Representation of the monistic SE

A managing director is not authorized to represent a monistic European Company (SE) in a legal transaction with himself. This authorization is reserved to the administrative board. This was clarified by the German Federal Court of Justice.

Facts

The decision of the German Federal Court of Justice (BGH) is based on the following facts: The managing director (meanwhile deceased) of a monistic European Company (SE) had sole power of representation and was also authorized to conclude legal transactions with himself or as a representative of third parties pursuant to his appointment.

The managing director, acting on both sides, i.e. in his own name and in the name of the SE, concluded a notarized “donation agreement in the event of death”, whereby he donated four works of art to the SE. Shortly before his death, however, he declared his withdrawal from the agreement based on all possible legal grounds. The SE subsequently requested a court to confirm that the agreement was valid.

The decision of the BGH dated 17 September 2024 – ref. number: X ZR 39/23

The request was unsuccessful. According to the BGH the SE was not effectively represented when the agreement was concluded, and it is therefore invalid.

In principle, an SE constituted in a one-tier/monistic system is represented by the managing directors pursuant to Section 41 (1) of the German SE Implementation Act (SEAG). However, according to Section 41 (5) SEAG, the administrative board is entitled to represent the company vis-a-vis its managing directors.

This even applies with regard to legal transactions through which the SE merely obtains a legal advantage within the meaning of Section 107 of the German Civil Code (BGB). The considerations according to which the prohibition of self-dealing pursuant to Section 181 BGB does not apply in such cases according to the established case law of the BGH cannot be transferred to Section 41 (5) SEAG. This is because the protective purpose of Section 41 (5) SEAG, which is modeled on Section 112 of the German Stock Corporation Act (AktG), is broader. Section 41 (5) SEAG covers every unilateral or multilateral legal transaction, regardless of whether the interests of the company are at risk in the individual case. The intention is to prevent conflicts of interest and ensure unbiased, proper representation of the SE. Section 112 AktG and Section 41 (5) SEAG contain an independent representation provision that assigns the power of representation for certain legal transactions exclusively to the supervisory board or the administrative board. These transactions are not defined by their content, but solely by the persons involved. Moreover, the law does not provide for any exemptions from these restrictions. As a result, the BGH was able to leave open the question of whether the donation agreement in the present case was merely legally advantageous for the SE within the meaning of Section 107 BGB.

Practical note

The decision by the BGH provides legal clarity on the question of who may represent a monistic SE in transactions with a managing director. Irrespective of the content of the transaction, this is always solely the administrative board. The decision is also important for stock corporations because it is the first time that the BGH has taken a clear position on the comparable provision of Section 112 AktG and supports the prevailing opinion that the stock corporation must always be represented by the supervisory board in all contracts with members of its management board, even if the same are only legally advantageous for the company.

The management of an SE can be organized in either a monistic or a dualistic manner. The present case concerned a monistic SE. In contrast to a German stock corporation under the AktG with a management board that manages the company and a supervisory board that monitors and controls the management board, in a monistic SE the administrative board performs both management and supervisory functions. The administrative board appoints managing directors who represent the monistic SE externally and take care of day-to-day business. However, the management function remains with the administrative board, which also has the power to issue instructions to the managing directors. The monistic system has the advantage, particularly for medium-sized companies, that it is not necessary to divide the management of the company into two bodies (management board and supervisory board) and thus can help to save cost. However, whether this advantage in individual cases may lead to a decision in favor of a company in the legal form of an SE, depends also on other legal and tax factors. When choosing the legal form, it is therefore always advisable to obtain detailed legal and tax advice in advance.