Managing Directors in Germany - Basic Knowledge
Legal advice by English-speaking Attorneys and Lawyers
The managing director of a German limited liability company (GmbH) or limited liability partnership (GmbH & Co. KG) has many legal duties and must observe a variety of obligations. If he violates legal or contractual obligations, this can lead to far-reaching claims for damages and personal liability of the managing director. Violation of company-internal rules of procedure, shareholder resolutions or shareholder instructions may result in a liability of the managing director. Some breaches of duties may even lead to criminal prosecution of the managing director. This situation warrants a closer look at the various aspects of working as a managing director for a German company.
Obligations and rights of the managing director arise from statutory law, the articles of association and the managing director service contract. Many of these obligations cannot be waived, and the managing director cannot be exempted from all risks associated with the role of a managing director under German law. For the benefit of the managing director, however, liability-reducing provisions in the management contract are permissible and certain personal risks may be insured by way of a directors and officers insurance policy (D&O).
Further information regarding typical contents and clauses in German law managing director service agreements: Managing director service contract: important clauses.
Social Security Obligation of the Managing Director?
External managing directors and managing directors with a minority shareholding often ask themselves whether they are subject to the statutory social security obligation. In practice, this question is assessed on the basis of several criteria. The jurisprudence essentially focuses on the "legal power" of the managing director in the company. Detailed information: Social security obligation of the managing director
Influence of the Shareholders on the Management of the Company
In German limited liability companies (GmbH) and German limited liability partnerships (GmbH & Co. KG), the shareholders have the right to instruct the management to carry out shareholders’ resolutions and thus effectively influence the day-to-day management. The shareholders may also enforce measures - sometimes even to the detriment of the interests of the company - against the will of the managing directors. The managing director generally has to follow instructions of the shareholders' meeting, unless the instructions are evidently against the law. Our corporate law experts in all major financial centres of Germany, particularly in Hamburg, Berlin, Munich and Frankfurt, are well experienced in advising and representing managing directors on how to act in case of a conflict with the shareholders of the company or in situations where certain instructions by the shareholders put the managing director or the company at risk.
Shareholder Loans in German Law Companies
The shareholder financing always poses certain risks for the shareholder and managing director. In certain situations, loan repayments from the company to the lender (shareholder) can lead to the personal liability of the managing director. It may also be necessary for the shareholder to repay the loan he has received to the company: Further information on German law shareholder loans.
Behavioural Requirements and Obligations in Case of a Crisis
Times of crisis in the company (e.g. due to financial distress) burden the management in any case. Under German law, in the context of a corporate crisis the managing director may be liable not only according to civil law but also might be prosecuted under criminal law. In situations where arguments (or a full dead-lock) arise in companies the managing director might get caught in between the arguing shareholders. Generally, shareholders' resolutions can be passed in and outside shareholders' meetings. In many cases, a managing director must comply with important formal requirements when convening the shareholders' meeting according to German law. If there is a risk of conflicts between the shareholders in the GmbH, there is a high potential for formal mistakes which might lead to further problems for the managing director and or the company. The managing director must know exactly how resolutions come to pass and how he should behave in a situation of crisis, otherwise he might be personally liability for damages caused to the company.
Information and Control Rights of (Minority) Shareholders
Each shareholder not only has the right to participate in the profits of the company, but also the right of participation in terms of information rights. German law provides for a specific scope of information and control rights, which can, however, be restricted and extended by the articles of association. The managing director is obliged to keep all information of the company in an orderly form at all times and must answer requests for information from each shareholder. Only in exceptional cases, and always after a shareholders' meeting has given its consent, may the managing director refuse to hand over information to a shareholder (for example, if he has indications that the shareholder wishes to set up a competing company).
Managing Director Liability
The position of managing director often comes with an above-average compensation package. It is often overlooked that such remuneration is to a large extent compensation for the far-reaching obligations and a potentially existential risk of personal liability. Each and every managing director bears a great responsibility. On the one hand, he is personally liable to the company as trustee of the company's assets. On the other hand, he is also liable to third parties (social security authorities, tax authorities) for the fulfilment of tax obligations.
Depending on the situation and the financial situation of the company, a wide variety of requirements are placed on the managing director. Only those who are familiar with the often complex framework of duties of the managing director can prevent liability risks and even the risk of criminal prosecution.
Our team of corporate and M&A attorneys and tax advisors throughout our offices in Hamburg, Berlin, Frankfurt and Munich is available to advise companies, shareholders and managing directors on all matters in connection with the rights and obligations, duties and potential liability of managing directors in Germany. We are frequently employed both as lead counsel as well as local German counsel in connection with litigation between shareholders and litigation for damages involving misconduct of managing directors. We offer hourly billing but are also open to alternative fee arrangements, such as caps of flat fees, depending on the particularities of the matter.
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