Definition and significance of the withdrawal of management authority
Die Withdrawal of management authority is a term in German corporate law that refers to the judicial or shareholder resolution-based revocation or limitation of the authority previously granted to a managing director to conduct the affairs of a company. This process primarily affects limited liability companies (GmbH), but can also be relevant for general partnerships (OHG), limited partnerships (KG), and, rarely, stock corporations (AG). The goal of the withdrawal is to protect the company from damaging conduct or serious breaches of duty by one or more managing directors.
Legal basis for the withdrawal of management authority
Statutory regulation in the GmbH
According to § 35 GmbHG (Limited Liability Companies Act), one or more managing directors have the authority of representation and internal management power. The legal possibility of withdrawing these powers arises in particular from § 38 GmbHG, whereby a distinction must be made between the appointment and dismissal of a managing director on the one hand, and the further withdrawal of management authority on the other.
Internal and external management authority
- Internal management authority: Pertains to the managing director’s ability to conduct the company’s affairs within the internal relationship with the shareholders.
- External (representative) authority: Refers to the legal representation of the company to third parties externally.
The withdrawal primarily relates to the internal management authority, as representative authority towards third parties can generally only be restricted by judicial decision or by an amendment to the commercial register.
Requirements and grounds for withdrawal
Important reason
As a rule, the withdrawal of management authority requires the existence of an important reason. Case law and academic literature further require that it would be unreasonable for the managing director to remain in office.Typical important reasons include:
- Serious breaches of duty (for example, acting on one’s own authority, disregarding shareholder resolutions)
- Inability to properly manage the company (e.g., permanent illness, personal unreliability)
- Breach of trust towards the company (e.g., embezzlement, misappropriation)
- Collaboration with competitors or violation of internal company non-competition covenants
Other reasons
Another reason may be the prevention of harm or the safeguarding of company assets. Here, even economic misjudgments or lasting disagreements with the other shareholders may count as reasons, as long as they adversely affect the company’s interests.
Procedure for withdrawing management authority
Resolution of the shareholders’ meeting
The shareholders’ meeting has the right to withdraw the management authority of one or more managing directors by majority resolution, unless this is excluded or restricted by the articles of association (§ 37 para. 1 GmbHG). In urgent exceptional cases, a judicial decision can also be obtained.Required majority: In the absence of differing provisions, a simple majority of the votes cast is sufficient in practice.
Judicial proceedings
If the shareholders refuse to take the necessary measures despite the existence of an important reason, any shareholder may, under § 39 GmbHG, file an action with the competent court for the withdrawal of management authority. The court examines whether there is an important reason and can order appropriate measures.
Interim legal protection
Interim legal protection may also be decisive here, for example, by means of a preliminary injunction when immediate action is necessary to protect the company from harm.
Legal consequences of withdrawing management authority
The legal consequences of withdrawal differ between internal and external relationships:
- In the internal relationship: The managing director loses the authority to manage the company independently. He or she is subordinate to the shareholders and must follow their instructions.
- In the external relationship: The withdrawal only takes effect vis-à-vis third parties after registration in the commercial register (§ 15 HGB). Until then, the authority of representation usually remains but can also be restricted by revoking powers of attorney and informing contractual partners.
Relation to dismissal
The withdrawal of management authority is not the same as the complete dismissal as managing director, which also requires an important reason according to § 38 para. 2 GmbHG. Often, the withdrawal of authority takes place first, which may serve as a preliminary stage for later dismissal.
Withdrawal of management authority in other company forms
General partnership (OHG) and limited partnership (KG)
Withdrawal of management authority is also possible in an OHG and KG (§ 117 para. 3 HGB). Here, this right belongs to the other shareholders if an important reason exists. Judicial proceedings can also be initiated if there is disagreement among the shareholders.
Stock corporation (AG)
In an AG, management authority is generally reserved for the executive board members, whose appointment or removal is regulated differently (§ 84 AktG). Withdrawal of management authority in the strict sense scarcely exists; instead, dismissal by the supervisory board is the usual approach.
Distinction: withdrawal, removal, and suspension
- Withdrawal of management authority: Restriction or removal of the authority to manage the company internally.
