The managing director of a company occupies a particular position in every respect in Germany. A reliable and skilled manager is known to be the best guarantee for a company’s long-term success. However, the managing director contract must be carefully drafted and analysed to ensure effective collaboration. Like any service contract in Germany, the managing director contract can be freely drafted. However, the contracting parties should carefully consider which aspects are fundamental to them and how they wish to set these out in the contract. This applies in particular regarding the rights and obligations of your managing director, in the definition of which managing director liability plays a significant role.
In this context, the German law firm Schlun & Elseven Rechtsanwälte offers skilled and committed legal advice. Our lawyers for German employment and corporate law will be happy to support you—even beyond the drafting of the managing director’s contract. Whether you have corporate, contract, employment, or tax law issues, our highly qualified legal team can assist you with all your company’s concerns. Contact us today to benefit from our expertise.
Legal Basis and Structure of the Managing Director Contract
The managing director contract is legally a service contract in Germany under Section 611 of the German Civil Code (BGB). It constitutes the managing director’s employment contract and includes their remuneration and provisions on sickness, holidays, and retirement benefits. In addition, the managing director’s area of responsibility should be clearly defined, including areas of responsibility such as finance, sales, and production. Representation rights should also be precisely regulated. Unless otherwise stipulated, the law in Germany provides for joint representation, whereby if there are several managing directors, only all of them are authorised to represent the company together and none of them alone, Section 35 para. 2 of the German Act on Limited Liability Companies (GmbHG), unless the company’s articles of association provide otherwise.
A notable feature of the managing director contract is that the managing director is not an employee. In particular, it must be evaluated whether the managing director is subject to social security contributions. The health insurance obligation should also be handled differently depending on the structure. The categorisation of not being an employee in Germany also affects the statutory protection against dismissal, the statutory minimum leave and the entitlement to maternity leave. These aspects make it all the more important to draft and review the managing director contract carefully. Other benefits, such as providing a company car or using IT equipment, can be contractually regulated so that the managing director can receive comparable entitlements.
Other factors, such as confidentiality agreements, pension entitlements and exclusion clauses (from working with competitors), can also be included. With reliable legal advice, both parties – the company and the managing director – can be sure that their interests will be protected and that a fair employment contract will be negotiated.
Representation Agreements | Transactions Requiring Approval
The powers of representation granted to the managing director are of essential importance. They are among the core tasks of a managing director. Therefore, careful provisions are made in the management contract regarding the authorisation to represent the company – especially if more than one managing director is appointed. In this way, it can be ensured that smooth cooperation between the managing directors is guaranteed, and conflicts of interest are avoided.
Transactions requiring approval, which should be included in the managing director contract, generally require the approval of all managing directors or a contractually agreed majority to be legally valid. Examples of transactions requiring approval are
- contracts and investments with a value above a certain amount,
- licence agreements,
- mergers and acquisitions,
- changes to the corporate structure and
- loan agreements.
Because of this, it is advisable to commission an experienced lawyer to draw up or review the managing director agreement. This will ensure that the agreement considers your company’s individual requirements and needs.
Managing Director Contract in Relation to the Company’s Articles of Association
Although the two legal documents – the management contract and the articles of association – should be considered separately, they are also closely linked and can influence each other in Germany. The articles of association set out the basic rules for the organisation and operation of the company and take precedence over the managing director agreement. It follows that the rights and obligations of the managing director provided for in the articles of association must be considered when drafting the managing director contract. In the event of conflicts between the managing director contract and the articles of association, the provisions of the articles of association apply.
The relationship between the two legal documents must also be observed in the event of subsequent amendments. If changes are made to the articles of association by a shareholders’ meeting, these may impact the managing director agreement and, in turn, require corresponding amendments.
The decision in favour of an internal or external managing director is individual and, therefore, cannot be assessed across the board for every company. A shareholder managing director is a person who acts as the managing director of the company and owns shares in the company. On the other hand, an external managing director is hired from outside the company to take over the position of managing director.
The advantage of the internal managing director constellation is that they are directly involved in the company’s success and have a solid connection to the company. As a result, a shareholder managing director can often demonstrate a high level of motivation and identification with the company’s goals. They can also contribute their entrepreneurial experience and expertise to drive the company forward. On the other hand, the role of a shareholder managing director can also present challenges. In particular, separating entrepreneurial and operational responsibility can be difficult, as the managing director must consider both their own interests as a shareholder and the company’s interests. Conflicts can arise between the shareholders and the managing director, especially regarding strategic decisions or the distribution of profits.
External managing directors often bring a broad range of experience and expertise gained through their work for various companies and industries. They have a more objective view of the company and its challenges and can bring new perspectives. However, a potential disadvantage of an external managing director may be that they may not have the same level of personal commitment and identification with the company as a shareholder managing director. In addition, the cost of hiring an external managing director can be higher, as a higher salary or additional remuneration components often need to be negotiated.
Ultimately, the choice between a shareholder managing director and an external managing director depends on your company’s individual circumstances and objectives. Our lawyers will be happy to support you in considering the legal aspects of the decision and defining the relevant provisions in the managing director agreement.
Practice Group: German Corporate Law
Practice Group:
German Corporate Law
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