Michael Hendricks
Burkhard Fassbach

As I discussed in a blog post at the time, in June 2021 VW announced that a settlement had been reached in the D&O liability action that had been filed against the company’s executives in connection with the “Dieselgate” scandal. The settlement, which had an aggregate value of approximately $351 million, was approved by VW shareholders in July 2021. However, minority shareholders have now filed a legal action against VW in an effort to oppose the settlement. In the following guest post, Michael Hendricks and Burkhard Fassbach review the minority shareholders’ legal action and discuss its implications. Michael is the founder of the German D&O specialist broker hendricks GmbH and Burkhard is a D&O-lawyer in private practice in Germany. I would like to thank Michael and Burkhard for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Michael and Burkhard’s article.




I. Introduction to the Dispute

Legal opposition is forming against the settlement agreed by VW shareholders in the diesel scandal with former CEO Martin Winterkorn and ex-Audi boss Rupert Stadler. German investor advocates want to overturn the resolutions of VW shareholders on the Winterkorn settlement. The automaker wanted to settle the legal dispute with its former top managers by way of a settlement. The minority shareholders believe this is not justifiable and are therefore contesting the resolutions of the VW Annual General Meeting on the settlements. A resolution of the Annual General Meeting can be challenged by legal action on grounds of infringement of the law or the Articles of Association in accordance with section 243 of the German Stock Corporation Act (AktG). The minority shareholders have filed a lawsuit against VW in the Hanover Regional Court.


At the Annual General Meeting in July, the shareholders had signed off on the settlement negotiated with Winterkorn, Stadler and two other former board members despite criticism voiced by investors and shareholder associations. According to the agreement, Winterkorn will pay 11.2 million euros and Stadler 4.1 million. 270 million will flow from the consortium of D&O insurers that Volkswagen has taken out for the benefit of the management.


With the settlement with the two former top managers, Volkswagen wanted to draw a line under the civil liability of members of the Board of Management and Supervisory Board in the scandal involving millions of emissions manipulation. VW is convinced that the resolutions of the annual general meeting will hold up in court. The reasons given by the minority shareholders for contesting the resolutions, VW argues, are without legal merit.


Even before the AGM, there had been criticism of the D&O deal. “From the shareholders’ point of view, it is unacceptable that Volkswagen is now closing the case,” Christian Strenger, a long-time VW shareholder and one of Germany’s most prominent corporate governance experts, told Handelsblatt (article dated July 20, 2021). He argues that the question of guilt, i.e. the trigger for the settlement, has not even been clarified yet.


With their lawsuits the minority shareholders are also targeting the settlement negotiated with the management liability insurance (D&O). Around 30 insurance companies such as Zurich, Allianz Global Corporate & Specialty, and XL Insurance Company agreed to pay the carmaker 270 million euros. Only U.S. insurer Berkshire Hathaway dropped out of the consortium. The deal was intended not only to settle claims against the insurance companies, but also to indemnify all other current and former members of the Board of Management and Supervisory Board against claims.


VW pointed out that all resolutions of the annual general meeting had been passed each with more than 99 percent of the votes. More than 90 percent of the ordinary shares are held by the family holding company Porsche SE, the state of Lower Saxony and the Emirate of Qatar. So far, dealing with the emissions scandal has cost the Wolfsburg-based carmaker more than 32 billion euros. VW’s main owner Porsche SE is also facing a shareholder lawsuit in the USA in connection with the diesel scandal.


Under German stock corporation law, the liability settlements that the company concludes with the defendant executive board members and the coverage settlements that the company concludes with the consortium of D&O insurers are, according to legal requirements, subject to the condition precedent of the annual general meeting approving the settlements and no objection from minority shareholders whose shares together constitute 10% of the company’s share capital having been recorded in the minutes.


The minority shareholders received support from the citizens’ movement Finanzwende. “High manager salaries are always justified by the high level of responsibility. But the examples of Winterkorn and Stadler show once again that, when it comes down to it, responsibility is often not taken,” Finanzwende board member Gerhard Schick told Handelsblatt. He says: “The sum with which the top managers could buy their way out of any further claim for damages is ridiculously small – both in comparison to the salaries they received and the damage to VW and Audi for which they are partly responsible. Success for the minority shareholders would also be a signal to other managers who cause damage to companies and, in some cases, to society.


