Advisory board GmbH – tasks and liability

Advisory board GmbH – What is the function of an advisory board in a GmbH? What are its tasks and what regulations apply to it? What about its remuneration?

Topics in our legal advice

In this guide on the subject of Beirat GmbH, the Herfurtner law firm answers all your legal questions.

Table of contents

1. Advisory board GmbH: Definition
2. Functions of an advisory board
3. Tasks – Advisory board GmbH
4. Delegation of tasks to the advisory board
5. Appointment of the advisory board
6. Transferability of responsibilities
7. Advisory board: Supervision and selection of managing directors
8. Existence of the advisory board – dependence
9. Advisory board members on letterhead?
10. Advisory board GmbH: Duties and rights
11. Formation of an advisory board – why? 6 reasons
12. Advisory board: 5 advantages
13. Advisory board GmbH – Lawyer

Advisory board GmbH – Definition

Family businesses can benefit from an advisory board to guide them through good and difficult times. The advisory board has crucial tasks, especially when it comes to succession planning.

There is no legal obligation for GmbHs to have an advisory board, but many choose to do so. We tell you when an advisory board makes sense for you. We give suggestions on how to find potential members for an advisory board and what you should consider when setting up an advisory board in your company. We also go into the duties and rights of an advisory board member.

Functions – Advisory Board GmbH

Companies are required by law to have certain boards of directors. If the company is subject to co-determination, a supervisory board, a shareholders’ meeting and at least one managing director are required.

The composition of the advisory board can be adapted to the specific requirements of the company.

Advisory boards are available to companies on a purely voluntary basis. It has advisory, supervisory and balancing functions, which can be individually designed. Therefore, the tasks of the advisory board can be tailored to the specific requirements of the company.

There is no definition of what an advisory board actually is. A board of directors or a shareholders’ committee is another name for this type of organisation.

Advisory board as advisor to the company management

As an entrepreneur, you have the task of making important decisions that will have a lasting impact on your company. The advisory board is a good place to have a debate about your projects. It is a place where entrepreneurially motivated, far-sighted and experienced people can meet and exchange ideas.

The advisory board can avoid operational blindness, identify new ways forward and reduce the likelihood of mistakes with the help of external expertise. An added benefit is that you are forced to defend your own views to others.

Leverage the expertise of an advisory board

Large companies may have staff-intensive departments and divisions, but medium-sized companies do not. This is why the advice of a business advisory board can be so important. Thanks to this support, they can make better judgements with greater certainty and efficiency.

Advisory board GmbH – Influence on the management

In medium-sized companies there are a large number of shareholders, such as the successors of the founder in a multi-generation company. In order to increase equity capital, it is possible to admit new shareholders from outside the company.

If the shareholders’ meeting is divided or lacks entrepreneurs, it cannot properly perform its control function vis-à-vis the company management. An advisory board can help here by ensuring that the management is supervised by a lean, competent and decisive body.

Neutral mediator in shareholder disputes

It has been shown that in a disjointed shareholders’ meeting, shareholder disputes increase over time. Extra work has to be done to keep disputes to a minimum.

At the same time, it becomes more difficult for shareholders to get their way and it becomes more difficult to reach a majority decision.

An advisory board that enjoys the trust of all shareholders can mediate and arbitrate because of its authority.

In some cases, it can even act as an arbitrator to avoid lengthy court proceedings.

Tasks of an advisory board

The tasks as well as the rights and duties of the advisory board must be defined depending on the objectives sought by the establishment of an advisory board. There is a difference between:

• the advisory board, which has an advisory function only, or
• the advisory board, which has the power to issue directives.

If the shareholders of the GmbH lack economic expertise and are not in a position to analyse the effects of economic decisions accurately, it is usually sufficient to set up an advisory board with an advisory function.

In this case, the advisory board should include experts who can provide sound and accurate advice to the shareholders. A genuine advisory board with real supervisory functions and sanctioning powers can be set up if the shareholders lack the confidence to make economic decisions and procedures themselves and to give instructions to and control the managing directors.

