prologue
This year’s petition from the NGO ClientEarth to Shell’s board members received a lot of attention across corporate boards. Combined with increasing supply chain regulation across Europe, there is a rapid focus on the liability of directors and officers for breach of regulatory obligations.
As the German law on corporate due diligence obligations in supply chains (LkSG) enters into force on 1 January 2023, the potential liability of directors and officers for their obligations under the LkSG and Let’s take a closer look at the scope of We first consider the potential external liability of directors and officers to third parties, then look to potential internal liability to the company and/or shareholders, and conclude on liability for fines.
external responsibility
Basis of claim
Over the past decade or more, there has been a clear shift in the subject matter of lawsuits filed by NGOs. Initially, the focus was primarily on governments. After his Shell judgment in the Netherlands (which was successful from the NGO’s point of view), NGOs focused more and more on corporations and widely deployed the arguments used in the Shell case across Europe. Now they even track individuals who are responsible for specific corporate strategies.
This raises the question whether such ESG claims for directors and officers are even conceivable in Germany.
The first precedents for ESG litigation against companies themselves are not encouraging for NGOs. Claims under the German General Tort Code (Sec. 823, 1004 BGB) have met with limited success. The lawsuit against RWE is on appeal after the company won. In the first instance, Daimler won the NGO in the first instance in the injunctive relief proceedings. However, the LkSG can provide NGOs with another avenue for activist lawsuits by pursuing corporate directors and officers instead.
LkSG denies ‘additional’ civil liability
LkSG itself does not provide a basis for civil liability for breach of obligations set forth in LkSG. 3(3) LkSG goes so far as to expressly deny any civil liability for breach of these obligations. The legislative intent was to establish no new civil liability for companies or individuals in the LkSG, while at the same time recognizing liability under previously enacted provisions.
LkSG is not a law of protection in the sense of Sec. 823(2) BGB
Two common tort provisions come to mind as potential grounds for claims. 823(2) BGB (Schutzgeszetze) – and seconds. 823(1), 1004 BGB is for interference with (and damage to) a person’s life, body, health, liberty, property or other equivalent subjective rights.
The general opinion in academia and practice seems to be that the LkSG provision is not protective law in that sense. Legislative intent also supports this assessment.
LkSG does not grant any subjective and enforceable rights to third parties
This leaves seconds. 823(1), 1004 BGB are considered grounds for claims. However, it seems highly questionable whether the terms of the LkSG can be construed as giving third parties subjective and enforceable rights. The clear legislative intent was to establish a statutory basis for fines only (administrative or criminal). The latter interpretation allows enumeration of section rights. 823(1), 1004 BGB fully covers the legal interests covered by LkSG. LkSG need not be identified as giving subjective rights.
Ultimately, the correct interpretation will be decided by the German courts, but at the moment the NGO is Sec. 823(1), 1004 BGB (for PR reasons only).
D&O coverage
If such a claim is granted in a final determination, the D&O Policy will: Compensation for damages Filed by companies against directors and officers who have violated their duties as stipulated by the LkSG (with the usual warnings against intentional actions, retention, etc.).
claim Injunctive Relief Since insured losses generally do not include company revenue losses (compare, for example, A-6.1 of the General Insurance Conditions (GDV Conditions) of the German Association of Insurance Companies), for example (i) changes in company strategy ( (ii) exclusion from public procurement under Sec. 2, even if such modification is court-ordered. 22 LkSG.
internal responsibility
company claims
At least incorporated German companies (GmbH, AG, etc.) are usually not liable for directors or officers if they breach an obligation imposed by the LkSG, as such breach is also a breach of their conduct obligations. Make a claim against the officer. Legal (e.g. Sec. 43(2) GmbHG, Sec. 93(2) AktG).
Damages (not loss of revenue, see above) caused by such breaches are generally covered by D&O insurance.
Activist Investor Litigation (Shareholder Claims)
ClientEarth’s allegations in its letter of demand to Shell’s board of directors in the UK (i.e., its shareholder status in the company gives rise to certain performance claims against board members) should not apply lightly to Germany. . Most of the time, the company’s best interest is an “ineffective basis” for asserting such claims, so requirements are rarely met in most cases (see, for example, Sec. 148 AktG). For example, it can cause large losses and even violate the company’s articles of association.
Damages (not loss of earnings, see above) caused by directors’ and officers’ breach of their obligations to act lawfully (including compliance with their obligations set out in LkSG) are normally covered by the D&O insurance policy. increase.
liability for fines
The LkSG prescribes fines (up to €800,000 for individuals and up to 2% of the company’s annual turnover for companies) for breaches of the duty of care imposed on directors and officers. Legally, a company acts through its directors and officers. In other words, directors and officers (including human rights officers) are perpetrators of such violations. Fines may then be imposed on directors and officers, the company, or both. If a company is fined, it may seek to recover damages from responsible directors and officers.
Fines imposed on directors or officers
fine for director or officer generally not compensated. Fines are excluded under the GDV Terms as they are not claims brought against directors or officers under the Statutory Liability Provisions (see GDV Terms A-1).
fines imposed on the company
if Company If you are fined, D&O policies generally do not provide coverage (see GDV Terms A-7.10). However, policies from outside Germany may include fines.
Company Claims Against Directors and Officers
Whether or not is a subject of great debate. request It is permissible under German law for a company to be held liable for fines imposed on it for breach of LkSG’s obligations by its directors and officers – some scholars and courts disagree. I would like to release the directors and officers, but some people make the same claim about the company. Both sides await a clear decision from the German Federal Court of Justice.
Even if recourse is granted under German law, compensation under A-7.10 of the GDV terms is normally waived and any compensation for penalties for companies is excluded.
Conclusion
Although civil litigation for breach of LkSG’s obligations appears to have met with limited success so far, the company (and its directors and officers) is concerned with LkSG’s compliance (see this article for a mandatory risk analysis). ), potential litigation risks, and fines and insurance coverage. Breach damages are normally covered by the D&O policy. Exceptions are fines against a company or its directors and officers, which are generally not recoverable under insurance policies.
In any event, it is of utmost importance for both companies and individuals to document all actions related to the obligations set out in the LkSG.
Future regulations may even expand the liability of directors and officers. The “Annex and Amendment Directive (EU) 2019/1937 to the Directive Proposals of the European Parliament and of the Council on Corporate Sustainability Due Diligence” was published on the 23rd. From February 2022, it clarifies that companies are liable for breach of their obligations under the Directive. This may result in an increase in recourse claims brought against our directors and officers.
