With considerable delay and overshadowed by the urgent legislative measures to mitigate the consequences of the Covid 19 pandemic, a new version of the German Corporate Governance Code (DCGK) came into force on March 20, 2020. The new requirements, which all joint stock companies listed in the regulated market must take into account from now on, are as far-reaching as little publicity as they came into force, so no deviation should be declared in the next declaration of conformity. Below we give you an overview of the most important innovations and the resulting need for action.

The new code has not only been fundamentally revised in terms of content, but also structurally and now contains so-called principles in addition to recommendations and suggestions. These serve to provide information about the essential legal requirements for responsible corporate management and form the basis for the recommendations and suggestions derived from them. However, these principles are not relevant for the annual declaration of conformity, since the declaration of conformity still only has to refer to recommendations. The structure of the code is now based on the central tasks of management and supervision (supplemented by related questions) instead of - as before - on the system of the law. A copy of the new version of the Code can be found on the website of the Government Commission www.dcgk.de .

The main changes concern the following points:

BOARD

1. Order

The first appointment of board members should now take place for a maximum of three years (recommendation B.3). This is in line with an already widespread practice.

Members of the Management Board should only take on sideline activities, in particular non-Group supervisory board mandates, with the approval of the supervisory board (recommendation E.3).

Anyone who is a member of the management board of a listed company should not hold more than two supervisory board mandates in non-group listed companies or comparable functions and should not chair a supervisory board in a non-group listed company (recommendation C.5).

2. Remuneration

In the area of ​​management board remuneration, the new code brings extensive innovations - which are required by the legal requirements of ARUG II. The ARUG II requires that the supervisory board develop a clear and understandable system for the remuneration of the board members. According to Recommendation G.1 of the Code, the remuneration system should specify in particular:

- how the total target remuneration is determined for the individual board members and what amount the total remuneration may not exceed (maximum remuneration),

- the relative share of fixed remuneration on the one hand and short-term variable and long-term variable remuneration components on the other hand in the total target remuneration,

- which financial and non-financial performance criteria are decisive for the granting of variable remuneration components,

- what is the relationship between the achievement of the previously agreed performance criteria and the variable remuneration,

- in what form and when the Executive Board member can dispose of the variable remuneration amounts granted.

On this basis, the supervisory board should then determine a specific total target remuneration for each individual (!) Board member (sum of all remuneration amounts for one year with 100% target achievement) (recommendation G.2).

In concrete terms of the statutory provision in Section 87 (1) sentence 1 AktG, the Code recommends that the Supervisory Board make a peer group comparison with other companies and assess the composition of the comparison group in order to assess the usual total remuneration of the Executive Board members (recommendation G .3).

For all variable remuneration components for each member of the Management Board, the Supervisory Board should determine the performance criteria for the upcoming fiscal year , which should be based not only on operational objectives but also on strategic objectives (recommendation G.7). The long-term variable remuneration should be higher than the short-term variable remuneration (recommendation G.6). The Executive Board member should receive the long-term variable remuneration mainly in shares of the company or have to invest in such shares; The Management Board should only be able to dispose of the amounts of the long-term variable remuneration after four years (recommendation G.10).

Furthermore, the Supervisory Board should be able to react appropriately to extraordinary developments with regard to remuneration and, in justified cases, be able to retain or reclaim the variable remuneration components ( clawback ) (recommendation G.11).

It remains the case that the amount of payments to a member of the Board of Directors in the event of premature termination of the position on the Board of Directors does not exceed two years' compensation (severance payment cap) and should not be paid more than the remaining term of the employment contract. In the event of a post-contractual non-competition clause, the severance payment should be counted towards the maternity leave allowance (recommendation G.13).

If a Management Board employment contract is terminated prematurely - for example as a result of a change of control - the outstanding variable remuneration components should be paid out in accordance with the originally agreed goals and specified due dates (recommendation G.12). In this respect, the Code also contains an additional suggestion that no benefits to the Executive Board should be agreed due to a change of control (suggestion G.14). Failure to follow this suggestion has no effect in the context of the declaration of conformity.

