Philanthropy or Crime? The Legal Limits to Sponsoring and Donations by Stock Corporations

10.05.2011

[] It has become standard practice for companies to support the arts, science, culture and sports through sponsoring and donation. In view of empty government coffers, the need for such private sector initiatives in these areas can be expected to increase in the future. At the same time, the management's use of corporate funds is now exposed to greater scrutiny, which is reflected in the growing number of investigations and prosecutions involving breach of trust. As a result, it is worthwhile taking a closer look at the aspects of corporate and criminal law involved in such acts of generosity on the part of stock corporations.

 

1. Background: Entrepreneurial Discretion

According to section 76(1) of the German Stock Corporation Act (Aktiengesetz – AktG), the management is responsible for a stock corporation's conduct of business. In this context, the management may also exercise discretionary judgment. However, corporate officers must be guided by the interests of the company when exercising such entrepreneurial discretion. This notion of the interests of the company encompasses the aggregate interests of the various stakeholders, which may to some extent even conflict. Such interests include in particular those of the company's owners (shareholders), employees and creditors, but, by virtue of the social component codified in Art. 14(2) of the Basic Law (Grundgesetz – GG), also those of society at large or the common good. When making decisions involving discretionary judgment, the management must reconcile the above-mentioned interests to achieve an appropriate balance. Against this background, it is generally considered acceptable for the management of stock companies to authorize generous contributions to support the arts, science, culture and sports.

Accordingly, the following will regularly be considered permissible under corporate law:

traditional sponsoring, which involves making money or monetary benefits available to persons, groups or organizations involved in sporting or cultural events or similar important public activities in such a manner as to achieve corporate objectives at the level of advertising or image-enhancing public relations at the same time, tax-deductible donations to non-profit organizations made with no expectation of receiving any direct benefit in return, philanthropy performed without regard to benefits and in some cases even performed anonymously.

It is hardly possible to distinguish clearly in an individual case between purely altruistic activities carried out exclusively for the benefit of society and major image-enhancing public relations activities that are intended to contribute significantly to the success of a company over the long term. Even contributions that are not made for immediately obvious advertising purposes may nonetheless serve the purpose of public relations since the company can simply mention them without giving details in the context of its press releases.

2. Limits Under Corporate Law

The authority to dispense corporate generosity that derives from the responsibility of the management for the conduct of business is not, however, tantamount to unlimited discretionary judgment. Section 93(1) of the German Stock Corporation Act stipulates that the management must consistently exercise its entrepreneurial discretion with the care of a prudent and conscientious manager. Corporate officers must ensure that any voluntary decrease in corporate assets is made with the care of a person who controls monies that do not belong to him in a fiduciary capacity. A company's officers cannot in any case be held liable for failure to properly exercise entrepreneurial discretion when making decisions if they could have reasonably assumed that they were acting in the interests of their company and on the basis of appropriate information in accordance with the business judgment rule embodied in the second sentence of section 93(1) of the German Stock Corporation Act. The Federal Court of Justice (judgment of 6 December 2001, 1 StR 215/01, NJW 2002, 1585) has defined the prerequisites for the admissibility of corporate donations – and the same is likely to apply in principle in the case of sponsoring – on the basis of the following concrete criteria:

Relevance to the Corporate Purpose

The greater the discrepancy between a cause that receives support from a company and the purpose for which that company was organized, the narrower the discretionary judgment of the management becomes.

Reasonable Relationship in Terms of Earnings and Assets

Corporate donations must remain within the realm of the reasonable as measured in terms of the earnings and assets of the donor organization. In the scholarly literature, the outlays for charitable purposes considered acceptable under corporate law vary between from 1 to 2 or even 5% of dividends distributed. In view of the fact that the management must exercise discretionary judgment and take into account current corporate earnings and assets in the individual case, the establishment of such general limits would not seem helpful. Assessment of what is reasonable can be particularly difficult when a company finds itself in a tight financial situation. According to the Federal Court of Justice, the management is not under any obligation to completely refrain from making corporate donations in those years in which the company operates at a loss. However, the court did state that the interests of a company do call for an especially diligent examination of corporate donation policy in the case of a permanent or longer-term deterioration of earnings performance.

Internal Transparency

The less the cause that receives support from a company has to do with the purpose for which that company was organized, the more stringent the requirements become in terms of internal disclosure and transparency of donations.

Exclusion of Improper Personal Interests

When making decisions regarding the choice of recipients and the amount of donations, corporate officers may not allow themselves to be guided by improper interests and in particular not by purely personal preferences. In the case of more sizeable donations that further the personal preferences or interests of an individual officer, that officer may not be allowed to make the corresponding decisions even if his position within the organization does generally include responsibility for donation policy.

Liability of the Management for Violations

In the event that a member of the management should exceed the bounds of his discretionary authority in a given case, this will constitute a breach of that member's duties under corporate law and make that member liable towards the company for damages pursuant to the first sentence of section 93(2) sentence 1 of the German Stock Corporation Act.

3. Criminal Aspects

According to the Federal Court of Justice, not every violation of duty under corporate law can also be assumed to constitute a breach of duty in the sense of a breach of trust pursuant to section 266 of the Criminal Code (Strafgesetzbuch – StGB). A breach of duty under corporate law must be more serious to qualify as a criminal act. Whether a breach of duty of the management occurring in connection with a donation is serious is determined by an overall picture that takes into account in particular the aspects of corporate law mentioned above (lack of relevance to corporate purpose, unreasonable amount in terms of the earnings and assets of the company, lack of internal transparency, and the existence of improper personal interests). In any case, a breach of duty within the meaning of section 266 of the Criminal Code can be assumed to exist in connection with the donations only if all of these criteria have been met.

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