ARAG/Garmenbeck — The Duty to Pursue, Seen from Switzerland

On 21 April 1997, the German Bundesgerichtshof handed down its judgment in the ARAG insurance matter — a decision that changed German corporate law’s understanding of when a supervisory board must pursue claims against former executives. Before ARAG, the Aufsichtsrat had wide latitude to decline to sue; business-judgment deference allowed it to weigh reputation, continuity, and the disruptive effect of litigation against recovery. After ARAG, that latitude contracted sharply. The supervisory board is now required to investigate whether claims exist, assess their merits, and pursue them unless there are compelling business-interest reasons to abstain — reasons that must be documented and are narrowly circumscribed. The matter matters to Swiss boards because the same question arises at every change of composition: a new board taking office, a successor after M&A, an administrator in bankruptcy — each confronts the question of whether to pursue claims against predecessors.

The Caremark — Sequana — Marchand — ARAG series

A comparative-commentary series opened with BTI v Sequana (UK, creditor duty) and continued with Marchand v. Barnhill (Delaware, oversight of mission-critical risks). It finds its third chapter in a question arguably older and more consequential than either: the duty to sue your predecessors. Where Sequana asks when the board’s loyalty shifts to creditors, and Marchand asks when the board must monitor its own company, ARAG asks when the board must pursue claims it already has. Each of these cases tightens a point at which directors had traditionally exercised discretion; each tightening, transposed to Swiss law, finds a Swiss doctrinal anchor already in place — which is the argument this commentary develops for ARAG.

The case

ARAG was a large German insurance group headquartered in Düsseldorf. Its chief executive, Ludwig Garmenbeck, engaged in speculative financial transactions through subsidiaries, producing losses that materially impaired the company’s capital position. After the losses crystallised, the supervisory board (Aufsichtsrat) considered whether to pursue liability claims against Garmenbeck under § 93 AktG — the German equivalent of Art. 754 OR in its substantive standard. The board declined. Its stated reasons were a mix: reputation of the company, continuity of operations, the disruptive effect of litigation on ongoing regulatory relationships, and what the board characterised as ordinary business-judgment discretion.

A shareholder, exercising the then-available shareholder-derivative right under § 147 AktG (a.F.) — the pre-UMAG version; the 2005 reform shifted the mechanism into a Klagezulassungsverfahren at § 148 AktG — challenged the non-pursuit. The matter moved through the courts and reached the Bundesgerichtshof on appeal from an OLG Düsseldorf judgment that had accepted the supervisory board’s discretion. The BGH reversed.

The holding

The supervisory board’s decision not to pursue claims is not an ordinary business-judgment call. The Aufsichtsrat, as fiduciary of the company, owes an affirmative duty to

1. Investigate whether claims against members of the executive board exist.
2. Assess the merits and quantum of those claims — not to make a final legal determination, which is for the court, but to form an informed view on plausibility and recoverable amount.
3. Pursue the claims, unless there are compelling business-interest reasons that, on documented analysis, outweigh recovery.

The compelling reasons are narrowly circumscribed. Reputation alone does not qualify. Business continuity alone does not qualify. What qualifies is a specific, documentable harm that would flow from pursuit — a pending transaction whose loss would exceed the recoverable damages; a regulatory relationship whose destabilisation would cost more than the claim is worth; a going-concern risk at the moment that litigation would push the company over. The reasons must be contemporaneously recorded, not reconstructed in defence.

The BGH framed the duty as flowing from the supervisory board’s fiduciary role as a separate body tasked with monitoring and, where necessary, disciplining the executive board. In the post-ARAG literature and later BGH decisions, the doctrine has been elaborated — on the permissible scope of non-pursuit, on the conflict-free composition of the deciding body, on the discharge (Entlastung) interaction, and on the consequences of supervisory-board failure to discharge the duty (including personal liability under § 116 AktG).

How a Swiss court would read the same question

Swiss corporate law does not have an exact equivalent to the German two-tier board’s supervisory duty, because the Verwaltungsrat is a single-tier board that combines what German law separates into Vorstand and Aufsichtsrat. But a Swiss successor board — a newly-elected board after an M&A, a restructuring, a hostile takeover, or a shareholder revolt — confronts the same practical question as the ARAG supervisory board: does it pursue claims against the previous administration? Three channels in Swiss doctrine reach the question.

Art. 717 OR — the duty to the company. The directors' duty of diligence extends to the protection of the company’s assets. Claims against former directors, where they exist and are recoverable, are assets of the company. A successor board’s failure to pursue a valid claim without a documented business-interest justification is, in substance, the same breach the BGH identified in ARAG: a non-decision dressed as a business-judgment decision. Direct Swiss Federal Supreme Court authority treating the successor board’s duty to pursue as a distinct ARAG-analogous question is thinner than the German elaboration; the Swiss treatment proceeds through the general Art. 717 OR standard and through the Art. 754 OR / Art. 260 SchKG enforcement channels where non-pursuit at company level shifts the claim to the creditor track.

Art. 754 OR — standing to sue. The company, ordinarily through its current board, has standing to pursue claims against former directors. Subsidiarily, qualifying shareholders have standing to sue for damage to the company (recoverable to the company, not to them). In bankruptcy, claims pass to creditors through Art. 260 SchKG cession — a fallback that German law lacks in quite the same form, and one that softens (without removing) the pressure on the successor board to act.

