I. Introduction and background

Pursuant to section 43 para. 2 Limited Liability Companies Act [Gesetz betreffend die Gesellschaften mit beschränkter Haftung – GmbHG], the managing company of a limited liability company [Gesellschaft mit beschränkter Haftung – GmbH] is liable towards the GmbH for damages incurred by the GmbH due to a violation of his obligations. A discharge for the managing director is granted by the shareholders’ meeting and is adopted by a corresponding shareholders’ resolution (section 46 no. 5 GmbHG), usually after accounting by presenting the annual financial statements. Fundamentally, the discharge for the managing director implies the approval of his management in relation to the past. It unfolds a preclusionary effect in such a way that the company is prevented from asserting claims against its managing director to the extent of the discharge. Therefore, this concerns completed transactions of which the shareholders have become aware on the basis of the managing directors’ reporting duty.
If the company is organized as a limited partnership with a limited liability company as general partner [GmbH & Co. KG], the managing director of the limited partnership general partner [Komplementär-GmbH] is in addition to the Komplementär-GmbH directly liable pursuant to established higher court jurisdiction, if the sole or essential task of the Komplementär-GmbH is to manage the business of the limited partnership [Kommanditgesellschaft – KG] (cf. Federal Court of Justice, judgment of 18 June 2013 – file no. II ZR 86/11). The dogmatic background is the consideration that the scope of protection existing due to the board and employment relationship between the Komplementär-GmbH and its managing director extends to the KG. In the event of a breach of duty, the KG can thus, in principle, directly hold the managing director of the limited partnership general partner liable and thus the resolution to discharge the limited partnership general partner directly benefits the managing director of the limited partnership general partner.

II. Current case

The case decided by the Frankfurt Higher Regional Court [Oberlandesgericht – OLG] (judgment of 23 May 2019 – file no. 5 U 21/18) dealt with the scope of the discharge of the Komplementär-GmbH. The KG had acquired a property and rented it out on a profitable basis. It had hired an external administrator for this purpose, who took over the accounting and was given a banking authorization. The administrator used this authorization to embezzle money from the KG over the years by collecting deposit payments due to the KG, faking tradesmen’s invoices and transferring his administrator’s salary twice. In the end, the total damage to the company amounted to approximately half a million euros.
After these circumstances became known, the shareholders discharged the Komplementär-GmbH respectively its managing director in shareholders’ meetings of the KG and of the Komplementär-GmbH by majority resolution. The claimant had voted against this and requested, initially unsuccessfully before the Regional Court, but now successfully before the Frankfurt OLG, the declaration that the discharge of the Komplementär-GmbH is void.

III. Limitations of discretion within the scope of the discharge of the managing director

The discharge of the managing director is left in principle to the discretion of the shareholders. However, the extent to which this discretion is limited in the event of gross misconduct on the part of the managing director remains controversial. In particular, the question of whether the shareholders must refuse to grant discharge if they are aware of an infringement of the law by the managing director that obliges them to pay damages is the subject of vivid discussion, and case law has also been inconsistent to date. The decisive question is whether the discretion granted to the shareholders’ meeting can be reduced to such an extent that only the refusal to grant discharge can be considered. According to case law, this depends on the individual case.
In its approval of the discharge, the Frankfurt OLG recognized a violation of the corporate loyalty obligation and thus declared the decision null and void. According to the Frankfurt OLH the discharge is null and void if no other decision than refusal is conceivable, thus rendering the discharge improper, in particular because the managing director is accused of serious or grave violations of duty and the company has suffered considerable damage. Just as the discharge of a managing director of a GmbH is contrary to good faith if the shareholders would have been obliged, on the basis of their duty of loyalty, to resolve the assertion of claims for damages against the managing director pursuant to section 46 no. 8 GmbHG. The decisive question was therefore whether the shareholders of the KG had also waived a claim of the KG against the managing director for damages by the resolutions on discharge, although such a serious violation of duty existed, according to which no other decision than the refusal of the discharge was conceivable. The Higher Regional Court of Frankfurt considered these requirements to be fulfilled.
In the first place, the fact that the managing director is only the managing director of the Komplementär-GmbH in his person does not preclude his liability. The employment and board relationship of the managing director to the Komplementär-GmbH resulted in duties of protection which also included the KG so that the KG had a direct claim against the managing director (see above). Under section 43 para. 1 GmbHG, the latter must exercise the due care of a prudent businessman. Although he may delegate his tasks to third parties, he is nevertheless obliged in that case to select, instruct and monitor them carefully. The more likely the delegated task is to pose a risk, the more thorough this control must be (duty of control). In addition, the managing director must organize the company in such a way that violations of duties by persons to whom tasks have been delegated are prevented (organizational duty). The court stated, according to these standards, the managing director seriously violated his duties. In particular, the use of the banking authorization would have allowed the administrator unrestricted access to the company’s assets and was therefore so sensitive to abuse that regular checks would have been necessary. The tendency of this organization to be exposed to danger and the lack of supervision by the managing director had been impressively demonstrated by the embezzlements that had occurred over the years. Against this background, he would be in serious violation of his duties as managing director pursuant to section 43 para. 1 GmbHG, which is why the shareholders of the KG were not allowed to discharge the Komplementär-GmbH (and thus indirectly its managing director).

IV. Outlook and consequences for the practice

The judgment clarifies the conditions under which the shareholders are restricted in their discretion in the context of the resolution on the discharge of a managing director and thus fortunately creates a certain degree of legal clarity. On the other hand, the long-standing dispute as to whether the discretion of the shareholders is generally limited if violations of duty giving rise to damages are known remains unaddressed. In any case, the judgment entails a further devaluation of the legal institution of the discharge of a managing director and thus a further restriction of the autonomy of shareholders within their scope of passing resolutions. In addition, the judgment once again underlines that, in the view of the managing director, it is advisable to obtain the consent of all shareholders in advance for particularly sensitive decisions. The appeal is currently pending, so it remains to be seen whether the Federal Court of Justice will agree with the legal opinion of the Frankfurt Higher Regional Court on this issue.