28.04.2015Liability of a Managing Director of a Limited Liability Company for Infringing Internal Regulations of Responsibility
The article summarizes a recent decision (OLG Naumburg, judgment of 01.23.2014 - 2 U 57/13) on the Liability of a Managing Director and concludes with practical instructions for the CEO.
The managing director represents the limited liability company (Gesellschaft mit beschränkter Haftung – GmbH) pursuant to § 35 Subsection 1 Sentence 1 German Limited Liability Law (Gesetz betreffend die Gesellschaften mit beschränkter Haftung – GmbHG) both in court and out of court and can therefore conclude considerable legal transactions for the company. In practice the managing director is also often released from the prohibition of self-contracting in § 181 German Civil Code (Bürgerliches Gesetzbuch – BGB) so that he/she can even represent the company in business transactions with himself/herself or with third parties which he/she represents. In certain cases the resulting legal ability in an external relationship, i.e. the power of representation of the company, can, however, go beyond the legal admissibility in the internal relationship between the managing director and the company, i.e. the power to manage the business. These situations lead to the question whether carrying out a certain measure is still covered by legal admissibility in the individual case or whether the power to manage the business has already been exceeded.
The ruling by the Higher Regional Court (Oberlandesgericht – OLG) in Naumburg dated January 23, 2014 (Case No. 2 U 57 / 13), shows that the internal distribution of responsibility among the executive bodies can be of crucial importance in this context. The decision gives us the opportunity in this article to summarize the allocation of responsibility between the managing director and the shareholder meeting. The decision by the OLG in Naumburg will then be described and assessed in detail. The article will close with practical advice on how to ensure compliance and mitigate legal risks as a managing director.
I. Summary of the Allocation of Responsibility Between the Managing Director and the Shareholder Meeting
As the managing body of the company the managing director is responsible for the business activities generally without coordination with the shareholder meeting. The general responsibility of the managing director for the business activities can be restricted, however, by the articles of association or by instructions and resolutions by the shareholder meeting, for example.
Furthermore certain tasks always fall under the responsibility of the shareholder meeting and are therefore not part of the managing director’s responsibility. This includes adopting the financial statement and the appropriation of the net distributable profit, requesting payment of contributions and also the appointment and revocation of managing directors and formally approving their actions. An additional responsibility of the shareholder meeting also covers substantiating and terminating the managing director’s employment relationship and all legal transactions in connection with the managing director’s employment relationship.
The decision by the OLG in Naumburg touches an area of potential conflict between shareholder responsibility pursuant to § 46 No. 5 GmbHG and the general responsibility of the managing director for the entire business activities of the company.
II. Decision by the Higher Regional Court in Naumburg
The plaintiff, a GmbH, claimed compensation from its former minority shareholder, who was at the same time also its managing director. The defendant who had the power of sole representation and was released from the restrictions of § 181 BGB had concluded consultation agreements with various companies where he was also a managing director and shareholder. One of these agreements which the court called a project management agreement was for consultation services to analyze and optimize existing business processes. It foresaw a flat-rate fee and a minimum term of several years. The defendant transferred an amount of approx. EURO 3,500 to the commissioned company which the plaintiff requested back as compensation through the court.
The OLG in Naumburg sentenced the defendant to pay the compensation in full on the grounds of the managing director’s failure to observe his duties, § 43 Subsection 2 GmbHG. The court ascertained that the defendant had not applied the required diligence of a prudent businessman when concluding the agreement since he had not adhered to the allocation of responsibility within the company.
The exclusive responsibility of the shareholder meeting for all agreements affecting the managing director’s employment relationship (§ 46 No. 5 GmbHG) generally also covers other legal transactions which are directly connected to the executive position of the managing director. The OLG in Naumburg stated that if a GmbH managing director concludes an agreement for services with himself/herself or a company in which he/she is a shareholder managing director and where the services are typically regulated in a managing director’s employment agreement or at least directly connected in their content to management, said agreement also falls under the original responsibility of the shareholder meeting like the managing director’s employment agreement itself.
These preconditions were fulfilled by the project management agreement. Seen in the cold light of day the agreement namely led to the fact that the defendant received additional payment for services which he had to render anyway based on his position as managing director. A decision by the shareholder meeting was therefore sensible here.
III. Assessment and Practical Advice
In its decision dated January 23, 2014, the OLG in Naumburg ultimately commented appropriately on the allocation of responsibility between the managing director and the shareholder meeting. With respect to the project management agreement it confirmed the prevailing opinion on the additional responsibility in § 46 No. 5 GmbHG.
Another issue which was picked up by the OLG in Naumburg is also relevant: the OLG pointed out that a managing director who is released from the restrictions in § 181 BGB is also subject to the prohibition of self-enrichment and may therefore not conclude any agreements between himself/herself or a company owned by him/her and the company of which he/she is the managing director if said agreements economically harm the company of which he/she is the managing director.
As the above ruling makes clear, managing directors should always keep in mind not only the limits of legal ability but also those of internal admissibility before concluding self-contracting business transactions – i.e. those between the managing directors and the company or between the company and a business undertaking which is represented by the managing directors. In cases of doubt it is recommended from the managing director’s perspective to obtain the consent of the shareholders before concluding a self-contracting business transaction and to document such transactions with care.
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