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When an employee becomes MD: managing the formalities of an internal promotion in Germany

Written by
Kliemt.HR Lawyers, the first port of call in employment law for top-class and future-proof advice.
This article discusses the relationship between the conclusion of the managing director's service contract and the appointment of the managing director as the legal representative of the company, and whether a chronological order between the two must or should be observed.

In economically turbulent times such as the Corona crisis, it is not uncommon for a ‘revolving door’ to occur at the management level of companies. When shareholders of a GmbH have found the new managing director within the ranks of their workforce, things usually cannot happen fast enough: the new managing director should immediately take control, implement operational decisions and direct the company towards, or keep it on the road to success. Sometimes the legally ‘clean’ implementation of the transformation from employee to managing director lags behind the actual implementation of the change of position.

Legal representative and service provider: the ‘separation principle’

In the case of managing directors of a GmbH, it should always be noted that the conclusion of a managing director’s service contract (contractual level) and the appointment as managing director of the GmbH (corporate level) must be strictly separated from each other: this is the so-called ‘separation principle’. The managing director’s service contract is a service agreement which regulates the contractual relationship between the managing director and the GmbH, such as remuneration, company car, holiday, post-contractual non-competition clause, etc. The appointment of a managing director, on the other hand, is a corporate act which establishes the rights and obligations of the managing director and his or her power of representation. The corporate relationship and the contractual relationship coexist legally independently. This means the appointing act alone does not automatically establish a managing director’s service contract (this was confirmed most recently by the Federal Labour Court in a ruling dated 25 October 2007 – 6 AZR 1045/06).

In practice, the appointment as managing director and the conclusion of the managing director’s service contract are usually combined by concluding a service contract (in writing) immediately after the formal appointment of the managing director. The preamble of the contract then refers to the respective appointment. Synchronising the conclusion of the contract and the appointment is usually in the interest of both parties, as the managing director is usually not willing to work without a service contract (and the remuneration components it sets out) in place; furthermore, the company will not be willing to conclude a managing director’s service contract if this is not accompanied by the respective appointment of the managing director.

Is it possible to conclude an effective director’s service contract before the appointment as managing director?

As mentioned above, the corporate act of appointment does not in itself constitute the conclusion of a director’s service contract. However, can there be circumstances in which a managing director’s service contract has already been concluded and from which the new managing director can then derive his or her rights (e.g. to higher remuneration, entitlement to a company car, etc.) even before s/he was appointed as managing director?

It follows from the ‘separation principle’ described above that the conclusion of a managing director’s service contract is, in principle, possible even before the appointment as managing director. This can be particularly relevant in the case of employees who are ‘promoted’ to become managing directors and who, de facto, take up the reins immediately, before they are formally appointed as managing directors. The circumstances in this case speak at least in favour of an implied (i.e. tacit) managing director’s service contract. The existing employment contract has no legal relevance here, as it does not ‘turn into’ a managing director’s service contract, but basically remains in existence alongside the managing director’s service relationship. If the ‘managing director’ is already exercising his or her functions as a legal representative of the company in legal transactions before s/he was appointed to this position by the competent body, s/he is then operating as a so-called ‘de facto managing director’ and has the same obligations and liability risks as a duly appointed managing director.

Practical advice

On the one hand, the ‘separation principle’ has the effect that the appointment of a managing director of a GmbH does not automatically result in the conclusion of a managing director’s service contract. On the other hand, however, it is possible, especially when employees are ‘promoted’ to be managing directors, that a managing director’s service contract could be concluded (at least by implication) before the official appointment of a managing director. The new managing director could therefore potentially derive claims against the company from this newly concluded service contract, even if its terms had not yet been agreed in writing between the parties at that time. Legal conflicts are therefore inevitable. Companies can avoid disputes by directly linking the appointment of a managing director to the conclusion of the contract, especially if a managing director is appointed from among their own staff.

Alexander Steven
Kliemt.HR Lawyers