If the articles of association permit, the advisory board may exercise control over or give instructions to the management. If the advisory board has concerns about a particular measure, e.g. an authorisation catalogue for transactions that are outside the ordinary course of business, these concerns can be communicated to it.

Delegation of tasks to the advisory board GmbH

Loans over 100,000 euros must be approved by the shareholders before they can be taken out by the managing directors. The advisory board could be responsible for this task. However, if the shareholders want to withdraw even more from the GmbH – for example, because they are getting older – they can delegate other tasks to the advisory board, such as the appointment of an auditor, the convening of shareholders’ meetings or the appointment and dismissal of managing directors.

In order to give these responsibilities a corporate character, they were transferred to the advisory board in the articles of association.

Appointment of the advisory board

The search for an advisory board member is initiated with a profile of requirements. In addition to the required professional competence, it also includes knowledge of management and interpersonal skills.

Use contacts of the Chamber of Commerce

With the information and contacts of advisory board members, you are able to target people you know. Trustworthy entrepreneurs can help you find the right people if you do not know any. The network of your Chamber of Commerce and Industry can also be used.

It offers free access to highly qualified managers from a wide range of industries. Finally, management consultants are also an option.

Advisory board membership: not possible for everyone

The person in question should be able to make legally binding decisions at any time. The advisory board member may not take on tasks for the company that he or she already performs for another organisation, such as auditing the company’s annual accounts.

The advisory board may not include members who are also involved in the dispute if it is to act as an arbitrator. Outsiders, on the other hand, may join the advisory board. The influence of third parties can be limited in this situation by the fact that the majority of the advisory board members must be shareholders.

Establishment of advisory board GmbH

The legal effort required to set up an advisory board depends on the tasks assigned to it. Consultation is sufficient if it is a simple contract under the law of obligations. The advisory board must be anchored in the articles of association if it is to have an influence on the future of the company.

Establishing an advisory board with an advisory function

The company can set up an advisory board with a purely advisory function by concluding a contract with each member of the advisory board. This will set out the duties and rights of each party. The company is responsible for providing the advisory board with the necessary information and the advisory board members are responsible for providing certain advisory services to the company.

In addition to these commercial contracts, the service contract law and the general law of obligations of the Civil Code may also apply. As a result, the end product is often light and manageable.

Involvement of the supervisory board in a company

The question arises as to how far the powers of the advisory board should extend in relation to other companies if it is to have an effect beyond the making of recommendations. The members of the advisory board and the management can no longer enter into an agreement under the law of obligations.

Rather, the advisory board should be part of the corporate structure. Therefore, its tasks and responsibilities must be clearly defined and separated from those of the other corporate units. You must also decide to what extent you want to interfere with the responsibilities and limitations of other business organisations.

Advisory Board GmbH – Transferability of Powers

As a general rule, you must abide by the legally binding powers of other corporations and legal entities. You must. Those powers that the general meeting of shareholders, individual shareholders or the management must have according to the law are referred to as mandatory powers.

The advisory board can be contacted, but has no decision-making power in the case of certain competences.

The skills of the supervisory board must be taken into account if your company is subject to co-determination. It is possible to exclude the advisory board from having a final say on necessary tasks, e.g. by asking the shareholders to approve the decisions of the advisory board anyway.

However, this method can lead to resolutions being passed later than expected. Therefore, it is usually better to give the advisory board real decision-making powers in areas where the law leaves you alone. To achieve this, you must first recognise which tasks an advisory board is not allowed to perform under the law, especially those that are the exclusive responsibility of another body.

A general meeting of shareholders must have the power to compel further contributions ( § 26 GmbHG), to amend the articles of association ( § 53 para. 1 GmbHG) and to dissolve the company ( § 60 para. 1 GmbHG) as well as to make other important decisions.

According to case law, the shareholders’ meeting must also keep an eye on “important management measures”. For example, parts of the company can be relocated.

