Why are some managers ineffective

When employment contracts with managing directors are ineffective

If a new managing director is to be appointed, the shareholders' meeting is responsible for concluding the employment contract. This competence can be shifted to the supervisory board - but what happens if the chairman of the supervisory board rushes forward and concludes the contract on his own? The Federal Court of Justice (BGH) recently dealt with this and made findings that are of fundamental importance for managing directors.

Harald Naumann * was appointed managing director of the pharmaceutical company Medicacent GmbH * in 1999 and received an employment contract. Ten years later, the company is taken over by Medicacorp GmbH *. There, too, Naumann hires as managing director and receives a new, fixed-term employment contract, which is concluded for Medicacorp GmbH by the chairman of the supervisory board "for the shareholder".

Three years later there is a falling out between Naumann and the new partner of Medicacorp GmbH. In an extraordinary shareholders' meeting, Naumann is dismissed and the employment contract is terminated without notice or, alternatively, properly. The slain managing director defends himself in court. He wants to establish that the termination is ineffective, that the employment relationship continues and that outstanding salaries are to be paid.

After the regional court dismissed the complaint and the higher regional court then overturned the first instance judgment, the appeal of Medicacorp GmbH before the BGH was successful. The following points can be derived from the judgment of 08/20/2019 (II ZR 121/16):

1.) An employment contract with a GmbH managing director is ineffective if the GmbH is not effectively represented. It is true that the competence to conclude a contract can be transferred from the shareholders' meeting to a supervisory board by statute. However, its chairman (as with the supervisory board of a stock corporation) can only execute a supervisory board resolution on the basis of a special authorization and thereby represent the supervisory board.

2.) An employment contract that is concluded by the chairman of the supervisory board before the supervisory board has passed a corresponding resolution is therefore ineffective. Because representation vis-à-vis the managing director is incumbent on the supervisory board as a whole as a body that forms its will by means of a resolution. This formation of will is missing if instead one member acts alone.

3.) This does not change anything if the chairman of the supervisory board concludes the employment contract “for the shareholder”. For it to be effective, on the one hand a shareholders' resolution would have had to be present and, on the other hand, the shareholders would have to be effectively represented - which was not the case here.

4.) The consequence: the ineffective employment contract is to be treated for the duration of the managing director's activity as if it had come into effect and there is a claim for remuneration for this time - because Naumann had actually worked with the knowledge of the chairman of the supervisory board. However, the employment relationship can be terminated for the future at any time without an important reason. It doesn’t change anything that Naumann has been managing director for several years and could have trusted the existence of the employment contract.

5.) Something else can only apply if the managing director and the GmbH have considered and carried out the ineffective employment contract as the basis of their legal relationship for years and the GmbH has confirmed its managing director in his trust in the legal validity of the contract through further actions. However, if there is a dispute about the validity of the contract three years after the conclusion of the ineffective contract and the new contract is already limited in time, no trust will be created.

Naumann should therefore have paid attention to the conclusion of the contract and obtained evidence that the Supervisory Board had passed a resolution before its chairman signed the employment contract with him. Because this was not done, Naumann is no longer entitled to any salary for the period following the termination.

* Names and company names changed by the editorial team.