Pitfalls in connection with the appointment of a board member of a German stock corporation as managing director of a subsidiary

The appointment of a board member of a German stock corporation as managing director of one of its subsidiaries can be a self-dealing to which the restrictions of Section 181 alt. 1 of the German Civil Code ("BGB") apply. This is illustrated by a decision of the Federal Court of Justice (Bundesgerichtshof, "BGH").

Facts

A stock corporation (Aktiengesellschaft, "AG") established a subsidiary company in the legal form of a limited liability company ("GmbH"). The AG was represented in the founding act by a representative authorized by two of the three members of the AG's board. The representative appointed the three members of the AG's board as managing directors of the GmbH upon the foundation of the GmbH.

The registry court considered this to be a violation of the prohibition of self-dealing pursuant to Section 181 Alt. 1 BGB and refused the entry of the GmbH in the commercial register. According to the court both, an approval issued by the supervisory board of the AG as well as a release of the AG’s board members from the restrictions imposed by Sec. 181 alt. 1 BGB, was required. The Higher Regional Court of Frankfurt (Oberlandesgericht, "OLG") confirmed the approval issued by the AG’s supervisory board as requirement. The OLG decided that Section 112 of the German Stock Corporation Act ("AktG") is not applicable in the present case, because the appointment of a board member of the AG as managing director of the subsidiary GmbH is an act of the GmbH and not of the AG. However, the OLG saw a violation of Section 181 Alt. 1 BGB, which – at least - applies accordingly. The two members of the management board of the AG who granted the power of attorney to the representative regarding the establishment of the GmbH acted in a double role in the present case (as board members on behalf of the AG and as managing directors of the GmbH for themselves). The fact that the resolution appointing the managing directors was not passed by the board members in person but by a representative authorized by the same does not change this result, because the  board members can never assign more rights to a sub-agent than they are entitled to.

The decision of the BGH, dated 17 January 2023 - II ZB 6/22

The appeal submitted to the BGH was successful and the BGH referred the matter back to the registry court. The BGH confirmed the decision of the OLG insofar as there was an obstacle to registration. However, according to the BGH, the OLG's decision was incorrect with regard to one fact: the supervisory board of the AG was not competent for issuing an approval in this case.

The BGH confirmed that the resolution on the appointment of the two board members of the AG  as managing directors of the subsidiary GmbH was provisionally invalid due to a violation of Section 181 alt. 1 BGB. However, each member of the AG's management board who is authorized to represent the company and whose power of representation is not restricted by Section 181 BGB could grant an approval in accordance with Section 177 para. 1 BGB. A deviation from this provision is only possible insofar as the legal representation has been transferred to other bodies of the respective company. However, Section 112 AktG, according to which the supervisory board is entitled to represent the AG towards the management board of the AG, is not applicable here. In the present case the third member of the AG's management board (who did not issue the power of attorney in favour of the representative) could therefore represent the AG - in line with the existing provisions of representation of the AG - jointly with another member of the board not excluded by Section 181 BGB or jointly with an authorized representative (“Prokurist”). The OLG did not review whether this option was feasible in the present case or not.

Practical advice

The decision concerns the important case in practice, where a member of the parent company's management board shall be appointed managing director of a subsidiary company. In such case, the restrictions of Section 181 alt. 1 BGB have to be observed. In order to avoid (provisional) invalidity of the resolution regarding the appointment of a managing director, the appointment or authorization in this respect should always be executed by other board members in each case (e.g. the board members A and B appoint board member C as managing director of the subsidiary). Another option is to comprehensively exempt the board members from the restrictions of Section 181 BGB. However, at times this is not desired due to the prevention of conflicts of interest intended by the prohibition of self-dealing. In any case, the requirements of case law should already be taken into account when preparing the resolutions for appointing managing directors. Otherwise there will be a risk of delay with regard to the respective entry in the commercial register.