Legal guide for company directors and CEOs in Germany

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

As directors must comply with all mandatory provisions of the law, there are numerous obligations that might also be categorised as a consideration of ESG. 

In all matters concerning the company, a managing director must exercise with due care of a prudent businessperson.

Therefore, the director must (also) adequately consider those opportunities and risks that arise for the company in connection with ESG.

We have often observed how companies contractually stipulate and enforce their individual sustainability requirements towards their business partners.

ESG Due Diligence is constantly becoming an increasingly important part of the Legal Due Diligence to be conducted in the course of a transaction. 

Following the implementation of the second European Shareholder Rights Directive (ARUG II) and the German Corporate Governance Code (GCGC) as of 17 May 2022, the supervisory board must align the remuneration structure of the management board of listed companies with the sustainable and long-term development of the company.

The German Supply Chain Act (in force since 1 January 2023) establishes certain duties of care in order to curb child labour, exploitation and the destruction of nature in the global production of goods. Companies should ensure that no human rights violations are committed throughout their supply chain, including at international level. Since 2024 the German Supply Chain Act applies also to companies with at least 1,000 employees.

Increasing standards are heavily driven by EU legislation: under the Sustainable Finance Disclosure Regulation financial market participants are obliged to publish information on the sustainability of their investment decisions. The Taxonomy Regulation defines requirements for sustainable investments and sets out criteria for determining whether an economic activity is to be classified as environmentally sustainable in order to be able to determine the degree of environmental sustainability of an investment.

The EU Corporate Sustainability Reporting Directive (CSRD), in force since 5 January 2023 and to be implemented by all members states within 18 months, intends to close existing gaps in reporting requirements and expand sustainability reporting overall including binding reporting standards at European level (ESRS). In Germany, the legislative process is underway, and a draft bill has been submitted that primarily makes adjustments to the German Commercial Code (HGB) in order to implement the CSRD regulations. The new reporting requirements must be applied at the earliest for financial years starting after 1 January 2024 if the company is already subject to the Non-Financial Reporting Directive (NFRD). The scope of the CSRD will be successively expanded in subsequent years. The draft also contains amendments to the German Supply Chain Act so that, for example, parts of the reporting obligations under the CSRD do not apply if a company (voluntarily) prepares a sustainability report under the German Supply Chain Act which is then audited.

Furthermore, the EU Corporate Sustainability Due Diligence Directive (CSDDD) will require companies to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights and the environment. This corporate due diligence duty applies to companies’ own operations, their subsidiaries, and their value chains. The directive also requires large companies to develop a plan to ensure that their strategy is compatible with the goals of the Paris Climate Agreement. Besides, the duties of company directors are clarified to ensure that their decisions consider human rights, climate change and the environment. The CSDDD will necessitate changes to the German Supply Chain Act. We expect a dynamic development and directors are called upon to keep a close eye on the changing legal framework.

Currently only capital market-oriented companies, financial service providers and insurance companies have the obligation to report non-financially, and there are also sustainability-related disclosure obligations for such companies. This will change with the implementation of the CSRD, which obliges all companies above a certain size to report on sustainability.

Reporting in these cases includes information on:

• environmental issues (e.g. greenhouse gas emissions, water consumption, air pollution)
• employee issues (e.g. gender equality, health protection, safety at work)
• social concerns (e.g. dialogue at local and regional level)
• respect for human rights (e.g. prevention of human rights violations)
• combating corruption and bribery (e.g. instruments used).

If there is no obligation for non-financial reporting, directors may be reporting voluntarily as companies increasingly use sustainability issues to create a positive external perception.

Under the CSDDD, the duties of company directors will be clarified to ensure that their decisions consider human rights, climate change and the environment.

German companies do not need to form a board of directors. Generally, appointing just one managing director (“Geschäftsführer”) is sufficient. The company’s articles of association (“Satzung”) may specify a higher number of directors. If there is more than one managing director, the managing directors together might be regarded as “the board”. 

Establishing a separate supervisory board may be mandatory under employee co-determination rules if the company has more than 500 employees. In such a case, a part of the supervisory board members is elected by the employees. A voluntary advisory board or supervisory board may also be provided for in the articles of association.

