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3.4.1.9  Duties Related to Social Security and Taxes

The managing director, among other things, is obliged to fulfill specific fiscal duties (e.g. monthly preliminary sales tax and wage tax returns) and to arrange for the timely preparation and filing of the annual tax return.76 If the GmbH has employees for whom social security contributions have to be made, the managing director must also file and transfer the social security contributions properly and on time.

3.4.1.10  Information on the Business Letterhead

The managing director must ensure that the company’s business letterhead contains the following information: the company’s legal form and principal place of business, the court at which the Commercial Register is maintained and the Commercial Register number, the last name and at least one fully spelled-out first name of each managing director; if the GmbH has a supervisory board, the last name and at least one fully spelled-out first name of the chairman of the supervisory board.77

3.4.1.11  Other Duties

As far as the managing director is authorized to manage the company’s business, it is her/his duty to manage it as appropriately and as beneficially as possible. The managing director shall keep himself informed about the company’s situation and take appropriate organizational steps to enable her/him to be up to date concerning the economic and financial situation of the company at all times.

In addition to the specific legal duties outlined above, the managing director is also bound by certain fiduciary duties. For instance, she/he must take the company’s interests into consideration and protect them (i.e. she/he may not use the company’s assets solely for her/his private purposes nor is she/he allowed to take any personal advantages related to business activities, for example in the form of commissions or bribes). Such fiduciary duties also include duties of confidentiality, non-com- petition and the duty to make use of so-called ‘corporate opportunities’ only in the interest of the company.

3.4.2  Liability Risks of Managing Directors

The managing director has exposure to a variety of liability risks in connection with her/his duties to the GmbH and third parties. The most important liability scenarios are outlined below.

3.4.2.1  Liability to the Company

The managing director of a GmbH must exercise the care of a prudent businessman when managing the affairs of the company.78 Managing directors who violate their duties are jointly and severally liable to the company for the resulting damages.79

76  See Sec. 34 of the German Tax Code (Abgabenordnung, AO). 77  See Sec. 36 GmbHG.

78  See Sec. 43 GmbHG.

79  See Sec. 43 para 2 GmbHG

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There are two exceptions to this rule, the first (and practically more important) one being the so-called ‘business judgment rule’.According to this rule, a managing director is not considered to have violated her/his duties when making a business decision if she/he (at the time of her/his decision) reasonably believed to be acting in the best interest of the company on the basis of sufficient information.80 The second exception involves cases in which the managing director has followed the binding instructions of the shareholders’meeting.

If these exceptions do not apply, the managing directors are liable for damages, in particular, in the event of payment from funds necessary to preserve the registered share capital, or in the event of a forbidden purchase by the GmbH of its own shares.81 In addition, the managing director must reimburse the company for any payments made in breach of duty following the date on which the GmbH becomes insolvent or the date on which it is determined that the GmbH is over-indebted.82 The managing director is also liable for any payments made to shareholders which leadthecompanytobecominginsolvent,83 andthemanagingdirectorcanonlyavoid this liability if she/he constantly monitors the financial situation of the company.

Finally, the managing director of the GmbH may also be liable to the company for damages for illegal actions under the German law of torts (delicts).84 Examples include committing criminal offences (e.g., for breach of fiduciary duty or fraud) or willfully causing damages to the company.

3.4.2.2  Liability to the Shareholders

The managing director is liable to the shareholders for any unauthorized repayments of capital contributions from the GmbH’s registered share capital.85 Managing directors are also liable if they violate the right of membership (Mitgliedschaftsrecht) of a shareholder, for instance by violating the competences of the shareholder’s meeting or by ignoring the obligation of equal treatment owed towards the shareholders.86

Moreover, the managing director may be subject to liability under German tort law for providing false information at the time of formation of the company or at any time thereafter.87 Thus, managing directors are liable for all emerging damages

80  The business judgment rule is based on the decision of the Federal Court of Justice in the case ARAG v. Garmenbeck as of 21April 1997, see BGHZ 135, 244.

81  See Sec. 33 GmbHG.

82  See Sec. 64 sentence 1 GmbHG. However, this liability does not apply to payments being made after this date if these payments have been made using the diligence of an orderly businessman, see Sec. 64 sentence 2 GmbHG.

83  See Sec. 64 sentence 3 GmbHG 84  See Secs. 823 et seq. BGB.

85  See Sec. 31 para 6 GmbHG.

86  See Sec. 823 para 1 BGB; the membership right of a shareholder is regarded as ‘another absolute right’in the sense of the provision.

