Action for Withdrawal of Management Authority

The withdrawal of the management authority means that a shareholder is deprived of the right and the duty to make decisions for the company in current matters. It exclusively concerns the internal relationship of the company. While § 117 UGB governs the withdrawal of the management authority, § 127 UGB concerns the power of representation externally. Both standards require the existence of an important reason and serve to maintain the functionality of the company.

Legal Basis and Objectives

According to § 117 para 1 UGB, a shareholder’s management authority can be withdrawn by judgment for important reason.

§ 127 UGB regulates the withdrawal of the power of representation with the same content. Both provisions serve to protect the company from conduct that is in breach of duty or unsuitable, but at the same time ensure that the shareholder concerned has legal protection against arbitrary dismissal.

In addition, § 117 para 2 UGB standardizes the right of the shareholder with management authority to himself terminate his management authority for an important reason if the further exercise of the management is no longer reasonable for him.

The aim of these regulations is to balance conflicting interests:

• Protection of the company from damage caused by misconduct,
• Protection of the shareholder concerned from unjustified withdrawal of his management function

Scope

§ 117 UGB applies both to general partnerships (OG) and limited partnerships (KG) and already in the start-up phase. For the GmbH & Co KG, § 117 para 1 UGB only applies to the general partner GmbH, but not to its managing directors, as an intervention in the internal organizational autonomy of the GmbH would be inadmissible.

Withdrawal of Management Authority Pursuant to § 117 Para 1 UGB

The withdrawal eliminates both the right and the duty to manage the business. This means that the shareholder concerned loses his decision-making competence in management-related matters.

The withdrawal can relate to an individual management authority or to a joint management authority with an extended or restricted scope. A contractually agreed departmental responsibility or the right of objection as part of the management can also be affected.

• Individual management authority: If a shareholder is allowed to make decisions alone, this right can be completely withdrawn from him
• Joint management authority: If several shareholders are only allowed to decide together, the withdrawal can be designed in such a way that the shareholder concerned is excluded from this joint authority
• Departmental responsibility: If a shareholder only has certain areas of responsibility according to the contract (e.g. finance, personnel), only this department can be withdrawn from him
• Right of objection: Even the right to veto decisions of other managing directors can be withdrawn

Important Reason as a Prerequisite

The withdrawal of management authority is an exceptional instrument to protect the interests of the company. If there is an important reason, it allows the premature termination of an ongoing management authority if its continuation is unreasonable.

1. Balancing of interests

The focus is on a balancing of interests between the shareholder concerned and the other shareholders or the company. The decisive factor is whether the maintenance of the management authority is still reasonable for the co-shareholders. In particular, conduct, merits, economic effects and possible degrees of fault must be taken into account.

2. Gross breach of duty

An important reason exists in the event of significant violations of legal or contractual obligations, such as:

• Disregard of approval or objection rights of other shareholders
• dishonest, blocking or inactive management
• Exceeding powers, abuse of the management function or damage to the company
• Violation of the non-competition clause or serious personal misconduct towards co-shareholders

The prerequisite is generally culpable conduct, whereby it is disputed whether gross or even slight negligence is sufficient.

3. Inability to properly manage the business

Another important reason is the inability to properly manage the business. It can be based on external circumstances and does not require fault. Examples:

• permanent illness or prolonged absence
• lack of specialist knowledge or failure to undergo further training
• age-related restrictions

This inability must objectively impair the proper management of the company.

4. Proportionality test

Each withdrawal is subject to a review of proportionality. The interference with the shareholder rights must be suitable and necessary to restore proper management. Milder means, such as a temporary restriction or internal reorganization of the management, must be examined as a priority.

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Jurisdiction and Filing of the Action

Participation of all Shareholders

All shareholders must be involved in the withdrawal procedure, including those who are excluded from management or representation. They form a necessary community of litigants on both the plaintiff and defendant sides. A mere out-of-court consent of individual shareholders is not sufficient. A waiver of the claim or a withdrawal of the action is only possible jointly by all co-litigants.

Involvement of Dissenting Shareholders

If a shareholder refuses to consent to the filing of the action, even though the withdrawal is in the interest of the company, he can be included in the proceedings as a co-defendant and sued for toleration of the action.

The defendant is the shareholder with management authority whose authority is to be withdrawn. If several managing directors are affected, a joint action can be brought, provided that the same reasons or an internal connection exist.

Time of Filing the Action

There is no statutory deadline. Nevertheless, the action must be filed immediately as soon as the important reason is known. Waiting for a longer period of time can diminish the importance of the reason and suggest that the continuation of the management authority remains reasonable.
Even ongoing grievances can be asserted at any time as long as they persist.
If the important reason ceases to exist during the process, the basis for the withdrawal no longer exists.

Interim Injunction to Secure the Claim

Until the judgment becomes final, the management authority remains in effect in principle. In order to protect the company from damage, the withdrawal claim can be secured by an interim injunction.

For this purpose, an important reason and a concrete endangerment of the company’s interests must be substantiated. The court can order various measures by way of discretion, such as:

• the complete or partial withdrawal of management authority,
• the prohibition of certain activities or access to business premises,
• the temporary transfer of management to other shareholders or third parties

The shareholders also form a uniform party to the dispute in the interim injunction proceedings.

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Legal Consequences of the Withdrawal

With the final validity of the judgment, the management authority of the shareholder concerned expires. He may no longer take any management actions and is liable for any damages incurred in the event of violations.

Any employment relationship is not automatically terminated by the withdrawal, but can be terminated for an important reason. The claim to managing director remuneration is generally void, unless otherwise agreed.