Practical tip

• Changes to the code that affect management board remuneration do not have to be taken into account in existing management board contracts. The new recommendations are then only to be taken into account when the Management Board contract is extended.
• The Supervisory Board has to set the specific total and maximum compensation for each member of the Management Board. The ARUG II also requires the specification of a maximum remuneration, but this does not necessarily have to be set for each individual board member, so that the code goes beyond the statutory provisions.
• The requirements for DCGK-compliant board remuneration are contained in the recommendations or suggestions G.1 to G.16. Insofar as the circumstances listed in Recommendation G.1 overlap with Section 87a (1) AktG, the following should be noted: Section 87a (1) sentence 2 AktG only contains minimum information , which - insofar as such elements are actually provided for in the Executive Board service contract - then also must be implemented as planned. Recommendation G.1 of the DCGK continues and contains the stipulation that the content mentioned there should actually be the subject of the remuneration system.

SUPERVISORY BOARD

1. Composition

The new code contains stricter recommendations to avoid so-called overboarding . If the supervisory board has so far only ensured that its candidates are nominated for election proposals, the code now recommends specific maximum limits for the number of supervisory board mandates held in parallel for members of the supervisory board.

Members of the Supervisory Board who are not members of the management board of a listed company should not hold more than five supervisory board mandates for non- group listed companies or comparable functions; a chair of the supervisory board counts twice (recommendation C.4).

Supervisory Board members who are also board member of a listed company, should only one perceive another Supervisory Board in a group listed company and not its Chairman hold (recommendation C.5).

Practical tip

• Listed stock corporations should obtain up-to-date information about external mandates from each member of the supervisory board and check whether there is now overboarding , taking into account the stricter recommendations .

2. Independence

Recommendations of the Code regarding the independence of Supervisory Board members apply only to shareholder representatives, this has now been clarified. Regardless , a board member is then when it is independently (i) from the company and the management, (ii) by a controlling shareholder and (iii) of major competitors.

Independence from society and the board

If the previous version of the Code still allowed the Supervisory Board to have an appropriate number of independent members in its opinion, there is now a clear requirement. " More than half " of the shareholder representatives on the Supervisory Board should be independent of the company and its board of directors (recommendation C.7), whereby the supervisory board chairman and the chairpersons of the audit and remuneration committee should always be independent of the company and the board of directors (Recommendation C.10).

A member of the Supervisory Board is considered to be independent if the member has no (i) personal or (ii) business relationship with the company or its board of directors, which can create a significant and not only temporary conflict of interest (recommendation C.7).

When assessing independence, circumstances listed in the catalog should now be taken into account as indicators whose independence is questionable (recommendation C.7). It is sufficient if these circumstances exist with the respective member of the Supervisory Board themselves or with a close family member (definition in accordance with IAS 24.9):

- Board membership in the past two years ,

- Within the last year a partner or in a responsible function in a company outside the group that maintains or has maintained an essential business relationship with the company or a company dependent on the company (e.g. as a customer, supplier, lender or consultant),

- A board member is a close family member,

- Membership on the supervisory board for more than twelve years .

Independence from the controlling shareholder

If the company has a controlling shareholder (by virtue of a domination agreement, absolute majority or at least a sustainable majority), a certain number of Supervisory Board members should be independent of this (recommendation C.9):

- For a supervisory board with six or fewer members, at least one shareholder representative should be independent of the controlling shareholder.

- If the Supervisory Board consists of more than six members, at least two shareholder representatives should be independent of the controlling shareholder.

- The chairman of the audit committee should always be independent of controlling shareholders (recommendation C.10).

A Supervisory Board member is independent of the controlling shareholder if he or she or a close family member (i) is neither a controlling shareholder nor (ii) belongs to the executive body of the controlling shareholder or (iii) has a personal or business relationship with the controlling shareholder that can create an essential and not only temporary conflict of interest.

