This country-specific Q&A provides an overview of Corporate Governance laws and regulations applicable in Austria.
What are the most common types of corporate business entity and what are the main structural differences between them?
Most privately held companies in Austria are incorporated as limited liability companies (Gesellschaft mit beschränkter Haftung, LLC). The legal form of a joint stock corporation (Aktiengesellschaft, JST) may be used for both private and public, ie exchange-listed, companies, whereby recent changes to the Austrian Stock Corporation Act introduced more stringent rules applicable to exchange-listed JSTs. The European Company (Societas Europea, SE) is a less frequently used form for a public company in Austria. Considering the material differences between the regimes applicable to the various legal forms available, the focus of the following lies on the JST.
What are the current key topical legal issues, developments, trends and challenges in corporate governance in this jurisdiction?
As this year was dominated by the COVID-19 crises, compared to the last year there were no big trends in the area of corporate governance. However, as in the past few years, developments in corporate governance are tending towards greater transparency, especially with respect to remuneration of the management and the supervisory board.
Who are the key persons involved in the management of each type of entity?
The organisational structure of a JST provides for a mandatory two-tier board structure. Key corporate actors are:
(i) the management board,
(ii) the supervisory board, and
(iii) the general shareholders’ meeting.
The management board manages and represents the company at its sole responsibility and, safe for certain transactions defined by law that require prior approval, is not subject to instructions from the supervisory board or the general meeting.
The supervisory board monitors and controls the actions of the management board. One of the supervisory board’s key review functions concerns the company’s financial reporting. For this purpose, the Austrian Stock Corporation Act provides for the mandatory establishment of an audit committee for public companies and certain other (large) companies; otherwise, the supervisory board may, at its discretion, establish and delegate certain tasks to committees.
The rights of the shareholders of a JST are materially limited to information rights, voting right and the right to receive dividends. Shareholders have no right to directly instruct or otherwise influence the management board, other than with respect to certain reserved decisions to be made in general meetings (see below) and those fundamental business decisions that the management board or the supervisory board put to a vote by the shareholders. In addition, Austrian doctrine (following the Holzmüller-doctrine developed by the German Supreme Court) requires shareholder approval with respect to certain structural decisions that may significantly interfere with shareholders’ rights by impacting their asset and control position. The Austrian Supreme Court, however, is reluctant to apply this doctrine, and – in a very recent decision rendered with respect to a limited liability company – applied analogies to provisions of the Austrian Stock Corporation Act, instead of taking stance to the Holzmüller-doctrine.
How are responsibility and management power divided between the entity’s management and its economic owners? How are decisions or approvals of the owners made or given (e.g. at a meeting or in writing)
Principally the company is represented in and out of court by its managing director(s). Shareholders (ie economic owners) in general do not have such power of representation. However, shareholders may influence the management of the company in various ways, eg intervene directly in the management of the company by giving instructions to the managing directors; the managing directors shall comply with such instructions. The prerequisite for an instruction is a shareholders’ resolution, although a mere implied consent or approval of the transaction by the shareholders is also sufficient. This dependence on the shareholders implies the management board’s exemption from liability towards the company. However, it must not be an unlawful instruction if the managing director is to be exempted from liability. In the event of a violation of the law leading to the invalidity of the instruction resolution, the managing director is not bound.
In addition, under the law, management can only carry out certain transactions with the prior approval of the shareholders. The articles of association may also stipulate certain transactions that may only be concluded with the prior approval of the shareholders.
Such shareholders resolutions can be passed in a shareholder’s meeting or – with shareholder’s consent – in writing.
What are the principal sources of corporate governance requirements and practices? Are entities required to comply with a specific code of corporate governance?
The most relevant sources of corporate governance requirements are primarily contained in:
Austrian and European company law rules (eg the Austrian Stock Corporation Act, the Societas Europea Act, the Limited Liability Company Act, the SE Regulation),
the Austrian Commercial Code,
for public companies: the Stock Exchange Act and ancillary laws and regulations, including the Takeover Act or the Accounting Control Act,
the (principally non-binding) Austrian Code of Corporate Governance,*)
certain regulatory laws, eg the Austrian Banking Act, as well as regulations and circulars of regulatory bodies like the Austrian Financial Markets Authority or the e-Control.