87  See Sec. 9a para 1 GmbHG.

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if they do not disclose a non-cash contribution which was planned as being covert when registering the GmbH.

Finally, if the managing director violates her/his duty to file a signed list of shareholders immediately after a change in shareholders has taken place or the amount of the respective shareholder’s shares has been effected, she/he can be held liable by those shareholders whose shareholdings have changed.88

3.4.2.3  Liability to Creditors of the GmbH

The managing director may also be liable to creditors of the company, for example, in the following cases:

Liability by Estoppel based on Pretended Authority

If the managing director does not disclose in business negotiations that she/he is acting on behalf of the GmbH, she/he may be personally liable by virtue of her/his prima facie authority to be the contractual partner (Rechtsschein).The managing director may, for example, be subject to so-called liability by estoppel, if she/he gives her/his contractual partner the impression of acting as an independent businessman (instead of the GmbH she/he represents), and thereby induces her/his contractual partner to rely upon personal liability of a natural person.

Liability for Culpa in Contrahendo

The managing director may also be personally liable for a breach of specific precontractual duties (so-called culpa in contrahendo) when representing the GmbH in negotiations with third parties.89 The principles of culpa in contrahendo would generally apply to the GmbH as the contracting party being represented by the managing director. However, under specific circumstances also managing directors may be held personally liable, if, e.g., during the negotiations of the contract, the managing director provided the other party with a personal guarantee for the correctness and completeness of her/his statements thereby causing the other party to place special reliance on her/him personally. For example, the managing director may be personally liable for damages incurred by a creditor, who relies upon incorrect representations of the managing director, entered into an agreement with the GmbH after the GmbH had already become insolvent. If the GmbH later fails to perform its obligations, the managing director may be held liable for so-called ‘reliance damages’.

Belated Filing for Insolvency

If the managing director culpably breaches her/his duty to file a petition for initiation of insolvency proceedings, the managing director may be personally liable for damages to creditors of the company.90

88  See Sec. 40 para 3 GmbHG; damages to these shareholders may occur from the possibility of bona fide purchase of shares by non-shareholders, introduced by MoMiG.

89  See Secs. 311 para 3, 241 para 2, 280 para 1 BGB.

90  Sec. 823 para 2 BGB in conjunction with Sec. 15a InsO.

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Product Liability

If the GmbH manufactures products, the duties of proper design, manufacture, and instruction, as well as product monitoring duties generally apply to the GmbH as the manufacturer. The managing director, however, is personally subject to specific organizational duties. She/he must ensure that the company does not market defective products and is thus responsible for the organization of product safety and quality management procedures. The managing director is also responsible for providing appropriate product information and appropriate product monitoring procedures. The managing director may be personally liable for a violation of these organizational duties if she/he knew or should have known that the products were defective and failed to prevent, or failed to prevent the distribution of such products in a timely manner, or failed to recall such products when such recall was required.

3.4.2.4  Liability for Violations of Competition Laws by the GmbH

The managing director may also be held personally liable for anti-competitive practices of the GmbH if she/he personally breaches competition laws or if she/he participates in the breach or infringement of unfair competition, antitrust laws or intellectual property rights, either directly or indirectly. Even if the managing director did not actively participate in such violations, her/his personal liability may result if she/he had knowledge of and, thus, an opportunity to prevent the violations. The managing director further must ensure that other managing directors, employees and third parties acting on behalf of the company do not violate unfair competition or antitrust laws or infringe intellectual property rights.

3.4.2.5  Personal Liability under Tort Law

In addition to the reasons for liability described above, the managing director may also be subject to liability under German tort law vis-à-vis the company’s creditors. The managing director may, for example, be held liable under Sec. 823 para 2 BGB together with certain provisions of the StGB which were specifically designed for the protection of business assets (fraud, breach of fiduciary duty, embezzlement) if the managing director recklessly causes damage to a business partner of the GmbH, e.g. by deceiving such a business partner with regard to a financial crisis of the company. In addition, if the managing director fails to comply with certain provisions of environmental law or with data protection laws, the managing director may be held liable under Sec. 823 para 2 BGB.

Pursuant to Sec. 826 BGB, the managing director may also be liable for willfully causing damage to a third party in a manner contrary to public policy. For example, if the managing partner intentionally deceives such third party with regard to the insolvency of the GmbH at the time the agreement is executed or intentionally delays filing the petition for initiation of insolvency proceedings, she/he will be personally liable to the creditors.91

91  In case of a negligent belated filing she/he may be liable under Sec. 823 para 2 BGB in conjunction with Sec. 15a InsO instead.