Management Board Contract of the AG in Germany

Compensation, Liability, Termination, Sample Formulations

Management board members in Germany have a prominent position in stock corporations. They represent and manage the company and are in this respect comparable to managing directors of a GmbH. Unlike managing directors, the members of the AG board can act largely without instructions. Neither individual shareholders nor the annual general meeting nor the supervisory board can issue instructions to the management board.

This great freedom of decision entails a special responsibility for the success and failure of the company. This responsibility is reflected in the complex regulations of management board contracts in Germany (also called management board employment contracts or management board service contracts).

We advise boards of directors and supervisory boards of stock corporations - regardless of whether they are large and listed on the DAX or small and not listed on the stock exchange - on the drafting, negotiation, conclusion and also termination of management board contracts.

For a non-binding inquiry, please contact one of our experts directly by phone or e-mail or use the contact form at the bottom of this page.

Legal Expertise in the area of Management Contracts in Germany

Our highly qualified and specialized team of attorneys and specialists in german corporate law will advise you on all matters relating to the contracts of management board members of listed and non-listed companies in Germany:

  1. Drafting and amendment of management board contracts
  2. Accompaniment, advice and support in contractual negotiations on new and to be amended management board contracts and remuneration systems
  3. Accompanying, advising and supporting the termination of management board contracts, in particular through termination, as well as advising on liability avoidance strategies
  4. Enforcement of or defense against claims arising from management board liability
  5. Drafting and adaptation of rules of procedure for the management board, coordination of rules of procedure with management board contracts
  6. Dispute resolution, mediation or judicial assertion of claims arising from or in connection with management board contracts, if necessary also through effective measures of interim legal protection (preliminary injunctions)
  7. Support in the (premature) termination of management board contracts
  8. Classic regulatory aspects of a management board contract

Management board service contracts in Germany contain a large number of provisions concerning the rights and obligations of the management board member, but also of the company. Each management board contract follows its own rules, which - depending on the industry, the subject matter and the size of the company as well as the business area and the shareholder structure - often differ greatly. This applies not only with regard to the areas of regulation, but also with regard to the depth and scope of regulation. Nevertheless, it is possible to name a few aspects which - in addition to a number of others - should be taken into account in the run-up to the conclusion of an management board service agreement in Germany (the following is a checklist from german practice):

  • Consideration of existing service/employment contracts including prior post-contractual non-competition clauses
  • Relationship of management board contract to articles of association, rules of procedure of the management board, previous management board-related resolutions of the supervisory board and their subsequent amendment options
  • Scope of power of representation and possibilities for subsequent amendment thereof
  • Scope of management authority (including departmental responsibility) and scope for subsequent amendment thereof
  • Compensation (fixed and variable)
  • Other compensation components, incentives (e.g. health care, retirement benefits, company car, D&O insurance)
  • Term of contract, options for termination of employment contract - Details of termination of employment contract (e.g. severance pay, linking clause)
  • (Post-contractual) non-competition clauses

The aforementioned classic regulatory aspects of management board employment contracts affect not only the rights and obligations of the management board and the company. The contract also regularly has an effect beyond this. A structured contract can, for example, avoid the uncertainties frequently encountered in german practice of subsequent personal claims by the company or third parties, as well as uncertainties in the subsequent enforcement of salary claims and restrictions on professional reorientation.

For members of the management board in Germany who are also shareholders, the practice-relevant aspect of hidden profit distributions can be regulated in a targeted manner by drafting the contract accordingly.

The following comments explain selected aspects, risks and control options in management board employment contracts:

Board of Management Office and Board of Management Contract in Germany

The office of a member of the board of management as such and the board of management contract are two different things. The position of member of the board of management, the so-called organ relationship, is established by the formal appointment as member of the board of management. The management board contract, the so-called service or employment contract, is created by the conclusion of a corresponding agreement in Germany.

In this context, it is important to note that the position as a member of the management board is fundamentally independent of the management board contract. Thus, someone can be a member of the management board in Germany without having concluded a management board contract with the stock corporation or without this contract being effective. On the other hand, a management board contract can be effective without the person in question (still) being a member of the management board.

In german practice, a careful check must therefore always be made as to whether there is a temporal concurrence between the management board office and the management board contract and from which legal relationship (board relationship or management board contract) the relevant duties arise. This concurrence is also important, for example, in answering the question of whether a departing board member is (still) subject to a non-competition clause.

With regard to the appointment and the associated management board contract, further legal and/or statutory aspects (e.g. "women's quota", personal requirements) must also be taken into account in individual cases.

