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When it comes to the removal of a shareholder managing director of a GmbH, a type of German private limited liability company, for good cause, it is a matter of whether there was in fact good cause at the time the decision was taken.

Disputes among the shareholders of a GmbH are not uncommon. If these give rise to a situation whereby the shareholder managing director is set to be removed and his or her employment contract terminated, it is often the shareholder managing director”s right to vote at the general meeting of the shareholders that tips the scale. That being said, he or she will not be able to exercise their right to vote if they are being removed for good cause. We at the commercial law firm GRP Rainer Rechtsanwälte note that a frequent point of contention in the case law is whether it is enough for good cause justifying removal to have a merely formal basis or whether good cause needs to be objectively supported by the facts and circumstances.

The Bundesgerichtshof (BGH), Germany”s Federal Supreme Court, has provided clarity on this issue. In its judgment of April 4, 2017, the BGH ruled that when it comes to removing a shareholder managing director of a GmbH or terminating his or her employment contract, it is a matter of whether there was in fact good cause at the time the decision was taken. The burden of proof is on the party making reference to good cause (Az.: II ZR 77/16).

In the instant case, two shareholders of a GmbH had differences of opinion. The plaintiff held 49 per cent of the shares in the company and sought the immediate removal of the managing director as well as termination of his employment contract. The defendant shareholder managing director held 51 per cent of the shares. He voted against the proposals in the general meeting of the shareholders and secured their rejection.

The legal proceedings concerned whether the shareholder managing director had been allowed to exercise his right to vote in the first place. The action was unsuccessful. The BGH held that there needs to objectively be good cause justifying removal and termination of the employment contract at the time the decision was made. The Court ruled that no such good cause existed at the time of the general meeting of the shareholders. The BGH went on to say that there can be said to be good cause if any further activity by the managing director would be unreasonable for the company, especially if this is due to gross derelictions of duty.

Lawyers who are experienced in the field of company law can advise shareholders and managing directors in the event of disputes and see to it that there are detailed contractual arrangements.