GER: Apparent Legality of Sacked Managers

Mar 22, 2024 Benn-Ibler Rechtsanwälte

The German Federal Court of Justice (Bundesgerichtshof, hereinafter BGH) has ruled: As long as a managing director is registered in the commercial register it’s safe to assume that the manager’s power to represent a company is valid. Anything to the contrary can only apply if there is positive knowledge of a manager’s abuse of power of representation, or if the manager was dismissed.

The case at hand concerns a private limited company (hereinafter GmbH) engaged in developing real estate projects. In 2015, the GmbH acquired a property with a market value of EUR 16 million. In 2018, at a general meeting of shareholders, the majority shareholder voted for the dismissal of the managing director. Due to shortcomings in the convening of the meeting, the validity of the resolution was questioned. Two days after the general meeting, the company represented by the (dismissed) managing director sold the property acquired in 2015 to a third party.

The third-party buyer knew that the manager had been removed, but was also aware of the doubts about the validity of the removal. The GmbH then demanded that the buyer agree to revoke the priority notice. The lower courts dismissed the claim. They held that the managing director had an effective power of representation at the time of the conclusion of the property purchase agreement, since the shareholders’ resolution was null and void.

The BGH has now decided:

The managing director was no longer authorised to carry out the sale of the property because he no longer had the power to represent the company. His appointment as managing director was effectively revoked at the shareholders’ meeting.

Nevertheless, the GmbH is obliged to act as if the power of representation had still existed when the contract was concluded. The dismissal of the managing director has not yet been entered in the commercial register. As long as the entry has not been made, the legal transactions are protected by Section 15 (1) of the German Commercial Code (Handelsgesetzbuch, HGB). According to the BGH, the situation could only be different if the buyer had positive knowledge of the effective dismissal. However, a distinction must be made between knowledge of the shareholder resolution and knowledge of the effectiveness of the dismissal. A need to know or a grossly negligent lack of knowledge is not sufficient. According to the BGH, the defendant would not have been obliged to make further enquiries even if the defendant had been aware of the resolution to dismiss the manager.

BGH II ZR 220/22 (9 January 2024)