There is no distinction between executive directors and non-executive directors. In particular, all directors share a joint responsibility for the affairs of the company. The role of a supervisory board and its members is limited to oversight. In case of a mandatory supervisory board, the tasks are defined by the applicable co-determination rules, and more extensive co-determination rights apply if the company has more than 2,000 employees. 

There are generally very few restrictions on who can become a managing director. Only individuals (as opposed to companies or other corporate entities) may be appointed as managing directors. Managing directors are not required to be German citizens and do not need to be resident in Germany. The practice of some commercial registers (“Handelsregister”) is, however, to require foreign managing directors to be capable of entering Germany at any time. 

The method of appointing managing directors is determined by law and the articles of association of the company. A managing director is usually appointed by a resolution of the shareholders or, if permitted under the articles of association, by a committee of shareholders or the advisory board. If there is a mandatory supervisory board and the company has more than 2,000 employees, managing directors are appointed by the supervisory board. In this instance, one of the company’s managing directors must be an employment director (“Arbeitsdirektor”), with special responsibility for employment matters. Where an employment director is required, the minimum number of directors is increased to two. 

Notification of the appointment and an affidavit signed by the managing director and notarised by a notary public must be submitted to the commercial register.

Appointments are frequently open-ended, but can also be made for a fixed term. In addition to formal appointments, companies regularly enter into service agreements with their managing directors. 

A managing director may resign from his/her office at any time by giving notice to the company, although such resignation may constitute a breach of contract. 

A managing director is subject to removal by shareholders’ resolution at any time. However, he/she may still be entitled to his/her salary and other benefits under a service agreement. 

Notice of the resignation or removal of a director must be provided to the relevant commercial register in notarised form. 

The power of managing directors to represent the company in dealings with third parties (V  “ ertretungsbefugnis”) is generally unlimited. German law distinguishes between the unlimited external power to represent and the internal authority to conduct the business of the company (“Geschäftsführung”). Only the latter may be limited, while third parties are protected by the unlimited power of representation. 

Generally, the company is represented by all its managing directors acting jointly. This rule, however, is often altered by the company’s articles of association. For example, one of the managing directors may be granted sole power of representation, or alternatively any two managing directors together, or one of the managing directors together with a holder of procuration (“Prokurist”), may represent the company. 

The managing director’s authority to conduct the business of the company is restricted by the articles of association, internal management rules, the service agreement and possibly by shareholders’ resolutions, supervisory board resolutions and decisions taken by the managing director(s) themselves. It is common practice to include a list of matters which fall outside the managing director’s authority in either the articles of association, the internal management rules or the service agreement. The managing director may not act in respect of such matters without prior approval from the competent body (usually the shareholders’ meeting). 

If there is more than one managing director, their cooperation should be regulated by the company’s articles of association or  by internal management rules. Under the statutory model of a German limited liability company, all “board members” have the same rights and duties. The managing directors are, as a general rule, required to jointly manage the company. The shareholders or the directors may allocate certain tasks to one or more managing director(s). However, such allocation of responsibilities does not affect the overall responsibility of each managing director for the company’s business as a whole. 

Appointment as a managing director does not in itself create a contractual relationship between the director and the company or entitle the director to remuneration.

The company therefore usually enters into a service agreement with the managing director, specifying the managing director’s duties and remuneration and containing provisions on matters such as confidentiality, non- solicitation, non-competition and fringe benefits. The service agreement is entered into by all shareholders on behalf of the company (unless there is a mandatory supervisory board) and the managing director.

Alternatively, such service agreement may also be concluded between the managing director and a different group company, e.g. the shareholder of the company. 

Removal of a director does not automatically terminate a service agreement and vice versa. Subject to certain restrictions, the service agreement may, however, expressly stipulate that if an individual ceases to be the managing director of the company, then his/her service agreement shall terminate as if notice of termination had been given. 

A managing director is subject to a statutory covenant not to compete with the company’s business while holding his/her office. The shareholders may release the managing director from this covenant at any time. Any non- competition and non-solicitation covenants which go beyond the statutory covenant must be set out in the service agreement. 

A managing director cannot represent the company in dealings with himself/herself or with a third party represented by him/her (such as another “affiliated” company for which he/she also acts as managing director), unless authorised by a shareholders’ resolution. Such a resolution has to be permitted by the company’s articles of association and filed with the commercial register. 

