The appointment of a member of the management board of a parent company as managing director of a subsidiary a German limited liability company (Gesellschaft mit beschränkter Haftung, “GmbH”) is very common in practice. However, this approach, which is often related to tax group regulations, can involve legal challenges.In a recent decision (Federal Court of Justice (Bundesgerichtshof, “BGH”) decision of 17.01.2023, ref.: II ZB 6/22), which specifically addressed the appointment of board members of a German stock corporation (Aktiengesellschaft, “AG”) as managing directors of a subsidiary, the BGH provided important clarifications on this issue and thus created more legal certainty.
Limitation of the power of representation under Section 181 German Civil Code
The BGH first clarified that Section 181 (1) of the German Civil Code (Bürgerliches Gesetzbuch, “BGB”) limits the power of representation of a member of the management board when making decisions regarding their own appointment as managing director. According to Section 181 (1) BGB, legal transactions of a representative in which they are the other party are, in principle, provisionally invalid (schwebend unwirksam). The purpose of this provision is to avoid possible conflicts of interest when a person represents different and possibly contradictory interests at the same time. In light of this purpose, it is irrelevant whether the board member is directly involved in the decision-making process or appoints a sub-representative. This is because a power of attorney can never grant more legal authority than the principal has personally. In the case decided by the BGH, a representative authorized by the board members had established a GmbH as a wholly owned subsidiary and, among other things, appointed the authorizing board members as managing directors of said GmbH. In the absence of an exemption from Section 181 (1) BGB, this appointment was provisionally invalid as self-dealing and had to be approved in order to be valid.
The role of the supervisory board
The party responsible for approval on the parent company's side in such a case has been a subject of controversy for a long time. Some have argued that section 112 sentence 1 of the German Stock Corporation Act (AktG) should apply. According to this provision, the supervisory board represents the company vis-à-vis the members of the management board. However, the BGH clearly rejected the general applicability of Section 112 AktG in such constellations. The provision only governs the representation of the AG (and not the subsidiary) vis-à-vis the management board. Considering the provision’s purpose (avoidance of conflicts of interest), applying this provision in the present case is not warranted: Even if there was a conflict of interest with regards to the appointment of a managing director between the AG (parent company) and the member of the management board, the parent company in this case merely acted as the sole shareholder of the subsidiary. Section 181 (1) BGB already provides sufficient protection for the sole shareholder.
In general, the approval of the managing director’s appointment in such cases can be made by a board member who is not affected by Section 181 (1) BGB, taking into account the parent company's rules on representation. For example, a board member who was not involved in the decision-making process for the managing director’s appointment and who has sole power of representation may be considered. The approval of the supervisory board is only required if there is no board member who would not be affected by a conflict of interest.
Consequences for practice
This decision of the BGH provides valuable guidance for companies and highlights the importance of complying with statutory requirements when appointing board members as managing directors of subsidiaries.
When appointing board members as managing directors of subsidiaries, certain points must be considered:
The prohibition of self-dealing under Section 181 (1) BGB generally applies. An AG can counter this by exempting the management board from Section 181 BGB within the framework of its right of self-organisation. The supervisory board would be responsible for this. In addition to a general exemption, the members of the management board who are involved in the decision-making process and are to be appointed as managing directors could also be specifically exempted from Section 181 (1) BGB for the pending legal transactions.
In the absence of a general or specific exemption from Section 181 BGB, the resolution of a member of the management board on their own appointment as managing director of a subsidiary is considered provisionally invalid.
With regard to the approval required for the resolution to be valid, a further distinction must be made: If the management board of the parent company has other board members authorised to represent the company who are not affected by the conflict of interest, they may approve the appointment of the managing director. Otherwise, the approval must be given by the supervisory board.