The managing director of a German Limited Liability Company (‘Gesellschaft mit beschränkter Haftung’ – GmbH) manages the company. This includes pursuing the company’s business objectives, representing the company in and out of court, and fulfilling the GmbH’s statutory obligations, such as the company’s bookkeeping and financial reporting, the filing of the annual accounts and the payment of taxes. For this reason, the selection of the managing director and their appointment or dismissal constitutes a significant business decision. In this blog article, we provide an overview of the legal framework and the procedure.

1. The appointment of the managing director

A managing director of a GmbH represents the company externally and manages it internally. The procedure for appointing a managing director is governed by the GmbHG (Limited Liability Companies Act) but may be modified in many respects by the GmbH’s articles of association (‘Gesellschaftsvertrag’).

Who is authorised to appoint the managing director?

The appointment of the managing director is the responsibility of the shareholders’ meeting. This is decided by a resolution passed by the shareholders by a simple majority, in accordance with the statutory provisions. The GmbH’s articles of association may contain provisions deviating from this regarding the appointment process, for example concerning the requirement for a qualified majority or the form of the appointment. It is therefore worth reviewing the articles of association before appointing a new managing director.

Formal requirements for appointment

The appointment of a new managing director takes effect immediately upon their acceptance of the resolution (‘Beschluss’) appointing them. Nevertheless, the new managing director must be entered in the Commercial Register (‘Handelsregister). This entry has only a declaratory effect.  As part of the registration process, the new managing director must make a statutory declaration before a notary, confirming that they have no previous convictions for certain criminal offences (e.g. fraud, delaying insolvency proceedings). It is therefore essential to involve a notary in the appointment of the new managing director. The necessary certification can now be obtained not only in person at a notary’s office but also online.

The internal relationship – the managing director’s employment contract

In addition to the formal appointment of the managing director, an employment contract (‘Geschäftsführer-Anstellungsvertrag’) for the managing director is usually also drawn up. This sets out the framework under employment law for the managing director’s employment relationship and thus the internal relationship between the GmbH and the managing director. Among other things, this contract specifies the managing director’s salary, working hours, scope of duties and other rights and obligations.

2. Dismissal of the managing director – legal framework and procedure

The dismissal of a managing director terminates the managing director’s authority to represent the GmbH on behalf of the shareholders.

Formalities for the dismissal 

Under section 38 of the German Limited Liability Companies Act (GmbHG), managing directors may be removed from office at any time by a resolution of the shareholders’ meeting. The removal must be recorded in the minutes. As with the appointment of a managing director, the removal must also be entered in the Commercial Register, which must again be performed through a notary. It is important to note that the dismissal takes effect in relation to the managing director immediately upon receipt of the notice; however, it only takes effect in relation to third parties once it has been entered in the Commercial Register or when they become aware of the dismissal by other means. For this reason, the entry of the dismissal in the Commercial Register should be arranged immediately after the resolution is passed.

Grounds for dismissal

In principle, a managing director may be removed from office at any time. A distinction is made between ordinary removal (known as ‘discretionary removal’) and removal for good cause:

• Removal without good cause: The shareholders may remove a managing director from office at any time and, if they so wish, with immediate effect. The situation is different only if the articles of association contain contrary provisions. In such a case, however, claims for damages may arise in favour of the dismissed managing director if, for example, he or she is entitled to compensation for the premature dismissal.

• Dismissal for good cause: A managing director may also be removed from office for good cause at any time. This results in the immediate termination of their appointment and is therefore similar to extraordinary dismissal under employment law. Removal from office for good cause may, for example, be considered in the event of serious misconduct on the part of the managing director or a permanent inability to perform their duties. Dismissal for good cause requires that the resolution be passed by a qualified majority at the shareholders’ meeting. The shareholders must set out the grounds for the dismissal and be able to provide substantiated evidence.

Don’t forget: the managing director’s employment contract

When dismissing managing directors, it is important not to overlook the internal relationship – that is, the concurrent employment contract. This must also be terminated upon dismissal, or the contract must provide for automatic termination in the event of dismissal.

3. Typical pitfalls in the appointment and dismissal of managing directors

The appointment and dismissal of a managing director take place within a highly formalised process. There are typical issues here that require particular attention:

• Inadequate resolution or incorrect majority: A common problem when appointing and removing managing directors is the adoption of a flawed resolution by the shareholders’ meeting. If, for example, the required majority is not met or other requirements of the GmbH’s articles of association are disregarded, the resolution could be flawed and therefore open to challenge.

• Failure to register changes in the Commercial Register: Another common mistake in practice is the failure to register the appointment or removal of a managing director in the Commercial Register. Without this registration, there is a risk that the appointment or removal will have no effect vis-à-vis third parties.

Conclusion: The legal significance of the appointment and dismissal of the managing director

The appointment and removal of the managing director of a GmbH are key decisions that must be taken in accordance with the relevant provisions and regulations set out in the articles of association. Errors cannot only jeopardise the validity of these measures, but may also lead to liability risks and claims for damages.