Director’s Duties and Liabilities under German Law

What are the Duties of Directors of German Companies (GmbH) and Corporations (Aktiengesellschaft)?

Obviously, pretty much all over the world, company directors and CEO’s have a general duty to be loyal, diligent and conscientious in managing the affairs of their company. This is also the case under German law. Directors and CEOs have to bear in mind what is best for the business and act accordingly. In this regard, German courts do apply an objective standard that does not, as a rule, depend on the specific knowledge, education, experience and abilities of the individual director. In other words: If someone takes on the job of a company director, he or she must be up to the requirements. In practice this means, that – depending on the size of the company – the director must hire and supervise qualified staff or outside consultants.

According to German case law, a company director has wide-ranging discretionary powers with regard to how to manage the company. This includes the power to take entrepreneurial decisions, even daring ones (entrepreneurial risk). Always provided, however, that the director carefully assesses the related risks before making such decisions. Under German law, actions (or inactivity) outside the limits of reasonable entrepreneurial conduct or violation of specific director’s duties may result in personal liability of the company director. The major difference between the director of a German Gesellschaft mit beschränkter Haftung (GmbH) and the CEO of a German Aktiengesellschaft is that the GmbH director must always obey the instructions of the shareholders. A vote of the shareholders (Gesellschafterbeschluss) is binding on the company director. In contrast, a CEO (Vorstand) of a German Aktiengesellschaft has much more leeway. The CEO (or the board of executors) manages the corporation as they themselves deem is best:

Section German 76  para. 1 German Stock Corporation Act states: 
Management of the stock corporation: The management board is to manage the affairs of the company on its own responsibility.

 

For example, directors (CEO’s) have an obligation under the German Stock Corporation Act (Aktiengesetz) to protect the company from financial penalties, losses and other financial harm. In their function as trustees of the company’s assets, company directors owe strict fiduciary duties. The Stock Corporation Act also provides for a number of specific duties, including those relating to the maintenance of registered share capital, bookkeeping, and the organization of the company. Finally, directors are also subject to numerous reporting requirements (including a duty to keep the securities market informed and updated) as well as strict confidentiality obligations.

Directors’ Liabilities under German Law

As a rule, only the company is liable towards outside parties, not the individual director or CEO. In other words: Third parties can rarely sue a company director directly for damages or compensation. The company is responsible for the (illegal or damaging) actions or omissions of their dirctors and CEOs. As a consequence, if a director causes financial damage by deliberately or negligently breaching their duty, the company can (and in most cases must) take internal recourse (Regress) against the director / CEO. A simple majority at the annual general meeting can force the company to seek internal recourse against a director. In such recourse proceedings (Regressanspruch), the director must prove that he or she has obeserved the relevant standard of care (Sorgfalt eines ordentlichen Geschäftsführers). The company only needs to demonstrate that it has suffered damages as a result of the actions of the director.

In exceptional circumstances, creditors of the company may bring a direct claim against a director. German statutory law permits bringing direct actions against a director where:

  • a company is unable to satisfy a claim arising from a violation of a duty by a director;
  • a company becomes insolvent and a director delayed the initiation of insolvency proceedings causing damage to the creditor; or
  • he is liable under tort law for a serious breach of duty or for a violation of legal provisions that protect certain individuals of groups of people, such as criminal provisions concerning fraudulent or false representation of the company’s affairs.

In German courts, successful direct claims have been brought against directors based on tort law where, for example, directors have deliberately published incorrect inside information. German court decisions of the last 10 to 15 years show a tendency by the courts to expand the scope of direct tort liability of directors.

For more on German business and corporate law see these posts:

More information on litigation and legal fees in Germany is available in these posts:

Harsh “Unfair Competition” Rules in Germany

The German Habit of sending out Cease and Desist Letters to Competitors

When you start trading in Germany you may be in for unpleasant surprises. The first letter your German subsidiary receives may likely be a formal cease and desist notice sent by your competitor’s lawyers. Why? Because under German unfair competition laws, every business has the right to formally demand competitors to fully comply with any and all German laws. And there are many such laws and regulations, some of which a British entrepreneur or even a British lawyer would never expect to exist.

Thus, everyone who considers starting business activities in Germany should read the German Act Against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, UWG). Read it, shake your head, then read it again.

