Siemens AG settlements with former Board members
This first appeared on KYC360 on 17 December 2009 as a Hot Topic Briefing on Bribery and Corruption
In its recently published Notice of Annual Shareholders’ Meeting (‘the Siemens’ Notice’) to be held in Munich, Germany, on 26 January 2010, Siemens AG stated it intends to conclude all legal action relating to the acts of corruption revealed in 2006. Following agreements with the criminal prosecution and regulatory authorities in the US and Germany at the end of 2008 Siemens now envisages coming to settlements with regard to the responsibilities of former members of the Managing and Supervisory Board.
German law in the past considered bribes paid abroad as not criminal (and even tax deductible), even though this could constitute a violation of foreign laws. However, in 1999 bribing foreign officials and in 2002 bribes paid to employees of foreign companies became subject to criminal sanctions. In addition, Siemens shares were listed on the New York Stock Exchange in 2001. Siemens subsequently became subject to the US Foreign Corrupt Practices Act 1977, which requires the implementation of a system of internal controls that guard against bribery outside and within the US.
The Managing Board of Siemens reacted to this changed legal situation by introducing a compliance program in connection with the US listing in 2001. However, the US and German authorities found that this was not implemented or monitored consistently. According to the recent Siemens Notice, efforts initiated to reorganise the compliance program were inadequate with the result that substantial structural deficiencies remained until the end of 2006; the members of the Corporate Executive Committee failed to institute the required efficient control of the operating divisions as well as the required sanctioning of each violation.
On 29 April 2008 the Siemens Supervisory Board retained external legal advisers to evaluate possible damage claims against members of the Managing Board. The legal advisers concluded that the organisation of the Siemens compliance system was deficient and the supervision of compliance rules was inadequate. They advised that the former members of the Corporate Executive Committee, Prof Johannes Feldmayer, Dr Thomas Ganswindt, Dr Klaus Kleinfeld, Prof Dr Edward G Krubasik, Rudi Lamprecht, Heinz-Joachim Neubürger, Prof Dr Heinrich v Pierer, Dr Jürgen Radomski, Dr Uriel Sharef and Prof Dr Klaus Wucherer had failed to fulfil their duties. On 8 August 2008 the Managing Board commissioned external legal advisers to evaluate possible claims against former members of the Supervisory Board.
Under the German Stock Corporation Act, Siemens can waive or settle claims against (former) members of the Managing and Supervisory Boards provided three years have passed since the claim came into existence, that the Shareholders’ Meeting approves the decision and that a minority of at least 10 per cent of the capital stock does not file a written objection. The Siemens Notice says the claims resulting from violations of organisational and supervisory duties in connection with corruption acts began at the latest with the comprehensive search of Siemens’ corporate offices on 15 November 2006, and that the three year period expired at the latest on 16 November 2009.
Most of the former board members - namely Baumann, Feldmayer, Kleinfeld, Krubasik, Lamprecht, v Pierer, Radomski, Sharef and Wucherer - have accepted individual settlements ranging between €500,000 and €5 million as submitted for approval by the Shareholder’s Meeting. Settlements could not be achieved with Ganswindt or Neubürger, and Siemens will initiate court proceedings against them and claim damages in accordance with their financial capability.
The Siemens Notice will be of interest to all companies seeking to hold to account individuals who have been responsible for allowing corrupt activity to occur. Siemens has taken the view that its proposal settlements of damage claims are preferable to enforcement in court. Certainly judicial enforcement could lead to years of costly legal action and further damage Siemens’ corporate reputation. These disputes could also devour a substantial part of the assets available for the compensation of losses (insurance payments and private assets) so that even after a successful conclusion of these legal disputes it would still be uncertain to what extent compensation payments by former board members could be actually realised.
The methodology used by Siemens to calculate how much each individual former board member should pay in a damages settlement is also to be noted. Siemens considered that one group of former members of the Managing Board possessed only information available to all members of the Corporate Executive Committee through reports and discussions in the Corporate Executive Committee and on the basis of which the accusations of violations of organisational and supervisory duties arose. This group includes Feldmayer, Kleinfeld, Krubasik, Lamprecht and Wucherer. There is no indication that in addition to the above they had specific supplemental information about the acts of corruption, let alone that they were actively involved. As a starting point, an amount of €500,000 was proposed as compensation to be paid by each member of this group. Due to his increased monitoring obligation as President of the Managing Board, this amount was increased to €2 million for Kleinfeld.
By contrast, Siemens considered that another group of former members of the Managing Board, including Ganswindt, Neubürger, v Pierer, Radomski and Sharef, had substantial special knowledge about the corruption practices occurring at the company. The individuals in this group were each expected to pay settlement amounts of €4 million. This figure was then modified according to the individual circumstances of each of the above former board members
Siemens’ expects Radomski to pay €3 million since while he had special knowledge, the allegations against him are less pronounced than for the other individuals in this group. Indeed, the public prosecutor is charging Radomski with only a misdemeanour while pursuing criminal charges against Ganswindt, Neubürger and Sharef.
Siemens expects v Pierer to pay €5 million in view of his increased monitoring obligation due in his role as long-term President of the Managing Board and his subsequent service as Chairman of the Supervisory Board.
An amount of €1 million was proposed for Ganswindt to pay, in view of his relatively short service on the Managing Board and his financial circumstances which meant he could not raise €4 million. This proposal was however not accepted by him and Siemens will bring a damages claim against him in court proceedings.
It is also to be noted that Siemens has proposed a settlement with its insurers to provide coverage for up to €100 million to compensate for losses resulting from and in connection with the acts of corruption while at the same time abrogating its insurance policies. Members of the Managing and Supervisory Board at Siemens belong to the group of insured persons covered by a directors’ liability insurance policy taken out by Siemens as the insured party with an aggregate insured amount of €250 million. All former board members currently receive preliminary insurance protection to cover their defence costs in connection with allegations of acts of corruption. However, the insurers disputed their obligation to cover the damage incurred by Siemens and claimed exemptions based on policy clauses and asserted rights that, if exercised, would lead to the retroactive rescission of the directors’ liability insurance.
Under the terms of the proposed settlement, the insurers would pay €90 million minus defence costs paid out until that time (currently €5.5 million) to Siemens. An additional €10 million would be held available for further defence costs. If this amount is not fully exhausted, half of the remaining amount would accrue to Siemens and half to the insurers. While the insurers would only pay a part of the maximum insurance coverage, Siemens will agree to put former board members in a position as if the insurers had paid out €250 million as compensation for its claims, unless the former board members willfully or knowingly violated their duties.