Rights and obligations of a managing director

Management

The most important duty of the managing director is to manage the company. This means safeguarding the financial interests of a third party in a fiduciary capacity and ensuring that business operations run smoothly, efficiently and on a profit-making basis. His duties include the following:
  • the obligation to cooperate with other managing directors
  • the obligation to monitor the activities of other managing directors
  • a duty of organisation, i.e. organising the company’s operations in such a way that there is an adequate overview of its business and financial situation at all times
The scope of management duties may be restricted by the articles of incorporation or by resolution of the shareholders. If the authority of the managing director is restricted in this way, he must undertake to abide by these limitations. If he exceeds his authority, he may find himself liable to pay the company compensation.

Representation

The managing director represents the company both judicially and extra-judicially. The principle of joint representation generally applies. Thus if more than one managing director is appointed, they must generally represent the company together. However, alternative provisions may be stipulated in the articles of incorporation. For instance, it may be decided that a managing director is allowed to represent the company alone, or that two managing directors or a managing director and an authorised signatory may do so together.
As far as the company’s external dealings are concerned, the scope of the managing director’s power of representation may be restricted neither by the articles of incorporation nor by resolution of the shareholders. Thus the authority of the managing director, which may be restricted, and his power of representation, which may not, are not necessarily congruent with one another.
If, despite having no authority to do so because of the restrictions imposed upon him, the managing director concludes a contract with a third party, the following consequences shall ensue:
  • A valid contract shall be effected between the company and the third party, because the company was properly represented by the managing director, whose power of representation is unrestricted as far as the company’s external dealings are concerned.
  • The managing director, who should not have concluded the contract with the third party because of his restricted authority, has exceeded that authority and will therefore be liable to compensate the company
The GmbHG reform introduced a ruling for situations where the company has no managing director (Absence of management, Art. 35 para. 1 sent. 2 GmbHG). If declarations of intent are to be submitted to the company or documents served on it, the company shall be represented by the shareholders. The business address entered in the Commercial Register may also be used.

Fiduciary duty

The managing director must exercise rigorous fiduciary duties vis-à-vis the company; he owes the company his loyalty. This fiduciary duty includes:
  • the duty of confidentiality, i.e. he must not disclose confidential matters or company secrets to third parties.
  • the duty of non-competition, i.e. the managing director must not transact any business in his own or any other name in the same business sector as that in which the company operates during his period of service, unless the memorandum of association provides otherwise.

Obligation to submit accounts and keep records, Reporting commitment

The managing director must undertake to keep proper records and prepare annual financial statements. He does not have to meet this obligation in person, and therefore requires no special expertise in accounting or record keeping. He must, however, employ qualified specialist personnel and oversee their activities.

Duties if half of the share capital is lost, and in the case of excessive debts / illiquidity

If the company uses up half of its share capital, the managing director must notify the shareholders accordingly. The notice of loss is intended to protect the company, the shareholders and the company’s creditors. The shareholders must consult with one another on the consequences of the loss, so that they can, for instance, resolve to increase the company’s capital. In the event of illiquidity and/or over-indebtedness, the managing director is obliged to file for insolvency without delay, but no later than 3 weeks after the occurrence of illiquidity or no later than 6 weeks after the occurrence of over-indebtedness.

Commercial Register obligations

The managing director must make the necessary entries in the Commercial Register. He must, for instance, register amendments to the memorandum of association, increases in share capital or changes of managing director or shareholder.

Disclosure

The managing director must ensure that the documents relating to the annual financial statements are submitted to the operator of the electronic Federal Gazette in electronic form.