Straw man and fiduciary relationship in Germany
Liability risks for managing directors and shareholders under german law
Particularly in small and medium-sized german businesses, there are always companies that are not managed by their official managing director entered in the commercial register. Typically, a person is persuaded to take over the management of a GmbH as a straw man. The uninitiated person is then entered in the commercial register as the managing director, although the actual fortunes of the company are managed by a person behind the scenes.
In some cases, the straw man managing director is also the formal shareholder of the GmbH (shares are held on the basis of a trust agreement), in others the backer is the direct shareholder. Common to all straw man arrangements in Germany is the spreading of business risks and opportunities: The straw man bears the liability risks and the backer profits economically from the transactions.
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Legal expertise in straw man and trust arrangements under german law
Our team of attorneys, certified specialists for german corporate law and tax law as well as tax advisors advise on straw man and trust arrangements at our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne, in particular on the following aspects:
- Analysis of the legal and tax framework of straw man arrangements and identification of alternatives
- Examination of the legal and tax risks of straw man constructions from the point of view of the company and its executive bodies
- Support in the reorganization and cancellation of straw man and trust relationships
- Advice on measures to minimize the liability of straw men
- Legal representation of managing directors in defending against (damage) claims
You can find out more about trusts and trustees here:
Reasons for the GmbH straw man phenomenon in Germany
Often smaller german companies with the legal form GmbH or GmbH & Co. KG, straw men are appointed as managing directors because the persons behind them may no longer be appointed as managing directors by law due to insolvency or a criminal act (Section 6 (2) GmbHG). The same applies to persons who are affected by an official trade ban and are therefore not allowed to take over the management of a GmbH in Germany.
Furthermore, stooges are used as managing directors in cases where the business is particularly prone to liability or, where applicable, does not comply with legal requirements. Here, the backer protects himself from the liability risks associated with the position of managing director by engaging an unsuspecting straw man. These backers cannot or do not want to take over the office of the managing director for the reasons mentioned and therefore try to run their business through straw men.
In the german practice of lawyers it can be observed that especially wives or other close persons who are inexperienced in business are persuaded to act as managing directors.
Civil and criminal liability risks for the straw man under german law
As a rule, the straw men are not informed of the existing risks under german civil and criminal law. In some cases, they are also promised that they have nothing to fear or that the backer will bear all the risks arising from the management of the company. In german practice, however, such agreements are very rarely documented in writing.
In fact, every person who is appointed managing director of a GmbH or a GmbH & Co. KG assumes all statutory management duties and the associated liability risks in full and without any restriction. Any agreements with the backer in this regard have no effect vis-à-vis third parties, but can at most trigger claims of the straw man vis-à-vis the backer.
The german law requires the managing director to keep an eye on all business relationships and to monitor the financial situation of the company at all times. The straw man managing director must also be aware of the financial situation of the company at all times. Every managing director can be held personally liable under german civil and criminal law for tax and social security liabilities. If a GmbH becomes insolvent, the straw man managing director is threatened with particularly severe liability for delaying insolvency if he fails to act (for more information on managing director liability, click here: Managing Director Liability).
In german practice, however, typical straw man managing directors do not take control of the financial accounting and leave the de facto management to the backer. If the backer takes a business risk and causes the GmbH to become insolvent, the formal managing director will be asked to pay by the tax authorities, social security institutions and insolvency administrators. The civil and fiscal courts repeatedly establish the liability of these straw men as well.
As a rule, a declaration by the straw man managing director that he did not personally manage the business does not relieve him of liability. In principle, liability cannot be avoided by any contractual arrangement between the straw man and the company or the straw man and the backer. The typical contractual liability avoidance strategies fail here. In the case of a management without appropriate control, which may also be accompanied by a permanent undercapitalization of the GmbH, the best liability protection lies in a preventive resignation from the office of managing director.
Since October 2017, the provisions of the German Money Laundering Act on the transparency register have taken effect. Through this register, fiduciary relationships or straw man constellations in Germany are to be disclosed to certain persons. Here you can find out more about the obligations in connection with the transparency register: Transparency register
Possible way out of liability: resignation from the office of managing director in Germany
In principle, every GmbH managing director in Germany can resign from his office as managing director at any time without stating important reasons. The resignation, which does not require any form, should be documented for evidentiary purposes. It should also be borne in mind that resignation from office in individual cases - e.g. if it is untimely - may also give rise to a claim for damages against the german company. However, this can usually be prevented with appropriate preparation and planning. It must be ensured that the resignation from office is entered in the Commercial Register.
If there is a written service contract for the managing director, the termination of the service contract should be considered in addition to the resignation. If, in the individual case, there are no important reasons for extraordinary termination of the managing director service agreement, the termination should be made in compliance with the contractual notice period. If possible, the resignation from office and the termination of the managing director's employment contract should always run concurrently.
If you are interested in an assessment of the existing liability risks in connection with straw man transactions, please contact our lawyers in our offices in Hamburg, Berlin, Munich, Frankfurt or Cologne. Our attorneys also represent you nationwide in Germany.