Austria: Breach of Trust - A Recent Supreme Court Ruling Has Broad Implications For Stock Corporations

Last Updated: 26 March 2014
Article by Klara Kiehl

Most Read Contributor in Austria, September 2019

Austria's breach of trust provision found its way back into the limelight only recently via the prominent criminal proceedings against the former management of LIBRO AG, a leading non-food retailer. The case involved the trial of LIBRO AG's former management for distributing a special dividend in the amount of ATS 440 million. In the following appellate proceedings, the Austria's Supreme Court took the chance to elaborate on whether the payout of a dividend to a 100% parent company constitutes a breach of trust.

On 30 January 2014, the Austrian Court made its eagerly-awaited ruling on the charges against the former management of LIBRO AG (12 Os 117/12s). The charges related to the acquisition and subsequent going public of the former Librodisk Handelsaktiengesellschaft, later LIBRO AG. The purchase of the shares was executed in 1997 by means of a purchasing SPV that was then merged downstream as a transferring company with LIBRO AG as absorbing company. The positive market value of the transferrable assets required for the merger was partially achieved by the distribution of a special dividend to the 100% parent company in the amount of ATS 440 million.

In 2002, LIBRO AG had to file for the opening of insolvency proceedings. A criminal investigation was opened shortly afterwards and progressed slowly but steadily. In 2009, the Public Prosecutor's office of Wiener Neustadt filed an indictment against the former management of LIBRO AG, claiming, among other things, that the distribution of the special dividend to the 100% parent company had violated capital maintenance rules and constituted a breach of trust within the meaning of sec 153 of the Austrian Criminal Code ("ACC").

At first glance, sec 153 of the ACC is not a very complex provision. It states, quite simply, that whoever knowingly abuses the authority conferred to him or her shall be liable to imprisonment, if he or she intends to cause and eventually causes financial harm to his or her principal (e.g. the company). Thus, sec 153 has three prerequisites: (i) an abuse of authority, (ii) financial harm, and (iii) criminal intent.

However, the Supreme Court's recent ruling once again underlines that the scope of what constitutes an "abuse of authority" is not always easy to assess. It is undisputed that the scope is determined through the inner relation between the principal (the company) and its representatives (the management board). Only if there are no internal rules or guidelines defining the concrete scope of the representatives' authority does one have to resort to general legal provisions, such as the Stock Corporation Act. So far, so good. But what happens if -- as was the case in the LIBRO proceedings -- 100 % of the shareholders authorize an act that is not in line with the provisions of the Stock Corporation Act, e.g. in violation of capital maintenance rules?

The Supreme Court has underlined that the representatives' duties are vis–a-vis the company as a separate legal entity. Thus, the management board of a stock corporation, which is free of any instructions from shareholders or the supervisory board (see sec 70 of the Austrian Stock Corporation Act), cannot exculpate itself by showing that a violation of the law was committed with the express consent of the shareholders and/or the supervisory board. The Supreme Court argues that the shareholders' consent is not sufficient, since the management board of a stock corporation has to consider not only the best interests of its shareholders, but also the interests of the company, the public, and the company's employees (see sec 70 of the Austrian Stock Corporation Act).

This ruling came as a surprise, since it is longstanding case law that a director of a limited liability company who is at the same time the sole shareholder of the company and therefore, "from an economic perspective", identical to the company, cannot commit breach of trust. The reasoning of the Supreme Court behind this long held doctrine is that since the (i) perpetrator is the sole shareholder of the relevant company, and (ii) the perpetrator him- or herself is vested with the power to act on behalf and in the name of the company, any financial harm suffered by the company is actually suffered by the perpetrator and not by "another" person / legal entity.

For this reason, many scholars were led to believe that the Supreme Court's "economic perspective" doctrine would be applicable to all cases in which an act has been committed with the explicit consent of all shareholders. This opinion was backed by a rather prominent ruling by Germany's Federal Court of Justice (BGH) in the so-called "Mannesmann Trial", which involved EUR 55 million in severance and bonus payments to the firm's departing CEO, payments that were approved following Vodafone Group PLC's multi-billion euro takeover of Mannesmann AG in 2000. In its ruling, the BGH held that an act committed with the express consent of all shareholders and/or the corporation's general meeting of shareholders cannot constitute a breach of trust (für ein den Untreuetatbestand ausschließendes Einverständnis bei einer Aktiengsellschaft [ist] "die Zustimmung aller Anteilseigner der (...) AG oder der diese repräsentierenden Hauptversammlung erforderlich"). This opinion has now been rebutted by Austria's Supreme Court.

Following the Supreme Court's ruling in the LIBRO case, it is clear that the management board of an Austrian stock corporation must always strictly abide by sec 70 of the Austrian Stock Corporation Act and act with the best interests of the company's shareholders, the public, and the company's employees in mind. Receiving explicit consent from the stock corporation's shareholders to a certain act does not provide the management board members with valid protection from potential criminal liability according to sec 153 of the ACC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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