Managing Director Agreements: The 10 Most Important Clauses at a Glance

The managing director agreement -- formally a freelance service contract under §§ 611 ff. BGB -- forms the basis of the legal relationship between the GmbH and its managing director. Unlike an employment contract, the managing director service contract is generally not subject to employment law. This means: no Dismissal Protection Act, no Works Constitution Act, no Federal Leave Act in its mandatory form. All the more important, therefore, is careful contractual drafting that protects both sides. This article presents the ten most important clauses and provides practical guidance for contract design.

Preliminary Note: Corporate Office and Service Contract

Before examining the individual clauses, a central distinction must be observed: the corporate office (appointment as managing director by shareholder resolution) and the service contract (engagement agreement) are legally separate. The removal from office as managing director does not automatically terminate the service contract, and vice versa. This separation principle has far-reaching consequences for contract design.

When distinguishing between a non-shareholder managing director and a shareholder-managing director, it should also be noted that for the non-shareholder managing director, the service contract is regularly a freelance service contract. For the shareholder-managing director, the classification depends on their shareholding and actual degree of influence -- a controlling shareholder-managing director is never an employee for social security purposes.

The 10 Most Important Clauses

1. Remuneration and Bonus

The remuneration clause is the centrepiece of the managing director agreement. It typically comprises:

Fixed salary: Monthly base salary, usually payable in twelve monthly instalments
Bonus: Performance-related remuneration, frequently linked to earnings before tax (EBT) or EBIT
Special payments: Holiday pay, Christmas bonus or other gratifications
Fringe benefits: Company car (including for private use), occupational pension, health insurance contributions

Design tip: Define the basis for calculating the bonus precisely and specify whether loss carry-forwards are taken into account (so-called loss offset clause). Avoid formulations that could be classified as a disguised distribution of profits in a tax audit -- particularly for shareholder-managing directors, the total remuneration should pass the arm's length test.

Common mistake: A bonus arrangement without a cap can lead to disproportionately high remuneration in exceptionally good financial years and become problematic from a tax perspective.

2. Job Description and Allocation of Responsibilities

The job description clause defines the managing director's area of responsibility. Where there are multiple managing directors, a clear allocation of responsibilities is recommended (e.g., commercial vs. technical management).

The job description should include:

The specific area of responsibility
Whether sole representation authority or only joint representation applies
The duty to exercise proper management with the care of a prudent businessperson (§ 43 GmbHG)
The obligation to personally perform duties (no general right of delegation)

Consent requirements limit the managing director's authority and are an essential instrument of shareholder control. Typical transactions requiring consent include:

Investments and expenditures above a specified threshold
Taking out loans and borrowings
Real estate transactions (acquisition, disposal, encumbrance)
Conclusion, amendment and termination of employment contracts above a certain remuneration level
Granting of Prokura and commercial powers of attorney
Establishment of or participation in other companies

Design tip: Either list the transactions requiring consent in the contract itself or refer to a catalogue in the rules of procedure, which can be more flexibly adapted. Also regulate the procedure: who grants consent (shareholders' meeting or advisory board), in what form and within what timeframe?

4. Non-Compete Obligation

The non-compete obligation must be distinguished in two phases:

During the term of office: The managing director is subject to a comprehensive non-compete obligation by operation of law, derived from the duty of loyalty. A contractual specification is nevertheless recommended to clearly define the scope.

After termination of the contract: A post-contractual non-compete obligation only applies if contractually agreed. Note:

The duration should be no more than two years -- longer restrictions are regularly regarded by the courts as unreasonable
The substantive and geographic scope must be clearly defined
Unlike employees, managing directors have no mandatory entitlement to garden leave compensation -- however, compensation is customary and strengthens enforceability
Agree a contractual penalty for the event of a breach

Common mistake: An overly broad non-compete obligation without garden leave compensation is frequently held to be unenforceable in the event of a dispute. Define the scope as narrowly as necessary to protect the company's legitimate interests.

