Tie-in clauses in manager employment contracts

In the case of managing directors of German limited companies, one has to distinguish between board membership on the one hand and the employment relationship on the other hand. This distinction becomes particularly relevant once the managing director is dismissed. The managing director of a limited company may be dismissed from his or her post at any time and without giving reason. However, this does not automatically mean the end of the employment contract. Rather, the claims of the managing director arising from his/her employment contract (in particular the claim to payment of the agreed remuneration) are essentially unaffected by a dismissal. This can lead to the (unsatisfactory) result that the managing director is no longer in office, but must be paid.

Drafting practitioners tackle this challenge by using so-called “tie-in” clauses, according to which the employment contract is linked to the board membership of the particular managing director. The aim is to enable the company, when dismissing the managing director, to also terminate his/her employment contract. Some years ago, the Federal Court of Justice decided (for the board of a public limited company) that a tie-in clause can be effective if it has been individually negotiated between the managing director and the company (judgment of 29 May 1989, II ZR 220/88). However, the Federal Court of Justice reasoned that the tie-in clause must be interpreted restrictively, in such a way that companies could not use tie-in clauses in order to circumvent the statutory minimum notice periods, i.e. the employment contract shall not end before such applicable statutory minimum notice period expires. This means that the employment contract does not end immediately after the announcement of the dismissal but only after the expiry of the minimum notice period stipulated by law.

In its recent decision the Higher Regional Court of Karlsruhe (judgment of 25 October 2016, 8 U 122/15) has now ruled that a tie-in clause is void if it has been pre-formulated by the company and unilaterally imposed on the managing director, rather than being individually negotiated. In the opinion of the Higher Regional Court of Karlsruhe, such a tie-in clause is deemed to be a general term and condition within the meaning of the general rules on standard terms and conditions which is considered null and void because it violates the statutory minimum notice periods. The Higher Regional Court of Karlsruhe rejected to apply the restrictive interpretation of the Federal Court of Justice to such pre-formulated tie-in clauses and pointed out that such an interpretation would run contrary to the purpose of the general rules on standard terms and conditions, which is to protect the contractual partner from unfair clauses, and would therefore not be permissible. As a result, the tie-in clause does not apply in these cases and cannot deemed to be replaced by a more ‘manager-friendly” clause.

Conclusion

Manager employment contracts have to be designed and negotiated with great care. If the aim is to enable the company to simultaneously terminate the board-membership as well as the employment contract of the managing director, pre-formulated terms do not suffice; rather, individually negotiated stipulations are necessary. This is particularly relevant for fixed-term employment contracts and for employment contracts which provide for long notice periods. In these cases, the discontinuation of the tie-in clause could mean that the employment contract continues despite the managing director being dismissed, which would mean that the he/she may have to be paid and employed (or exempted) for a longer period of time. That is good news for the manager, but not so for the company.

Dr. Barbara Mayer
Dr. Oliver Wasmeier