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 brink.

1) The case (fictitious)

Initial situation

A medium-sized technology company is under time and cost pressure. In order to secure supply chains, the sole managing director concludes a long-term supply and service contract with a considerable volume at short notice. Although there are approval catalogs and threshold values in the articles of association, rules of procedure and service contract, they are formulated inconsistently and have not been applied consistently for years.

As liquidity becomes tighter, the majority shareholder views the deal as an overstepping of authority, dismisses the managing director and terminates the employment contract without notice. Objective: separation without severance pay, reduction of variable remuneration and protection against alleged liability risks. At the same time, the question arises as to 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.
• Board and resolution issues: Dismissals and accompanying resolutions are only valid if the summons, agenda, resolution and majority are correct. The practice of quick individual decisions over many years 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 of all, I take the pressure off the situation: the termination without notice is legally challenged, payment claims and inspection rights are secured and all relevant documents (contracts, minutes, emails, KPI and billing data) are organized and preserved. At the same time, I clarify the company’s commitment to the third-party contract that has already been concluded.

I then reconstruct the practice at the time of signing: Which transactions were previously signed without explicit resolutions? Which budget or framework resolutions had the effect of tacit approvals? What did liquidity, risk and calculation look like back then? On this basis, termination without notice can often be defused – effectively bound on the outside, no good cause or priority of a warning on the inside. This makes fixed remuneration and variable components calculable.

I then determine the direction together with the client. Either continuation with rehabilitation, if trust and profitability speak in favor of this (withdrawal or conversion of the termination, clear approval and reporting lines, correct bonus settlement). Or an orderly exit with a package, if the separation is more appropriate: remuneration until the end of the ordinary period, variable claims after inspection, appropriate severance pay, mutual settlement of further liability allegations, neutral reference letter and a trouble-free handover of IT and data. In parallel with the contractual partner, I bring the third-party contract back on track economically (e.g. extension/milestones) so that the GmbH does not suffer any consequential damage.