Conclusion of the Management Board Contract, role of the Supervisory Board in Germany

The supervisory board of the company in Germany is responsible for concluding the management board contract. It concludes the contract as the representative of the AG. Particular attention must be paid if the supervisory board is represented when the contract is concluded. This mandatory exclusive responsibility of the supervisory board also exists for subsequent amendments or additions to the management board employment contract, including termination of the contract.

The general view is that the supervisory board in Germany can also delegate the authority for the management board contract to a (minimum three-member) management board committee. In practice, the question arises in particular in group constellations and where interim managers are concerned as to whether the management board contract can also be concluded with a third company. The background to this is the idea that such a "third-party employment contract", which is common above all in corporate groups in Germany, contradicts the sole obligation of the management board to act in the best interests of the AG. Notwithstanding remaining legal risks, corresponding third-party employment contracts are practiced.

Term of the Management Board Contract in Germany

According to Art. 84 of the German Stock Corporation Act (AktG), a management board member may be appointed for a maximum period of 5 years. It follows from this that the management board contract can also be concluded for a maximum period of 5 years. As reappointment is permissible (again for a maximum of 5 years), a corresponding extension of the employment contract is also deemed permissible. However, this can be done at the earliest before the current contract expires. A typical simple contractual provision (sample contract) in Germany reads:

  • "This agreement shall enter into force on .... It shall end upon expiry of the appointment as member of the board of management at ..... The company and the management board member shall enter into negotiations on an extension of this contract no later than ... months before the expiry of this contract."

Labor Law and the Management Board in Germany

It should be noted that german employment law provisions and principles, e.g. company practice, principle of equal treatment, are generally not applicable to members of the management board and, in particular, there is no protection against dismissal of employees.

Compensation of the Management Board, German Corporate Governance Code (GCGC)

The compensation of the management board in Germany is generally made up of fixed, variable and other monetary components. In accordance with the express provision of Art. 87 para. 1 AktG, the total compensation paid to a member of the management board must be commensurate with his duties and performance and with the situation of the company and may not exceed the customary level of compensation without special justification.

For listed companies, Section 4.2 of the German Corporate Governance Code (GCGC) must also be observed. According to this, the entire management board compensation structure in Germany must be geared, among other things, to sustainable corporate development.

The practical question of the appropriateness of the compensation is assessed on the basis of the total compensation, i.e. the sum of the fixed, variable and other monetary compensation components. The variable salary componentsin german AGs include profit sharing / profit bonuses as well as monetary and value-based asset commitments. The specific structure of the variable compensation components in accordance with the law is complex in detail (interaction of reference values, time horizon and fixed/variable components). Other non-cash components include, for example, expense allowances, insurance payments, private use of company cars and pension commitments. A typical simple regulation (sample contract) reads:

  • "The management board member receives fixed and variable compensation. The fixed compensation amounts to EUR ... p.a. The performance-related variable compensation is determined as follows"

Especially from the point of view of the german company, namely from the point of view of the responsible supervisory board, it is advisable to carefully design the compensation regulations. If the latter do not comply with the complex legal requirements in Germany, the supervisory board risks personal liability. However, board members are also well advised to consider compensation arrangements from the point of view of appropriateness. According to the latest opinion, board members are personally liable for damages if they allow themselves to be promised inappropriately high compensation.

Articles 87a and 120 AktG must also be observed for the contracts of members of the management board of listed companies. Accordingly, the supervisory board of a listed stock corporation in Germany must determine a compensation system for the members of the management board in accordance with the statutory requirements. This must be approved by the annual general meeting.

Allocation of Duties and Departments in Germany

The management board in Germany is usually free to distribute the tasks and business of the company among the individual members in the interests of the effectiveness of management. If the management board - or the supervisory board - makes such a division of responsibilities, each member of the management board alone bears full responsibility for the department assigned to him. For the other members, this means a reduction in liability, as they are only required to supervise the other board member. The risk of liability in Germany is thus immensely reduced.

In german practice, the portfolio assigned to the management board member is usually named in the management board contract. From the company's point of view, it is advisable to have an opening clause which allows a change of department without the involvement of the management board. Management board members, on the other hand, should work towards a binding allocation of portfolios or alternative regulatory mechanisms. A typical simple regulation (sample contract) reads:

  • "The board member shall responsibly manage the area of ..."

