Responsibility of the Shareholders' Assembly for Director’s Remuneration

Does the shareholders' assembly hold responsibility for the conclusion of an agreement between the corporation when a third party is involved? The Federal Court of Justice answered this question May 14, 2019 (re II ZR 299/17).

Salary of director decided by shareholders

Director of one Company to Serve as Director of Second Company

The director of D GmbH had made an agreement with the suing S GmbH, according to which the  D GmbH provided the S GmbH with an employee who was to act as an additional  director of S GmbH. The subject of this agreement was also the remuneration for this director’s activities. The S GmbH’s director had concluded the agreement. S GmbH’s shareholders did not participate in negotiating the contract. s

Shareholders’ Responsibility for Directors

In its decision, the BGH dealt with two practice-relevant issues of GmbH law:

  1. the responsibility of the shareholders' meeting for agreements on the employment and remuneration of directors
    and
  2. the legal capacity of the GmbH after removal of its director.

The BGH ruled that the agreement concluded by D GmbH’s director regarding the S GmbH was ineffective. The shareholders' meeting of a GmbH is exclusively responsible to conclude an agreement on the remuneration of any director. A shareholder’s resolution is necessary for this. Nothing else applies to the agreement with a third party (here: D GmbH), which has the assignment of employees for the purpose of taking over managerial activities for a GmbH.

According to §46 no. 5 GmbHG, the shareholders’ meeting is responsible for the appointment, dismissal, and discharge as well as remuneration of directors. According to the ruling case-law of the Federal Court of Justice, this is the so-called annex competence of the company owners. In other words, the director of a company represents the company in daily business but in internal matters, the shareholders have the say.

Legal Capacity of a Limited Liability Company without a Director

In this judgment, BGH also dealt with the legal capacity of a limited liability company (namely S GmbH). whose sole director had been dismissed before bringing the matter to court. Without a director, the S GmbH was not able to act. The S GmbH and a lower court, on the other hand, contended that it did not matter. whether or not the dismissal was effective or not. Since the allegedly dismissed director was in any case still registered in the commercial registry.

BGH held, the effective date of the dismissal of the director is not dependent on the entry in the commercial register. Rather, the dismissal would take effect already upon announcement of the decision of the shareholders' meeting to the director. The subsequent entry in the commercial register was merely declaratory.

The S GmbH’s further argument that they were arguing with good faith did not bring any merits. They could not rely on the good faith protection pursuant to §15 HGB because this provision is only for the protection of third parties. Third parties may fully rely on the contents of the commercial registry – unless they know it better. However, the issue is about the S GmbH itself.

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Director’s Protection against Incorrect Deletion in Commercial Registry after his Dismissal

Immediate Termination of a Director’s Employment Contract for Compliance Violations