Independence from major competitors

In addition, members of the Supervisory Board should not perform any board functions or advisory tasks with major competitors of the company and should not be related to a major competitor (recommendation C.12).

Practical tip

• Independence is always the subject of a case-by-case assessment and can therefore - if there are good reasons - be confirmed even if one or more of the indicators mentioned in the code are met. In this case, the assessment made should be justified in the declaration on corporate management (recommendation C.8).

3. Remuneration

Nothing has changed in terms of remuneration. The higher expenditure of time for the Chairman of the Supervisory Board, his deputy, the Chairman and the members of the committees should, as before, be adequately taken into account in the remuneration (recommendation G.17). Furthermore, the suggestion should consist in principle of a fixed remuneration. If performance-related remuneration is nevertheless provided, the Code recommends that it be geared towards the long-term development of society (recommendation G.18).

4. Transparency requirements

The new version of the code no longer requires a regular limit on the length of service on the Supervisory Board. The duration of membership of the supervisory board should now be disclosed (recommendation C.3).

The report of the Supervisory Board should state how many meetings of the Supervisory Board and the committees each individual member took part in (recommendation D.8). Previously, disclosure was only required if a member attended only half or fewer of the meetings.

Another new feature is that the rules of procedure for the Supervisory Board should be made available on the company's website (recommendation D.1). See also our practical tip at the end of this client alert.

Finally, the procedure for long-term succession planning for the Management Board should now be described in the corporate governance statement (recommendation B.2).

Practical tip

• A disclosure of the procedure for succession planning for the board should be considered carefully. The selection and coordination with suitable candidates is usually done in a very confidential environment. Transparency could have negative consequences in this area.
• The new requirements for the content of the report of the Supervisory Board and the declaration on corporate governance should be communicated to the responsible bodies within the company in good time, as there may be longer implementation periods in this regard.

5. Regular meetings and self-assessment

The Supervisory Board should now meet regularly - and not as previously only if necessary - without the Executive Board (recommendation D.7).

In addition, it should regularly assess how effectively the Supervisory Board as a whole and its committees are performing their tasks. In the corporate governance declaration, the supervisory board should report whether and how a self- assessment was carried out (recommendation D.13). However, the results of the self-assessment do not have to be disclosed.

Practical tip

• The new recommendation could also be a small challenge to meet regularly without the Management Board, since the Supervisory Board is regularly dependent on the presence of the Management Board in order to receive current information about the company. A possible approach could be to continue to hold the meetings regularly with the board, but at the end of the day a window for advice without the board.

6. Accounting and auditing

What is new is that the chairman of the examination board should be familiar with the final examination (recommendation D.4), which is already common in practice. In addition, the examination board should regularly assess the quality of the final examination (recommendation D.11).

REPORTING

The information required by the new code is no longer to be provided in a separate corporate governance report, but in the corporate governance declaration (section 289f HGB) and the report of the supervisory board (section 171 (2) HGB).

The declaration on corporate governance should be supplemented by the following information:

• Concept for long-term succession planning for the board (recommendation B.2)
• Age limit for board members (recommendation B.5)
• Status of implementation regarding diversity in the AR as well as details of the shareholder representatives who are independent in the opinion of the Supervisory Board and mention of the names (recommendation C.1)
• Age limit for AR members (recommendation C.2)
• Reason why an AR member is to be regarded as independent despite fulfilling the indicators according to recommendation C.7 (recommendation C.8)
• Name of the committee members in the AR and the respective committee chair (recommendation D.2)
• AR report on the self-assessment of the effectiveness of task performance in the AR and its committees (formerly: efficiency review) (recommendation D.13)

The report of the Supervisory Board should contain the following additional information:

• Indication of the number of meetings of the AR or its committees that the individual members attended (telephone or video conference also counts as participation; but should not be the rule) (recommendation D.8)
• Indication of how the company supported the members of the supervisory board during the inauguration as well as with training and further education measures (recommendation D.12).
• Information about conflicts of interest that have arisen in the AR and their treatment (recommendation E.1).
• In addition, for clarification, a note could be advised that the Supervisory Board met regularly in accordance with Recommendation D.7 even without the Management Board.

