3.3  Internal Organization	91

50000
40000
30000
20000
10000
0
14.11.08	01.11.2009	01.11.2010	28.02.2011

Fig. 3.4 Registered entrepreneurial companies (UG) in Germany. (Data according to Institut für Rechtstatsachenforschung zum Deutschen und Europäischen Unternehmensrecht Jena, available at: www.rewi.uni-jena.de.)

3.3  Internal Organization

As mentioned above, the GmbH is a highly flexible business vehicle. With only 87 sections, the GmbHG leaves many issues unregulated, thus leaving a considerable freedom for legal design. Therefore, the GmbH has been characterized as a laudable realization of the idea ‘think small first’.31 It is thus consistent that the rules governing the GmbH’s internal organization are not nearly as complex and rigid as the tight legal framework applicable to a GermanAG.

The GmbH is required to have a shareholders’ meeting (Gesellschafterversammlung) and at least one managing director (Geschäftsführer) as mandatory bodies (Organe). And, as indicated above, in certain instances the GmbH must also establish a supervisory board pursuant to specific German co-determination laws. If German co-determination rules do not apply, however, the implementation of a supervisory board is optional. In practice, also an optional advisory board (Beirat) is quite often created which, unlike the supervisory board, has less of a control function but rather assumes a more auxiliary, assisting role.

3.3.1  Shareholders’ Meeting (Gesellschafterversammlung)

The shareholders’ meeting has been coined the ‘supreme body’ of a GmbH.32 It is the forum in which the shareholders—as owners of the company—meet and make the necessary decisions.Although decisions regarding everyday operative management in practice are often made directly by the managing director(s), certain matters

31  See Bachmann 2008, p. 1065. 32  See e.g. Dornseifer 2005, p. 126.

92	3  Limited Liability Company (GmbH)

of general importance to the GmbH are reserved for decisions by the shareholders’ meeting.33 Furthermore, the GmbH’s shareholders’meeting may closely control the managing directors by giving binding instructions which may regard all matters concerning the company.34 In practice, managing directors are often bound by ‘rules of procedure for the management’ in which, among other things, certain management decisions require the prior approval of the shareholders’meeting.35 The shareholders also have the right to revoke the appointment of managing directors at any time (subject to a restriction of this right in the articles of association).36

The shareholders’ meeting is convened by the managing director(s) by registered letter with a notice of at least one week.37 At least one annual meeting must take place to approve the annual account, formally approve the management, and— where applicable—distribute the profits.38 Further (extraordinary) meetings shall be called whenever the situation of the company so requires.39 Also, a minority of shareholders holding at least 10% of the total shares of the company may demand a convocation at any time.40

General decisions are made by the majority of votes cast41, and amendments to the articles require a three-quarter majority.42 Each EUR 1 of a capital share grants one vote to the respective shareholder.43 Although, as a rule, decisions of the shareholders are made in the meeting, they are also free to decide in writing (letter, fax or email).44

33  See Secs. 46, 53 GmbHG; such exclusive competencies include, among others: amendments to the articles of association (incl. capital increases and reductions), approval of annual account, appropriation of profits, appointment and dismissal of managing directors, measures to check and supervise the management, partition and redemption of shares.

34  In contrast to theAktG, the GmbHG does not provide for an exclusive sphere of competence of the management body regarding day-to-day management; as the GmbH is specifically designed to suit the needs of closely held businesses, there is no mandatory separation of ownership and control.

35  See Sec. 46 no. 6 GmbHG. 36  See Sec. 46 no. 5 GmbHG.

37  See Secs. 49 para 1, 51 para 1 GmbHG. 38  See Sec. 46 nos. 1 and 5 GmbHG.

39  See Sec. 49 para 2 GmbHG; such extraordinary convocation is mandatory especially if a balance sheet shows that half the company’s share capital has been lost, Sec. 49 para 3 GmbHG. In case of an UG Sec. 5a para 4 GmbHG additionally requires a shareholders’ meeting to be summoned if illiquidity is imminent.

40  See Sec. 50 GmbHG.

41  See Sec. 47 para 1 GmbHG. 42  See Sec. 53 para 2 GmbHG. 43  See Sec. 47 para 2 GmbHG. 44  See Sec. 48 para 2 GmbHG.

3.3  Internal Organization	93

3.3.2  Managing Director (Geschäftsführer)

The managing director (Geschäftsführer)45 of the GmbH is responsible for the day- to-day management and representation of the corporation.46 As such, the managing director carries out any legal measures or other necessary actions appropriate for re­ alizing the purpose of the company. However, in contrast to the Vorstand of anAG, the managing director’s position and competence is weaker and less comprehensive. The managing director of a GmbH has to comply with the instructions of the shareholders, which may be issued either on a case-by-case basis or more generally through corresponding by-law provisions or rules of procedure for the management. Furthermore, certain matters of critical importance are generally reserved for decisions made by the shareholders’meeting as mandated by law.

The managing director is appointed and removed by a resolution of the shareholders’ meeting.47 The GmbHG defines specific requirements as to the eligibility of persons to be appointed as managing directors: Only natural persons with full legal capacity may be appointed48; legal entities are not eligible.49 In contrast to partnerships, the Geschäftsführer of a GmbH does not have to be a shareholder, but may be (and often is) an outsider with special business expertise (so-called Prinzip der Fremdorganschaft).50 Furthermore, the law enumerates a catalogue of criteria which automatically (ipso iure) disqualify a person from becoming appointed managing director, such as a final sentence for fraud or similar offences in the last five years prior to her/his appointment.51

The managing director is the legal representative of the GmbH. In case of more than one managing director, the general rule is that the company has to be represented jointly by all managing directors.52 Modifications of this principle, such as stipulating a power of sole representation for one of the managing directors in the articles of association, are quite common in practice. E.g., exemptions from the legal prohibition of self-contracting and multiple representation authority (Sec. 181 BGB) may be advisable, particularly in cases in which the same person is appointed as managing director of several entities in a group of companies. Restrictions of the power of representation have, as a general rule, no effect vis-à-vis third parties. However, if the managing director violates internal restrictions (e.g. she/he concludes a contract without the required prior approval of the shareholders’meeting) she/he may be liable for breach of duty.

45 A GmbH must have at least one managing director (Sec. 6 para 1 GmbHG); there is no maximum number. For the sake of readability we will use to the singular unless otherwise appropriate.

46  See Sec. 35 para 1 GmbHG. 47  See Sec. 46 no 5 GmbHG. 48  See Sec. 6 GmbHG.

49  In corporate group structures it is therefore the CEO of the controlling entity, not the controlling entity itself who is appointed as Geschäftsführer of a subordinated GmbH.

50  See Sec. 6 para 3 GmbHG. 51  See Sec. 6 GmbHG.

52  See Sec. 35 para 2 sentence 1 GmbHG.