Consultants: a liability trap for managing directors?!
Cum/ex transactions and the role played in these by banks and their governing bodies are currently the subject of a great deal of dispute and discussion. In this context, little attention is paid to the significance of legal consultant involvement and of their expert opinions regarding the “legal permissibility” of cum/ex transactions for the liability in question of the acting executive bodies. The decisive point here is probably whether or not an incorrect legal assessment or wrong legal advice by the legal consultant negates a culpability, thus rendering void an action by the governing bodies that was (potentially) in breach of duty. The question whether reliance on the “advice of an expert” ultimately has an “exculpatory” effect, however, affects not only legal issues, but ultimately all areas (e.g. scientific, technical, artistic issues) in which managing directors utilise the expertise of consultants. In a recourse case against the managing director, the selection and use of consultants by the managing director is thus of (partially) decisive importance. Of considerable importance here is the burden of proof that falls on the managing director. In a recourse action, the onus is on him/her to demonstrate that he/she was not in breach of duty or at least not culpably so.
Selection and use of consultants
Fundamental requirements for the selection of the consultant
When making the necessary selection decision, the managing director must personally ascertain that the consultant has the required specific expertise. It is therefore not sufficient that a third party (e.g. a supervisory board member) has named the consultant as a competent contact person for the issue to be examined. In order to prove the required expertise of the consultant, it is not only important that the advisor is formally qualified (e.g. as a lawyer), but also that the advisor has the required expertise and experience regarding the issue to be assessed. If the managing director is unable to assess based on the available information whether an individual selected as a consultant is sufficiently competent, this individual must not be consulted.
The consultant to be consulted must be independent, i.e. must not be guided in their deliberations by improper considerations or self-interest. The extent to which independence is already excluded by the economic dependence of the consultant, or by the consultant being bound by their instructions, depends on the individual case. For example, employees of the legal department are bound by instructions, but should not be dependent per se in this sense. By contrast, an external consultant may be dependent on the company because they receive a great many contracts from it. A prior involvement of the consultant with the issue to be examined may also negate their required independence.
Fundamental requirements for information provided to the consultant
The consultant must be given access to all the information and all the documents needed in order to properly answer the question under examination. Managing directors must either themselves know what information is relevant, or must ask the consultant. Simply relying on the consultant to request the necessary information is thus not sufficient. If the consultant reaches an incorrect conclusion because the managing director mistakenly considers a piece of information to be irrelevant, this will ultimately fall under the responsibility of the managing director. The managing director is therefore strongly advised to sufficiently make the question to be examined sufficiently specific, and to coordinate with the consultant regarding the information required to answer the question. If in doubt, the consultant should rather be given “too much” information than too little. Due to the managing director’s burden of proof in a recourse case, the managing director should also ensure that it can subsequently be determined in a lawsuit which facts the consultant used as the basis for their investigation. No consultant opinion should therefore be completed without a concluding list of the documents and information used by the consultant.
Unsuitable expert opinions or opinions of convenience do not negate the culpability of the managing director and thus his/her liability. The managing director therefore cannot blindly trust the consultant’s answer. Rather, the managing director must check the result of the consultation for plausibility. The managing director can only evade an accusation of failure to perform or completely perform a plausibility check if it subsequently transpires that the expert opinion contains no grounds for objection. Within the framework of the plausibility check, the managing director must examine whether the expert opinion or the recommended action is based on accurate and complete facts, and whether it engages thoroughly with the questions posed or only one-sidedly represents one of several competing views. Finally, the managing director must check whether the information provided contains contradictions or incomplete reasoning. Furthermore, the managing director must compare the result of the expert opinion with any current general state of opinions in the relevant industry. If the expert opinion contradicts those principles, this may substantiate concerns about the accuracy of the expert opinion, which the managing director must then investigate. As a general rule, an expert opinion prepared for a “layperson” must also be comprehensible to a layperson. If it is not, there is a significant risk that it will not form an appropriate basis for decision-making by the managing director.
However, a managing director is not expected to conduct a plausibility check of the kind that ultimately requires the very expertise for which the consultant has been engaged. Neither is a managing director usually required to work through an expert opinion of several hundred pages in detail, word for word. The principle that exceptions prove the rule applies here, however. The more existential for the company the question to be examined is, the more intensively a managing director must engage with it, and thus also with the consultant’s recommendation for action.
Managing directors are strongly advised to deal with these requirements, which case law ultimately applies to the selection and use of consultants, and to ensure compliance with them. In recourse proceedings dealing with a managing director’s actions in breach of duty and in a manner detrimental to the company, it is any case only in very rare and exceptional circumstances that the culpability can be rendered void by a general statement to the effect that the managing director followed his/her consultant’s recommendation in good faith.
About the author
Publication: E-Book „GmbH-Geschäftsführer 2018“
Publication date: 17. Mai 2018
Publisher: EUROFORUM Deutschland GmbH