Guide to Minimizing Managing Director Liability in GmbHs

In capital companies, the liability of shareholders is very limited. In contrast, the managing directors of GmbHs and the boards of AGs are confronted with liability risks on a daily basis. In recent years, however, the risk of being exposed to claims for damages for business misconduct has increased considerably. This affects not only large, listed companies, but also small and medium-sized companies, where liability lawsuits against management are increasing.

Through targeted measures, liability risks for managing directors can be proactively reduced. The following guide provides an initial overview of how liability risks can be reduced. With effective prevention strategies, lawsuits against managing directors can be minimized or completely avoided.

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Tools to minimize liability risks

Below we present various instruments that can help reduce the liability risk for managing directors:

1. Limitation of liability
   The liability standard according to Section 43 Paragraph 2 GmbH can be limited to a certain extent by contract, so that the managing director is only liable for damages up to a certain amount. However, intent and gross negligence are excluded from this limit. In our opinion, however, a limitation of liability for minor negligence should be possible.
2. Contractually reduced liability standard
   According to Section 43 Paragraph 2 GmbH, the managing director is liable for damages resulting from negligent actions. In the event of insolvency, claims for damages are often asserted by the insolvency administrator. A contractual limitation of liability that releases the managing director from liability for minor negligence would be an effective way of limiting liability and can be agreed in the employment contract for duties that are not relevant to creditor protection.
3. forfeiture clauses with liability-limiting effect
   The Federal Court of Justice considers it possible in principle to shorten the limitation period for claims for damages against managing directors. Outside of the capital preservation protection, the 5-year limitation period for claims for damages can be effectively shortened by contract in accordance with Section 43 Paragraph 2 GmbH.
4. No employee liability for external managers
   In certain cases, employees are liable according to the principle of business-related activity, which allows a reduction in their liability, for example by excluding minor negligence. An external managing director could argue that this limitation of liability also applies to him. However, the prevailing opinion rejects this, since managing directors are always obliged to manage the company comprehensively and perform an employer function.
5. Observance of the payment block
   When distributing profits to GmbH shareholders, the managing director must observe the capital maintenance requirements stipulated by law. He may not pay out to the shareholders the assets required to maintain the share capital (Section 30 GmbHG), which is referred to as a payment freeze. If he attacks the share capital in favor of the shareholders, liability risks arise (Section 31 Paragraph 6 GmbHG), and there may even be a threat of criminal prosecution for breach of trust.
6. Limitation of liability through division of departments and delegation of tasks
   In a GmbH with several managing directors, overall responsibility applies, which means that each managing director is liable for the actions of the others. Liability risks can be reduced by dividing up departments and delegating tasks, although these are not permitted without restrictions.
7. discharge resolution in favor of the managing director
   The discharge of the managing director by the shareholders' meeting reduces his liability risk and should be done annually. It reduces claims for damages if it is based on sufficient information. However, liability risks remain for unknown actions. A comprehensive exclusion of liability is only possible through a general receipt.
8. Transactions requiring approval
   Ensuring that certain transactions require the approval of the shareholders.
9. shareholder approval for risky transactions
   Obtaining the consent of shareholders for risky business decisions.
10. D&O insurance
    Taking out Directors and Officers insurance to protect yourself against liability claims.
11. Liability Privileges for Voluntary Managing Directors
    Granting of special liability protection regulations for voluntary managing directors.

Transactions requiring approval

Many managing director service contracts contain so-called transactions that require approval. These contractual clauses serve to control the managing directors, and the consent of the shareholders is usually required. However, it is also possible for other bodies, such as the advisory board, to approve these transactions that require approval. Such consent requirements often apply to licensing agreements, loan agreements and real estate purchase agreements. These reservations are typically anchored in managing director contracts, partnership agreements or managing director rules of procedure.

A breach of these contractual consent reservations can have serious consequences for the managing director, including extraordinary termination and the possibility of being held liable to the GmbH. This also applies if the managing director concludes transactions in urgent cases without first obtaining the consent of the shareholders.

shareholder approval for risky transactions

Obtaining consent can be important for liability avoidance reasons not only in the case of contractually regulated consent reservations, but also in other situations. In the case of risky management measures, the managing director should inform all shareholders of the potential risks and obtain their consent through a formal shareholders' resolution. Such a resolution significantly reduces the liability risks.

D&O insurance

It can be contractually agreed that the company takes out insurance for its managing director to protect him against liability risks. This insurance is called a directors and officers policy (D&O insurance). D&O insurance, which is widespread in the USA, is also becoming increasingly important in Germany. Whether such preventive protection makes sense in individual cases depends on a detailed analysis. In any case, the company and the managing director should clarify exactly which risks are covered, how high the sum insured is, whether the protection also applies in the event of gross negligence and criminal investigations, and what specific restrictions exist.

Liability privileges for voluntary managing directors

Since the end of 2009, voluntary board members of associations have been subject to a reduced liability according to Section 31a of the German Civil Code: the board is only liable for intentional acts or gross negligence. Legal literature is debating whether this reduced liability also applies to voluntary managing directors of a GmbH. It is likely that voluntary managing directors will continue to be liable for minor negligence. The fact that the work is unpaid is not enough to justify a statutory reduction in liability, as controlling shareholders in corporations often act as managing directors of their subsidiaries free of charge.