Germany: COVID-19 – Decisions based on proper factual basis

The rapidly expanding Corona-19 pandemic puts significant pressure on companies of all sizes in each segment. Entrepreneurs, managing directors and board members have to make far-reaching decisions in the shortest possible time with considerable uncertainty about forecasting in a situation that has hitherto been completely unknown. It is clear that many decisions will not have the desired success; some will do even more harm than good in hindsight.

This also raises the question of civil or even criminal liability risks for decision-makers.

Now and in the upcoming months, many entrepreneurs and board members will have to make many atypical risk decisions. The object of their actions is not the ordinary course of business activity, which, in addition to new opportunities, also entails known and unknown risks. What is needed is action to reduce risks arising from a sudden and dynamic change in the business environment that is hardly predictable. The cushioning of these risks may require measures that were unthinkable a few days ago – from the termination of a transaction to the deferred investment to the temporary closure of plants or the application for state aid.

Business leaders operate in a black box in crisis management as well as politicians: whether the drastic measures are ultimately necessary and successful will only tell the future – but action must be taken now. Unlike politics, managers and entrepreneurs carry a significant personal liability risk. If they are wrong, they threaten not only existential consequences for the company, but also personal reputation and, at worst, loss of office, as well as tangible legal consequences.

As a result, corporate leaders find themselves in a dilemma where both options for action – immediate action and further waiting – are risky, and in which any decision made can prove to be wrong in retrospect. It would therefore be highly unfair to make the occurrence of legal consequences dependent on the outcome of the decision. In order to prevent this, the German corporate (§ 93 German Stock Corporation Act) and case law limits the risks of liability. A breach of due diligence is only due to “totally unacceptable action“.  For example, if the error is already obvious to an outsider, as in the case of insufficient collection and evaluation of information prior to a decision.

It is necessary, but also sufficient, for management to establish an ‘appropriate factual basis’ in the specific situation and for the decision-makers to assume this ‘reasonably‘ at the time of the decision. It does not matter whether a subsequent review concludes that the decision was in fact based on appropriate information or was to the benefit of the company.

These criteria, which are admittedly soft, give decision-makers in companies what they need most now: a sufficiently broad basis for decision-making.

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