Corporate Deal Source is pleased to present the first of many blog posts with an international flavor. Today’s post discusses a German Supreme Court decision that recently altered the fiduciary duty landscape for a GmbH (i.e., a German limited liability company). Dr. Clemens Just summarizes briefly below how the German Supreme Court came to the conclusion that an individual lacking a formal appointment as a managing director of a GmbH may indeed owe fiduciary duties to the GmbH. Understanding these new implications is critical not only for German deal-makers but also for international deal-makers doing deals in Germany.
* * *
Under German corporate law, the managing director of a GmbH (German limited liability company) has general fiduciary duties to the company. While this concept has not been laid down in German corporate law statutes, it has been widely accepted by German courts. The precise scope of these fiduciary duties is somewhat unclear, but there is in general a broad understanding that managing directors of a GmbH: (i) must keep sensitive company matters confidential, (ii) in the event of a direct conflict of interest between the managing director and the company, the managing director must act to protect the company and (iii) the managing director is prevented from exploiting its position in the company to enrich itself at the expense of the company, i.e. by accepting a commission fee in exchange for arranging a transaction with the company.
In a recent decision, the German Supreme Court (BGH) had to analyse the question of whether a managing director in fact (i.e. a person without a formal appointment as managing director but who directly or indirectly exercises substantial influence over the company’s business decisions) may also be subject to such fiduciary duties. This fiduciary duty was analyzed in connection with a criminal embezzlement action, however, the fiduciary relationship of the person to the company had to be clarified. The BGH held that while the threshold whether an individual can be deemed to be a “managing director in fact” is high, once that threshold has been passed, the person in question will have fiduciary duties to the company. Consequently, an individual who can be viewed as managing director in fact cannot argue that the lack of a formal appointment as managing director precludes him owing fiduciary duties to a company. It should therefore be carefully checked whether the test criteria of a managing director in fact of a GmbH may apply, as this may mean that such person has fiduciary duties to the company in question and could be liable for damages if it violates those fiduciary duties.