The case partly focused on the question of whether BaFin may protect the insured by examining whether the provisions in the articles of association of an insurance undertaking are compatible with the provisions of company law.

A Pensionskasse with the legal form of a small mutual association had applied for approval from BaFin for an amendment to its articles of association. Among other things, it wanted the supervisory board to be able to fully exempt the members of the management board from the provisions of the German Civil Code (Bürgerliches Gesetzbuch – BGB) on contracting with oneself (see info box). The members of the management board were tenants in the undertaking's own flats as well as being members of the Pensionskasse and future beneficiaries. The intended amendment to the articles of association would have allowed them to decide on their own affairs.

BaFin issued a notice prohibiting this, since it took the view that only an exemption from the ban on multiple representation is permissible. It therefore approved the amendment of a different clause in the articles of association, allowing the management board to exempt special representatives from the ban on multiple representation. The Administrative Court (Verwaltungsgericht) of Frankfurt am Main and the Higher Administrative Court of the federal state of Hesse (Hessischer Verwaltungsgerichtshof) have now confirmed BaFin's interpretation of the law (file no. 7 K 315/14.F and file no. 6 A 1590/15.Z).

Pensionskasse as a small mutual assocoation

Insurance undertakings in Germany may be authorised in various legal forms, with the most common being stock corporations (Aktiengesellschaft – AG) and mutual societies (Versicherungsverein auf Gegenseitigkeit – VVaG). BaFin can class mutual societies whose articles of association limit their operations to a certain range of business, geographical area or group of persons as small mutual associations within the meaning of section 210 of the VAG. In this case, certain provisions of the German Act Concerning Industrial and Trading Cooperative Societies (Genossenschaftsgesetz – GenG) apply to the undertaking.

If the small mutual association is a Pensionskasse within the meaning of the VAG, further particularities apply. Pensionskassen are a special form of life insurance undertaking whose business purpose is to provide cover for beneficiaries for a loss of income due to old-age, invalidity or death. In the legal form of a small mutual association, they always have three governing bodies: a management board, a supervisory board and a senior representative body (assembly of members or representatives).

Approval from BaFin

The articles of association of an insurance undertaking are part of its business plan, which only becomes effective once it has been approved by BaFin. This applies both to the initial version and to each subsequent amendment. BaFin's approval decision is based on the reasons why it can, or indeed must, refuse to grant authorisation pursuant to section 11 of the VAG. Pursuant to this provision, it also has to examine whether the interests of the insured are adequately safeguarded.

The Administrative Court of Frankfurt am Main takes the view that this is not the case if there is a "substantial disadvantage" and the insured are inappropriately adversely affected. Regarding this, the interests of all parties must be fully weighed against each other.

Representation by the supervisory board alone

The court dismissed the Pensionskasse's action against the decision made by BaFin, taking the view that the arrangement at hand was a compulsory ground for rejection. BaFin did not have any discretion, according to the ruling, since it had to prevent a risk that the interests of the insured would not be adequately safeguarded.

At the undertaking, pursuant to section 39 (1) of the GenG only the supervisory board was authorised to represent the Pensionskasse in any legal transactions between the Pensionskasse and the members of the management board. Therefore, it could not be exempted from the prohibition on contracting in one's own name, ruled the court. This corresponds to the previous rulings of the Federal Court of Justice (Bundesgerichtshof) and other courts on section 39 of the GenG and on the parallel provision of section 112 of the German Stock Corporation Act (Aktiengesetz – AktG ), pursuant to which it is not permissible to fully exempt the management board from the prohibition contained within section 181 of the BGB.

The Administrative Court decided that the intended amendment to the articles of association would lead to the risk of a conflict of interests and thus contravene the protective purpose of section 39 (1) sentence 1 of the GenG. This was also the basis for BaFin's assessment of whether the interests of the insured, i.e. at the Pensionskasse the current and future beneficiaries, are adequately safeguarded. If senior management could conclude contracts with themselves in the name of the undertaking, there would be a basic risk that, without control mechanisms, legal transactions could be undertaken which would have a direct or indirect negative effect on the insured.

Confirmation from the Higher Administrative Court

The Pensionskasse applied for leave to appeal from the Hesse Higher Administrative Court (Hessischer Verwaltungsgerichtshof) but, since this was refused, the first instance judgement has legal force.

In its decision, the Higher Administrative Court stresses that the legal questions regarding the provisions of the VAG and the GenG relevant to this case had already been clarified in court. The rules on representation aim to ensure that the responsible governing bodies safeguard the interests of the undertaking in an objective manner in order to avoid the risk of conflicts of interest which could harm the insured, the judgement noted. If a member of the management board were to be fully exempted from the ban on contracting in one's own name, there would be a risk that the management board could give itself preferential treatment, leading to a significant negative impact on the interests of beneficiaries. These are already not adequately safeguarded if a provision in the articles of association affecting the insurance relationship violates existing law.

Comprehensive scope and note on interpretation

The legal assessment that only the supervisory board may represent the undertaking in all legal transactions between an insurer and its management board also applies to stock corporations and mutual societies which are not small mutual associations. The reason for this is the reference to section 112 of the AktG made in section 189 (3) sentence 1 of the VAG.

BaFin had previously approved articles of association of other undertakings which exempted the management board from the provisions on contracting with oneself. Taking the ruling into account, they must be interpreted to mean that only the exemption from the ban on multiple representation is allowed. In the case at hand, this was not possible since, for one thing, the Pensionskasse had explicitly stated that it was intended for the management board members to contract in their own name and for another, BaFin had separately approved the exemption of the special representatives from the ban on multiple representation. Comparing the two clauses in the articles of association would have given the impression that the management board members were impermissibly exempt from both variants of contracting with oneself.