The termination of managing directors, board members and other corporate officers is among the most complex and contentious processes in corporate law. Whether due to strategic considerations, shareholder disputes or alleged breaches of duty, the moment when the end of an executive position is on the table confronts decision-makers with questions that must be answered within a very short period of time.
For those affected, it is not only their immediate professional future that is at stake. Issues such as severance payments, long-term incentive programs, D&O insurance coverage, corporate shareholdings and—last but not least—reputation are central. The legal framework is typically multifaceted: corporate law, service contract law, tax law and capital markets law may all be relevant simultaneously.
This article provides a well-founded overview of the key legal issues relating to the termination of managing directors and board members—from the perspective of those whose interests need to be protected.
One of the key principles for understanding the termination of managing directors and board members is the strict distinction between two legal relationships that are closely linked but legally independent:
The corporate office refers to the position as managing director (GmbH) or member of the management board (AG). It is established by resolution of the competent corporate body and can generally be revoked at any time—without cause in the case of a GmbH (unless restricted by the articles of association or limited by shareholder duties of loyalty), and only for good cause in the case of an AG.
The service relationship governs the contractual relationship between the individual and the company: remuneration, duties, ancillary activities, confidentiality, non-compete obligations and termination conditions. Managing directors are subject to the principles of service contract law, not employment law—meaning that statutory dismissal protection does not apply to genuine corporate officers.
This dual structure is strategically important: removal from office can be effected quickly, but it does not automatically affect the service agreement or the associated compensation claims. Failure to properly address the termination of the service agreement entails significant financial risks.
The removal of a managing director in a GmbH is comparatively straightforward from a corporate law perspective: the shareholders’ meeting may resolve to revoke the appointment at any time and generally without cause, provided there are no restrictions in the articles of association and no breach of shareholder duties of loyalty.
Legally, the removal becomes effective upon adoption of the resolution in practice, it becomes relevant once the affected individual becomes aware of it. From that moment, managerial authority and power of representation cease.
Registration in the commercial register has only declaratory effect but serves to protect third parties in legal transactions.
In practice, removal is often accompanied by immediate operational measures such as the confiscation of company IDs, deactivation of IT access and prohibition of access to company premises. For affected individuals, this is often the first indication that separation has been implemented.
In a stock corporation, removal of a management board member is subject to significantly stricter requirements: the supervisory board may revoke the appointment only for good cause, in particular in cases of serious breach of duty, inability to properly manage the company or withdrawal of confidence by the general meeting.
These stricter requirements mean that such decisions are subject to judicial review and may be challenged if the required cause is lacking. As a result, board members generally have a stronger legal position than managing directors of a GmbH.
The initial phase following removal is critical. The following points should be reviewed without delay:
Service agreements for corporate officers often provide for longer fixed terms. Ordinary termination is only possible if expressly provided for in the contract or once the minimum term has expired.
This means that even after immediate removal, compensation claims may continue for the entire remaining term of the service agreement—unless a valid extraordinary termination is effected.
Extraordinary termination requires good cause within the meaning of applicable law. The threshold is high: there must be conduct that makes it unreasonable to continue the contractual relationship even until the end of the ordinary notice period.
In addition, strict time limits apply: termination must be declared within two weeks of becoming aware of the relevant facts. Formal errors or failure to meet deadlines render the termination invalid.
The most common areas of dispute include:
A special situation arises where the managing director is also a shareholder or where shareholder disputes trigger the removal. In such cases, corporate and shareholder law overlap.
Managing directors with shareholdings are often protected by articles of association, shareholders’ agreements or side letters. Removal from office may trigger follow-up issues such as pre-emption rights, drag-along and tag-along clauses, valuation mechanisms and the contestation of shareholder resolutions.
In private equity environments, management participation schemes follow their own rules. Leaver provisions are often strict and may lead to significant financial disadvantages if classified as a Bad Leaver case.
Separation from a corporate office rarely marks the end of exposure. Claims for alleged breaches of duty are often asserted after departure—by the company, creditors or in the context of corporate disputes.
Managing directors and board members are liable to the company for damages caused by culpable breaches of duty. However, the business judgment rule provides significant discretion for entrepreneurial decisions made on an informed basis and in the company’s best interest.
D&O insurance may provide coverage, but its scope must be carefully reviewed, particularly with regard to exclusions, continued coverage after departure and potential termination of the policy.
Post-contractual non-compete obligations are common but not always enforceable. Case law imposes strict requirements: the clause must protect a legitimate interest of the company, must not unreasonably restrict future professional activity and—where required—must be linked to adequate compensation.
If compensation is insufficient, the clause may be wholly or partially invalid.
The legal landscape of executive terminations continues to evolve. Key developments include:
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