October 07, 2019 Issue: October 2019

GERMANY - Terminating the Managing Director of a German GmbH: How to Do it Legally Sound

By: André Zimmermann

The status of a managing director (Geschäftsführer) of a German limited liability company (GmbH) is determined (i) by the appointment as managing director and, thus, the corporate office as a legal representative of the company; and (ii) by the underlying service agreement. If a company intends to separate from a managing director, both the appointment and the service agreement must be terminated. It’s important to realize that these are two different issues that must be addressed when parting ways with a managing director.

Termination of Appointment as Managing Director

The termination of the appointment is achieved by a shareholders’ resolution revoking the appointment of the managing director. It becomes effective with the notice to the managing director that the appointment was revoked, or later in accordance with the resolution.

Unless the articles of association of the company provide otherwise, the revocation can be made at any time and without reason. It is, however, necessary to comply with the articles’ regulations on the decision-taking process of the shareholders.

The revocation should be registered with the Commercial Register without undue delay. While this registration is not necessary for the validity of the revocation, it is important because otherwise the managing director can still enter into obligations on behalf of the company with third parties who are not aware of the revocation.

Termination of the Service Agreement

Managing directors are generally not considered to be employees under German law and, therefore, not within the scope of most regulations of German employment law. So, for example, managing directors do not enjoy dismissal protection under the Dismissal Protection Act (“DPA”) (Kündigungsschutzgesetz – KSchG). Their service agreements can be terminated subject to the contractually agreed or statutory notice periods without any specific reason required.

If the service agreement of the managing director is concluded for a specific term without the explicit reservation that notice can be given during its term, then mere notice is not sufficient to terminate the contract. Instead, notice can only be given for good cause. Absence such cause, the contract will end only with the expiry of its term.

If the service agreement is concluded for an indefinite period or if the company has reserved the right in to give notice of termination during an agreed specific term, the agreement may be terminated by giving notice with the notice period agreed. In the absence of an agreed notice period, the statutory notice periods for employees apply. Depending on the length of service, they range between 4 weeks to the 15th or the end of a calendar month and 7 months to the end of a calendar month.

No Dismissal Protection

If the managing director’s service agreement is concluded with the company where he is appointed managing director, the DPA providing for the main protection against dismissal for employees does not apply. Consequently, it is not necessary to have a justifying reason for terminating a managing director. Notice can be given without any reason at all. Only some formal requirements must be met. In particular, it is necessary that the notice is based on a shareholders’ resolution and that the notice letter is signed by a person who is either the proper legal representative of the shareholder(s) or is authorized to give notice in the shareholders’ resolution.

The respective shareholder resolution should be attached to the notice letter. Both the resolution and the notice letter must be delivered in the original form. If the managing director’s service agreement is concluded with a company where she/he is not appointed managing director, the DPA likely applies. If so, the notice must be justified by certain reasons provided for in the Act. In practice, in such scenarios company and managing director will negotiate the terms of the exit.

Other Aspects to Check

Often additional aspects must be considered when terminating the managing director. These include a release from the duty to provide services (garden leave), or, if agreed in the service agreement, bonus entitlements and a post-contractual non-compete covenant. The company may generally waive a post-contractual non-compete, but will usually have to comply with a notice period of three to twelve months before the waiver becomes effective which means that the company will need to pay the compensation agreed for the non-compete for this period.

André Zimmermann

Orrick, Herrington & Sutcliffe LLP