Appointment of members of the management board of a German stock corporation as managing directors of subsidiaries

Introduction

The problem of appointing members of the management board of an AG as managing directors of its subsidiary arises from the fact that it is not possible to exempt members of the management board from the prohibition on concluding transactions of the AG with the member of the management board in his own name (Sec. 181 Alt. 1 German Civil Code (BGB)). This is based on the assumption of the BGH that Sec. 112 sentence 1 German Stock Corporation Act (AktG), according to which in such cases the stock corporation is represented by the supervisory board (Aufsichtsrat) vis-à-vis the member of the man­agement board, makes the exemption from Sec. 181 Alt. 1 BGB impossible for members of the man­agement board.

However, the question then arises as to whether it is the supervisory board that represents the stock corporation in the appointment of management board members as managing directors of the subsidiary. Here, however, the BGH argues that the supervisory board alone is responsible for the appointment of managing directors of subsidiaries pursuant to Sec. 78 para. 1 sentence 1 AktG, as the scope of application of Sec. 112 sentence 1 AktG does not apply in this case.

Thus, under certain circumstances, the dilemma arises that the member of the management board may not represent the stock corporation, as this would constitute a violation of Sec. 181 Alt. 1 BGB, but also that the supervisory board may not represent the stock corporation, as Sec. 112 sentence 1 AktG does not apply. The decision of the BGH has provided a little more clarity in these constellations.

Decision of the BGH

In this specific case, the management board of the stock corporation consisted of three members. The members of the management board were authorized to represent the company together with another member of the management board or an authorized representative (Prokurist). Two members of the management board authorized a third party to represent the stock corporation in the establishment of a subsidiary (GmbH) and the appointment of all three members of the management board as managing directors of the subsidiary.

By interim order of the competent local court (Register Court), the stock corporation was instructed to obtain the approval of the supervisory board for the appointment of the two members of the management board who authorized the third party, including the exemption of the two members of the management board from the restrictions of Sec. 181 Alt. 1 AktG for the individual case.

The Higher Regional Court (OLG), as the appellate court (Beschwerdegericht), overturned the interim order, but only to the extent that the Register Court required not only approval by the supervisory board but also exemption from Sec. 181 Alt. 1 BGB.

The BGH ultimately ruled that the appointment of the managing directors was provisionally ineffective (schwebend unwirksam) due to the violation of Sec. 181 Alt. 1 BGB and that the authorization of a third party does not change this, because the principal of a power of attorney cannot grant more rights to a representative than he himself holds. Furthermore, the BGH ruled that the supervisory board was not responsible for the authorization, as this was the responsibility of the management board as the primary representative body of the stock corporation pursuant to Sec. 78 para. 1 sentence 1 AktG. In addition, there is no case of Sec. 112 sentence 1 AktG, which regulates when the supervisory board represents the stock cor-poration in exceptional cases.

In the case at hand, the third member of the management board, together with an authorized representative (Prokurist), was able to approve the appointment of the two remaining members of the management board as managing directors of the subsidiary.

Practical advice

There are basically three constellations when appointing members of the management board of a stock corporation as managing directors of a subsidiary:

1. Appointment of individual members of the management board

Provided that a sufficient number of members of the management board and, if applicable, authorized representatives (Prokuristen) are not affected by Sec. 181 Alt. 1 BGB, they can appoint individual mem­bers of the management board as managing directors of the subsidiary by resolution. It is important to ensure that the members of the management board to be appointed do not participate in the resolution. Another possibility is to appoint a member of the management board as sole representative for this specific transaction pursuant to Sec. 78 para. 4 AktG, but of course a member who is not to become managing director of the subsidiary.

2. Appointment of all members of the management board

If all members of the management board are also to be appointed as managing directors of the sub­sidiary, a resolution shall be passed on each individual appointment. The member of the management board whose appointment is being decided on may not participate in the passing of the respective resolution.

3. Sole member of the management board

In the case of a sole member of the management board, a violation of the prohibition of self-contracting cannot be avoided in principle. There is still no decision by the BGH on how to deal with such con­stellations. In our view, it is advisable in such cases to consider either the temporary appointment of a deputy member of the management board or representation of the stock corporation by the supervisory board.

Conclusion

For the time being, the decision provides practical guidance as to how members of the management board can be appointed as managing directors of their subsidiaries in the future without violating the prohibition on self-contracting. It is also now clear that the resolutions that are provisionally ineffective (schwebend unwirksam) cannot be approved by the supervisory board. However, it cannot be concluded from the decision whether members of the management board can be exempted in future from the restrictions of Sec. 181 Alt. 1 BGB in this specific case.