An advisory board cannot assume the rights and duties that have been assigned to the management alone. For example, there are duties in connection with the commercial register application ( § 78 GmbHG), bookkeeping ( § 41 GmbHG), the preparation of the annual financial statements and the management report ( § 42a GmbHG) and the filing of an insolvency petition ( § 64 section 1 GmbHG). The right of each individual shareholder to information and inspection ( § 51a GmbHG) is also taboo.

Advisory board – selection and monitoring of directors

Nevertheless, don’t be put off by the list. An advisory board can nevertheless perform a whole range of activities. First of all, the advisory board can have the task of supervising the management of the company instead of the shareholders.

This is always useful when the number of shareholders has grown through inheritances and gifts and these shareholders are no longer in a position to make important business decisions.

The advisory board’s strategy of selecting the company’s management also makes sense. This decision can be made more quickly by a competent advisory board than by a possibly quarrelling and obstructive shareholders’ meeting.

Where necessary, the advisory board’s personnel competence also extends to the dismissal of managing directors from their posts. It can also approve the company’s annual accounts and decide on the distribution of the company’s profits.

Responsibilities of the advisory board: different arrangements possible

There are always possibilities for improvement. For example, if a specific management position is at stake, the general meeting could reserve the right to accept or reject a decision on hiring or dismissing (e.g. the chairman of the board).

In addition, the advisory board can be mandated to carry out management actions, provided that these do not fall within the remit of the managing directors.

However, it is important to find a balance in this situation. The willingness to take on the work becomes less if the executive director’s competences are too low, just as a “toothless” advisory board is no guarantee of an appealing task.

Advisory board GmbH vote – majority of shareholders required

However, the advisory board’s powers do not automatically pass to it when it takes office, but must be granted to it voluntarily. This may not seem like much at first glance, but it is precisely in this area that disagreements arise time and again. The tasks of the advisory board should be explicitly regulated. For example, the management is still appointed and controlled by the shareholders ( § 46 GmbHG).

It is up to the shareholders to decide whether they want to set up an advisory board or not.

As a consequence, the advisory board must be anchored in the articles of association and the articles may have to be amended. Alternatively, the articles of association may provide for the establishment of an advisory board. On the other hand, it is conceivable that the articles of association only grant the shareholders’ meeting the power to establish an advisory board once.

The same leeway applies to the composition of the group. Thus, the articles of association could specify the composition and duties of the advisory board.

Or the articles of association only provide for the establishment of an advisory board and leave everything else to the procedure. This has the advantage that no regular amendments to the articles of association are required due to changes in the advisory board.

Existence of advisory board dependent on shareholders

In any case, the shareholders have the final say as to whether the advisory board is formed or not. They can abolish the advisory board by amending the articles of association. They also have a say in the composition of the advisory board. The members of the advisory board are usually elected by the shareholders at a general meeting.

Therefore, people who are regularly elected enjoy more credibility, which can be an advantage in settling disputes.

However, a minority, such as the company founders, may not have a say in the matter. Therefore, the articles of association may allow some shareholders or groups of shareholders to appoint a member of the advisory board of their choice. This appointment to the advisory board is followed by a formal employment contract between the company and the person concerned.

It regulates the rights and duties of the individual advisory board members.

When an advisory board member’s term of office expires, his or her membership ends. Prior to that, advisory board members may voluntarily resign from office at any time. An advisory board member may be removed prematurely if he or she has violated his or her duties by performing advisory board work in disregard of the shareholders’ meeting or the shareholders entitled to make proposals.

Shareholders’ meetings, even if they have not delegated the offending member to the advisory board, are authorised to act in the event of particularly serious violations. Premature termination of employment can occur for various reasons, e.g. resignation or dismissal. Make sure that the parallel employment contract is terminated in addition to the appointment.

List advisory board members on letterhead?

Changes in the composition of the advisory board do not have to be reported if the advisory board is dissolved and entered in the commercial register. Be careful when listing the names of the advisory board members on the letterhead.

The members of an advisory board that is not subject to supervision should not be listed on the company’s letterhead, as this is anti-competitive and misleading.

Advisory board GmbH – these are the duties and rights

The articles of association restrict what an advisory board member may and may not do. If the articles of association allow for the establishment of an advisory board, the shareholders will adopt rules of procedure that set out the rights and duties of the advisory board members, unless the articles of association provide otherwise.

