Dismissal and removal of a board member in Germany: What you need to know

As a member of the board of directors (Vorstand) of a stock corporation in Germany (Aktiengesellschaft, AG), you face specific legal challenges in the event of your removal from the board. The legal distinction between the role of a board member and the underlying contract of service often leads to uncertainty. Our article gives you more details on the requirements of a removal from your office as a board member on the one side and the termination of the contract of service on the other side, including aspects around your severance pay.

The key facts at a glance:

1. The relationship as a member of the board (Organverhältnis) and the service contract (Dienstvertrag) are two separate legal relationships, which follow different rules in case of a removal from the board and the termination of the service contract.
2. A removal from the board is only permitted on a “grave cause” (“wichtiger Grund”) in terms of the German Stock Corporation Act (AktG).
3. The service contract is usually a fixed-term contract. It can only be terminated at an earlier stage by a summary dismissal or by a termination agreement (Aufhebungsvertrag).
4. There is no statutory obligation for severance pay. For voluntary negotiations the “German Corporate Governance Code” can be used as a guideline.
5. Board members can challenge a dismissal or removal from the office before the Civil Courts.
6. Legal advice is strongly recommended due to the complex facts and legal issues involved.

Two separate legal relationships

Board members of a German stock corporation (AG) have a special legal status that differs fundamentally from a “normal” employment relationship. There are two separate legal relationships:

Corporate relationship (Organverhältnis)

The formal appointment to the board creates a “corporate relationship” (“organschaftliches Verhältnis”) between the board member (office holder) and the company. The term is limited to a maximum of five years. Only the supervisory board (Aufsichtsrat) appoints and removes board members.¹

Service contract (Dienstvertrag)

At the same time a service contract² is concluded. It contains details on remuneration, termination, notice periods etc. As this contract is not an employment contract, different rules apply:

1. No special protection: The Protection Against Dismissal Act (Kündigungsschutzgesetz, KSchG) does not apply to board members.³ A dismissal does not have to be “socially justified” in order to be valid.
2. Court jurisdiction: Board members are not employees. Therefore Civil Courts (Amtsgerichte, Landgerichte) have jurisdiction.⁴ 
3. Works council not in charge: Board members are not employees according to the Works Constitution Act (Betriebsverfassungsgesetz).⁵ Therefore the works council (Betriebsrat) does not have to be heard before a dismissal.

Removal of a board member 

A member of the board may leave office by resigning or, in the case of a fixed-term appointment, upon the expiration of the term.

Further, the appointment can be revoked (“removal from office”). It can only take place with a “grave cause” (“wichtiger Grund”).⁶ The aim is to protect the independence of the board and its ability to manage the company properly. The law does not define “grave cause.” It only gives a few examples:

• Serious breach of duties (examples: corruption, breach of trust/embezzlement, balance sheet manipulation, etc.)
• Inability to manage the business (examples: lack of expertise, prolonged illness or addiction-related illness, etc.).
• Withdrawal of confidence by the general meeting (Hauptversammlung), e.g. significant disagreements about the company’s strategic direction.

Only the supervisory board (Aufsichtsrat) is in charge for appointing and removing board members. The following requirements must be met:

• a formal invitation to the meeting,
• confirmation of a quorum,
• a proper resolution, and
• a majority of the members.

Not complying with this procedure renders the removal invalid.

Termination of the service contract 

The service contract of a board member is usually a fixed-term contract. It automatically expires, when the time as agreed upon has lapsed.⁷ Early termination is only possible in two ways: 

1. by a summary dismissal (based on an “grave cause”)⁸ or
2. by a mutually agreed termination agreement (more details below.)

“Linkage clauses” (“Kopplungsklauseln”)

Service contracts often contain so-called linkage clauses (Kopplungsklauseln). They link the board membership and the service contract. That means that in case the board member leaves the board, the service contract comes to an end:

Examples:

The independence between the corporate relationship and the service contract offers board members a certain protection, particularly where the board member wants to challenge an unjustified removal. For this reason, linkage clauses must comply with the statutory rules on general terms and condition (AGB-Recht). Such clauses must not be surprising; they must be clear and understandable, and they must not unreasonably disadvantage the person concerned.⁹

Summary dismissal  

A summary dismissal or extraordinary termination of a board member’s service contract requires an “important reason”.¹⁰ This means there must be a severe breach of duty and the terminating party cannot reasonably be expected to continue the service relationship until the end of the regular notice period or until the agreed end of the service relationship. This may be the case where the board member commits serious breaches of duty, such as:

• criminal offences or serious regulatory offences (for example, breach of trust/embezzlement or data protection violations),
• balance sheet manipulation or bribery,
• breach of non-competition clauses, etc.