The duties of the managing director are complex and this section merely provides a basic introduction to the subject. A managing director must comply with mandatory provisions of the law, the articles of association, the provisions of any service agreement, and shareholders’ resolutions. 

In all matters concerning the company, a managing director must exercise the diligence of a “prudent businessperson”. The test is objective and requires the director to exercise reasonable care, without regard to his/her own individual level of skill and experience. 

A managing director is subject to a wide range of specific statutory duties, for example requiring him/her to:

• ensure all statutory filings with the commercial register are made comply with the statutory requirement to maintain accounts
• uphold the principles of capital maintenance (i.e. not to pay back to shareholders the stated share capital of the company) – a doctrine that has led to very complex case law and which particularly affects intra-group transactions such as cash pooling or upstream loans/upstream securities
• prepare for and convene the annual shareholders’ meeting,
• report to shareholders and answer their requests for information. 

The managing director must also ensure that the company meets its obligations under public law – in particular tax and social security laws. 

The managing director must, in all circumstances, act in the best interests of the company, which are not necessarily identical to the shareholders’ interests. However, the shareholders’ meeting or the sole shareholder of a limited liability company may influence every single management issue by giving instructions to the managing directors. A breach of the duty to act in the best interests of the company can also be ratified by the company’s shareholders. 

There are also many duties of a managing director aimed at protecting the interests of third parties such as the company’s creditors and even the general public (for example, the tax and social security authorities). 

If the company is in financial difficulties, there is a greater onus on the managing director to act in the interests of creditors, and a greater risk of the managing director incurring personal liability. Professional advice should therefore be obtained as a matter of course. 

If the company becomes insolvent or over-indebted, the managing director must file a petition for insolvency proceedings without undue delay, but in any case within 3 weeks of the company becoming insolvent or over-indebted. As soon as the company gets into financial difficulties and well before filing for insolvency may be required, managing directors are under a continuous monitoring obligation so that they are in a position to act without undue delay once insolvency or over-indebtedness are established. 

If the company’s financing through to the end of the following financial year is in question, managing directors need to assess carefully the future viability of the company’s business. Should they fail to conclude that there is a high likelihood that the enterprise will continue to exist, a stricter over-indebtedness test applies even at that point in time. 

Failure to file for insolvency proceedings in time is a criminal offence. One of the consequences of a conviction would be a prohibition on being a managing director of a company for a period of 5 years. 

A managing director who negligently or intentionally breaches his/her duties to the company is liable for damages vis à vis the company. However insofar as a managing director’s action has been (validly) approved or ratified by the shareholders, the company is, as a general rule, precluded from claiming damages in relation to such breach.

If misconduct can be attributed to several managing directors, they are liable on a joint and several basis. Particular liabilities may arise in connection with the managing director’s duty to monitor the contribution to, and maintenance of, the company’s share capital. 

If the obligation to file for insolvency in time is not complied with, the managing director is liable for damages not only to the company but also to third parties – in particular to creditors of the company. In such a case, the managing director may also be held liable by the company or, in particular, by its insolvency administrator for payments made by the company after insolvency or over-indebtedness are established. 

A breach of the managing director’s obligations under tax and social security laws may also have implications extending beyond liability to the company. In the event of misconduct or gross negligence, the relevant governmental authorities may have a cause of action against the managing director, and in extreme cases, criminal sanctions may ensue. 

It is somewhat doubtful under German law whether the managing director’s liability to the company can be validly limited in advance by any kind of general agreement.

The company, however, may waive specific claims against a managing director. The shareholders of a company regularly resolve to approve the managing director’s management (“Entlastung”) after the close of each business year. Such formal approval operates as a waiver of any claims which were identifiable at the time of the resolution.

The managing director’s potential liability towards third parties is not subject to limitation or waiver by the company. Equally, there can be no limitation or waiver where the managing director’s liability to the company is related to the interests of the company’s creditors (most particularly, in an insolvency situation). A managing director’s liability may be covered by an indemnity from the parent company – if so agreed and to the extent permitted by law. Furthermore, the company may take out directors’ and officers’ liability insurance cover (“D&O”) in favour of its managing directors.