Corporate / M&A

Duties and Liabilities of Management Board (MB) and Supervisory Board (SB) in Corporate Reorganizations

Corporate reorganizations are very common in corporate practice. The liability risks borne by MB and SB members in the context of corporate reorganisations should not be underestimated.

Duties of MB and SB

The MB and SB of companies that are involved in corporate reorganizations, ie of the company transferring assets and the company assuming these assets, must take legal actions according to the applicable legal regime1. In the following, our focus is on mergers (Verschmelzung) and de-mergers for absorption (Spaltung zur Aufnahme):

By entering into a merger agreement or a de-merger agreement, respectively, the MB’s of the transferring company and assuming company, lay down the principles of such a transaction. Occasionally, a due diligence of the transferring company or particular assets to be transferred is undertaken.

Further, the MB’s of the involved companies must describe and provide reasons for the intended (de-)merger from a legal and economic view in their (de-)merger report. The SB must audit the (de-)merger based on the MBꞌs report and an independent audit report2. The MB must also fulfil some publication requirements.3 Merger agreements and de-merger agreements are in principle subject to the approval of the involved companies’ shareholders.4 As a final step, the MB’s of involved companies have to register the merger or de-merger with the commercial register of the competent court.

Liabilities of MB and SB of transferring company

Legal basis

In the case of a merger, according to sec 227 AktG, members of the MB and the SB are jointly liable for any damages to the company, its shareholders, or creditors caused by the merger, provided that corporate bodies have acted negligently when preparing and executing the merger. The valuation of assets to be transferred and  the establishment of whether the capital resources of the assuming company are sufficient are particularly relevant in this respect.

In the case of a de-merger, according to sec 3 para 5 SpaltG, members of the MB and the SB are jointly liable for any damages to the involved companies (by application of sec 41 AktG mutatis mutandis)5 or its shareholders, provided that members of these corporate bodies have acted negligently when preparing and executing the de-merger.

In both cases, fault is presumed, but the opposite can be proven by members of these corporate bodies. Moreover, shareholder approvals for a merger or de-merger do not release the MB and SB members from such liability.

Parties entitled to a claim

In the case of a merger, the transferring company is, in principle, entitled to a claim. Shareholders and creditors may only claim for further damages, which are caused in addition to the company’s damages. For the purpose of such claims, the transferring company is deemed to continue existing (sec 227 AktG).

In case of a 100% upstream merger, no liability of members of the MB and the SB exists towards the transferring company and the sole shareholder; however, it still exists towards creditors (sec 232 AktG).

In the case of a de-merger, both the transferring company and the assuming company are entitled to a claim. Shareholders may only claim for further damages, which are caused in addition to their company’s damages. Creditors may not base their claims directly on sec 3 para 5 SpaltG.

Enforcement

In the case of a merger, the transferring company in fact ceases to exist with the merger’s registration. Thus, liability claims must be asserted by a special representative appointed by the competent court upon request of a shareholder or a creditor (Sec 228 AktG).

In the case of a de-merger, the appointment of such special representative for the assertion of liability claims is not required, as the transferring company continues to exist.

In general, such claims become time-barred five years after publication of registration of the (de-)merger (sec 227 AktG and sec 3 para 5 SpaltG).

Liabilities of MB and SB of assuming company

As to the liability of members of the MB and the SB of the assuming company, the general liability regime of the AktG and GmbHG6 applies7. Consequently, the MB and the SB become liable towards the assuming company in case a merger is prepared and executed without the prudence of a careful and conscientious businessperson. Such claims also become time-barred five years after publication of registration of the merger (sec 229 AktG).

The liability risks of the MB and the SB of involved companies should be taken into consideration when preparing and executing corporate reorganizations.

1
E.g. for mergers: sec 219 et seqq of the Austrian Stock Corporation Act (Aktiengesetz; AktG) and sec 96 et seqq of the Austrian Act on Limited Liability Companies (GmbH-Gesetz; GmbHG); for de-mergers: Austrian De-Merger Act (Spaltungsgesetz; SpaltG); for conversions: Austrian Conversion Act (Umwandlungsgesetz, UmwG); and respective articles of the Austrian Reorganization Tax Act (Umgründungssteuergesetz; UmgrStG).
2
MB reports, an independent audit, and a SB audit are not required in case of a 100% upstream merger or can be waived by all shareholders of the involved companies (also in the case of a de-merger).
3
In the case of a merger, such requirements can be waived by all shareholders of the involved companies.
4
Shareholdersꞌ approvals are not required in the case of a 100% upstream merger or upstream de-merger.
5
Sec 41 AktG provides for a liability claim in the case of negligent acts when founding a company.
6
See sec 84 and 99 AktG and sec 25 and 33 GmbHG.
7
In the case of a de-merger with new foundation (Spaltung zur Neugründung), members of MB and SB are (only) liable when acting negligently in connection with the foundation of the company.