D&O: Higher Regional Court Dusseldorf rules on recourse of company fines
Développement en droit 28 juillet 2023 28 juillet 2023
Royaume-Uni et Europe
Droit des sociétés
Recently, the issue of whether fines imposed on a company can be sought from its managing directors has been a subject of ongoing debate. The question has evolved due to European regulations and new laws implemented at the national level. The latest ruling from the Higher Regional Court of Dusseldorf (case ref. VI-6 U 1/22 (Kart)) states that cartel fines imposed on a company cannot be recovered.
The question whether and to what extent the company can take recourse for fine imposed on it against its directors based on their liability towards the company under Section 93 para. 2 of the German Stock Corporation Act (AktG) or Section 43 para. 2 of the German Limited Liability Companies Act (GmbHG) has been a matter of controversy in corporate and insurance law for years. For example, some experts consider a recourse to be excluded and refer to the sanctioning and preventive purpose of company fines. Others consider company fines to be recoverable in general, but sometimes argue that the amount has to be reduced. This is based on the position that, in particular, the punitive nature of the company fines would be circumvented if a recourse against directors was permitted.
As for now, the German Federal Court of Justice has not decided on the issue. According to a ruling by the Regional Labour Court Dusseldorf (ref. 16 Sa 459/14) in 2015, cartel company fines shall not be reimbursable. In a decision of February 2022, the Higher Regional Court Saarbrücken (ref. 1 U 114/20) did not decide on the recourse of cartel company fines. However, in an obiter dictum, the Higher Regional Court Saarbrücken indicated that it shared the first instance court’s views (Regional Court Saarbrücken, ref. 7 HK O 6/16) that a recourse should not be permissible.
Resolution of Regional Court Dortmund and decision of Higher Regional Court Dusseldorf
Now, discussions have taken up again with a recent resolution of the Regional Court Dortmund dated 21 June 2023 (ref. 8 O 5/22 (Kart)), in which the court found cartel company fines to be reimbursable by the managing director – thus contrary to previous court rulings. The court argues that there is a separation between sanctions and civil law, a sufficient deterrent effect and the preventive purpose of company fines vis-à-vis the company still remain in place as the actual actor for the company is their director. Thus, the court also preliminarily found the asserted claims for lawyers‘ fees exceeding the German Act on the Remuneration of Lawyers (RVG) to be recoverable.
In contrast, the Higher Regional Court Dusseldorf (ref. VI-6 U 1/22) has now held in its ruling dated 27 July 2023 that cartel company fines shall not be recoverable from a managing director. Thus, the court upheld the decision of the Regional Court Dusseldorf dated 10 December 2021 (ref. 37 O 66/20 (Kart)). This case concerns the so-called stainless-steel cartel. The company had asserted claims against its managing director in the amount of EUR 4.1 million in relation to the imposed company fine. Against the managing director himself, a separate fine was imposed as well.
The Higher Regional Court Dusseldorf ruled that in case one was to find company cartel fines to be reimbursable, the objectives of antitrust laws would be undermined, according to which, separate fines are imposed on the acting person and the company itself – also in relation to their amounts. A recourse claim would further pose the risk of jeopardising the sanctioning purpose of a company fine. By such recourse claims against directors, companies could in fact evade their responsibility under antitrust law. This would be all the more true if the directors were covered by D&O insurance and the amount of coverage was higher than the fine imposed on the company. By dismissing the asserted claims for company fines, the court also ruled that the lawyer’s fees in respect of the company fines were directly related to the fine proceedings against the company and as such not reimbursable as well. This ruling is not yet legally binding as the court granted an appeal to the German Federal Court of Justice since there still is a lack of a supreme court decision to this controversially discussed issue.
Outlook and consequences for D&O insurers
In view of the number of fines imposed on companies, eg more than EUR 4bn under the GDPR Europewide since 2018, a potential recourse is of immense importance not only for companies being fined, their directors, but also for their D&O insurers. A distinction must be made between fines imposed on the directors themselves, which regularly do not constitute a financial loss within the meaning of the respective insurance conditions, and fines imposed on the companies. With regard to the latter, the fines are in a first instance paid by the companies and subsequently potentially passed on to the directors as loss of the company via Section 93 para. 2 AktG or Section 43 para. 2 GmbHG. In this respect, many policies contain explicit coverage provisions for recourse claims of company fines against managing directors so that D&O insurers closely monitor this discussion as such recourse claims can pose a significant exposure.
In such cases, D&O insurers will also closely assess whether the conduct exclusion might apply since antitrust violations are often conducted intentionally. The decision of the Higher Regional Court Dusseldorf also contains relevant statements in that regard: The court assumes that the director breached his duties intentionally. It also found that the director was not acting under a so-called unavoidable error of prohibition (unvermeidbarer Verbotsirrtum), as it was far-fetched that he should not have been aware of the infringement of antitrust law (with specific examples outlined by the court). This is often claimed by directors in such cases as a defence in order to argue, inter alia, in relation to the D&O insurer that the conduct exclusion does not apply – which the court in this case found not to be credible. While the application of the conduct exclusion has to be assessed on a case-by-case basis and would need to be decided in separate coverage proceedings, the ruling gives important guidelines for D&O insurers in this regard.
Although the issue of recourse of company fines currently preliminary relates to cartel fines, the discussions and, hence, the decision of the Higher Regional Court Dusseldorf of 27 July 2023 might be of much broader significance. Against the background of regulation at the European level and the implementation of new regulations on a national level, the question is relevant in various fields of law. For example, fines for violations of the General Data Protection Regulation, which are often in the two to three-digit million range, are up on the agenda. In addition, the German Supply Chain Act (LkSG), which came into force on 1 January this year, provides for the possibility of sanctioning non-compliance with the new due diligence obligations with fines against the companies falling within its scope as well as their representatives. The same is true with regard to the German Whistleblower Protection Act (HinSchG), which came into force on 2 July this year. The European Commission's new proposal for a directive on so-called Green Claims also provides for the member states to maintain or introduce regulations on fines in order to be able to adequately and effectively punish violations of the provisions on information obligations and the verifiability of environmentally related advertising.
While it is important to note that certain arguments, in particular against allowing for a recourse, are based on particularities under antitrust laws, the new Dusseldorf decision still is of much broader relevance, and the question of recourse of company fines will remain controversial, at least until a first decision by the German Federal Court of Justice is ultimately rendered. A space to watch for companies and their directors but also their D&O insurers!