DELETIONS AND UNEXECUTED RECOMMENDATIONS

For an overview, a brief summary of which recommendations have been abolished with the new code :

• Corporate governance report as a separate document (information must now be provided in the corporate governance statement and in the report of the Supervisory Board)
• Remuneration report (now regulated by law in Section 162 AktG)
• The Supervisory Board should regularly review the efficiency of its work.
• Establishing a regular limit for the length of service on the Supervisory Board
• For its proposals for the election of new members of the Supervisory Board to the Annual General Meeting, the Supervisory Board should ensure that the respective candidate can spend the expected amount of time.
• Proposed candidates for the chair of the Supervisory Board are to be announced to the shareholders.
• The Management Board should discuss financial information during the year with the Supervisory Board or its Audit Committee before publication.
• A corresponding deductible should be agreed in a D&O insurance policy for the Supervisory Board.
• The board should consist of several people and have a chairman or spokesman. Rules of procedure are to regulate the work of the board, in particular the responsibilities of individual board members, matters reserved for the entire board and the majority required for board resolutions (unanimity or majority vote).
• As part of ongoing public relations work, the dates of the publication of the annual reports and financial information during the year as well as the annual general meeting, balance sheet press and analyst conferences are to be published on the company's website in sufficient time in advance in a financial calendar (however, this corresponds to a requirement of the stock exchange regulations of the Frankfurt Stock Exchange for the Prime Standard).

The following recommendations were included in the first draft of a new code, but were not then adopted in the final version :

• Introduction of an additional “ apply and explain rule” regarding the implementation of recommendations in addition to the legally required “ comply or explain” rule (§ 161 AktG).
• Recommendation to limit the term of office for members of the Supervisory Board to three years.

APPLICABILITY OF THE NEW RULES:

Stock corporation law requires an annual declaration from the Management Board and the Supervisory Board as to whether the recommendations of the "Government Commission on the German Corporate Governance Code" have been and will be met, or which recommendations have not been or will not be applied and why not.

The declaration therefore includes a report on the past (“has”) and a declaration of intent for the future (“will”).

If there has been a new version of the code in the course of the past year up to the date of submission of the declaration of conformity, then the reporting for the past must refer to the old and also the new version. In contrast, the declaration of intent for the future only has to refer to the new version.

It is only necessary to update the declaration of conformity during the year if there is a change in the intention to comply with the recommendations for the future.

Practical tip

• The mere fact that there is a new code version does not in itself trigger an obligation to update. The new code is only relevant for the declaration of conformity if it is to be submitted regularly next time. H. for most societies until 2021.
• In this declaration of conformity, a “ shared” declaration of conformity is required: a declaration regarding the period until the entry into force of the 2019 code (for this period, the declaration of conformity must refer to the 2017 code) and a declaration for the period from the entry into force of the new DCGK 2019 (for this period, the declaration of conformity must refer to the 2019 Code).
• BUT: It should already be checked which recommendations should and should not be followed in order to avoid a declaration of deviation in the next declaration of conformity. Necessary measures to implement new recommendations should be taken immediately. This applies, for example, to the publication of the rules of procedure for the Supervisory Board on the website (recommendation D.1). If the rules of procedure are not published immediately, a deviation would have to be published in the next declaration of conformity, at least for the past.
• For certain companies regulated by special law, recommendations of the Code may not be applicable due to the overriding legal requirements . In the corporate governance declaration, the supervisory board and executive board should now provide information on whether and which recommendations of the code were not applicable (recommendation F.4).
• In addition, not every recommendation of the Code is equally suitable for all companies. It is therefore advisable, especially for small and medium-sized companies, to carefully check whether it really makes sense to follow all recommendations. It now corresponds to good corporate governance not to follow recommendations when there is a justified reason and to justify this accordingly.

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