, as well as on entering into strategic alliances (joint ventures), on capital increases, issuing bearer and convertible bonds and concluding loan agreements already fall within the scope of duties of a supervisory board member. The same applies to advising on business management issues (see Lorenz/Pospiech, NZG 2011, 81).

Special expertise does not necessarily justify consultancy activity

With regard to the duties of the corporate bodies, the individual member of the supervisory board shall make available to the company both his or her individual expertise and experience. The special qualification of a supervisory board member cannot be remunerated separately by way of a consultancy agreement. Especially since the individual expertise is likely to have been a major reason for the appointment to the supervisory board.

No consultant remuneration for increased commitment in times of crisis

If the company’s circumstances require a supervisory board member to work beyond his or her normal duties, the supervisory board member must do so on the basis of his or her position on the board. During a company crisis, the supervisory board’s duties to monitor and advise the company’s governing bodies become more stringent. A more clean-cut division between reasonable and unreasonably high effort cannot be made in this context. Accordingly, a supervisory board member cannot claim additional remuneration for an increased effort required by the specific situation of the company. Special remuneration (apart from attendance fees for additional supervisory board meetings) can only be granted by a resolution of the general meeting.

Activities eligible for approval outside the scope of duties of the corporate governing body

In the first instance, there is room for consulting activities that can be approved for the assessment of specific questions of operative business or activities for the preparation or implementation of concrete management measures.

Activities eligible for approval based on depth of consultation

Furthermore, the ability to give consent within the meaning of section 114 AktG may also exist in the case of contracts whose subject matter is in principle subject to the supervision of the supervisory board. Such an exception is to be assumed if the contractually owed service has a special depth of consultation in the individual case. This applies, for example, to factual constellations in which an independent expert would otherwise have been instructed by the company. An indication for a corresponding depth of advice is generally a concrete task that is related to a narrowly defined operational area.

Examples of consulting activities that can be approved

Case-law has considered the development of an IT-supported controlling system to be an approvable activity within the meaning of section 114 AktG. Other examples are the selection of a new head of department in a central division, the preparation of a special issue placement, special legal and tax advice or the technical preparation and handling of a company acquisition. Furthermore, litigation is one of the operational activities of the day-to-day business that can be advised upon. The execution of an extensive M&A transaction can also be regarded as an activity outside the scope of duties of a corporate body.

Lessons learned

Before concluding a consultancy agreement, it must be checked whether the supervisory board’s consent is required. In addition to consultancy contracts with supervisory board members personally, this also applies to contracts of the stock corporation with a consultancy company that has a special connection to a supervisory board member, for example because he or she is a partner or managing director/board member there. The rigid case law also affirms a duty of consent in the case of the interposition of a third party, i.e. if the supervisory board member (or “his/her” consulting firm) concludes a consulting contract with a third party company, which in turn advises the stock corporation. If the required consent is not given, any remuneration already paid must be returned.

In addition, it must be examined which services are eligible for approval at all: These are those activities which do not already fall within the competence of the supervisory board and are compensated with the supervisory board remuneration. This often difficult distinction is made on the basis of the concrete subject matter of the contract.