In the ARAG/Garmenbeck decision, the German Federal Supreme Court (BGH) imposed a general duty of prosecution on the supervisory board: By virtue of its duty to monitor and control the activities of the Board of Management, the Supervisory Board has a duty to investigate the existence of claims for damages by the stock corporation against members of the Board of Management in its own responsibility. Certainty that the action for damages will be successful is not a prerequisite. If, according to the result of this assessment, the stock corporation is entitled to enforceable claims for damages, the supervisory board must in principle pursue these claims. If the Supervisory Board does not fulfill its duty to pursue claims for damages against members of the Executive Board, it is in breach of its duties and may itself be held liable by the Company for damages.


II. VW’s View on the D&O Settlements

In the run-up to the Annual General Meeting, the Supervisory Board and the Board of Management of Volkswagen had informed the shareholders that they were convinced that the settlement agreements put to the vote were in the corporate interest of Volkswagen:


The responsibilities of the members of Volkswagen’s executive bodies in connection with the diesel issue have now been thoroughly and very carefully investigated over a period of more than five and a half years. Following the conclusion of this comprehensive investigation, the investigation is now to be completed so that Volkswagen can draw a line under the examination of the responsibilities of the board members and also conclude the diesel issue in this respect. Only once this investigation and the settlement agreements have been concluded can the substantial funds from the D&O insurance and the personal contributions of the board members against whom claims have been made be paid.


The Supervisory Board and the Board of Management consider the settlement contributions to be paid by the participating insurers of the VW D&O and the respective own contributions, which add up to an amount of EUR 287,815,000.00 on a group-wide basis, to be financially appropriate in the interest of the Company. Admittedly, both the financial losses incurred by the Volkswagen Group as a result of the diesel issue as a whole and the financial losses attributable to the negligent breaches of duty by Professor Dr. Winterkorn and Mr. Stadler and the other insured persons are, in the Company’s view, significantly higher than the total amount agreed. However, even taking into account the sum insured, the financial capacity of the persons against whom claims have been made is far from sufficient to cover the losses attributable to these persons from the perspective of the Company. Against this background, it is not realistic to expect full satisfaction of the Company’s claims for damages.


In addition, Volkswagen would have to conduct several complex proceedings in order to assert its claims for damages in court. In a first step, Volkswagen would have to take action against the persons against whom claims have been asserted, in particular Professor Dr. Winterkorn and Mr. Stadler, in order to then be able to assert claims against the insurers of the VW D&O in a second step. While the existence and scope of liability claims would have to be clarified in the proceedings against the persons against whom claims have been asserted, the decisive question in subsequent proceedings against the insurers of VW D&O would be whether and to what extent any claims for damages awarded against the Company are insured.


As with any legal dispute, the legal assertion of claims for damages against the persons claimed against would be associated with litigation risks that could result in the claims for damages not being awarded or not being awarded in full. In the event of a dispute between the Company and the persons against whom claims have been asserted, the courts would have to decide a number of complex factual and legal questions. The claimed persons would very likely raise a variety of factual and legal defenses to the claims for compensation. Many of the legal questions raised by this have not yet been decided either by the courts or by the highest courts. Even with a view to a possible legal dispute with the insurers of the VW D&O, it could not be assumed that the insurers of the VW D&O would recognize Volkswagen’s claims without raising extensive (legal) objections. Moreover, legally binding decisions in the legal proceedings would not be expected for many years.


A legal pursuit of the claims against Professor Dr. Winterkorn and Mr. Stadler as well as the other persons claimed against and the insurers of VW D&O would nevertheless in any case cause considerable costs on the part of all parties to the proceedings. Volkswagen would thus be burdened with substantial procedural costs. In addition, even if Volkswagen were to prevail, the costs of the proceedings on the part of the persons against whom claims have been asserted would burden the liability assets available to Volkswagen and thus indirectly, in turn, Volkswagen. In the event of complete or partial defeat, the Company would have to bear all or part of the costs of proceedings incurred in addition to its remaining damages. By concluding the settlement agreements before the lawsuit is filed, the costs of a legal dispute can be avoided.


In addition, unlike in the case of a judicial assertion of the claims, a realization of the claims against Professor Dr. Winterkorn and Mr. Stadler as well as a claim against the involved insurers of the VW D&O in a considerable amount and a timely inflow of the funds to Volkswagen is secured.


