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Are board members allowed to appoint themselves as managing directors? This question had to be decided by the German Federal Court of Justice (“BGH”) at the beginning of the year.
The case is quite significant in many companies’ practice: Three board members of a German stock corporation (“AG”) were to become managing directors of a subsidiary GmbH. To that end, two of these three board members authorized a third board member to establish companies on behalf of the AG and to appoint their managing directors.
The register court, however, was skeptic: For the managing directors’ proper appointment it requested an approval of the resolution appointing the managing directors by the AG’s supervisory board. Furthermore, the register court demanded evidence that all board members had been exempt from the self-dealing prohibition for the specific case. The proceedings went all the way to the BGH. According to its decision, the BGH now links the effectiveness of the managing directors’ appointment to other requirements than those of the registry court. But first things first:
Self-appointment: What is the conflict of interest?
If a person is appointed as a company’s managing director, this is called “managing director’s appointment”. It is executed by the shareholders’ meeting’s resolution unless otherwise provided for by the articles of association. In case of a self-appointment, the board member as the parent AG’s legal representative appoints himself as the subsidiary GmbH’s management. On the one hand, when making the declaration of appointment, he acts on behalf of the parent AG as sole shareholder of the GmbH in formation. On the other hand, however, the board member also acts on his own behalf when accepting the office. Thus, the board member represents two interests which are not necessarily congruent.
This own (legal) preferential treatment is a conflict of interest the law intends to avoid with Art. 181 Case 1 BGB (German Civil Code). This is not changed by the board member interposing a third party.
Even though such approach is not uncommon in group structures, it often results in a (pending) invalidity of the appointment and thus creates legal uncertainty. Therefore, it is all the more important to clarify by whom the AG needs to be represented in order to avoid a conflict of interest and whether approval can be granted in the event of a breach. These questions arise irrespective of the parent company’s legal form.
Self-appointment as self-dealing: How has the BGH solved the conflict?
The BGH considers the self-appointment as managing director to be a case of self-dealing pursuant to Art. 181 BGB. When voting on their own appointment, the two board members involved in granting the power of attorney and the resolution were subject to the restrictions pursuant to Art. 181 Case 1 BGB. A board member cannot circumvent the existing conflict of interest in his person by appointing a representative voting on his behalf. This renders the resolution on the appointment provisionally invalid. In case of the “third” board member, on the other hand, there is no self-dealing as he has neither been involved in granting the power of attorney nor in the resolution. Thus, he has been effectively appointed as managing director.
A solution is provided by the parent AG’s articles of incorporation. In the case at hand, the articles provided that the parent AG could be represented either by two board members acting jointly or by one board member together with an authorized signatory (Prokurist). Thus, the appointment could be approved by the effectively appointed board member and one authorized signatory.
However, the BGH assesses the supervisory board’s role different than the register court. The supervisory board lacks authority to approve, as Art. 112 AktG (German Stock Corporation Act) is not applicable. However, it remains unclear whether the approval could be exceptionally declared by the supervisory board if the management board is not able to do so as it does not have sufficient members not being subject to a conflict of interest.
BGH decision on self-dealing: What does it mean in practice?
It is advisable to counteract any possible grounds for a managing director appointment’s invalidity right from the outset. In a first step, it is important to consider possible conflicts of interest already when appointing the various corporate bodies. A forward-looking planning is recommended in order to avoid considerable additional expenses and legal uncertainty afterwards.
The exact procedure could be as follows: The board members mutually appoint each other as managing directors or grant separate powers of attorney for that purpose. It is important that the other party is not involved, not even through a third party. The case of an insufficient number of board members for such approach has not been decided by the BGH.
Furthermore, it is advisable to obtain approval from the supervisory board. The supervisory board could also appoint a deputy board member. Approving an appointment subsequently turns out to be difficult. The BGH, anyways, rejects the supervisory board’s competence for approval.
Restrictions in self-appointment: Is an exemption possible?
The decision does not provide any indications as to how an exemption from Art. 181 BGB can be granted. However, it is to be assumed that an exemption must already be included in the articles of association or can be granted by the supervisory board which in turn requires authorization to do so in the articles of association. If necessary, adjustments must therefore be made to the company's own articles of association.
Thanks for contributing to the article to Eden Tahmasian, research associate in Baker Tilly’s M&A/General Commercial and Corporate practice group.