Merck 2008 Annual Report Download - page 70

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65
CORPORATE GOVERNANCE
Corporate governance
Joint Report of the Executive Board and the Supervisory Board according to section 3.10 of
the German Corporate Governance Code
The German Corporate Governance Code is geared exclusively toward the conditions at a
German stock corporation (Aktiengesellschaft). Merck KGaA has therefore independently
examined and determined how the Code can be applied logically to a partnership limited
by shares (Kommanditgesellschaft auf Aktien) to serve the interests of shareholders. In
order to enable shareholders to compare the situation at other companies more easily, we
have decided to base corporate governance on the conduct recommendations made by the
Code Commission relating to management and supervision (governance) and to forego
having our own, also permissible, code. With a few exceptions, the recommendations of
the Code, the intent and meaning of which are applied, are complied with. To improve
understanding, the following gives a general explanation of the company form Komman-
ditgesellschaft auf Aktien (KGaA) followed by the specific situation at Merck.
Partnership limited by shares (Kommanditgesellschaft auf Aktien)
The partnership limited by shares (Kommanditgesellschaft auf Aktien or KGaA) is a
company with its own legal personality, at which at least one partner has unlimited
liability for the company’s creditors (general partner) and the others hold an interest
in the share capital without any personal liability for the company’s debts (limited
liability shareholders) (section 278 (1) of the German Stock Corporation Act (AktG)).
It is therefore a hybrid of an Aktiengesellschaft (German Stock Corporation) and a
Kommanditgesellschaft (limited partnership) with a focus on stock corporation law.
Distinctive differences to the Aktiengesellschaft include the presence of general part-
ners, who essentially also manage the company’s business activities, the absence of
a management board and the restriction of rights and obligations of the supervisory
board. In particular, the supervisory board is not responsible for appointing general
partners or for regulating the terms and conditions of contracts, while at the Aktien-
gesellschaft it appoints the management board. At the KGaA, it also does not have
the legal authority to issue rules of procedure for the executive board or a catalog of
business transactions requiring approval. There are also special features with regard
to the Annual General Meeting. For example, many of the resolutions made require
the approval of the general partners (section 285 (2) AktG), including the adoption of
the annual financial statements (section 286 (1) AktG). A large number of the conduct
recommendations contained in the Code, which is geared towards Aktiengesellschaften,
can therefore only be applied to a KGaA as appropriate.
Merck KGaA
The general partner E. Merck KG (until and including December 31, 2008 E. Merck OHG)
holds around 70% of the total capital of Merck KGaA (equity interest); the limited
liability shareholders hold the remainder, which is divided into shares (share capital).
E. Merck KG is excluded from the management of business activities. The general
partners with no equity interest (Executive Board), on the other hand, manage business
activities. Nevertheless, due to its substantial capital investment and unlimited personal
liability, E. Merck KG is an influential authority with a strong interest in compliance
with procedures and efficiency of business operations at Merck KGaA. Merck KGaA’s
participation in the profit or loss of E. Merck KG in accordance with Articles 26 et seq.
of the Articles of Association provides for further harmonization of the interests of the
limited liability shareholders and E. Merck KG.
The KGaA is a hybrid of a
stock corporation and limited
partnership.