The Supervisory Board and the Board of Management are convinced that it cannot be ruled out that public court proceedings in which the conduct of Professor Dr. Winterkorn and Mr. Stadler, in some cases dating back a long time, is publicly discussed and assessed could damage the public image of Volkswagen and the Volkswagen Group. In this respect, the Supervisory Board and the Board of Management see a risk that the considerable achievements and successes of Volkswagen in recent years in terms of compliance management would not be appropriately perceived by the public. Rather – also due to corresponding negative press coverage of the legal proceedings – these successes could be subverted by the misconduct of former managers and employees in the past. Such a perception could have a negative impact on the current business activities and reputation of the Company and the entire Volkswagen Group, which Volkswagen believes must be avoided in the interests of the Company.


Furthermore, the effectiveness of the settlement agreements would significantly simplify Volkswagen’s legal situation. It is true that Berkshire Hathaway is not participating in the Coverage Settlement and the Supervisory Board has issued a mandate to prepare legal action against Berkshire Hathaway. A claim is possible in the context of arbitration proceedings. Apart from this, however, Volkswagen could subsequently concentrate on defending itself against claims and defend itself in the best possible way in the proceedings still pending.


The personal contributions made by Professor Dr. Winterkorn and Mr. Stadler reflect their responsibility and the damage caused to Volkswagen on the one hand, but also their services to Volkswagen during their many years of successful work for the Group. During the period in which Professor Dr. Winterkorn was Chairman of the Board of Management, the Volkswagen Group generated a cumulative net profit of approximately EUR 75 billion. The own contributions owed by Professor Dr. Winterkorn and Mr. Stadler under the liability settlements underline the fact that Volkswagen does not accept without sanction conduct in breach of duty on the part of its board members, but rather holds accountable the board members who acted in breach of duty.


The waiver of possible liability claims against the other insured persons is in turn without any economic disadvantages to the Company, since according to the results of the extensive legal investigations there are no claims for damages by the companies against the other insured persons. Moreover, only such a comprehensive solution can achieve the intended purpose of the agreements, i.e. to finally settle the diesel issue in terms of liability and insurance law questions with regard to possible board liability claims. This arrangement also enables the acting board members to concentrate in particular on future-related tasks in the companies.



III. The Action by Minority Shareholders

The SdK Schutzgemeinschaft der Kapitalanleger e.V., one of the leading German investor associations, with its main focus on representing the interests of investors and protecting minority shareholders, has filed an action for annulment or rescission with the Regional Court of Hanover against various resolutions of the Annual General Meeting of VW AG, according to which settlement agreements were approved, among others, between the Company and Prof. Dr. Martin Winterkorn on the one hand and Mr. Rupert Stadler on the other. The SdK stated the reasons for the action in a press release dated August 27, 2021, as follows:


The subject of the action are the settlements resolved at the Annual General Meeting of VW AG on July 22, 2021. They are intended to “draw a line” under the civil liability of members of the Board of Management and Supervisory Board in the context the so-called diesel scandal, which has burdened VW AG with more than 32 billion (!) euros.


The exact damage is not yet foreseeable. This is because neither the facts of the case have been conclusively determined nor is it foreseeable what further sanctions will be imposed on the Volkswagen Group and its former board members, e.g. in the USA. Nevertheless, the claims for compensation are already to be finally settled.


To this end, so-called liability settlements are to be reached with Prof. Winterkorn and Mr. Stadler, the former Chairmen of the Board of Management of VW AG and AUDI AG. These persons are to make personal compensation payments, in large part, however, by waiving outstanding bonuses. These payments are not only intended to settle all claims for damages against the aforementioned gentlemen. They are also to be indemnified against all third-party claims by VW AG.


In addition, a so-called coverage settlement is to be reached with the D&O insurers. This settlement is intended not only to settle the coverage claims against the insurers, but also to indemnify all other current and former members of the Board of Management and Supervisory Board against all claims. The settlement also benefits those Executive Board and Supervisory Board members who prepared the contested resolutions and proposed them to the Annual General Meeting.


Attorney Markus Kienle, member of the SdK Executive Board, considers these settlement agreements to be completely inappropriate: “Executive Board members receive extraordinarily high compensation, which is also intended to compensate for liability risks. Unfortunately, it can be observed time and again that this liability is only of a theoretical nature. In practice, it almost never applies, even in clear-cut cases. In the case of Volkswagen, the whole thing is taken ad absurdum. Although neither the criminal investigation nor the internal investigation has been completed, a settlement is already to be reached that is completely insignificant for the company in terms of its amount. This cannot be legal.”


The SdK has therefore had the resolutions legally examined. This examination has shown that the resolutions adopted are null and void or voidable, in particular for the following reasons:


– The resolutions are not specific enough. An objectively judging shareholder does not even know what is to be resolved in detail.