Some examples:

  • Every website and all stationary (letters, emails etc) must quote the complete business details including full business address, commercial register number, name(s) of director(s) and more. For details see section 5 UWG on incomplete information about a business trading in Germany.
  • Your website must have a so called “Impressum” which contains all relevant company information. Pursuant to section 5 Telemediengesetz the customer must be able to find the entire information about the offering company “easily” and “quickly”.
  • Websites must comply with German consumer protection laws and data protection laws; sounds harmless but the requirements are so complex that even most German companies are in breach of some aspects of these regulations.
  • Advertising material must specify its publisher.
  • All information on websites and advertising material must be truthful. You think that is understood and no problem? Well, here is an example for a typical mistake: We often represent British businesses which establish a German subsidiary and then make advertising statements like “25 years of experience” because the British parent company has been doing business for 25 years and they think they are allowed to make such statements for the entire group. They are not! Two weeks later, the German subisiary (a newly formed GmbH) is being served a number of cease and desist letters by German lawyers demanding to stop making this false and misleading statement, because the German subsidiary (which has made that statement in their ads) does not have 25 years of experience.
  • Another classic mistake is making an incorrect or incomplete price quotation on a website or on any advertisement material. Any mentioning of a price must clearly specify the final amount, the German VAT and any information about delivery costs. If not, this constitutes an infringement of section 1 II Preisangabenverordnung (PAngV) and in turn an infringement of the competition regulations (sections 3 and 3a UWG). Again you may think: How hard can this be? Well, take a look for yourself. It tells you a lot about German law that the regulation about how prices for goods and services must be presented is 8 pages long, see here.

Why are German Competitors (and their Lawyers) so aggressive?

These cease and desist letters (Aufforderung zur Abgabe einer strafbewehrten Unterlassungserklärung) are more than a mere nuisance because it is a peculiarity under German law that the recipient of such a lawyer’s letter must bear the competitor’s lawyers legal fees. Without any prior warning! The first letter you receive already triggers costs for you. Depending on the concrete breach these costs range from a few hundred to a few thousand Euros. And if you are unlucky, you will receive cease and desist letters from various german competitors with regard to the same breach.

Thus, German business lawyers are very interested in representing German businesses in that field, because with each such cease and desist letter they stand a good chance of earning a few thousand Euros. Their clients, your German competitors, are also keen of sending out such cease and desist letters, because it makes life difficult and expensive for new competing businesses, Ideally, this is a way for an established German business to prevent the market entry by a new company.

Do not ignore Cease and Desist Letters!

We note that British clients doing business in Germany tend to ignore such letters from competitor’s lawyers. This is a big and costly mistake, because if you to not acknowledge the breach and make a formal promise to the competitor to remedy the breach, then the competitor has the right to immediately sue your company. The competitor will apply to a German court by way of an Unterlassungsklage (action for an injunction). In most cases, the claimant will apply for an accelerated proceeding and ask for a preliminary injunction (einstweilige Unterlassungsverfügung), which – in obvious cases or if the British defendant does not properly respond – is usually granted by the German courts.

Then it becomes really dangerous, because if your company continues the breach (e.g. the website still infringes German laws or regulations) then very harsh penalties kick in. Depending on the size of your business (turnover in Germany), the number and duration of the breaches and other factors, the German court may order your company to pay a penalty (Ordnungsgeld) of up to 250,000 Euro.

Thus, in case you have been served an Unterlassungsaufforderung (cease and desist letter), you should immediately remedy the breach, then contact a German business lawyer and discuss what your options are. In most cases, if you have actually been in breach of German laws or regulations, you will have to (teeth-grindingly) acknowledge this breach (by sending them an Unterlassungserklärung) and to pay the opponent’s legal fees. In most cases, however, there is a chance to negogiate about the other side’s legal fees.

Such a formal acknowledgement (strafbewehrte Unterlassungserklärung) prevents the competitor from suing you. However, such an acknowledgment letter is only valid if it contains a promise to pay a contractual fine (Vertragsstrafeversprechen) in case you breach the same regulation again. Without such a promise to pay a fine the acknowledgement letter is worthless and you still rund the risk of being sued.

We certainly hope that we have not killed your desire to start trading in Germany. However, when you take up business activities in Germany, you should expect to be closely monitored by your German competitors. Thus, do not give them a chance to torture you with costly cease and desist letters.

By the way: It is not just competitors who may be observing you. German consumer protection groups (Verbraucherschutzorganisationen) also have the right to send out cease and desist notices.

For more on German business and corporate law see these posts:

More information on litigation and legal fees in Germany is available in these posts:

Experts on German-British and German-American Legal Matters

Since 2003, the German business and corporate law firm Graf Partners LLP specialises in British-German and US-German legal cases. Our German business and corporate lawyers are native speaker level fluent in English, have many years of practical experience with clients from Britiain and the USA and are part of a well established network of law, tax and accounting firms.

