Greed or business as usual?

20th January 2004, Comments 0 comments

A German court will this month hear a landmark case concerning the executive bonuses paid out in the wake of Vodafone's bitter takeover battle for Mannesmann in 2000. Douglas Sutton reports how the case also underscores differences between the way business is done in the Anglo-Saxon world and in Germany.

Deutsche Bank Chief Josef Ackermann faces trial with five co-defendants

Six German business figures, including Deutsche Bank chairman Josef Ackermann, are going on trial in Duesseldorf in a case examining the bonuses paid out in the spectacular USD 230 billion (EUR 185 billion) Mannesmann takeover battle four years ago.

While the legal aspects are intricate, the view in the mind of the general public is that the trial, starting in January, is about a moral issue — the perceived greed of executives approving huge bonuses for themselves and others.

German prosecutors will be trying to prove that the DM 111 million (EUR 57 million) in bonuses paid out after the hostile takeover of Mannesmann by British firm Vodafone in early 2000 were exorbitant and a breach of duty toward Mannesmann shareholders.

The defence will argue that, far from being hurt, shareholders actually benefited by the fact that the biggest corporate takeover in history drove the price of Mannesmann shares strongly upwards.

Besides Ackermann, who at the time was on Mannesmann's supervisory board, the most prominent defendants are Klaus Esser, the former chief executive, along with Joachim Funk, who was chairman of the company's supervisory board and Klaus Zwickel, former chief of the metalworkers union IG Metall who also sat on the supervisory board.

Neither Zwickel nor Ackermann received any money themselves, but their votes on the supervisory board helped to approve the bonuses for some of the others.

Two lesser-known figures, Juergen Ladberg who was head of Mannesmann's employees council, and the former personnel director, Dietmar Droste, are also charged.

*quote1*At the core of the charges is a German word — "Untreue" — which in the business sense roughly means "breach of fiduciary duty", the obligation to defend company and shareholder interests.

But defining this term could prove to be difficult in a German court, legal analysts ahead of the proceedings said, noting the differing practices and views about bonuses in the Anglo-American corporate world and those in Germany.

Under the German criminal code's paragraph 266, the breach of fiduciary duty concept could be applied on grounds that the bonuses were money which should have gone to Mannesmann's shareholders and not to individual executives.

Chief among the recipients was Esser, who had bitterly tried to fight off his company's takeover by Vodafone, but who then got a "golden parachute" of more than DEM 60 million.

While in popular sentiment this might look like greed, prosecutors will have to prove that the bonuses did actual damage to Mannesmann shareholders in the "Untreue" sense of breach of fiduciary duty.

Further, while bonuses are known to be business-as-usual in the Anglo-American corporate world, laws covering German corporations do not provide for such large-scale payments.

Under German stock corporation law paragraph 87, rewards to executive directors have to be "kept in appropriate relation" to the duties assigned them. This means the Duesseldorf court will have to grapple with what defines "appropriate".

Prosecutors are expected to argue that the bonuses were to the detriment of shareholders and to the Mannesmann company, and that being so much in excess of the usual rewards paid to German executives, the payments were far from being appropriate.

But the defence is expected to point out how Mannesmann shareholders benefited, thanks to Esser's spirited battle trying to ward off the takeover.

In the epic battle, Vodafone finally agreed on 2 February 2000 to pay USD 229 billion for Mannesmann — around USD 99 billion higher than its initial bid.

After the takeover agreement the bonuses for Esser, Funk and some 18 further former executives were approved. But soon afterwards, questions about alleged irregularities in the decision process were raised, particularly regarding how Funk was on the committee which approved the bonuses, including the one to himself.

The Duesseldorf prosecutor's office launched an investigation and after a long series of legal wrangling over the charges and the scope of the inquiry, the office presented its case in February 2003, some three years after the initial bonus payment decisions.

In September 2003, the court agreed to hear the case. Reports say the trial could go as long as six months.
January 2004


Subject: German News

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