Especially in internationally operating companies in Germany, english-language terms are used in connection with the division of departments. These range from CEO (Chief Executive Officer) and CFO (Chief Financial Officer) to COO (Chief Operating Officer) and CTO (Chief Technology Officer). In legal contexts, these terms should be used with caution, as they are sometimes understood differently even in the anglo-american legal sphere.

D&O Insurance in Germany

In the event of a breach of duty, in Germany, a member of the management board is liable to the company for the damage incurred. In this case, the usual burden of proof is reversed. The AG does not have to prove that the management board has breached its duties. Rather, the management board must prove that it properly fulfilled its duties. For the stock corporation, this makes it easier to assert claims for damages; for the management board, it makes it immensely more difficult to defend against claims for compensation.

In view of this and a very strong tendency to actually hold management board members liable, management board contracts in Germany usually include an obligation on the part of the company to maintain directors and officers (D&O) liability insurance for the benefit of the management board. A D&O insurance policy is a liability insurance policy that insures the members of the company's executive bodies - management board members, supervisory board members, advisory board members - in the event that a claim is made against them by the company or a third party due to a breach of duty. A typical (very simple) contract provision in Germany (sample provision) reads:

  • "The company shall maintain an insurance policy in favor of the member of the management board which protects the member of the management board against the risks of being held liable for damages by the company and/or third parties due to alleged or actual breaches of duty in connection with his activities as a member of the management board (D&O insurance). The sum insured shall be at least EUR ... per claim."

German practice shows that regulations on D&O insurance are rarely carefully structured, so that from the perspective of the management board there are often unexpectedly large gaps in protection. For example, the practice-relevant points of insolvency and corporate criminal law must be taken into account here.

Social security, pension entitlements, company pension in Germany

Management board members are usually not subject to compulsory social insurance in all areas. In particular, management board members are not, by german law, compulsory members of statutory accident insurance, unemployment insurance and pension insurance in Germany. With regard to statutory health and long-term care insurance, there is legal uncertainty because the law does not expressly exempt management board members from statutory health and long-term care insurance. In german practice, the board member's salary exceeds the assessment limits, so that an exemption from compulsory insurance is usually possible,

Consequently, coverage of the relevant risks - in particular illness, accident and old age - is the subject of the management board contracts in the form of the conclusion of corresponding insurance contracts under private law for the benefit of the management board by the company or corresponding assumption of the costs of the necessary insurance policies. Company pensions and pension entitlements in Germany also serve to provide social security for the management board.

Termination, Termination of Management Board Contract in Germany

In the case of a fixed-term management board contract, it may only be terminated for cause, i.e. for good cause. An exception applies if the contract expressly provides for the possibility of ordinary termination. The coexistence of the relationship between the executive body and the employment contract in Germany means that dismissal from the management board (i.e. revocation of the appointment) does not automatically lead to termination of the management board contract. From the company's point of view, linking clauses play an important role in this context.

The purpose of these clauses is that, on the basis of a contractual provision, a dismissal as a member of the management board in Germany also ("automatically") means termination of the employment contract - a so-called linking clause. By linking dismissal and termination in this way, the company wishes to avoid lengthy and costly disputes about the termination of the management board employment contract. A typical frequently encountered contractual provision (sample wording) reads:

  • "Revocation of the appointment as a member of the management board shall terminate the management board contract by applying the notice periods of Section 622 of the German Civil Code mutatis mutandis."

It should be noted, however, that such coupling clauses in Germany are increasingly considered invalid; in particular if the clauses have a general terms and conditions character. Finally, a member of the management board - unlike a GmbH managing director - can only be dismissed for good cause. In addition to termination of the management board contract, the parties involved can of course also terminate the management board contract by mutual agreement.

As with the conclusion of the management board contract in Germany, termination is the sole responsibility of the supervisory board. In view of the legal formalities involved in termination, the supervisory board should prepare the termination carefully and, if in doubt, seek advice.

Termination Agreement, Settlement Agreement in Germany

In german practice, there is a tendency to settle the termination of the board relationship and the management board contract by mutual agreement by concluding a corresponding "settlement agreement". The reason for such termination agreements is usually the lack of a link between the board relationship and the employment relationship and the associated legal uncertainties. From the management board's point of view, in the event of a mutually agreed separation, further "soft" provisions can also be agreed immediately, e.g. employment reference, non-competition clause and language regulations for the departure. With regard to the frequently desired regulations on liability in Germany, it should be noted that the granting of a so-called "general receipt" is only possible under very narrow conditions under stock corporation law.

For more details, see: dismissal or resignation from office of the AG board of management.

Note: The samples / sample formulations are for illustrative purposes and do not constitute a recommendation.

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