Managing partner Bernhard Schmeilzl was admitted as German Rechtsanwalt (attorney at law) to the Munich Bar in 2001 and specialises in international cases ever since, with a focus on German-American and German-English commercial, corporate and also probate cases. In addition to obtaining his German legal exams with distinction, he also graduated from the English University of Leicester where he obtained his Master of Laws degree in EU Commercial Law in 2003.

In 2014, Graf Partners LLP has set up the international litigation department GP Chambers which focuses on providing professional litigation services to British and US-American clients, both on a commercial and a private client level. The Graf Partners litigation lawyers regularly appear before German law Courts throughout the country and provide specialist legal advice, support and advocacy services in all commercial and civil law matters, ranging from contract disputes, corporate litigation and employment, to damage claims, divorces and contentious probate. If you wish us to advise or represent you in a German or cross border case, or if you need an expert report on German law, please call +49 941 463 7070.

 

Starting a New Business in the UK

How to Incorporate a Company. What You Need to Know

Are you thinking about establishing a business in the UK? Where do you start? This note will give you a brief understanding of the Companies Act 2006 and what you need to know in order to set up a business in the UK. The Companies Act 2006 provides for three types of companies to be established:

  1. Company limited by shares;
  2. Company limited by guarantee; and
  3. Unlimited Company.

The most common form is the company limited by shares, which will be discussed here. Continue reading

When starting a Business in Germany: Don’t Forget the Trade Register Notification (Gewerbeanmeldung)

Under German law (see section 14 Gewerbeordnung, i.e. German Trade Regulation), the commencement of a business activity must be notified in writing (Gewerbeanmeldung) to the local Ordnungsamt (Trades Office), which is a department of the municipal government, for example the city of Munich. This notification obligation also applies to any change in the business (e.g. move, modification to the nature of the business or staff recruitment) and to the termination of the trade activity, which requires a termination notification (Gewerbeabmeldung). More information on the various options in terms of how to start a business in Germany is available here. For an overview of German company forms see here. Continue reading

How to read a German Commercial Register Extract

Every German company, partnership and association must be officially registered in the Handelsregister (Commercial Register). In contrast to England, where this information is collected centrally by Companies House, Germany uses a decentralised system.The “original” records of a company are kept at the respective local District Court (Amtsgericht) where the company has its official seat. This legal seat does not necessarily need to be the actual place of business. Continue reading

Beware of the horrid Monster of German Labour Law: Ficticious Self-Employment

German labour law is strictly regulated and employees are well protected against dismissal if the employer’s workforce exceeeds 10 full time employees (details here). Furthermore, German wage tax (Lohnsteuer), health insurance, social security and state pension contributions are rather hefty (for more see here: Statutory Pension Insurance in Germany). Therefore, to try to avoid these labour costs, some employers but also employees are tempted to make it look as if the employee was a freelancer. They enter into a “consulting” or “freelance” agreement. But in reality the employer still expects the so called “freelancer” to be there at certain hours and the “freelancer” does not have any other clients. This is extremely risky:  Continue reading

London Chamber of Commerce: 10 practical tips for doing business in Germany

In this issue of „London Business Matters“, the London Chamber of Commerce’s monthly magazine, German corporate and business lawyer Bernhard Schmeilzl has compiled 10 Top Tips when starting a Business in Germany”. The magazine also contains helpful information about the trading relations between the UK and Germany. Just browse the online issue. For more details on how to establish a business in Germany please see the articles below

– 3 Ways to expand your Business to Germany
– What is a German “Mini-GmbH” or “Unternehmergesellschaft”?
– 10 Things to do when starting a German Business
– Guide for doing Business in Germany

 

The law firm Graf & Partners (Germany) assists entrepreneurs and businesses with their international expansion to Germany since 2003. Also, we have a network of professionals in the areas tax, IT, marketing and business consulting. Do not hesitate to contact us by calling solicitor Bernhard Schmeilzl at +49 941 785 3053 or send an email to: mail [at] grafpartner.com

3 Ways to expand your Business to Germany

Establish a real German Company, register a Branch Office or start with a mere Representative Office

If you want to sell your goods or services to Germans it is in most cases a huge advantage to be actually present in Germany. A German business address and phone number shows that you are seriously committed to doing business in Germany long term and thus builds trust with customers and business partners. But how to go about it technically? Continue reading

10 Things to do when starting a German Business

If you have read our previous postings “Guide for doing Business in Germany“, “Establish a German Limited Company (GmbH): FAQ and Checklist“, “Taxation for UK Expats or Freelancers in Germany” and “Open a Business Bank Account in Germany?” you already have a pretty good idea how to go about starting your own German business. With this posting we provide ten – personal and probably subjectively biased – practical tips how to get a head start: Continue reading