Managing director in Germany: corporate office and service agreement

A managing director holds a corporate office and is usually also bound by a managing director service agreement. These two legal relationships must be assessed separately.

Corporate office and service agreement are not the same

Appointment as managing director creates the corporate office.

The service agreement regulates matters such as duties, remuneration, contractual term and termination.

Removal from corporate office does not generally terminate the service agreement automatically. Conversely, termination of the service agreement does not necessarily end the corporate appointment immediately.

External and shareholder managing directors

The legal position may depend on whether the managing director holds shares in the company and what influence exists over shareholder resolutions.

An external managing director without shares may be in a different legal and practical position from a controlling shareholder-managing director.

Relevant issues may include:

• shareholding
• blocking rights
• voting arrangements
• actual influence over corporate decisions
• social-security status
• negotiating power during a separation

Review appointment and removal from office

The assessment may include:

• the competent corporate body
• the appointment resolution
• the removal resolution
• special provisions in the articles of association
• commercial-register filings
• representation powers
• management authority
• coupling clauses in the service agreement

The corporate documentation and the contractual documentation should be reviewed together.

Termination of the service agreement

Termination of the managing director service agreement is governed by the contractual terms and the applicable statutory rules.

Relevant questions may include:

• contractual term
• ordinary notice periods
• termination for cause
• contractual exclusion periods
• authority to issue the termination notice
• representation of the company
• continued remuneration
• release from duties
• accrued bonus or profit-participation claims

The removal resolution and the contractual termination measure should not be treated as interchangeable.

Dismissal protection and court jurisdiction

Managing directors cannot automatically rely on the same dismissal-protection rules as employees.

The precise legal position, the timing of proceedings and the circumstances of the individual case may affect the available protection.

The question whether the labour courts or the ordinary civil courts have jurisdiction must also be examined separately.

Review remuneration completely

Managing director remuneration may contain several components:

• fixed remuneration
• bonus
• profit participation
• target agreements
• company car
• occupational pension arrangements
• insurance benefits
• severance provisions
• compensation for post-contractual restrictive covenants

During a separation, it should be determined which claims have already accrued and how variable remuneration is to be calculated.

Liability and D&O insurance

Managing directors may face personal liability for breaches of corporate duties.

The assessment may include:

• statutory and contractual duties
• allocation of responsibilities
• shareholder instructions
• documentation of decisions
• internal and external liability
• limitation periods
• indemnification arrangements
• D&O insurance

D&O insurance does not replace a review of coverage limits, exclusions, deductibles and reporting periods.

Restrictive covenants

Competition restrictions may apply during the corporate appointment and the contractual relationship.

Post-contractual restrictive covenants should be reviewed for:

• duration
• geographical scope
• restricted activities
• affected markets
• exceptions
• contractual consequences
• possible compensation

The practical effect on future professional opportunities should form part of the economic assessment.

Structure separation as one complete package

A consensual separation should coordinate corporate office and service agreement while keeping the two legal relationships distinct.

Typical provisions may concern:

• date of removal from office
• termination date of the service agreement
• continued remuneration
• release from duties
• bonus and profit participation
• severance
• company car and other property
• restrictive covenants
• liability and release
• D&O tail coverage
• references
• internal and external communication
• commercial-register filings

The legal, financial and reputational consequences should be assessed together.