Who can hold the Role of Managing Director?
A managing director has to be a natural person with full legal capacity over the age of 18. They can be male or female and there is no requirement that they need to be German. They should however, be able to work in Germany and be able to avail of appropriate visas. Furthermore, there is no specific qualification required for the role of managing director. However, they have to be able to work in the profession and not have any ban preventing them from working in the industry or disqualified from holding a directorship. Should the appointed managing director not be able to work in the industry, and shareholders knowingly appoint them to the role, the shareholders can be held liable for the losses incurred.
A company can also appoint more than one, as some companies require more depending on their size. These directors should however make sure that they are working in tandem as coherent leadership is important for success. The interests of the company should come first when it comes to planning and implementing strategies.
The Legal Status of a Managing Director
Managing directors are key to providing leadership within a company. Without a reliable and competent leader, an enterprise may face serious difficulties. The legal status of a managing director is an unusual one as they are not recognised as “employees” under employment law, yet in some cases they are under social security law. If their shareholding within the company is less than 50 percent then they must be part of the statutory health insurance scheme.
The lack of employee status under employment law has several important points. In concrete terms it means the following:
- No Automatic Entitlement to Unfair Dismissal Protection: managing directors are not simply provided with the same statutory employment law protection granted to employees in this field.
- Statutory Minimum Holiday: similarly, managing directors are not automatically entitled to statutory minimum paid holiday time.
- No automatic right to Maternity Leave: The protection granted by the Maternity Protection Act in Germany does not automatically extend to managing directors as they are not viewed as employees.
However, these issues should be resolved in the service agreement negotiated between the company and the managing director. As well as these issues other factors such as confidentiality agreements, pension rights and exclusion clauses (from working with competition) can be inserted. With the right legal assistance in your corner from experienced employment law professionals negotiating a fair service agreement is more than achievable. Having reliable legal counsel means that you can rest assured when it comes to your entitlements as a managing director.
Obligation: Compliance with the Law
As the managing director of the company, you are held responsible for ensuring that the company is compliant with company law in Germany. It is vital to ensure that there is a structure in place to prevent breaches of the law within the company. Ensuring that the right managers are in place in different parts of the company structure will help on this front. As well as the company itself, the managing director should be aware that their responsibility further extends to subsidiaries of the company. Once again, this is where a good management structure, putting steps in place to ensure that the employees are aware of legal elements in their field and having steps in place to monitor output is vital.
In order to ensure that this takes place it is vital that your company has legal advise and assistance from experienced lawyers. Our employment law team provide in-house advice to companies while we also provide advice on corporate law in Germany.
Obligation: Financial Management of the Company
The managing director is responsible for overseeing the financial running of the company. Having competent financial assistance is vital to ensure that the financial transactions are all above board. Although there may be a financial manager overseeing the finances, the managing director is ultimately responsible for ensuring that the bookkeeping records of the company are accurate. Ensuring that the appropriate taxes are paid and that shareholders receive their entitlements in the correct manner is an important aspect of the role. One element of this responsibility is ensuring that the annual financial statements are submitted on time and in the right manner.
It is in the financial running of the company that the threat of accusations of white-collar crime offences can emerge. Should a managing director be found guilty of crimes such as embezzlement, fraud or incorrect filing they can face losing their role, being barred from future directorships and in some cases even prison sentences.
Duty Towards Company as a Managing Director
Managing directors are expected to perform their role in the manner of a prudent businessperson. This is laid out in law by § 43 Limited Liability Companies Act. In terms of making business decisions and entering contracts the managing director is expected to properly assess the risk involved and act accordingly. In decisions about the running of the company, managing directors have considerable power. However, they are expected to take advice and counsel onboard especially when it comes to important business decisions. They should put the interests of the company first, ahead of their own interests if they conflict. Poor decision making that results in financial losses for the company can mean having to answer to the shareholders.
As s managing director there is an obligation to not disclose important information concerning to company to rival enterprises. Disclosure of business secrets can result in criminal charges depending on the circumstances. The managing director also has to ensure that the company does not breach German competition law. Practices that are considered to be antitrust in nature can lead to heavy financial sanctions for the company.
The full duties of the managing director should be outlined in the Articles of Association and the service agreement. These documents will act alongside their other legal obligations.
One of the roles of the managing director is to coordinate with the shareholders. A company is not the private fiefdom of a managing director and they have a responsibility to act in the interests of the shareholders. This obligation does not extend to actions that would be in breach of the law. Otherwise, the managing director(s) should have then goals of the shareholders in mind when carrying out the running of the company. It is also their responsibility to arrange shareholders’ meetings when appropriate. Shareholders have the right to information about the running of the company and to monitor the performance of the managing director. How this interaction with the shareholders is conducted can be of vital importance to the successful running of the company.
Managing directors can be appointed at general meetings by the shareholders or in some cases by a body designated to do so. This body will act in the interests of the shareholders. Under § 6(5) Limited Liability Companies Act, in some cases, shareholders can be held liable for appointing a managing director who should not hold the role.
Termination of a Service Agreement
As stated above, managing directors are not seen as employees in the traditional sense. Therefore, they are not provided with the protections available to employees under the Protection Against Unfair Dismissals Act. However, elements of such an Act can be negotiated within the service agreement agreed between the company and the managing director. Alternatively, they can be placed within the Articles of Association as to how the company operates.
Contracts can be for a defined period of time or for an undefined period of time. Most jobs in Germany are for an unspecified length of time. If the service agreement is for a defined period of time, and a notice period is not specified within the contract, then the contract will end at the expiry of the term. For contracts of indefinite duration, if there is no stated notice period within the service agreement then the statutory notice periods apply.
Shareholders have the right to dismiss managing directors, and as the Protection Against Unfair Dismissals Act does not automatically apply, no reasoning is required. However, there has to be proof that it is the desire of the shareholders. This can be in the form of a written statement signed by the representative of the shareholders. Should a director be found to have acted fraudulently, have been involved with embezzlement or other white collar-crimes, they can face disqualification as a director.
Does a Managing Director Need to Live in Germany?
A managing director in Germany does not need to be German and they do not need to have their primary residence in Germany. In fact the only thing that needs to be shown is that the managing director is not banned from visiting Germany. However, should the managing director not have their main residence in Germany the company could face questions relating to tax issues. If the company is not operated from inside Germany then it faces questions as to whether it is really a German company at all.
Steps should be taken by the managing director to ensure that the company is in fact primarily run and organised from Germany for it to remain a German company. This may mean that the appointment of someone within Germany to oversee the German section of operations may be prudent. However, this will depend on the circumstances surrounding the company.
Does a Managing Director in Germany Need to Speak German?
We have had inquiries from clients in important roles seeking the answer to this question. Some have been offered to opportunity to manage companies in Germany based on their skill as a manager and not for their German language skills. The answer to this question is no, German language skills are not a requirement to be a manager in Germany. However, it is of course beneficial to have German language skills for living in Germany and for operating a business in the country but it is not a requirement. It should be noted that if you do not have German language skills, or if your German is not at a high professional standard upon taking up the managing director role, it is advisable to get documents translated and have help from a translator readily available. Limited language skills is not a valid excuse in legal issues.