Managing director liability & company law

Case study – exceeding authority

A contract too big, governance too unclear – and suddenly the GmbH’s ability to act is on the line.

1) The case (fictitious)

Initial situation

A mid-sized technology company comes under pressure on time and costs. To secure supply chains, the sole managing director swiftly concludes a long-term supply and service agreement of considerable volume. Articles of association, rules of procedure and the service agreement do contain approval catalogues and thresholds – but they are drafted inconsistently and have not been applied consistently for years.

As liquidity tightens, the majority shareholders classify the contract as an excess of authority, remove the managing director and terminate the service agreement without notice. Their aim: separation without severance, reduction of variable remuneration and protection against alleged liability risks. At the same time, the question arises whether the GmbH remains bound by the contract with the third-party company.

What it’s all about legally

• External relationship: In principle, the power of representation of the executive body has unlimited effect vis-à-vis third parties; internal approval obligations are primarily binding internally. As a rule, the company remains bound by the contract.
• Questions of corporate bodies and resolutions: removal and accompanying resolutions are valid only if convening, agenda, resolution process and majority are in proper order. A long-standing practice of swift individual decisions can carry weight.
• Employment contract law: There must be good cause for termination without notice. In the case of contradictory documents and tolerated sole signing, a warning is usually reasonable. The ex-ante view is decisive: Was the decision justifiable and within the company’s discretion?
• Evidence & profitability: Minutes, e-mail chronologies, signature/approval lists as well as budget and framework resolutions show the actual decision-making culture. KPI, liquidity and calculation documents support justifiability.
• D&O: Early claims notification and coverage review ensure scope for defense.

2) How I help

First, I take the pressure out of the situation: the dismissal without notice is challenged, payment claims and inspection rights are secured, and all relevant documents (contracts, minutes, emails, KPI and accounting data) are organised and preserved. In parallel, I clarify whether the company remains bound by the third-party contract already concluded.

Afterwards, I reconstruct the practice at the time of signing: which transactions were previously executed without explicit resolutions? Which budget or framework resolutions operated as implicit approvals? What were liquidity, risk and calculations at that time? On this basis, termination without notice can often be defused – externally the company remains bound, internally there is no “good cause” or a prior warning takes precedence. This makes both fixed and variable remuneration calculable.

I then define the strategic direction together with the client. Either continuation with rehabilitation, if trust and economics support it (withdrawal or conversion of the termination, clear approval and reporting lines, proper bonus accounting). Or an orderly exit with a settlement package, if separation is the more appropriate route: remuneration until the end of the ordinary term, variable entitlements after inspection, appropriate severance, mutual release of further liability allegations, a neutral reference letter, and a smooth handover of IT and data. In parallel, I bring the third-party contract economically on track with the counterparty (e.g. deferral or milestones) to ensure the GmbH does not incur consequential damage.