The “Director Contract” in a GmbH
A director is appointed. But what does that actually mean?
If the company is a German GmbH, this generally refers to the position of the Geschäftsführer (managing director). If this is the case, a management contract is required. This in turn is subject to the provisions of the service contract. Our article provides a comprehensive overview of the key components and legal framework of the managing director contract.
Legal background
In Germany, the position of the managing director is primarily governed by the German Limited Liability Companies Act (GmbHG). A managing director is appointed, dismissed by the shareholders’ meeting and is responsible for the management of the company. He is subject to the shareholders’ right to issue instructions. It is possible for the managing director to be a shareholder at the same time, but not necessary. In the latter case, this is referred to as third-party management. Initially, the appointment as managing director only establishes the relationship as an executive body, which is supplemented by the managing director agreement to include the relationship under the law of obligations and must contain provisions relating to employment law.
It should be noted that, according to the Federal Court of Justice, the managing director of a GmbH is not considered an employee. According to the Federal Labor Court, a contractual relationship under labor law only exists in exceptional cases, such as strong dependence and being bound by instructions.
The main features of the director's contract should be based on the following
Remuneration and additional benefits
The managing director’s remuneration usually consists of a fixed basic salary and variable components. Variable remuneration can include profit-sharing or performance-related bonuses. Fringe benefits such as a company car and pension scheme must also be regulated in detail.
It should also be noted that the Continued Remuneration Act (EFZG) and the Federal Leave Act (BUrlG) only apply to employees and therefore do not affect the managing director. For this reason, a managing director contract should continue to include provisions on paid vacation, continued remuneration in the event of illness and the assumption of health insurance costs by the company.
Power of representation in the managing director contract
First of all, a regulation is required as to whether the managing director may act alone or whether contracts are to be signed jointly with another managing director. Furthermore, it must be determined whether the managing director may also conclude contracts with himself or related parties in accordance with Section 181 BGB . It is advantageous for the company to structure the powers of representation and management in the contract as flexibly as possible in order to be able to adapt to changing company conditions.
Confidentiality and non-competition clauses
Confidentiality clauses are intended to ensure the protection of sensitive company information. Non-compete clauses can restrict the managing director during employment and after its termination. In the case of post-contractual non-compete clauses, it should be noted that they must be compensated by a waiting allowance and must be reasonable in terms of their duration and geographical scope.
Liability and insurance
According to Section 43 Para. 1 GmbHG, the managing director must exercise the diligence of a prudent businessman. Typical breaches of duty include wrong decisions regarding investments, disregard of laws or internal guidelines and inadequate monitoring of company processes. In the event of insolvency, the managing director may be liable in accordance with Section 15b InsO (insolvency code) for payments made after the company became insolvent or overindebted. If there is a breach of duty, the managing director is personally liable to the company for any losses incurred. To protect the managing director, a D&O insurance policy (Directors and Officers) can be taken out to cover personal liability risks.
The managing director’s liability risk can be limited by a clause that guarantees the managing director the right to regular discharge. The shareholders give their consent to the actions of the managing director. If damage occurs as a result, the managing director can argue that the shareholders could have recognized the potential breach of duty.
Social security obligations of the managing director
The social security aspects of a director’s contract differ in part from the regulations for ordinary employees. Managing directors are exempt from social security contributions if they have a significant influence on the company, e.g. as a majority shareholder. Third-party managing directors and minority shareholder managing directors, on the other hand, are subject to social security contributions, i.e. statutory pension, unemployment, health and long-term care insurance.
Termination of the management contract
Finally, the contract should contain provisions on termination of the employment relationship, including notice periods and, if desired, a possible severance payment. The reasons for extraordinary termination should also be specified. If necessary, a linking clause can also become an effective part of the contract, whereby the termination of the employment contract is linked to the loss of the position on the executive body. In principle, a distinction must be made between the executive position of the managing director and his employment relationship. The employment relationship initially remains unaffected by a dismissal, meaning that the managing director is still entitled to remuneration and bonuses. However, there is an exception if a condition subsequent has been agreed in the contract that links the end of the employment relationship to the revocation of the position of managing director. In this case, the loss of the managing director position also leads to the end of the employment contract.
Conclusion
A managing director agreement should always be carefully drafted in order to meet both the legal requirements and the individual needs and interests of both parties. By drafting the contract precisely, we can avoid potential conflicts and create the basis for successful management.
