A member of the board of executive directors at a German stock corporation (AG) cannot simply appoint themselves to the position of managing director at a wholly owned subsidiary, no questions asked. That was the verdict of Germany’s highest civil court, the Bundesgerichtshof (BGH) (case ref.: II ZB 6/22).
It is necessary when creating structures within a corporate group to comply with legal and regulatory frameworks. While there are times when it may make sense to consolidate powers and responsibilities, this can also be a source of legal headaches, explains Michael Rainer, managing partner and point of contact for company law at MTR Legal Rechtsanwälte.
It is common in corporate groups for executive board members to also serve as managing directors of subsidiaries. However, from the perspective of company law, the issue of competency surrounding the power to appoint managing directors is subject to ongoing debate, much of which has centered on whether a board member of an AG can assign themselves the role of managing director at a wholly owned subsidiary. Fortunately, the Bundesgerichtshof’s judgment from January 17, 2023, has brought some clarity to this issue, with the Court ruling that a board member of an AG cannot simply appoint themselves to the position of managing director at a subsidiary, no questions asked. Their authority to act as a representative is limited in this regard, and this limitation cannot be circumvented via an authorized representative. Having said that, the BGH noted that the appointment of the managing director is also not a matter for the supervisory board.
Two of the three board members at the AG in this case had designated an authorized representative, who then established a subsidiary GmbH – a type of German limited liability company – and appointed the three board members of the AG as managing directors of the GmbH. The registry court subsequently rejected the application for registration of the company in the commercial register. The appointment of the managing directors was found wanting here, as it amounted to contracting with oneself within the meaning of Section 181 of the German Civil Code (BGB). The registry court also required that the appointment be approved by the supervisory board.
Frankfurt’s higher regional court – the Oberlandesgericht (OLG) Frankfurt – also considered there to be a conflict of interest in the appointment of the board members, with the result that the case ultimately came before the BGH. The Karlsruhe judges confirmed that the appointment of the managing directors was provisionally invalid and needed to be approved, meaning that the impediment to registering the GmbH in the commercial register could be removed. In a point of departure from the finding of the registry court, however, the BGH held that approving the appointment of managing directors does not fall within the remit of the supervisory board. The Court went on to clarify that the approval could be granted, for example, by the third executive board member at the AG who was not involved in appointing the authorized representative, e.g., in conjunction with a “Prokurist”, a person vested with general commercial power of representation.
The team of company law experts at MTR Legal Rechtsanwälte can provide counsel.