Whilst private companies may voluntarily commit to compliance with the principles of the Austrian Code of Corporate Governance, such a commitment is mandatory for a public company in order to be admitted to the prime market of the Vienna Stock Exchange.
Furthermore, the articles of association of the private and public companies may provide for additional rules on corporate governance, eg specify additional duties of the management board and the supervisory board. Finally, special (internal) rules of procedure may regulate corporate governance requirements at company level.
How is the board or other governing body constituted?
The typical governing body of an Austrian public company consists of a two-tier board, even though the two-tier board structure is only mandatory for the JST (see above Point 3). The respective responsibilities can be (and should be) allocated in internal bylaws (management board bylaw and supervisory board bylaw). Such bylaws include all guidelines and rules that a collegial body in particular adopts for the purpose of a systematic workflow.
How are the members of the board appointed and removed? What influence do the entity’s owners have over this?
With respect to JSTs, members of the management board are in general appointed and removed by the supervisory board. There is a rare case exception for an appointment by court order. Besides the general qualifications there are no specific requirements for the appointment, however a removal can only be carried out for important reasons. The competence of the supervisory board to appoint and remove the members of the management board cannot be delegated.
The supervisory board consists of shareholder and employee representatives. The shareholder representatives are elected by the general shareholders’ meeting. It is possible to give certain shareholders or holders of restricted shares the right to nominate a supervisory board member. Members of the supervisory board can be removed without objective justification. The employee representatives are not elected, they are sent by the responsible institutions.
The shareholders’ influence on the management board is therefore indirect: they cannot exert direct influence but can set a direction through the appointment (and threatened removal) of the members of the supervisory board. The influence on the supervisory board is almost comprehensive: the shareholders can appoint and remove members with virtually no restrictions. However, the employee representatives can only be appointed and removed by the competent body of the employee representation.
In contrast, the influence of the shareholders is greater and more direct in a limited liability company: the managing director are generally appointed and dismissed by the shareholders with a simple majority.
Who typically serves on the board? Are there requirements that govern board composition or impose qualifications for board members regarding independence, diversity, tenure or succession?
Any physical person capable to act may be appointed as managing director. Capacity to act means (full) autonomy; it requires reaching the age of 18. This person may not be member of the supervisory board of the same company. The articles of association may impose further personal and professional requirements (eg age, domicile, habitual residence, citizenship). In particular, the main eligability requirements and selection criteria for board members are, in addition to professional qualifications, foreign language skills and experience abroad, entrepreneurial successes already achieved (practical experience), their analytical and strategic skills, their ability to critically question and, if necessary, change established practices, to implement efficiency improvement or cost-cutting programmes and personnel savings – even against all resistance, their performance, goal orientation, personal initiative, leadership qualities.
What is the role of the board with respect to setting and changing strategy?
The management board has sole responsibility for managing the enterprise and has to take into account the interests of the shareholders, of the employees and the public good. Fundamental decisions are reached by the entire management board. Such decisions include, in particular, the concrete formulation of goals of the enterprise and the definition of the enterprise’s strategy. In the case of significant deviations from projected figures, the management board shall immediately inform the supervisory board.
The supervisory board is responsible for overseeing the management board and provides support to the management board in governing the enterprise and, in particular, assists in making decisions of fundamental significance.
Again, the shareholders of a limited liability company have more influence in the direct life of the company: the general meeting of shareholders is the supreme body of the company, it can issue binding instructions in any matter and is usually empowered to freely appoint and dismiss managing directors (see above Point 7).
How are members of the board compensated? Is their remuneration regulated in any way?
In general, members of the management board of private and public companies receive a salary that includes fixed and variable performance-linked components. In addition to these basic components, applicable laws also include other types of pecuniary benefits, ie profit participations, expense allowances, insurance payments, commissions, incentive-related remuneration commitments and fringe benefits of any kind, under the term “compensation”.
When determining the aggregate amount of the compensation payable to a member of the management board, the supervisory board must ensure that the compensation bears a reasonable relationship to the duties and performance of such member of the management board and to the financial situation of the company, and that it creates long-term incentives for a sustainable corporate development. Variable remuneration components shall be linked, above all, to sustainable, long-term and multi-year performance criteria. Performance criteria shall also include non-financial criteria and shall not entice the members of the management board to take unreasonable risks.
