In a decision dated May 8, 2023 (case reference: 2 W 25/23), the Braunschweig Higher Regional Court (OLG) addressed the question of whether specific ESG reporting obligations can be provided for in the articles of association of a stock corporation (AG). The OLG Braunschweig answered this question in the negative, basing its reasoning primarily on the principle of the strictness of the articles of association (Satzungsstrenge) and the autonomy of the management board in managing a company.

FACTS OF THE CASE

The applicants had first demanded in 2022 that the management board of Volkswagen AG, the respondent in the present case, add a motion for a resolution to the agenda of the next annual general meeting aimed at amending the articles of association.

The new provision to be included in the articles of association aimed to stipulate a specific form of sustainability reporting, pursuant to which the management board must disclose which direct or indirect lobbying activities the group companies pursue or support with regard to sustainability and climate change.

The management board of Volkswagen AG rejected this request by the applicants as inadmissible in July 2022 by email. The applicants then filed a court application in October 2022 with the Braunschweig Local Court pursuant to Section 122(3) sentence 1 German Stock Corporation Act (AktG) to include the requested amendment to the articles of association as an item for resolution at the next annual general meeting.

The Local Court rejected this application in March 2023. With the appeal before the OLG Braunschweig as the competent court of appeal, the applicants continued to pursue their request in full.

DECISION OF OLG BRAUNSCHWEIG

The OLG Braunschweig dismissed the appeal, the main reason given being that the proposed resolution to amend the articles of association was unlawful.

The proposed obligation of the management board to report on lobbying activities relating to sustainability and climate change is seen as not compatible with the principle of strictness of the articles of association pursuant to Section 23(5) AktG. It would constitute an impermissible interference in the mandatory allocation of responsibilities under stock corporation law between the three bodies of a stock corporation: the management board, supervisory board, and annual general meeting.

The OLG Braunschweig did not specify whether the reporting obligation is a deviating or merely supplementary provision of the articles of association pursuant to Section 23(5) AktG, as even a supplementary provision must be compatible with the other provisions and fundamental principles of stock corporation law, which is not the case with the reporting obligation proposed by the applicants.

First, the reporting obligation is an impermissible interference in the management discretion of the management board in accordance with Section 76(1) AktG. According to this standard, the management board is responsible for managing the company, while the annual general meeting can only influence the management of the company by determining the purpose and objectives of the company in the articles of association. That said, the articles of association may not contain any specific instructions to management.

However, precisely such specific instructions are contained in the proposed provision in the articles of association on the sustainability reporting obligation, as this interferes with the management board’s authority to draw up separate nonfinancial statements pursuant to Sections 315b para. 3, 289b para. 3, and 289c German Commercial Code (HGB) in conjunction with Section 264 para. 1 sentence 1 HGB. Pursuant to Section 289b(3) No. 1 HGB, such a separate nonfinancial statement must fulfill the content requirements of Section 289c HGB.

In accordance with Section 289c(2) No. 1 HGB, the report must also address environmental issues such as, for example, greenhouse gas emissions, water consumption, air pollution, the use of renewable and nonrenewable energies, or the protection of biodiversity.

In the opinion of the OLG Braunschweig, it is the sole responsibility of the management board to decide how a nonfinancial statement is to be structured in detail. Any specification, expansion, and tightening of the content of the statement beyond the framework stipulated by statutory law would lead to an inadmissible restriction of the discretion of the management board in this context. In the opinion of the OLG Braunschweig, the amendment to the articles of association proposed by the applicants contains such inadmissible restrictions.

Second, the OLG Braunschweig also classifies the actual effect of the reporting obligation as inadmissible. The effect was to be assessed exclusively according to objective criteria and not according to the subjective objectives of the applicants. In the present case, the reporting obligation provides a clear incentive for the management board to focus its business policy on the positive fulfillment of the circumstances required in the reports, i.e., on ecologically sustainable management.

This is because the management board wants to report positive developments and decisions on ecological aspects in the sustainability reports. As a result, even though the reporting obligation does not constitute a binding instruction to act, it creates a de facto target for a climate-friendly orientation of business policy.

These circumstances give rise to an impermissible controlling influence by the articles of association on the management of the company by the management board, which violates the allocation of management powers to the management board in accordance with Section 76(1) AktG.

CLASSIFICATION BY LEGAL LITERATURE

The reasoning of the Higher Regional Court of Braunschweig has so far been met with predominant approval in legal literature.

However, it is noted by some[1] that the sustainability reporting obligation, which is only regulated in the articles of association, cannot restrict the discretion of the management board in fulfilling obligations set forth by statutory law with regard to the content of the nonfinancial statement.

Furthermore, the steering effect of sustainability reporting on the management board is seen as minimal at best, as the management board is not free in its decision with regard to sustainability-related lobbying in any case, but rather has to always weigh up whether a lobbying measure is compatible with the self-declared climate targets.

Legal literature[2] predominantly follows the decision of the OLG Braunschweig and affirms a violation of the strictness of the articles of association by the sustainability reporting obligation. It is emphasized that the legally prescribed division of responsibilities between the management board, supervisory board, and annual general meeting is essential for the AG and is therefore in no way open to question.

However, in order to be able to report on positive sustainability developments and thus preempt public criticism, the management board’s autonomy in managing the company is restricted by the sustainability reporting obligation. Some also point out that the violation of the strictness of the articles of association can also be justified by a violation of the provisions on accounting law for stock corporations that were subsequently transferred from the AktG to the HGB, as these standards are also covered by the principle of strictness of the articles of association.

CONCLUSION

For the time being, it can be assumed that the introduction of sustainability reporting obligations for the management board of a stock corporation under the articles of association is inadmissible. Nevertheless, there is a high probability that the issue will once again become the subject of legal proceedings due to the increasing focus of the public and shareholders, particularly institutional investors, on ESG issues such as sustainability in business decisions.

In view of the fact that a superior court decision on such a case constellation has not yet been issued in Germany due to the non-admission of an appeal in the present case, it cannot be ruled out that a different decision will be issued in the future. The topic of the legal admissibility of statutory ESG reporting obligations for management boards of stock corporations therefore remains topical even after the decision of the OLG Braunschweig.

It also appears possible that ESG legislation on a European level will further define the scope of duties of management boards of stock corporations with regard to sustainability reporting.

[1] Klöhn in: NZG 2023, at 645-652.

[2] Verses in: AG 2023, at 578-583; Reichert, Groh in: NZG 2023, at 1500-1503.

[View source.]