08-28-2008

No in-house transactions with German stock corporations? Federal Court of Justice requires award procedure as a basic principle




The Federal Court of Justice [BGH] has tightened the noose of procurement law even a little more (Judgment dated July 3, 2008, I ZR 145/05). The Federation, States and municipalities will hardly be able to directly award contracts to their subsidiaries. As an example, it will no longer just be possible for a city to obtain electricity and gas for city halls and schools directly from its public utility subsidiary, if said subsidiary is a stock corporation.

Specifically, the case before the BGH concerned municipal insurance associations. The first Civil Division, however, translated its statements in general to what are known as in-house transactions with stock corporations. According to the division's view, stock corporations - even if being 100% publicly-owned - are not directly controlled by the shareholders since the general assembly is "neither superordinate nor authorized to issue directives" to the executive board. This is why the requirements of the European Court of Justice with respect to direct awards would not be fulfilled, meaning that even purely municipal stock corporations will have to face competition in their own city in the future.

"While this decision establishes high requirements, it does not completely rule out in-house transactions with stock corporations," Dr. Ute Jasper, partner at Düsseldorf law firm Heuking Kühn Lüer Wojtek, comments. "So far, the BGH has not dealt with exceptions, such as controls by controlling agreements," Jasper continues," so that there remains some leeway for direct awards, including to stock corporations."

With respect to another item, the BGH even expressly allowed new exceptions. The first Civil Division does not deem it impossible for direct awards also being an option when a private company has an indirect holding in the contractor. Previously, the European Court of Justice case-law has been interpreted such that any privately held interest would exclude an in-house transaction without considering the actual control. The BGH now expressly deemed private participations acceptable if the "public shareholder" may exercise its voting rights "without consideration of the interests of private partners."

Thus, the following result materializes: While as a basic principle there are strict requirements with respect to direct awards, these are to be reviewed not in a formal and categorical manner, but in relation to the respective contract and the controlled company. It is of importance whether the company in the individual case, including as stock corporation or with private participation, is directly publicly managed and controlled.

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