5. Removal and Termination -- The Coupling Clause

The separation of corporate office and service contract can lead to unsatisfactory results in practice: the managing director is removed from office but retains the remunerated service contract. To avoid this, coupling clauses are common:

Automatic termination: The service contract terminates automatically upon removal (so-called condition subsequent)
Special termination right: Removal entitles the company to extraordinary termination of the service contract with a shortened notice period
Garden leave clause: The company may irrevocably release the managing director from duties following removal

Design tip: Regulate the notice periods carefully. Periods of six months to the end of a quarter or the end of a year are common. Ordinary termination should only be possible with an appropriate notice period. For extraordinary termination, the general principles of § 626 BGB (important reason) apply.

6. D&O Insurance

The Directors and Officers Insurance (D&O insurance) protects the managing director against the financial consequences of personal liability. Given the strict liability standards of § 43 GmbHG, D&O insurance is now standard.

The contract should regulate:

The company's obligation to take out and maintain D&O insurance with an appropriate sum insured
The minimum sum insured (sector-dependent, typically one to five million euros)
The managing director's deductible (mandatory for public limited companies, freely negotiable for GmbH)
Run-off cover after the managing director's departure

7. Holiday Entitlement

Since the managing director is generally not an employee, the Federal Leave Act does not directly apply. The holiday entitlement must therefore be contractually stipulated.

Common provisions include:

Number of holiday days (typically 25 to 30 days in practice)
Carry-over of untaken holiday to the following year
Payment in lieu upon termination of the contractual relationship
Clarification of whether the managing director can determine their own holiday or requires shareholder approval

Common mistake: If there is no contractual provision on holiday, legal uncertainty arises. Case law tends to grant the managing director a minimum holiday by analogy with the Federal Leave Act -- however, the details of the arrangement remain contentious.

8. Secondary Activities

Provisions on secondary activities protect the company against the managing director deploying their working capacity elsewhere. A typical clause includes:

A general prohibition of paid and unpaid secondary activities
A consent requirement from the shareholders' meeting
Exceptions for certain activities (e.g., honorary mandates, management of personal assets, supervisory board positions in non-competing companies)
The obligation to immediately disclose any secondary activity

9. Confidentiality

The confidentiality clause obliges the managing director to maintain secrecy regarding all confidential information of the company. Although such an obligation already arises from the duty of loyalty, an express contractual provision is recommended:

Definition of confidential information (trade secrets, customer data, internal strategies, financial data)
Continuation of the confidentiality obligation after termination of the contract (typically indefinite or for at least three to five years)
Return obligation for all documents and data carriers upon departure
Contractual penalty for breach of the confidentiality obligation
Consideration of the German Trade Secrets Act (GeschGehG), which requires appropriate protective measures

10. Severance Provision

The severance clause governs the payment of severance upon early termination of the service contract. Since the managing director has no statutory severance entitlement, the contractual arrangement is particularly important.

Common models include:

Flat-rate severance: A fixed amount (e.g., one to two years' salary) upon termination by the company without important reason
Service-based severance: Graduated by length of service (e.g., half a month's salary per year of service)
No severance entitlement in the event of termination for important reason or resignation by the managing director
Set-off of other income during the remaining term of the contract

Design tip: From the company's perspective, the severance should be linked to compliance with the post-contractual non-compete obligation. From the managing director's perspective, care should be taken that severance is also paid upon removal without important reason.

Common mistake: For shareholder-managing directors, an excessive severance arrangement may be classified as a disguised distribution of profits. The severance level must pass the arm's length test.

Further Recommended Provisions

In addition to the ten core clauses, a managing director agreement should address further points:

Contract term: Fixed term (typically three to five years) or indefinite with ordinary termination possibility
Company car: Type and specification, private use, arrangements upon termination
Occupational pension: Pension commitment, vesting periods, insolvency protection
Arbitration clause: Jurisdiction of an arbitration tribunal instead of ordinary courts
Severability clause: Provision for the event that individual contractual provisions are invalid

Conclusion

The managing director agreement requires careful and individually tailored drafting. Unlike employment contracts, no protective statutory framework applies -- what has not been agreed generally does not apply. Both the company and the managing director are well advised to negotiate the key clauses early and in detail. Particular attention should be paid to the coupling clause between corporate office and service contract, the remuneration structure (particularly for shareholder-managing directors with regard to disguised distributions of profits) and the post-contractual non-compete obligation.

compleneo advises on the design, review and negotiation of managing director agreements and supports both shareholders and managing directors in creating a balanced and legally secure contractual foundation.

Managing Director Agreements: The 10 Most Important Clauses at a Glance