– In addition, the resolutions are blocked from the outset due to the special audit ordered by the Higher Regional Court of Celle (decision of November 8, 2017, 9 W 86/17). The Higher Regional Court of Celle had ordered an external audit of the events surrounding the diesel scandal. VW fought in vain against an independent special auditor investigating the diesel scandal. The Higher Regional Court (OLG) Celle has decided to appoint an auditor as a special auditor. The special audit at VW was pushed through by the Deutsche Schutzvereinigung für Wertpapierbesitz (DSW). The results of the special audit will be made public and are likely to be of particular interest to investors. They want to know as precisely as possible who knew what and when in order to be able to prove a delayed ad hoc announcement on the diesel scandal. VW has already investigated this issue internally and had it investigated by Jones Day and U.S. compliance monitor Larry Thompson, among others. But, according to DSW’s accusation, the results are being kept under wraps. The previously announced ‘Jones Day Report’ has never seen the light of day. (German-language reference here.)


– In view of the content of the settlements, there is an abuse of rights: The settlements and the related resolutions are directed against the Company. With the settlements, existing claims for damages, the assertion of which would not entail any significant litigation risk, are settled for an amount of less than 1% of the total damages. This is despite the fact that, to the best of our knowledge, the persons involved in particular are capable of paying far greater damages.


– The settlements also contain indemnifications in favor of other board members in violation of the Articles of Association and an inadmissible advance waiver.


– The preparation of resolutions by the Supervisory Board was inadequate. The respective (proposed) resolution of the Supervisory Board pursuant to § 124 (3) AktG is defective and void.


– The proposed resolution is also defective because the Executive Board and Supervisory Board members themselves benefit from the settlement and were therefore subject to a conflict of interest.


– In addition, the Annual General Meeting was not provided with essential information which is absolutely necessary for a proper decision. This applies in particular to the reason for and the amount of the claims which are to be summarily “settled away” and to the related litigation risks. Above all, the claims against Supervisory Board members, most of whom were elected by the majority shareholders, are not even discussed in detail and are to be settled by a hidden provision in the Coverage Settlement. Either these parameters were not even determined or, in any case, they were not presented to the Annual General Meeting. (German-language source here.)



IV. Assessment and Conclusion

The Hanover Regional Court will rule on the lawsuit no earlier than in 2022. The lawsuit already has a fundamental impact on D&O claims settlement practice in Germany. Insured persons may not have legal certainty for many years as long as the sword of Damocles of the shareholder lawsuit is hanging over the resolutions of the Annual General Meeting on the D&O settlement. If the plaintiffs prevail, the Supervisory Board would have to pursue the directors’ and officers’ liability claims further and, if necessary, enforce them in court. It is possible that the Supervisory Board would then also be subject to liability under the aspect of compliance with the settlement.


In the context of the ARAG doctrine of the Federal Supreme Court (BGH), the question arises as to whether the Supervisory Board settled too early and should first have pursued further clarification or waited for the result of the special audit.


In principle, the ARAG doctrine does not prohibit the supervisory board from reaching a settlement, even a low one – because the shareholders must approve the settlement in any case (§ 93 IV 3 AktG). And as the principal, they have the final say and can even waive the claim completely (i.e., quasi settlement “at zero”) if they so desire. The minority is protected by the veto right. In this respect, it is a well-balanced legal system. The plaintiffs’ main argument is that the settlement is not based on sufficiently established facts. The plaintiff minority shareholders are concerned with transparency and a solid basis for a settlement on which shareholders can form an opinion. As long as the relevant expert opinions known to the corporate bodies are not available to the shareholders, the case cannot be closed without a special audit. Whether the result of the special audit must be awaited and/or whether the duty of loyalty sets additional limits is an open question. The law says nothing about this, so further development of the law would be called for here. The interesting question is whether the Federal Supreme Court (BGH) will go this far in the final instance.


D&O insurers and insured persons have an interest in VW successfully defending itself against the action brought by minority shareholders. In the future, supervisory boards should carefully examine how they do not create a breeding ground for such lawsuits. In a tough D&O market, it is not to be expected that the market will react with a new coverage module for the defense against such lawsuits (entity cover). Many questions therefore remain unanswered, and all parties involved must eagerly await the first-instance ruling of the Hanover Regional Court. Winterkorn & Co, the D&O insurers and VW should not take the shareholder lawsuits lightly. The old legal wisdom applies: “In court and on the high seas, we are alone in God’s hands”. Cheat software doesn’t help.


The authors will report on the ruling in a second part of this guest article.