NO CLAIMS FOR DAMAGES AGAINST A SUPERVISORY BOARD CHAIRMAN AS A REPRESENTATIVE WITHOUT POWER OF REPRESENTATION IN THE EVENT OF CONCLUDING A MANAGEMENT BOARD SERVICE AGREEMENT WITHOUT A SUPERVISORY BOARD RESOLUTION
When concluding a management board service agreement, a joint-stock company is represented by the supervisory board which must pass a resolution on the conclusion of the service agreement. When the agreement itself is subsequently concluded, the supervisory board is usually represented by its chairman. The Regional Court Munich I (ruling dated 13 February 2020; file no. 5 HK O 2393/19) has now dealt with the question of whether a supervisory board chairman who concludes a service agreement in the name of the company with a designated management board member in the absence of a corresponding supervisory board resolution is obliged to pay damages to the designated management board member.
I. Introduction and legal backgrounds
1. Representative without power of representation
If someone concludes an agreement with a third party as a representative without power of representation, he is obliged to fulfill the agreement or to pay damages to this third party at the latter’s discretion if the person represented refuses to approve the agreement (section 179 para. 2 German Civil Code (BGB)). The background to this basic civil law regulation is that the representative causes the third party to have confidence in the actual existence of the power of representation. The representative will naturally know the lack of his power of representation earlier than the third party. However, the law provides for an exception to this rule if the trust of the third party is not protection-worthy because he either knew or had to know of the lack of the power of representation (section 179 para. 3 BGB). The previously uninvolved person represented can, but does not have to, claim the transaction by giving his approval.
2. Appointment of a management board member and conclusion of a management board service agreement
If a management board member is to be appointed at a joint-stock company, this usually involves two aspects: On the one hand, the appointment to the management board and, on the other hand, the conclusion of a management board service agreement.
The appointment of a new management board member is the responsibility of the supervisory board (section 84 para. 1 sentence 1 German Stock Corporation Act (AktG)) and is carried out by resolution of the supervisory board. The appointment is the corporate law act by which a person is appointed to the management board.
In addition – as good as always – a management board service agreement is concluded between the joint-stock company and its management board member, which must be separated from the act of appointment. The supervisory board has to approve the conclusion of this management board service agreement by resolution. Regularly, resolutions on the appointment of a member and the conclusion of a management board service agreement are passed simultaneously and the chairman of the supervisory board is authorized to conclude the management board service agreement.
3. Liability of the supervisory board chairman
If a chairman of the supervisory board now concludes a management board service agreement without a resolution of the supervisory board approving the conclusion of this agreement, the agreement with the joint-stock company cannot be concluded due to the absence of the resolution. The supervisory board chairman is generally liable to the designated member of the management board as a representative without power of representation according to the principles described above.
II. Facts of the ruling of the Munich Regional Court
The claimant – a lawyer – negotiated over a period of approximately two months with the management board and later with the supervisory board of a financial services institution about a position as a member of the management board. Following a discussion with the supervisory board, the draft of a management service agreement was sent to her. The supervisory board dealt with this draft within the scope of a meeting, but without passing a resolution (not even on the appointment of the claimant). Nevertheless, the claimant has already been introduced internally and at business events as a management board member and has already been allowed to choose a company car.
The chairman of the supervisory board, later being the defendant, sent the claimant a document titled “service agreement”, signed by him on behalf of the supervisory board which the claimant countersigned. However, this document contained a placeholder in the date of the supervisory board’s resolution on the appointment of the claimant as member of the management board. The claimant was later informed that the supervisory board would neither approve her appointment as a member of the management board nor the conclusion of her service agreement.
In her action filed with the Regional Court, the claimant now demanded compensation for her management board salary from the chairman of the supervisory board.
III. Ruling of the Munich Regional Court
The Regional Court dismissed the claim. The court stated, that the resolution of approval by the supervisory board is a mandatory requirement for the conclusion of the management board service agreement. In the absence of a resolution in this respect, the accused supervisory board chairman had acted as a representative without power of representation. Therefore, he was basically liable to the claimant according to the principles described above.
According to the Regional Court, however, the claimant was able to notice that the declaration made by the chairman was not covered by a corresponding resolution of the supervisory board. In the interest of safety in commercial practice, the claimant could in principle rely on the alleged power of representation without being obliged to investigate its existence and scope. If, on the other hand, there are indications of a lack of power of representation and if these concerns are not addressed, any trust worthy of protection would be lacking. The Regional Court identified such an indication in the fact that the document sent contained only a placeholder in the date of the appointment resolution.
Even if the appointment resolution is legally independent of the resolution on the conclusion of the management board service agreement, this should have aroused the claimant’s distrust of the power of representation and caused her to make appropriate investigations. After all, the employment contract is only concluded because of the corporate appointment; without this appointment, the contract is meaningless. Accordingly, both resolutions are mutually coordinated and related to each other. A potential management board member must be aware of this factual dependency, because it is the legal basis of his activity. The requirements to the obligation to make inquiries and to make investigations depend among other things also on the business experience of the declaring opponent; special professional knowledge must be considered, based on which the claimant being an attorney would have had to investigate in this case all the more.
In the opinion of the court, the fact that the claimant had already been introduced internally as a management board member and appeared as such at social events did not affect the duty of investigation either. Any comments or the behavior of other persons working for the company towards the claimant could in any case not create a basis of trust with the claimant. Unlike the supervisory board, they were not entitled to represent that company towards the claimant in any case, making their conduct irrelevant.
IV. Assessment and consequences for the practice
At first glance, the opposite view seems justifiable: The very reason that the claimant, as a lawyer, should have known the difference between the supervisory board’s appointment resolution and the consent resolution on the conclusion of the management board service agreement could be argued that, due to the potential absence of the appointment resolution, she would not have had to conclude that the resolution on the management board service agreement was missing. On closer inspection, however, this view falls short. As the court points out convincingly, both resolutions are in fact so closely linked in practice that the claimant should have carried out an investigation. However, the judgment is not final. It therefore remains to be seen how the Munich Higher Regional Court will decide in the appeal proceedings.
In practice, as mentioned above, the appointment and service agreement are often discussed and decided jointly at a supervisory board meeting. In individual cases, e.g. if a future management board member has been poached from a third party, a decision on the employment contract is made before the actual appointment. At that point, the contract is effective, even if the management board member is not subsequently appointed. However, the supervisory board may also conclude a service agreement for the management board member subject to the condition precedent of the appointment of the management board member if the appointment resolution has not yet been passed.
As a rule, the chairman of the supervisory board is authorized to conclude the management board service agreement by resolution of the supervisory board. Acting prior to the resolution of the supervisory board in order to have the financial statements approved by the supervisory board later exposes the chairman of the supervisory board to the risk of personal liability.
The decision shows once again that, due to the mandatory provisions of the German Stock Corporation Act, even when a management board member is appointed and a management board service agreement is concluded, it must be examined carefully whether the joint-stock company has been effectively represented and all necessary resolutions have been effectively passed. Accordingly, a designated member of the management board should inform himself at the time of conclusion of the management board service agreement whether the necessary resolutions of the supervisory board for the approval of the management board service agreement and, if applicable, the appointment as member of the management board have already been made.
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