I. Self-dealing: The main features of section 181 BGB

§Section 181 BGB sets out a legal restriction on the power of representation for so-called self-dealings. In a self-dealing transaction, one person occurs on both sides of the legal transaction, acting as a representative at least once. A distinction is made within the scope of self-dealing transactions as to whether the representative concludes the transaction with himself/herself in his/her own name (so-called self-contracting, e.g. if the managing director of a limited liability company (GmbH ) sells to himself/herself a property of the GmbH) or with himself/herself as the representative of a third party (so-called multiple representation, e.g. if the managing director of a GmbH sells a property of the first GmbH to another GmbH in which he/she also acts as managing director). Generally, a transaction concluded as a self-dealing is provisionally invalid, so its conclusion largely depends on the approval of the represented party.
It is clear that such self-dealing transactions involve a great risk of abuse, which is based on an abstract general conflict of interest and is to be basically prevented in order to protect the represented party. Irrespective of the exceptions from this legal restriction, which will not be gone into here more closely, a self-dealing is not given as far as the representative appears on “the same side” of the legal transaction in his own name and on behalf of third parties, e.g. if a property of a GmbH and its managing director is part of a co-ownership and the managing director sells the property to a third party both in his own name and in the name of the GmbH. In this case, an abstract conflict of interest cannot be anticipated.

II. Representation of the company towards members of the Management Board: The main features of section 112 AktG

EAn AG is generally represented by its (members of the) Management Board. In turn, the AG is represented by the Supervisory Board in and out of court towards the members of the Management Board in accordance with section 112 AktG. This ruling affects all legal transactions and legal acts between the AG and the members of the Management Board, involving the active and passive representation of the AG towards all current and retired as well as future members of the Management Board.
Section 112 AktG aims to ensure the unbiased protection of business requirements and is based on the concern that the Management Board does not provide the necessary impartiality if only some of its members are involved in the legal relationship in question themselves. As with section 181 BGB, a standardized examination of the state of interest takes place in the interest of legal certainty irrespective of whether there is a concrete threat to business requirements.
Section 112 AktG covers only cases of self-contracting, i.e. the conclusion of contracts between the AG and members of its Management Board in person. In cases of multiple representation section 181 BGB is still applicable. Whereas the representing bodies of partnerships and limited liability companies may be partially as well as completely exempted from the restrictions of section 181 BGB, the members of the Management Board of an AG can only be authorized to act as multiple representatives due to the mandatory nature of section 112 AktG. It is unclear whether section 112 AktG applies accordingly to transactions with third parties (such as a GmbH) if this third party is controlled by a member of the Management Board. This question is discussed in the literature with regard to the purpose of protection but has not yet been settled by a Supreme Court.
It is also controversial whether a violation of section 112 AktG leads to the provisional invalidity of a legal transaction, i.e. to the extent that an authorization is possible, or to the nullity of the legal transaction. So far, the BGH has left this question open due to the lack of materiality in its rulings but has assumed for passive proceedings against the AG that the Supervisory Board may approve the conduct of proceedings by the Management Board as well as enter the proceedings as legal representative of the AG.

III. The BGH judgment of 25 July 2017

DThe Second Civil Division of the BGH, which is responsible for company law, clarified the scope of section 112 AktG in its judgment of 25 July 2017 (file number II ZR 235/15) as follows:

“A stock corporation does not act in the sense of section 112 sentence 1 AktG towards a member of the Management Board if, within the framework of a multilateral agreement, the company and the Management Board member do not make declarations of intent which run counter to one another, but instead make parallel declarations of intent towards a third contractual party.“ (Guideline of the Court)

The factual situation underlying the decision was the following: The plaintiff was a member of the Supervisory Board of the AG, the defendant was Chairman of the Management Board of the AG. The parties entered into several agreements, some of which were also concluded by the AG. In one agreement in which the AG undertook commitments towards the plaintiff, it was represented by two members of the Management Board. The subject matter of the legal dispute was whether the defendant’s notice led to a termination of the agreement and, as preliminary question, whether the agreement was concluded legally effectively, in particular whether the AG was validly represented.
The BGH annulled the appeal judgment and referred the case back to the Court of Appeal because, inter alia, it considered the appellate court’s statements on the applicability of section 112 AktG to be insufficient. Referring to its jurisprudence and the literature on section 181 BGB, according to which (as already described under paragraph I.) there is no limitation of the power of representation to the extent that a representative of several parties appears on the same side of a legal transaction, the BGH affirms an action of the AG towards the Management Board member within the meaning of section 112 AktG as far as an abstract conflict of interest is possible. The BGH further states that contrary declarations of intent cannot be derived solely from the fact that a tripartite contract with reciprocal obligations of all parties involved is concluded between the member of the Management Board, the AG and third parties. It is also not sufficient if the contractual provisions only concern the AG as an “object” without including own declarations of the AG.
However, the BGH has not commented on the question as to the legal consequences of a possible breach of section 112 AktG for a legal transaction, i.e. pending ineffectiveness or nullity.

Consequences for practical situations

DThe BGH’s judgement clarifies that section 112 AktG does not apply in cases of commutated interests. In the sense of legal clarity, this is to be welcomed but not surprising in view of the protective purpose comparable to section 181 BGB. In future, this will enable the Management Board’s members to reliably assume their power of representation in the event of a clear synchronization of interests. However, since the judgment does not specify in detail when interests in a tripartite contract are to be regarded as equal or contrary, this is still to be determined by means of an individual case-by-case examination.
In cases of doubt, legal certainty may be achieved by a precautionary double representation of the AG by the Management Board as well as the Supervisory Board. However, a precautionary involvement of all potentially necessary representative bodies will not always be practicable. Complex demarcation issues may arise, especially in the case of corporate structures which typically involve a personnel integration at several levels.
Therefore, it remains essential to carry out an individual case-by-case examination on the basis of the parties involved and the contents of the contract in order to determine which representative bodies are to be involved.