With respect to public companies, the Austrian Corporate Governance Code, and with respect to credit institutions, applicable laws and regulations, provide for detailed regimes regulating the various components of the remuneration and the conditions for the pay out of the variable remuneration, eg deferral periods or vesting periods applicable to financial instruments granted.
Do members of the board owe any fiduciary or special duties and, if so, to whom? What are the potential consequences of breaching any such duties?
Members of the board owe fiduciary duties to the company. They have to put their private interests behind the interests of the company. In order to safeguard an unbiased control over the board members, business transactions between members of the board and the company are subject to the prior approval of the governing body (‘duty of loyalty’).
Members of the management board who violate their duties are jointly and severally liable to compensate the Company for the resulting damage. The obligation to pay compensation does not apply if the conduct is based on a decision of the general shareholders’ meeting. There is also external liability to third parties, such as creditors and shareholders in specific cases.
The members of the management board are liable, in addition to the Company, for tax liabilities and social security contributions if these cannot be paid as a result of a culpable breach of the duties imposed on the management board.
Board members are personally liable for the legal entity’s compliance with administrative regulations. Furthermore, there is limited liability in connection with errors/delays in the run-up to the opening of insolvency proceedings. Moreover, the management board is subject to general criminal liability with its activities.
Are indemnities and/or insurance permitted to cover board members’ potential personal liability? If permitted, are such protections typical or rare?
Board members may be liable for damage caused by their action or omissions to the company. They are liable jointly and severally with their entire personal property but are only liable if they personally have acted unlawfully and culpably. D&O liability insurance policies for both board members and members of the supervisory board have become standard in most Austrian JSTs and LLCs. The best way to protect against liability is to comply with the standards of the Business Judgment Rule: make a business judgment on an informed basis, without any conflict of interest and in the best interest of the company.
How (and by whom) are board members typically overseen and evaluated?
In general board members of a JST are under supervision of the supervisory board. The main task of the supervisory board of a JST is to monitor the performance of the management board with respect to legality, expediency, and economic efficiency. In order to be able to fulfil this task, the supervisory board requires comprehensive information. It can therefore demand a report from the management board at any time on the affairs of the company and can inspect and check the books and records of the company, the company’s funds, etc. Although the supervisory board cannot issue instructions to the management board, it must object to deficiencies in the management of the company and provide the necessary advice.
In order to ensure that the variable remuneration components comply with the principles summarized above (see Point 10), evaluation policies and measurable criteria must be fixed in advance and serve as a basis for an ex-ante risk and performance assessment. In addition, these policies serve as a basis for an ex-post assessment of the performance and, if need be, an ex-post adjustment of the deferred variable remuneration or a clawback of remuneration already paid out based on obviously false data.
Is the board required to engage actively with the entity’s economic owners? If so, how does it do this and report on its actions?
The annual shareholders’ meeting (or additional extraordinary meetings) is the main source of information for the shareholders. The management and the supervisory board inform about the last business year and answer questions of the shareholders. Companies may publish information on their website (eg business forecasts, profit warning). Listed companies use ad hoc announcements. Equal treatment of all shareholders under similar conditions is mandatory, therefore separate communication by the management/supervisory board to single shareholders could lead to claims by other discriminated shareholders.
Are dual-class and multi-class capital structures permitted? If so, how common are they?
The Austrian Stock Corporation Act expressly allows shares vested with different legal positions, ie membership rights. In practice, the most prevalent form of non-common shares in Austria is the issue of non-voting preference shares with preferential dividend rights. The law also permits the granting of individual rights such as individual presence rights when resolutions are to be passed or specific approval rights to an amendment to the articles of association, capital increases and similar structural decisions such as mergers or split-offs.
The principle of equal treatment only prohibits arbitrary unequal treatment of shareholders but allows differentiation on objective grounds. If the articles of association specify several classes of shares, the respective membership rights have different contents, and the different legal treatment has no impact on the equal treatment requirement. The downside of this flexibility is, however, that dual or multi-class capital structures increase the complexity of the decision-making process and the efforts required for holding general meetings. Therefore, public companies tend to reduce non-voting preference shares with preferential dividend rights by converting preference shares into common shares, or, in the case of new issues, to refrain from issuing preference shares.
What financial and non-financial information must an entity disclose to the public? How does it do this?