It is also possible to examine the employment contract, although the articles of association or the rules of procedure usually take precedence. It is possible that the members of the advisory board are unclear about their rights and duties because the advisory board is not regulated by law.

Therefore, the most important issues should be regulated in the articles of association or the by-laws of the advisory board.

Duty to provide information to advisory board members

All material information must be provided to advisory board members who receive remuneration.

The first thing to clarify is how much they are compensated. As a rule, advisory board members are compensated for their time and effort. Just because you say nothing about the remuneration of advisory board members does not mean that they get nothing. Rather, they are entitled to their regular salary under section 612(2) of the German Civil Code.

Research has shown that the meeting expenses for an individual advisory board member are between 1,000 and 2,500 euros.

The amount is decided by the general meeting in each case. It can distinguish between internal and external members (i.e. shareholders) (i.e. mostly professional advisors). However, case law states that internal members cannot be compensated at the same level as external members.

As part of their advisory, supervisory and remuneration duties, advisory board members must also receive the information they need to fulfil their duties. They are protected in this respect by the duty of confidentiality, but for the sake of clarity you should explicitly state this in the articles of association or rules of procedure.

Advisory board GmbH – liability and responsibility of the members

Every member of the advisory board is expected to perform his or her duties with diligence. The member can be held liable for damages if the company is harmed. Every advisory board member should therefore take out directors’ and officers’ liability insurance (D&O insurance) in his or her own interest.

Insurance policies for supervisory boards of public limited companies are usually more restrictive, so it is important to make sure that the activity of an advisory board member in a limited liability company or partnership is also insured.

Advisory board of a limited liability company

The supervisory board supervises the business activities of the management board on behalf of the shareholders of a public limited company. There is no corresponding supervisory body in the GmbH. However, a supervisory board consisting of one third of employees is only mandatory in companies with more than 500 employees (One-Third Participation Act).

In addition, the state municipal code prescribes supervisory boards for municipal companies to ensure the authority of the municipality.

An advisory board can be established by the articles of association even if a supervisory body is not required. It can, for example, have a similar control function as the supervisory board or even go beyond it, but also serve only as an advisory body.

Statutory regulations can be found in 52 GmbHG, but also in case law and ordinances.

Motives for the formation of an advisory board

An advisory board or supervisory board can, for example, be established under the GmbH Act and entrusted with special tasks, according to § 52 GmbHG. The following are 6 reasons for setting up an advisory board:

1. Some of the shareholders are newcomers to the corporate world.
2. There are several interest groups, each of which wants to be represented on an advisory board or other supervisory body.
3. There are shareholders who have invested a lot of money and want a body to “watch over” and control the directors.
4. In the GmbH there are a large number of shareholders, also from abroad, who are difficult to bring into line.
5. There are a large number of shareholders who all have different economic and personal motives.
6. The GmbH should have a positive public image so that loans can be taken out more easily and new employees can be approached more easily.

5 Advantages of an advisory board

The establishment of an advisory board for the GmbH brings many advantages.

1. In the event of a succession arrangement, the continuity of business operations is ensured.
2. The GmbH can draw on the know-how of experienced and capable managers who support it in an advisory capacity.
3. The advisory board brings external expertise into the company (bankers, auditors).
4. Investors from outside the company have additional benefits and opportunities for control (advantages in financing, raising capital).
5. A positive public perception of the GmbH is achieved, which benefits the company’s further objectives (e.g. appointment of an IT professor for the targeted recruitment of IT employees).

Advisory board GmbH lawyer advises

Do you have legal questions about the advisory board of a limited liability company? Do you need support in contract law?

Contact the Herfurtner law firm. Our lawyers will advise you in the entire German-speaking area. Also on the topics of company formation, stock corporation AG, limited liability companies, managing directors GmbH, liability of managing directors and shareholders as well as shareholders GmbH.

If you have invested in or made payments to one of the companies on this list, our lawyers will be at your disposal at short notice.