If a limited liability company under German law (GmbH) has several managing directors, they have joint authority to conduct the company’s business. This means that all managing directors have to decide on management measures jointly and unanimously. In practice, this is mostly neither particularly reasonable nor feasible. Therefore, it may be a good idea that either the Articles of Association, or the shareholders by way of a shareholder resolution or the managing directors themselves draw up bylaws.
Why does a German GmbH need bylaws?
The bylaws comprise a business organization plan which assigns certain areas of responsibility (divisions) to the individual managers who will manage their division on their own responsibility and authority. These divisions may include: bookkeeping, tax, finance, legal, compliance, human resources, production, sales or procurement.
In addition, the bylaws typically contain regulations relating to
- the internal organization of the management consisting of several members (e.g. by appointing a chairman or a spokesman of the management);
- the procedure for management meetings and resolutions;
- information and consultation of the managers among each other; and
- business requiring the approval by the shareholders’ meeting.
Regarding the allocation of responsibilities, management measures may be distinguished by their importance, e.g. by stipulating that transactions in the ordinary course of business may be handled by one managing director alone. The joint management of all managing directors will, in this case, continue to apply to all extraordinary business transactions.
All managing directors still have a supervisory role
Even if an area of responsibility has been assigned to one managing director, all other managing directors still remain obliged to supervise this managing director. As a result, the managing directors must also provide for an appropriate information system, which is tailored to the type and size of the company and enables them to supervise the other managing directors.
All managing directors continue to have the power and obligation to manage the company’s management as a whole (e.g. corporate policies and organizational structure) and those areas of responsibility that have not been assigned to any of the managing directors.
Allocation of responsibilities helps reduce liability risk
For the managing directors, the key advantages of an allocation of responsibilities consist in clear accountabilities and reducing their liability risk to the GmbH.
Because, according to Section 43 of the German Act governing Limited Liability Companies (GmbH-Gesetz), a managing director is liable to the GmbH if he has failed to conduct the company’s affairs “with the due care of a prudent businessman”. As the directors’ individual abilities are irrelevant in this context, lack of expertise will be no acceptable excuse.
To the extent that the responsibility for a business area has been effectively entrusted to one managing director, the others will only have to comply with the above standard of care in supervising said managing director. However, this duty can increase in case of a crises or extraordinary situation.
Federal Court of Justice’s requirements for business organization plans
In its ruling of 11/06/2018 (file reference II ZR 11/17, DB 2019, 300), the German Federal Court of Justice summarized the requirements on the allocation of responsibilities, which must be met in order for reductions of liability to apply:
- The management tasks must be defined clearly and unambiguously in such a way that there is no doubt as to who of the managing directors is responsible.
- The areas of responsibility must be allocated to managing directors, who have the necessary professional and personal qualification.
- The allocation of responsibilities requires the approval of all managing directors.
- The allocation of responsibilities need not necessarily be made in writing or by explicit agreement. However, a written documentation is required in order to clearly and unambiguously define the tasks.
We will be pleased to advise you on drafting and implementing bylaws or business organization plans in compliance with the legal requirements as well as on any and all questions relating to the liability of a managing director of a GmbH.