In Austria, the grade of publishable information depends mainly on the legal form of the entity. This means that a limited liability company does not have to disclose as much information as a JST and within the JSTs a listed JST or a credit institution has to disclose more information than a non-listed JST.
The basic information such as shareholders, management board members, supervisory board members, share capital, etc can be found in the companies register which is open to the public. In this register, most of the corporations have to publish their annual financial statements.
Can an entity’s economic owners propose matters for a vote or call a special meeting? If so, what is the procedure?
Generally, shareholder(s) holding at least 5 % of the share capital of a JST may request the addition of new items to the agenda of the general meeting. The motion must contain (i) the formulated agenda item and (ii) the resolution proposal, together with a reasoning. The shareholder(s) may file the motion prior to the publication of the agenda, or afterwards. In the latter case, the motion needs to be filed no less than 21 days (or 19 days in case of an extraordinary general meeting) prior to the annual general meeting.
In addition to the above, shareholders holding at least 1 % of the share capital of a public company may request that additional resolutions be proposed on the agenda items announced by the management board.
During the general meeting, shareholders may – similar to the management board and the supervisory board – submit motions for resolutions with respect to any item on the agenda.
In principle, the management board has the power and the duty to convene the general meeting. The supervisory board has the right to convene a special meeting in particular situations, especially if the ‘welfare of the company’ requires it. A minority of 5% of the shareholders may request in writing that a general meeting be convened , submitting the agenda and a proposal for a resolution on each item on the agenda. Although the management board decides on this request, it can only refuse in the event of disregard of the statutory provisions or in the event of abuse. The articles of association may extend, but not limit, the rights of the supervisory board or the shareholders to convene a general meeting.
What rights do investors have to take enforcement action against an entity and/or the members of its board?
The shareholders have various management rights which are generally only exercised at the general shareholders’ meeting. In addition, there are rights, in particular control powers and information rights, which are exercised outside the general shareholders’ meeting. However, there is generally no entitlement to enforcement of a certain conduct by the shareholder against the management board or supervisory board.
The shareholders can use their information rights to ensure that correct action is taken. The general shareholders’ meeting can refuse to pass a discharge resolution and thus maintain possible liability of the management and supervisory board. They can also dismiss the members of the supervisory board at any time and thus exert direct pressure on the supervisory board and indirect pressure on the management board (see above point 7).
There are several minority rights that are linked to a shareholding of 5 to 10 %. These include a right to a special audit and the assertion of claims for damages.
Is shareholder activism common? If so, what are the recent trends? How can shareholders exert influence on a corporate entity’s management?
Even though the Austrian Shareholder Association and certain Austrian activist shareholders continue to take more active roles in representing (minority) shareholders’ interests, shareholder activism does still not play an important role in Austria.
Notwithstanding the above, shareholders of public companies tend to make a more active use of their rights leading to an increased number of opposing votes to eg the appointment of members of the supervisory board and other, also structural, decisions. In addition, in merger and squeeze out situations, shareholders are even more willing to contest eg the share exchange ratio of mergers or the squeeze-out compensation in court.
Are shareholder meetings required to be held annually, or at any other specified time? What information needs to be presented at a shareholder meeting?
The ordinary shareholders’ meetings are to be called by the management board once a year, at the latest within 8 months following the end of the preceding business year. The notice of meeting must be published and state the name of the company as well as the time and place of the meeting. The latest version of the notice must be issued not later than 28 days before the date of the meeting. However, due to the COVID-19 crisis, this 8-month period was prolonged to the end of the year 2020 and the same exception will apply in 2021. Moreover, until the end of 2021 shareholder’s meeting may now take place virtually.
The shareholders’ meeting is the centre of information and the statutory platform for communication for shareholders vis-à-vis the company and among each other. Accordingly, the Austrian Stock Corporation Act provides for various information duties applicable to the management board and the supervisory board, as well as information and proposal rights for shareholders, each to be exercised in the shareholders’ meeting. The duty to provide information is linked to the respective items on which the general meeting shall render its decision. It may vary from information on the course of business (in relation to the resolutions related to the financial statements, the distribution of profits as well the release form liability of the management board and the supervisory board for a specific business year) to providing background information with respect to a potential filing of claims against the management board or the supervisory board. Further information that needs to be presented may relate to amendments to the articles of association, changes to the share capital, reorganisation matters (mergers, spin-offs), the sale of all or a material part of the assets of the company as well as the liquidation of the company.
