Dismissal of members of the executive board in the public limited company
Dismissal of the board of a public limited company (AG) is a much more complicated situation than the dismissal of a managing director from a private limited company (GmbH). This is largely because stock corporation law is very formal and complex.
However, there are some differences between the executive office and the executive contract. In addition, it is not uncommon for disagreements between the board member in question and the supervisory board, important shareholders and other board members to be the impetus for the desired resignation.
The resolution is complicated by the fact that the board member in question may be liable for something. Below are details on how to terminate your board position and contract.
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Public limited company definition
The AG is made up of several bodies. The general meeting is the basis for the public limited company and consists of the shareholders. The members of the supervisory board are elected and appointed at this general meeting.
The members of the next executive board must be elected and appointed by the general meeting if the general meeting has elected the supervisory board. The resulting interdependence benefits the function of the individual organs.
The dismissal of the executive bodies also depends on the fact that the AG is structured in this way. Both appointment and dismissal are the responsibility of the same organs. Therefore, this text discusses under which circumstances either the executive board can be dismissed.
Duties and Responsibilities of the Executive Board of a Stock Corporation
Pursuant to section 76 (1) of the German Stock Corporation Act (AktG), the executive board of a company is exclusively responsible for the management of the company’s business. The executive board is responsible for the internal order of management and the external representation of the company.
The executive board is subject to supervision by the supervisory board in these matters. The supervisory board has the task of intervening if it believes that the executive board or one of its members is not fulfilling this responsibility. In rare cases, direct resignation of the executive board may be necessary.
Dismissal of the executive board of a public limited company: Who is authorised to do so?
The members of the executive board can be dismissed by the supervisory board. There is no other way to regulate this in the articles of association of the AG or elsewhere. However, the executive board is immune from dismissal by the general meeting.
Nevertheless, the general meeting can revoke the authority of the executive board or members of the executive board to act in its capacity. This lack of trust is an important reason for the supervisory board’s decision to “remove” the executive board.
Executive Board Contract and Executive Board Office – Information
From a legal perspective, it is important to assess and manage the interplay and interaction between the levels of executive office and the executive contract when leaving the executive board.
Resignation from the board and termination of the board contract are two sides of the same coin for which different rules apply. Termination of the board contract is not automatically the consequence of the removal of a board member from office.
Board membership and termination of contract
The office of a board member ends by:
- Resignation = resignation.
- Or the decision of the public limited company to revoke the appointment, i.e. to remove him or her = dismissal.
- Or by the scheduled expiry of the period for which the director was appointed.
A director’s contract in settlement is terminated by:
- The expiry of the period for which it was planned.
- Or by ordinary termination.
- Or by a mutually agreed termination agreement of both parties.
Termination of cooperation with the Executive Board
When a board member is dismissed from his post, his contractual relationship with the company ends. Of course, the supervisory board cannot simply dismiss the executive board if there is a minor disagreement. According to 84 (4) AktG, you need good cause to do so. Good cause is difficult to define.
There must be compelling circumstances where the parties cannot reasonably be expected to wait until the expiry of the board’s regular term.
A serious breach of duty, the inability to manage the company properly or a vote of no confidence by the general meeting are such reasons, unless the vote of no confidence was for obviously irrational reasons.
The supervisory board may resolve to dismiss the executive board if there is sufficient cause for doing so. After the resolution has been passed, the dismissal becomes effective immediately and must usually be entered in the commercial register. This is only a declaratory entry.
Dismissal of the executive board of a public limited company: Cancellation of the executive board contract
A management board contract, also called a service contract or employment contract, is another form of binding the management board to the public limited company.
Due to the time restrictions associated with a management board position, ordinary termination provisions in management board contracts are uncommon.
There are only two possibilities for the public limited company and the executive board member to terminate the executive board contract prematurely: extraordinary termination without notice for good cause or termination of the executive board contract by mutual consent.
Revocation possible without culpable conduct
Membership of the executive board ends with the termination of the appointment or the employment relationship. The two expressions are interchangeable in meaning. Dismissal, which is used much less frequently, is the same.
The BGH referred the case back to the Court of Appeal for reconsideration after the first judgment was appealed. The BGH states that if the reasons for the AGM’s mistrust are found to be flawed, this does not make the withdrawal of confidence any more irrational or subjective than it already was.
Rather, the main basis for the termination of the appointment was the vote of no confidence by the general meeting. This resulted from the board acting neither negligently nor in breach of duty.
The exclusion requirement of § 84 para. 3 sentence 2 alt. 3 AktG could not be avoided despite the absence of fault on the part of the executive board member if the general meeting determined that the executive board was no longer tenable due to certain events.
The BGH relied on the wording of the provision, according to which a resignation from office due to a lack of trust is only excluded as an exception if the lack of trust was manifestly justified.
This is only the case if the withdrawal of confidence is done in an inadmissible manner, for example in violation of law, custom or loyalty. The burden of proof for the existence of such exceptional circumstances was again on the board member concerned.
However, the BGH ruled that the vote of no confidence was not arbitrary if the shareholders could wrongly assume that there were objective reasons for the vote. Furthermore, the BGH affirmed that a shareholders’ resolution withdrawing confidence from a board member does not have to be justified.
The underlying rule that a general meeting resolution does not require a statement of reasons is quoted here for clarification. There is no qualifying wording in section 84 (3) AktG that would allow an exception in this situation.
