Limited liability company: Responsibility of the shareholders' meeting for the remuneration of the managing directors

The shareholders' meeting of a limited liability company (GmbH) is competent for the conclusion of agreements regulating the activities of managing directors and their remuneration. This applies in particular to the managing director’s service agreement. As the Federal Court of Justice (BGH) confirmed in a recent decision, this also applies if the GmbH concludes an agreement with a third party that makes employees available to the GmbH for managing activities.

Background

The managing director of the defendant GmbH had concluded an agreement with the plaintiff, also a GmbH, according to which the defendant provided the plaintiff with an employee who was to act as (further) managing director of the plaintiff. The agreement also included a provision on the remuneration for these managing director activities. On the part of the plaintiff, its managing director had concluded the agreement; the plaintiff's shareholders' meeting had not participated in the conclusion of the agreement. In its legal action, the plaintiff asserted repayment of the remuneration paid to the defendant, since the underlying agreement was invalid and the payment had therefore been made without legal reason.

The judgment of the Federal Court of Justice (BGH) of May 14, 2019, Case No. II ZR 299/17

In its decision, the Federal Court of Justice (BGH) dealt with two questions of the law on limited liability companies relevant to practice: (1) the competence of the shareholders' meeting for the conclusion of agreements on the employment and remuneration of managing directors and (2) the capacity of the GmbH to take legal action after the dismissal of its managing director.

The Federal Court of Justice (BGH) ruled that the agreement concluded by the plaintiff's managing director was invalid. The shareholders' meeting of the GmbH was exclusively competent for the conclusion of an agreement on the remuneration of a (further) managing director. A resolution of the plaintiff's shareholders' meeting was required. These principles also apply to the agreement with a third party (here: the defendant GmbH), which concerns the transfer of employees for the purpose of assuming managing activities for a GmbH.

According to Section 46 para. 5 of the German Limited Liability Companies Act (GmbHG), the shareholders' meeting is competent for the appointment, dismissal and discharge of managing directors. According to the settled case-law of the Federal Court of Justice (BGH) (see most recent judgment of July 3, 2018, Case No. II ZR 452/17), this means that the competence for the conclusion of the managing director’s service agreement is a so-called annex competence. This also applies to any other agreement on the remuneration of managing directors' activities. The managing director of a GmbH is not authorized to conclude such a remuneration agreement. This is not covered by his power of representation according to Section 35 para. 1 GmbHG. Rather, only the shareholders' meeting is competent.

In its judgment, the Federal Court of Justice (BGH) also dealt with the capacity of a GmbH (namely the plaintiff) to take legal action whose sole managing director had been dismissed according to the defendant's assertion prior to the filing of the legal action. Without a managing director, however, the plaintiff would not be able to sue. On the other hand, the plaintiff and the Higher Regional Court considered that it was not decisive whether an effective dismissal order had actually been issued, which the plaintiff contested, since the (allegedly) dismissed managing director was still registered as managing director in the commercial register.

The Federal Court of Justice (BGH) decided that the court had to verify the capacity to take legal action ex officio at any stage of the procedure, not only in the first instance, but also in the appeal instance. Whether the dismissal of the managing director is effective or not, does not dependent on the entry in the commercial register. Rather, the dismissal becomes effective  by notice of the resolution of the shareholders' meeting to the managing director. The subsequent entry in the commercial register is merely declaratory. The plaintiff could also not invoke the protection of public faith according to Section 15 of the German Commercial Code (HGB); this provision only served to protect third parties. However, the plaintiff, whose representation was at issue, was not a third party. The plaintiff could therefore not, in principle, rely on the publicity of the commercial register in matters which concerned the company itself. The Federal Court of Justice (BGH) referred the case back to the Higher Regional Court to examine the plaintiff's capacity to take legal action.

Note

In continuation of its established case law, the BGH confirms (1.) the position of the shareholders' meeting as the supreme decision-making body as stipulated in the German Limited Liability Companies Act and (2.) the purely declaratory significance of the entry of the managing director in the commercial register.

The shareholders' meeting is competent for the conclusion of an agreement on the reimbursement of expenses for external employees who are made available to a GmbH as (further) managing directors. This is appropriate in order to ensure that the appointment of the managing director as an organ representing the limited liability company is in line with his employment on the basis of a service agreement.