Immediate termination of a managing director employment contract in the event of compliance violations

The employment contract of a managing director of a limited liability company can be terminated with immediate effect in the event of violations of internal compliance regulations.

Background

The plaintiff is the former managing director of the defendant, a limited liability company (GmbH) which is part of a group of companies. The group-wide compliance guidelines inter alia stipulated that commission payments that exceed a certain amount could only be agreed in writing, in compliance with a four-eyes principle and with certain approvals.

The plaintiff did not comply with these requirements as he (solely and without obtaining the necessary approvals) agreed on a commission payment for a business partner of the defendant that significantly exceeded the amounts provided for in the compliance guidelines. When the defendant became aware of this, it immediately dismissed the plaintiff as managing director and terminated the plaintiff’s employment contract without notice for good cause as well (after obtaining the necessary shareholders' resolution). The plaintiff opposed to this with the argument that the extraordinary termination of his employment contract was invalid and sued the defendant for continued payment of his managing director's salary.

The decision of the Higher Regional Court Hamm of May 29, 2019 (ref.no. 8 U 146/18)

The Higher Regional Court Hamm decided in favor of the defendant and ruled that the termination of the plaintiff's employment contract was valid. From the court’s point of view, the violation of the compliance provisions per se, i.e. irrespective of the damage suffered, constituted such a serious breach of duty by the plaintiff that it justified the immediate termination of the employment contract.

Practical advice: Compliance as an important core area of managing director activity

"Compliance", i.e. the observance of legal regulations as well as the measures taken in advance to ensure the lawful conduct of company employees and to actively prevent violations of the law, is an important issue equally in large, medium-sized and small enterprises. The creation of a compliance system is much more than just a corporate guideline or an opportunity to advertise on the market with a positive and compliant corporate image. As the judgment of the Higher Regional Court Hamm has shown, a compliance system for the company is an effective safeguard against misconduct of the employees and managing directors. In case of violations against compliance guidelines, the managing director can not only be dismissed as a corporate body (which is possible at any time, if not explicitly regulated otherwise in the articles of association), but also the employment relationship can be terminated with immediate effect and without prior warning. For this reason alone, the importance of a compliance system should not be underestimated.

The question whether a company establishes a compliance system is not at the discretion of its shareholders and managing directors. Instead, in particular in public limited companies and GmbHs, the so-called legality obligation can constitute an obligation of the managing directors and executive committees to a compliance system (depending upon size, kind and organization of the enterprise). Omission of can even be penalty-reinforced (Section 130 Administrative Offences Act (OWiG)).

Accordingly, shareholders and managing directors of companies of any size should equally actively think about the question of "compliance" and examine whether and how a compliance system can be implemented in their company. If a compliance system is established, it should take into account the particularities of the company concerned (e.g. active activity in countries where corruption is widespread). Finally, in order to avoid their own liability, executive and supervisory bodies (e.g. supervisory boards or advisory boards), are obliged to observe and monitor compliance with the compliance regulations (e.g. by random checks of an established four-eye principle).