Effective management control by foreign shareholders

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last updated on 22 February 2022 | reading time approx. 1 minute
from Mathias Becker
 
Foreign investors have a burning interest in effectively managing their subsidiaries or shareholdings in Germany. Companies operating as limited liability companies (GmbH) offer the best opportunities for controlling management bodies.
 
 
Germany as a business location is still very popular among domestic and foreign investors. Therefore, foreign entrepreneurs and companies are increasingly investing in Germany by either acquiring shares in existing companies or establishing new subsidiaries here.
 
When a foreign entrepreneur or a foreign company becomes a shareholder in a German company, they usually face the pressing question of whether and how the management bodies of the German company can be supervised. Experience shows that this question is often even an important criterion for foreign investors when deciding whether to invest, especially since these management positions in German companies are often filled by German executives for a variety of reasons (local presence, knowledge of the domestic market, command of the language, etc.), who are, of course, usually unknown and, above all, unfamiliar to the foreign shareholder.
 
The opportunities for supervising the management bodies of German companies usually depend on
  • (1) the legal form of the German company and
  • (2) the contractual provisions.

 

For a potential investment in Germany, of course, you can consider all business forms present in German company law. In most cases, however, a foreign shareholder chooses the form of a limited liability company (GmbH) or, less frequently, a joint-stock company (AG). In practice, other business forms however play only a minor role in such cases. Compared to the AG, the GmbH offers far more effective ways of supervising the management bodies. This is because while the management board of a GmbH is bound by instructions of the shareholders' meeting, the board of directors of an AG acts in principle independently and can only be supervised – and not by the stockholders but by the supervisory board.
 
However, even for a GmbH it is advisable to contractually ensure that the management board member is effectively controlled, as the legal protection of the shareholder usually does not go far enough. Thus, the power of representation of the management board member, who in principle can represent the GmbH towards third parties without limitation, can be restricted within the internal relationship with the GmbH, for example, by introducing reservations of consent. Regular reporting obligations can also be regulated to the benefit of the shareholders. Such regulations can be included in the articles of association of the company or in the service contract with the management board member. In most cases, however, it is advisable – especially if the German company has several management board members – to include these regulations in the rules of procedure for the management board. The advantage: Contrary to the service contract, rules of procedure can be changed at any time, even against the will of the management board member, and thus adjusted to current circumstances.

 

Conclusion 

Summing up, we can conclude that the GmbH as a business form offers the best protection for a foreign shareholder who is interested in controlling the management bodies. However, it is strongly recommended that this protection be further improved individually by incorporating appropriate regulations, ideally by adopting rules of procedure.

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