The management authority of the remaining shareholders remains unaffected. If the withdrawn shareholder is the sole managing director, the remaining shareholders must re-regulate the management.

Termination of Management Authority Pursuant to § 117 Para 2 UGB

According to § 117 para 2 UGB, shareholders have an inalienable right to unilaterally terminate their management authority for an important reason. This right of design allows the premature termination of the permanent obligation of management if the continuation is unreasonable. The shareholder status remains, only the management authority and duty is terminated.

Important Reason and Requirement

An important reason exists if the exercise of management is no longer reasonable for the shareholder. It can arise from personal circumstances (e.g. illness, age, prolonged absence) or disrupted relationships with the co-shareholders.
Own breaches of duty do not justify termination. The view of the terminating shareholder is always decisive.

Assertion

The termination is informal, but must be received by all co-shareholders in order to become effective. The articles of association change accordingly upon receipt. There is no statutory deadline, but waiting for a longer period of time may indicate the reasonableness of the continuation. In the event of untimely termination, the shareholder is liable for damages, provided that he terminates immediately without a compelling reason, although a reasonable transitional period would have been possible.

Legal Consequences of the Termination

The management authority ends either with the expiry of the notice period or, if a continuation is unreasonable, with immediate effect. If the termination occurs without the existence of an important reason, it remains without legal effect and the shareholder is liable for any breaches of duty. With an effective termination, the power of representation also expires, as the law does not provide for an independent termination option for this.

Structuring under the Articles of Association

The articles of association can further elaborate on the withdrawal of management authority by providing for additional termination reasons (e.g. age limit, expiry of time, loss of legal capacity) or deadlines for filing an action. Similarly, facilitated withdrawal mechanisms up to dismissal without an important reason can be agreed.

Instead of a court action, the articles of association can also provide that the withdrawal of management authority is carried out by a majority or unanimous resolution of the shareholders. However, the shareholder concerned has the right to bring an action for declaratory judgment against an unjustified withdrawal resolution, whereby the possibility of a judicial review may not be contractually excluded.

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Withdrawal of the Power of Representation Pursuant to § 127 UGB

The withdrawal of the power of representation follows the same requirements as § 117 UGB, but concerns the right to represent the company externally, since both standards are largely identical in content, the principles developed for § 117 UGB apply mutatis mutandis to § 127 UGB.

In practice, the withdrawal of management authority is often combined with the withdrawal of the power of representation in order to achieve a complete separation of management competence.

The action is jointly admissible and expedient in both cases if there is a uniform important reason.

Subject of the Withdrawal

In contrast to the withdrawal of management authority, § 127 UGB concerns the power of representation in the external relationship, i.e. the legal capacity of the company vis-à-vis third parties. The withdrawal therefore has a direct impact on company register entries and publicity effects.

Every organizational representation is covered, regardless of whether it is legally or contractually based. In contrast, the withdrawal of a power of attorney or commercial power of attorney is governed by other special regulations.

Requirements and Important Reason

Whether an important reason exists is determined by the same standards as in § 117 UGB. As a rule, the unreasonableness of further management also leads to the unreasonableness of representation and vice versa. However, the reason must be examined in relation to its function: An abuse of the power of representation may justify a withdrawal without the management authority having to be withdrawn at the same time.

Termination of the Power of Representation

§ 127 UGB does not provide for an own termination option for the power of representation. This is logically consistent because every act of representation is also an act of management. If the management authority is terminated pursuant to § 117 para 2 UGB, the power of representation automatically expires.

Registration in the Company Register

The withdrawal of the power of representation must be registered in the company register by all shareholders, including the shareholder concerned. If the excluded shareholder refuses to cooperate, his cooperation can be enforced by court order or a coercive measure can be taken under the Company Register Act. In the case of interim injunctions, the court arranges for the entry ex officio.

Extinction of the Power of Representation

The power of representation expires with the final validity of the withdrawal judgment. As long as the change has not been entered in the company register, third parties can, however, continue to rely on the previous representation situation due to the negative publicity. Legal certainty vis-à-vis third parties only occurs with proper registration.

Negative publicity means that third parties may rely on the content of the company register. As long as a fact, such as the withdrawal of the power of representation, is not registered, it is not effective against third parties acting in good faith, even if it already exists in fact.

The revocation does not lead to the company’s incapacity to act. If, after the withdrawal, no partner with power of representation is available, either a new partner must be admitted or a statutory joint representation of all unlimitedly liable partners must be assumed. In a two-member company, this can automatically result in sole power of representation for the remaining partner.

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Relationship to other Legal Remedies

The withdrawal of the power of management is a special case of corporate law rights of formation. In addition, there are:

• the action for exclusion pursuant to § 140 UGB,
• the action for dissolution pursuant to § 133 UGB, and
• the possibility of amicable dismissal by resolution of the partners

Compared to these legal remedies, the withdrawal is the milder measure, as it does not lead to the termination of membership, but only affects the management function.

Your Benefits with Legal Assistance

The withdrawal of the power of management is often associated with considerable legal and economic tensions within the company. It affects not only the internal distribution of power, but can also have serious consequences for the management, liability and external impact.

Without legal support, there is a risk of procedural errors that can lead to the invalidity of the measure. In addition, the assessment of an “important reason” requires a careful legal assessment in order to avoid lengthy and costly disputes.

With legal support, such risks can be specifically avoided, because we prepare the procedure in a legally secure manner, protect the interests of all parties involved and create a solution that is both legally and economically sustainable.

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FAQ – Frequently Asked Questions