Personal liability of executives
The risk of being held personally liable has significantly increased in recent years for officers, directors, and board members under German Law. Not only has the number of cases in which managers have to face liability claims risen. It is also the amounts of the claimed damages that are higher than ever before. The origin of this development under German Law has been various corporate scandals in the recent 10-15 years, which were caused by serious failures of the management. In reaction, there has been legislative tightening and a stricter interpretation of the German Liability Laws by the courts.
Senior executives are at a particular risk
Senior executives are confronted with a greater risk of liability as regular employees (who are privileged under German Employment Law): Even slight and ordinary negligence may lead to managerial employees being held liable with their private assets. This also applies to expats in Germany and is e.g. the case where the damage caused is related to an activity that is characteristic of the executive’s position (such as exercising the managerial right to give instructions to employees). In contrast to directors and officers, the managerial employees (leitende Angestellte) are usually not covered by D&O liability insurance that protects them in case they face a claim. Additionally, there is often uncertainty about whether an executive can be qualified as managerial (leitender Angestellter) in terms of German Employment Law. This cannot be unilaterally set by the employer but has to be eventually assessed by the Employment Court (if this is crucial in a certain context).
Typical situations that may lead to personal liability of executives and managerial employees
- The manager makes a decision without knowing the relevant facts that would objectively be needed to make a decision of this impact
- Opportunities and risks of a decision and its consequences are being judged irresponsibly wrong
- The senior executive takes a decision clearly under foreign influence, or despite a clear conflict of interests, and the decision’s consequence is seriously disadvantageous for the company
- Tax obligations are breached in the executive’s area of responsibility
- Social security contributions are not properly deducted
- Insolvency application is not made in due time, despite illiquidity or over-indebtedness