Art. 758 OR — discharge (Entlastung). The shareholders' discharge resolution binds the company and the shareholders who voted in favour, for facts disclosed. Facts not disclosed at the time of discharge remain actionable. This is the narrow but real escape route: the prior board may have obtained formal discharge for a period but on incomplete facts, in which case the successor board’s Art. 717 duty to investigate and, as appropriate, pursue is live.

The Swiss court reviewing a successor board’s decision not to pursue a former CEO would, in practice, ask the same four questions the BGH asked in ARAG: was the decision informed, was there an adequate merits assessment, are the stated business-interest reasons documented and weighty, and was the decision reached through a conflict-free process? The doctrinal language differs; the substantive review is the same.

Where the two systems converge, and where they do not

Convergence. Both jurisdictions treat the decision to pursue or not as subject to substantive fiduciary review, not ordinary business-judgment deference. Both require a documented process: investigation, assessment, reasoned decision. Both treat reputation-alone and continuity-alone as inadequate grounds for non-pursuit. Both recognise that conflicted directors — those with personal ties to the former administration — cannot credibly decide the question.

Divergence. German law has a specific, elaborated doctrine (ARAG and progeny); Swiss law reaches the result through the general Art. 717 OR standard, with thinner direct case law. The German two-tier structure places the duty on the Aufsichtsrat as a body institutionally separate from the executive board; the Swiss single-tier Verwaltungsrat combines decision-making and oversight, which complicates the conflict analysis whenever directors of the prior era remain on the successor body. The Swiss Art. 260 SchKG cession path creates an enforcement fallback that German law lacks: if the Swiss successor board declines and the company later enters bankruptcy, creditors can pursue directly — a feature illustrated in the Papierschlamm commentary.

What boards should take from it

1. On change of composition, investigate first. A Swiss successor board’s first substantive agenda item should be a systematic review: are there known or plausibly asserted claims against former directors or executives? What is the evidence, the quantum, the exposure? This review is not optional and is not an administrative task; it is the first discharge of the Art. 717 duty in the new capacity. A board that defers the review until “a quieter moment” is a board that will not meaningfully perform it.

2. Reasons for non-pursuit must be documented and specific. A decision not to pursue, grounded in reputation or continuity or the cost of litigation alone, is fragile. The reasons that hold are specific, contemporaneous, and weighable: a defined transaction whose loss would exceed recovery; a defined regulatory exposure; a defined going-concern risk. The documentation is contemporaneous or it is not real; post-hoc rationalisation does not bind a court reviewing the decision three years later.

3. The conflict structure is load-bearing. Directors with personal loyalties to former executives — prior advisers, long-term colleagues, shareholders aligned with the former administration — are conflicted from the decision on non-pursuit. The conflict-free-committee pattern familiar from sell-side M&A and conflict-of-interest transactions applies here equally. The deciding body must be credibly unconflicted, and that credibility must be visible on the record.

4. Discharge is not a release from inquiry. Even where the shareholders granted formal Entlastung to the prior board, the successor board’s duty to investigate survives. Discharge binds only on the facts disclosed. Facts discovered after the fact remain actionable. A successor board that treats a shareholder resolution as license to skip the inquiry has misread the instrument.

5. Bankruptcy transfers but does not extinguish. If the company enters bankruptcy, Art. 260 SchKG cession gives creditors a path to pursue that the successor board had declined. The directors' personal exposure is not contained by the successor board’s choice of non-pursuit at the company level — it simply moves from the company track to the creditor track. This is the Papierschlamm pattern in a Swiss setting.

Implications for the reference work

Director Duties under Swiss Law, at § 5 (consequences of breach), will be updated to articulate the Swiss Art. 717 OR duty to investigate and pursue claims against former directors in ARAG-adjacent terms, cross-referenced to this commentary. The Shareholder Disputes article will note the interaction with the liability action under Art. 754 OR where the current board’s non-pursuit produces shareholder-side derivative threats. The Litigation Readiness article will gain a note on the documentary discipline required when a successor board decides on non-pursuit — particularly the contemporaneous memorandum that is the difference, after three years, between a defensible decision and an indefensible one.

Primary sources

German: BGHZ 135, 244 (II ZR 175/95), decided 21 April 1997 — the ARAG/Garmenbeck decision of the Bundesgerichtshof on the supervisory board’s duty to investigate and pursue claims. Supporting German provisions: § 93 AktG (directors' duty of care and liability), § 116 AktG (supervisory-board liability), § 147 AktG (shareholder-derivative action as applicable in the period).

Swiss anchors: Art. 717 OR (duty of care and loyalty), Art. 754 OR (liability action), Art. 758 OR (Entlastung), Art. 260 SchKG (cession in bankruptcy). Cross-references to Swiss decisions are to opencaselaw.ch.

See also

• Director Duties under Swiss Law
• Shareholder Disputes under Swiss Law
• Litigation Readiness for Swiss Boards
• Commentary: 4A_62/2024 — the Papierschlamm case
• Commentary: BTI v Sequana — the creditor duty, seen from Switzerland
• Commentary: Marchand v. Barnhill — the oversight duty, seen from Switzerland
• Agenda: shareholder dissent and derivative threat
• Glossary: Verantwortlichkeitsklage
• Glossary: Entlastung