The BGH has ruled that the dismissal of a board member need not be preceded by a hearing of the board before it becomes effective.
In particular, if the reason for the revocation of the board member’s appointment is not the suspicion of a criminal offence, but a general mistrust of the board member, the labour law principles of dismissal on suspicion do not apply.
Termination of employment or removal from office for cause
The term “revocation of appointment” occurs frequently in actual language usage. This is because section 84 (4) sentence 1 AktG explicitly states that removal is the counterpart to appointment.
Furthermore, the Stock Corporation Act requires that there must be an “important reason” for the revocation of the appointment of a member of the executive board. This is why one also speaks of a “termination without notice” or “extraordinary” termination.
The requirement of good cause for dismissal provides the executive board member with a certain degree of security. Unlike the managing director of a GmbH, board members cannot be dismissed at will.
This leads to a kind of gagging of the public limited company. An unpopular board member cannot be removed suddenly and without justification.
The supervisory board should therefore consider a short appointment period when appointing the executive board, especially for the first appointment. The frequent practice of the supervisory board to exceed the maximum term of 5 years often seems to border on a breach of duty.
Dismissal of the executive board of a public limited company: The idea that the executive board should primarily manage the company independently of the supervisory board and shareholders on its own responsibility – “in peace” – and lead it to success is the basis for the requirement of an important reason for dismissal.
The law sets out in broad terms what constitutes just cause for the dismissal of a board member. Thus, just cause for the dismissal of a board member shall be a serious breach of duty, the inability to manage the business properly or a vote of no confidence by the general meeting.
- Vote of no confidence by the members.
- Gross breach of duty.
- No proper removal of the executive board.
- Inability to act as executive director.
Dismissal of a member of the executive board of a public limited company: an extraordinary reason for termination
If, after weighing the interests of the public limited company and the board member, it is determined that the continuation of the board member’s contract until the actual termination of the contract is unreasonable, there is good cause under section 626 BGB.
But when does it become unreasonable for the AG to continue? Under what circumstances would it be unreasonable for the board to agree to a contract extension?
Trust as a prerequisite for productive cooperation
As a preliminary conclusion, it can be stated that with this decision the BGH sets out the rules for the revocation of an executive board appointment due to a lack of trust and thus creates more legal clarity on this issue.
The basis of the BGH ruling is the court’s conviction that an existing relationship of trust is necessary for successful cooperation between the various bodies of an AG. If the general meeting decides to revoke the powers of the executive board, it is not obliged to give reasons. A prior hearing of the executive board is also not required.
From a procedural point of view, it should be emphasised that dismissal for lack of confidence usually requires a resolution of the general meeting. Pursuant to section 84, paragraph 3, sentence 4 of the German Stock Corporation Act (AktG), the termination of an executive board appointment is effective until a court has ruled on the legality of the termination.
For this reason, it is incumbent on the excluded board member to challenge the dismissal in court.
Absence from board duties due to birth, adoption, care or serious illness
If a member of the executive board is at least temporarily unable to perform the duties associated with his or her appointment due to maternity leave, parental leave, care of a family member or illness, he or she may, pursuant to section 84 (3) of the German Stock Corporation Act (as regulated by the Act Supplementing and Amending Equal Voting Rights Regulations), demand that the supervisory board revoke his or her appointment.
In simplified terms, this is a claim for reappointment as a board member in addition to a conditional claim for reinstatement.
If a board member requests and is granted maternity leave, the supervisory board must comply with this request and take measures to ensure that the board member is reappointed after the statutory maternity leave periods have expired.
The supervisory board is not obliged to cancel the appointment if there is an important reason, e.g. parental leave, nursing care or illness. If a member of the Executive Board wishes to take a “leave of absence” of more than 3 months, the Supervisory Board may reject the request without giving reasons, in which case the Executive Board has no possibility to terminate the appointment.
Termination and Dismissal at a Listed AG
Generally, there are no special considerations for the dismissal of board members of listed companies.
Accordingly, the standards outlined above apply to the executive board of a listed company, including the good cause for dismissal, section 626 of the German Civil Code (BGB), and the good cause for termination of the executive board contract.
Dismissal of the executive board of a stock corporation: However, in connection with the termination of the executive board relationship, listed stock corporations must observe the necessary special regulations under capital market law, in particular the specifically applicable publicity obligations (including ad hoc announcements).
Action for annulment against the dismissal of members of the board of directors
Dismissal of the management board of a public limited company: When a listed company dismisses its management board, this often happens in one fell swoop. The board must then weigh its options and decide how best to defend itself legally.
The board has the right to challenge its dismissal through civil law. The aim of the action is to prove that the dismissal was not based on good cause, making the dismissal invalid. Under certain circumstances, the board may consider issuing an injunction against the AG.
A director may also bring an action against the termination of his or her employment contract, and such actions are admissible in court. It is important to emphasise that the board has no power to invoke labour laws or principles.
In particular, the protection of the German Dismissal Protection Act (KSchG) does not apply. Consequently, the proceedings must be brought before a court of civil jurisdiction (not the labour court, section 5 ArbGG).
Lawsuits against the termination of executive board contracts often have two objectives:
- To prove that the executive board contract has not been terminated (i.e. that it continues to exist); and
- To ensure that remuneration is not discontinued in the middle of the contract (directors’ remuneration).
Our lawyers’ experience shows that a strategic approach and knowledge of the intricacies of company law are usually decisive in conflicts involving the dismissal and replacement of the board of directors.
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.