BGH Judgement: Self-appointment of managing directors in the group and the prohibition of self-dealing

In group structures, it is not uncommon for members of the management board of a stock corporation to become involved in the management of subsidiaries. However, when stock corporation board members appoint themselves as managing directors of a wholly-owned GmbH (German Limited Liability Company) subsidiary (the Company), the law may reach its limits.

Whether and under what conditions a “self-appointment” is possible and whether the interposition of an authorized representative changes anything – the Federal Court of Justice (BGH) ruled on this at the beginning of 2023 (BGH, judgment of 17.01.23, ref.: II ZB 6/22).

Board members to become managing directors of a wholly-owned subsidiary.

In the present case, three German Stock Corporation (AG) board members were also to become managing directors of a wholly-owned subsidiary. The subsidiary had the legal form of a GmbH. To implement this decision, two of the three board members appointed a lawyer as an authorized representative to appoint managing directors. As part of this authorization, the lawyer founded the GmbH and appointed all three members of the AG’s management board as managing directors of the subsidiary.

However, when the GmbH had been registered in the commercial register, the registration court identified an obstacle to registration: the managing directors had yet to be duly appointed.

By way of an interim order, the court imposed the condition that the GmbH (formally in the foundation stage) obtain authorization from the Supervisory Board of its parent company under sec. 112 AktG (German Stock Corporation Act) to appoint the Managing Director and to submit an exemption of all Management Board members by the Supervisory Board from the prohibition of self-dealing (sec. 181 case 1 BGB -German Civil Code-) for this specific transaction. The Company appealed against this interim ruling. However, it was only partially upheld.

Inadmissible self-dealing in the case of self-appointment renders the appointment invalid.

About the exemption from the prohibition of self-dealing, the BGH ruled as follows:

“The power of representation of the member of the management board of a stock corporation is limited when passing a resolution on his appointment as managing director of the subsidiary under sec. 181 case 1 BGB.”

The BGH thus clarified that sec. 181 Alt. 1 BGB applies in the self-appointment of managing directors in group constellations. This provision prohibits representatives from concluding transactions with themselves in the name of another person – including in the name of a company. Otherwise, the appointment as managing director – is invalid due to the prohibition of self-dealing under sec. 181 BGB.
In the present case, the BGH, exactly such a constellation existed when the Management Board members had themselves appointed as managing directors of the wholly-owned subsidiary via the authorized lawyer. Even the involvement of the authorized lawyer did not help legally as an intermediate step. The BGH clarified that a sub-authorized representation did not legally change the situation in the meaning and purpose of sec. 181 BGB: Even with an intermediary authorized representative, the management board members would ultimately act simultaneously on both sides of the appointment process (AG and subsidiary GmbH) in the case of a self-appointment.

Authorisation of the supervisory board? No authorization authority!

But could an authorization by the supervisory board according to sec. 112 of the German Stock Corporation Act (AktG) heal and thus make the appointment effective retrospectively? The BGH ruled as follows:

“Sec. 112 sentence 1 AktG is not applicable to the appointment of a stock corporation’s management board member as managing director of a subsidiary.”

Authorisation by the Supervisory Board is, therefore, not possible due to a lack of competence. § Section 112 sentence 1 AktG would only cover the representation of the stock corporation vis-à-vis its Management Board member, according to the court. However, appointing managing directors is an act of the subsidiary GmbH.

Thorough (personnel) planning is essential in a group structure.

This case shows that appointing the same persons to different positions in corporate groups is often legally complex. If mistakes were made, resolutions and, thus, appointments of necessary board representatives may be invalid. This consequence creates legal uncertainty and additional work, which should be avoided.

On the one hand, resolutions in such constellations should be adequately prepared, i.e., uninvolved persons or exemptions should pass resolutions from sec. 181 BGB should be obtained from the supervisory board in advance. On the other hand, it is necessary and sensible to plan the composition of the committees in the group companies with the foresight to avoid problems of this kind as far as possible from the outset.