Termination of managing director: removal, dismissal and contract pitfalls

Removing a managing director (Geschäftsführer) from a German GmbH is legally very different from dismissing a normal employee. That is because for a managing director, two separate relationships exist: the corporate role (Organstellung) and the service contract (Dienstvertrag). One can end without the other. This often leads to confusion about notice periods, severance, and tax consequences. This guide explains how removal and termination work, which mistakes to avoid, and how managing directors can protect themselves.

Key takeaways

• Removing a managing director only ends the corporate office – it does not automatically terminate the service contract.
• A separate shareholder resolution is required both for removal and for contract termination.
• Managing directors are not protected by the German Dismissal Protection Act (§ 14 KSchG).
• Settlements and termination agreements must consider tax consequences early, ideally with legal and tax advice.
• Contract wording, company bylaws, and shareholdings often decide whether a dismissal is lawful.

Removal of the managing director

A small corporation in Germany (GmbH) must be legally represented by at least one human being – the managing director(s). The managing director(s) form the executive body of the GmbH and act on its behalf, and are appointed by the shareholders. Unless the articles of association provide otherwise, this appointment can be revoked at any time. Removing the managing director ends their role as an executive arm of the company – however, this removal must not be confused with terminating their employment contract: 

• Purpose: Removal only ends the corporate office and the power to represent the company.
• Resolution: Simple majority resolution is sufficient unless the articles of association require “important cause”.
• Articles of association: May restrict removal to cases of “important cause”.
• Voting rights: Managing directors who are also shareholders may still vote on their own removal unless an important cause is alleged.
• Risk of abuse: In close shareholding structures, “important cause” may be used as a pretext – courts can review this.
• Resignation: A managing director may resign from office at any time without reason.

Termination of the managing director’s contract

Removal from office does not end the service contract. A second resolution is required to terminate the contractual relationship. The following principles apply:

• Service contract rules: Most managing director contracts qualify as service contracts under civil law, not employment law.
• Ordinary termination: If paid monthly, termination is generally possible by the 15th of a month for the end of that month (§ 621 No. 3 BGB), unless the contract states otherwise.
• Fixed-term contracts: Ordinary termination is usually excluded unless the contract allows it. Extraordinary termination for “important cause” cannot be excluded.
• No statutory dismissal protection: As an organ of the company, the managing director is excluded from the Dismissal Protection Act (§ 14 KSchG).
• Exception: “Fremdgeschäftsführer” (non-shareholder MDs in personal dependence) may, in rare cases, be treated like employees – EU law increasingly influences this assessment.
• Case law relevance: Current BAG and ECJ rulings should always be checked; expert legal advice is essential before litigation.

Settlement agreement or termination agreement

Instead of unilateral termination, many GmbHs and managing directors opt for a negotiated separation. A settlement can have advantages for both parties: 

Advantages for the managing director

• Potential limitation of liability claims
• Clear release from duties and responsibilities
• One-time settlement of all claims
• Negotiated severance
• Positive reference (Dienstzeugnis)

Advantages for the company

• Avoids costly legal disputes
• Clean separation with legal certainty
• Immediate handover of company assets and passwords
• No need to prove “important cause” for dismissal

In practice, termination agreements often include:

• Waiver of all future claims
• Immediate release from duties (Freistellung)
• Return of company car, laptop, phone, documents
• Agreement on tax handling of severance

Relevant clauses in a typical managing director contract

Before negotiating a separation, the relevant clauses in your managing director contract should be checked carefully, for instance:

• Termination rules (ordinary / extraordinary, notice periods, fixed term)
• Compensation: fixed salary, bonuses, commissions, allowances
• Release rules and outstanding leave
• Liability and discharge of responsibility (Entlastung)
• Support duties during transition
• Expense reimbursement
• Severance amount, due date, tax allocation
• Return of company property (car, devices, data)
• Reference wording (draft normally attached)
• Insurance arrangements: D&O, life insurance, pension, accident cover
• Post-contractual non-compete and compensation (Karenzentschädigung)
• Confidentiality clauses
• Entire-agreement and jurisdiction clauses

Given the high financial stakes, legal and tax advice is recommended.

Tax optimisation for severance

Severance in a termination or settlement agreement is subject to income tax (plus solidarity surcharge and possibly church tax). The tax burden can be significantly reduced if planned early. Typical optimisation tools include the shifting payment to a low-income year and the use of the tax relief for one-time payments (“Fünftelregelung”).

Frequently asked questions (FAQ)