Germany: Kept Out: Appointment of Foreign Managing Directors That Do Not Have the Ability to Enter the Country at Will

Last Updated: 29 November 2010
Article by Marc O. Peisert

GERMAN M&A AND PRIVATE EQUITY NEWS - 4TH QUARTER 2010

Appointing a foreign national as the managing director of a German limited liability company ("GmbH") is a wellestablished practice in Germany. Particularly when a foreign company acquires a German company, a representative of the parent company is often appointed as an additional managing director on the German management team. It is undisputed that foreign citizenship as such is not by any means an obstacle to such an appointment. What is disputed is whether and to what extent a managing director who is not resident in Germany must be authorized to enter Germany, an issue not expressly addressed by statute. More specifically, the question is whether a managing director must be present in Germany in order to meet his obligations and to what extent his ability to enter and exit the country plays a role in this context.

On a practical level, this question becomes relevant when the appointment of the managing director is registered in the commercial register. The commercial register may refuse to make such registration if there is an obstacle to the appointment. The practical application of these rules by the commercial registers has been inconsistent. Frequently, the appointment of a foreign national as a managing director is simply waved through. No problems arise in the case of nationals of EU member states, who are entitled to enter the country at any time under EU law, as well as nationals of countries exempted from visa requirements, who typically receive a residency permit of up to three months without any particular authorization. Since a high-court decision has not been forthcoming, the courts at the commercial registers may question the residence-permit status of a managing director in individual cases, which in the worst case may lead to the refusal to register the managing director. However, a recent decision of the court of appeal of Munich (31 Wx 142/09, December 17, 2009) emphasizes that the law, particularly due to the internationalization of corporate law in recent years, is leading towards liberalization of the treatment of nonresident managing directors.

Decision of the Court of Appeal of Munich

In the case before the court, the presence of the managing director in Germany was merely tolerated by the authorities, and he had no valid residency or work permit. The trial court was of the opinion that a foreigner from a state outside the EU had to prove he had the ability to enter Germany at any time. This was not the case with respect to the petitioner, since he was threatened with deportation and prohibition on re-entering the country. The court of first instance, concluding that there was no guarantee the managing director could satisfy the legal obligations of his office, confirmed the commercial register's rejection of his registration.

Until 2008, proponents of this hard line were supported by the so-called domicile theory (Sitztheorie), which generally applied to German companies until that time. According to this theory, the domicile of a company's administration had to be within Germany. The move of a company's administration to a location outside Germany would consequently lead to the liquidation of the company in Germany. Therefore, the business and administrative activities of the company could not be conducted from outside the country on a permanent basis without being subject to the charge of (impermissibly) having a foreign-domiciled administrative center. The only option a foreign nonresident managing director had was to reach material administrative decisions during regular visits to Germany. The question of whether he was entitled to enter the country therefore played a significant role.

Acknowledging that the question had previously been in dispute, the court was of the view that the requirement for a managing director living outside Germany to be able to enter the country at any time was invalid after the introduction of the so-called incorporation theory (Gründungstheorie) due to the recent reform of GmbH law. According to this theory, the administrative center of a GmbH may be located outside the country. Since a GmbH now has the option to transfer its entire administration outside the country without fear of sanction, there is no longer any foundation to the argument that it is extremely difficult for a managing director who is not entitled to enter the country at any time to access the company's books and records or contact its employees and business partners. The same principle must apply to a managing director who is currently residing in Germany but may not enter the country in the future. The court declined to give the commercial- register court the authority to review the residency status and the associated interconnection of laws concerning legal aliens and corporate law, since simple deportation or a prohibition on entering the country—particularly in light of the revised wording of the Limited Liability Companies Act—does not qualify as a ban from a profession that would render an appointment as managing director illegal under the Act.

Meeting the Obligations of a Managing Director From Outside the Country

This result is based on the assessment that lack of ability to enter the country at any time does not essentially pose an obstacle to the managing director's duty to properly manage the company, a duty that is also in the public interest. The court of appeal only marginally addresses this, presumably supported by the assumption that this assessment has already been made by the legislature and that express permission for a GmbH to have a foreign domicile is incompatible with the requirement for a managing director to have a place of residence in Germany.

This assessment, however, is also justified on the merits. Thanks to modern forms of communication, it is possible for a managing director residing outside the country to obtain the information relevant to the performance of his duties, as well as to implement his decisions in Germany by delegation. Even important actions that are reserved for the managing director—such as filing for bankruptcy—can be taken care of from outside the country.

Impact

The court of appeal of Munich follows previous decisions by the courts of appeal of Düsseldorf and Dresden. It is to be expected that additional courts will follow this view.

Although formal barriers regarding the registration in Germany of nonresident managing directors are increasingly likely to disappear, none of the substantive obligations to which managing directors are subject have been eased in any way. In order to avoid personal liability, a managing director residing outside Germany must ensure that he meets such obligations, and to this extent, he may find himself in a more difficult situation than a local managing director. As mentioned above, however, these practical difficulties can be largely dispelled through the establishment of adequate information, compliance, and delegation mechanisms by the managing director.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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