The shareholders’ right to request information about the items on the agenda is one of the core membership rights. The answers usually have to be given by members of the management board during the general meeting and in any case have to be true, complete and understandable. The information request may only be denied if the information, in the reasonable opinion of the company, is likely to cause a substantial disadvantage to the company itself or to its affiliates or if providing such information would be punishable by law.
Are there any organisations that provide voting recommendations, or otherwise advise or influence investors on whether and how to vote (whether generally in the market or with respect to a particular entity)?
Up to now, activist shareholders in Austria mainly applied standard strategies to exercise their influence – also beyond their proportionate shareholding – by eg issuing open letters to the company or using press and social media channels to reach other shareholders.
Further, proxy advisors issued voting guidelines also for public companies in Austria and provide voting recommendations based on these guidelines. Even though these voting recommendations are primarily aimed at institutional investors, these recommendations may also have a significant effect on the decision-making of the retail investors, in particular with regard to corporate governance aspects and eg capital measures.
What role do other stakeholders, including debt-holders, employees and other workers, suppliers, customers, regulators, the government and communities typically play in the corporate governance of a corporate entity?
The directors of a JST have to consider not only the benefit of the company but also the interest of the employees, the shareholders and the public (whether represented by the government or communities). Employees’ interest is pursued both through the workers’ representatives in the supervisory board and by the workers’ council in the company. There are no statutory provisions for the involvement of debt holders, suppliers, customers, the government, or communities, but individual agreements or actual influence of such stakeholders may exist (eg provisions in a loan agreement that require the consent of the bank or information rights prior to certain actions of the company).
How are the interests of non-shareholder stakeholders factored into the decisions of the governing body of a corporate entity?
Sometimes decisions that are in the best interest of the company (eg continuance in times of economic troubles) are not in the interests of non-shareholder or other stakeholders, such as the employees (eg workers being laid off). Ultimately, from a legal perspective, the interest of the company prevails, although public opinion is also often crucial for a company’s success. Thus, the management will usually consider other stakeholders’ interests while making decisions.
What consideration is typically given to ESG issues by corporate entities? What are the key legal obligations with respect to ESG matters?
There are numerous statutory provisions about product safety, environmental protection, worker protection etc that any company must comply with. In addition, some companies (big corporations, companies of public interest) are required to publish a “non-financial statement” describing the company’s business activities and objective, including environmental issues, social issues, workers’ interests and the protection of human rights, as well as anti-corruption measures.
What stewardship, disclosure and other responsibilities do investors have with regard to the corporate governance of an entity in which they are invested or their level of investment or interest in the entity?
The concept of shareholder engagement does not yet have a long historical tradition by international standards as Austrian shareholders were, for many years, validly considered to be highly inactive. However, investors are becoming increasingly active and are not conspicuous merely by using their voting rights at the annual general meeting.
In recent years, activities on the part of (institutional) investors and proxy-advisors exerting their influence to ensure that the company operates more sustainably or eg digitizes its business models, for example. However, also private investors or small shareholders can engage and also management, even though there are no statutory requirements imposing an obligation on shareholders to engage.
Statutory disclosure obligations apply with respect to public companies, in particular with respect to takeover thresholds and notification obligations towards eg the stock exchange or regulatory bodies. Recently, the newly enacted rules on foreign direct investment screening provide for notification obligations if foreign, ie non-EU entities, acquire 25% or more or of 50% or more of the share capital of an Austrian entity, whereby an additional threshold of 10% applies for companies active in “highly sensitive sectors”. Compliance with these rules is protected by criminal and administrative sanctions applicable within and outside of Austria.
What are the current perspectives in this jurisdiction regarding short-term investment objectives in contrast with the promotion of sustainable longer-term value creation?
The increase of the capital gains tax on dividend payments as well as the abolition of the speculation period (taxing short term gains) was a fatal signal to private investors on the domestic Austrian capital market. Taking back these measures, In particular as a sign to bolster the an economic, legal and fiscal environment allowing the strengthening of the equity basis of companies and corporation in the current Covid-19 pandemic by long-term investments, is a more and more often loudly demanded measure in Austria. Until now, the legislator has not yet taken any steps in this regard.
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