Revoking the appointment as a board member is not enough to justify a termination without notice regarding the service contract. The termination of the service contract requires a separate “important reason”. In exceptional cases, the board member can also issue a summary dismissal, for example in the case of unreasonable conduct by the supervisory board or other board members. In practice, however, this is quite seldom.

Important is the two-week deadline in terms of Section 626 BGB: The party, who wants to terminate the service contract without notice, can only do so, if it has gained knowledge of the relevant facts within 2 weeks before the summary dismissal. This deadline frequently poses challenges for companies, particularly where internal coordination within the supervisory board is time intense. 

It is recommendable that a board member should consult a lawyer specializing in corporate and employment law, if he needs advice on a dismissal, the negotiation of a termination agreement or a severance payment. An experienced expert can assess your position much better and enforce your rights more effectively.

Termination agreement as an alternative 

A termination agreement (Aufhebungsvertrag) between the board member and the company terminates the service contract by mutual consent. A clear, written agreement is important in order to avoid later disputes:

• Ending both the corporate and the service relationship: The termination agreement stipulates the end of the service contract on an agreed date. The supervisory board must terminate the corporate relationship separately.
• Board members should make sure that they obtain a “formal discharge” (“Entlastung”) for the term of office.
• In the event of early termination, an irrevocable release from the services (Freistellung) should be agreed upon together with the payment of the salary and all other additional benefits (e.g. bonuses, the use of a company car).
• Settling outstanding claims: All unsettled claims, such as salary, bonuses, etc. must be part of teh termination agreement. Particularly in the case of long-term bonuses, such as share-based compensation, it is important to review the contractual terms in order to secure such claims.
• Non-competition clauses: Existing non-competetition clauses (Wettbewerbsverbote) and any compensation for the period of restraint (Karenzentschädigung) must be part of the agreement.
• Settlement clause (Erledigungsklausel): A settlement clause ensures that no further claims exist once the parties have fulfilled their obligations in terms of the agreement. 
• Severance pay: There is no statutory obligation for severance pay. The parties can negotiate it on a voluntary basis. 

Termination agreements regarding board members often involve complex circumstances and large sums. We highly recommend legal support.

Legal steps 

Civil Courts (Amtsgerichte, Landgerichte) have jurisdiction for legal disputes, not Labour Courts.¹¹

Action against the removal

A board member can file a law suit against a removal, if there was no “grave cause.”¹² The Court has to establish whether the removal was valid or not. 

The removal will remain effective until a court decides otherwise.¹³ 

Action against the termination of the service contract

More often board members file claims against the termination of the service contract, as the financial aspects are more important. Unlike employees, board members cannot rely on employment law protection, such as the Protection Against Dismissal Act (“Kündigungsschutzgesetz”). Court proceedings have therefore mainly two objectives:

1. Continuation of the service contract: a declaration that the termination was invalid and that the contract still continues.
2. Continued payment of remuneration: a claim to continued payment of salary, including bonuses and other benefits.

Claims for damages

Board members can claim damages if the company has culpably breached its duties. 

Conversely, the company can also claim damages from board members in case of breaches of duty. In managing the business, board members must exercise the care of a prudent and conscientious manager. If they breach these duties, they must compensate the company for the damage.¹⁴

In most cases we recommend legal advice as the facts and legal questions are usually very complex.

Severance pay

There is no statutory obligation for severance pay. 

The parties can negotiate severance payments in the service contract or a termination agreement. They are not based on the usual employment law criteria. There is a German Corporate Governance Code. Under its item G.13, severance payments should not exceed the value of two years’ remuneration and should not amount to more than the remaining term of the contract. The Code is not binding., but the courts use it as a benchmark.

The amount of the severance pay depends on all components of remuneration (base salary, variable components, special payments, additional benefits, pension commitments, etc.). 

Frequently asked questions (FAQs)

1. Section 84 Absatz 1 AktG ↩︎
2. Section 611 BGB ↩︎
3. Section 14 Absatz 1 Nr. 1 KSchG ↩︎
4. Section 5 Absatz 1 Satz 3 ArbGG ↩︎
5. Section 5 BetrVG ↩︎
6. Section 84 AktG ↩︎
7. Section 620 BGB ↩︎
8. Section 626 BGB ↩︎
9. Section 305 ff. BGB ↩︎
10. Section 626 BGB ↩︎
11. Section 5 ArbGG ↩︎
12. Section 84 subsection 4 AktG ↩︎
13. Section 84 subsection 4 AktG ↩︎
14. Section 93 AktG ↩︎