- Removal from office: Complete termination of the office as managing director; regularly according to § 38 GmbHG.
- Suspension: Temporary suspension of authority while maintaining board membership, usually as an interim measure during ongoing investigations or court proceedings.
Consequences for the affected managing director
With the withdrawal, the managing director loses certain rights and duties but initially retains his or her board position. This may entail liability consequences, both internally and externally. The affected person can take legal action against unwarranted withdrawal, for example by filing an action for annulment or declaratory judgment.
Conclusion
Die Withdrawal of management authority is an important instrument in corporate law to ensure effective control and safeguard the company’s interests against managing directors who act in breach of duty or are incapable. The statutory and contractual frameworks are complex and require careful examination of the facts and legal situation, especially with regard to procedural steps, reasons, and effectiveness vis-à-vis third parties. Different types of companies must always be considered separately to meet specific requirements and legal consequences.
Frequently asked questions
Under what conditions can management authority be withdrawn?
The withdrawal of management authority regularly requires an important reason that makes further exercise of management by the affected managing director unreasonable for the company. Such reasons may include serious breaches of duty, inability to manage properly, significant conflicts of interest, loss of shareholders’ trust, or criminal acts detrimental to the company. The specific requirements derive from the articles of association and, where no differing provisions exist, from statutory regulations, especially § 38 GmbHG for the GmbH. The withdrawal must generally occur by shareholder resolution, complying with formal requirements (e.g., convening of the shareholders’ meeting, majority requirements) as well as the right to be heard for the affected managing director.
What formal steps must be observed when withdrawing management authority?
The withdrawal of management authority generally requires a formal shareholders’ resolution. The resolution must be duly adopted at a shareholders’ meeting that has been convened in accordance with the legal and statutory provisions. The agenda must explicitly list the item ‘withdrawal of management authority.’ The affected managing director must be invited to the meeting and heard but does not have voting rights where his or her own removal is concerned. The specific procedure and majorities may be regulated differently in the articles of association. Subsequently, the resolution should be documented in writing, and necessary entries (such as dismissal as managing director in the commercial register) must be made.
What are the legal consequences of the withdrawal of management authority?
Upon effective withdrawal of management authority, the affected managing director loses the power to represent and manage the company externally. Managing directors entered in the commercial register generally remain effective externally until the change is registered; however, legal transactions performed in the name of the company must generally be recognized by the company so long as there is no knowledge of the withdrawal (§ 15 HGB). Internally, it must be clarified whether, in addition to the withdrawal of authority, the board membership (dismissal as managing director) and/or the employment relationship has also ended – this must be considered separately.
Can management authority be withdrawn only partially?
Yes, under corporate law principles, management authority can also be limited to certain areas if provided for in the articles of association or by a corresponding resolution. Partial withdrawal is conceivable for specific business areas or transactions (e.g., no conclusion of real estate transactions). The extent of the restriction and its effectiveness internally and externally depend primarily on the respective company form and specific contractual agreements. A restriction becomes legally effective especially through a change in administrative allocation or an explicit shareholders’ resolution.
Does the affected managing director have legal protection against withdrawal of authority?
Against an unjustified withdrawal of management authority, the affected managing director has various legal remedies. On the one hand, he or she may have the formal and substantive legality of the shareholders’ resolution reviewed in a legal action for annulment, with the period for action and admissibility depending on the articles of association and the company form. Additionally, interim legal protection in the form of a preliminary injunction can, under certain circumstances, be applied for to prevent irreversible disadvantages in the case of an obviously unlawful withdrawal. The managing director can also assert claims for damages or continued payment of remuneration (if the service contract continues) against the company.
What are the differences between withdrawal of management authority and dismissal as managing director?
Management authority concerns the actual management and representation of the company, while the board position as managing director relates to the legal status as an organ of the company. A withdrawal can mean that the managing director is still formally listed in the commercial register and legally holds the office, but internally has no authority to lead. Complete dismissal as managing director, on the other hand, also ends the board position and must be registered with the commercial register (§ 39 GmbHG). In practice, both measures are often combined, but legally they must be strictly distinguished, as they have different consequences regarding rights, obligations, and liability.
