GERMANY Law and Practice Contributed by: Leif Gösta Gerling, Matthias Krämer, Anna Reuber and Jiabao Gerling-Li, LPA
agement decisions – especially strategic or capital- intensive ones – cannot be taken unilaterally. Such structures are standard in international JVs to balance control and operational flexibility. 7.2 Duties and Functions of JV Boards and Directors In Germany, managing directors of a GmbH owe fiduciary duties primarily to the JV itself as well as its creditors, and not directly to the shareholders who appointed them. These duties include the duty of care ( Sorgfaltspflicht ) and the duty of loyalty ( Treuepflicht ), requiring managing directors to act in the best inter - ests of the JV, avoid conflicts of interest and exer - cise proper business judgement. They must ensure compliance with laws, proper accounting and prudent management, and may, as an exception, be held per - sonally liable for violations of these duties, particularly in cases of gross negligence or wilful misconduct. In corporations ( Kapitalgesellschaften ), managing direc - tors are also obliged to ensure that the JV has suf - ficient capital resources. Principles such as capital raising ( Kapitalaufbringung ) and capital maintenance ( Kapitalerhaltung ), which are intended to prevent a loss of value from the JV that would disadvantage creditors, also address the conduct of the manage - ment. Conflicts can arise if a managing director has obli - gations toward the appointing JV party. German law generally requires managing directors to prioritise the interests of the JV over the interests of the appointing shareholder, although contractual arrangements can clarify reporting obligations or require consent from the shareholder for certain actions. These arrange - ments, however, cannot legally override statutory duties towards the JV, and managing directors must avoid transactions that would constitute self-dealing or harm the JV. Delegation of functions is permissible within the man - agement framework. Day-to-day responsibilities may be allocated to individual directors, subcommittees or, in certain cases, external service providers. How - ever, material matters of strategic, financial and/or corporate structure-related importance are typically reserved to the full board of managing directors and, in many cases, to the shareholders’ meeting. The arti -
cles of association and any JV agreement typically define which powers are delegable and which require collective or shareholder approval, ensuring minor - ity protection and alignment with agreed governance structures. 7.3 Conflicts of Interest Conflicts of interest for managing directors of a JV are managed on the basis that managing directors owe their duties primarily to the JV itself rather than to the shareholder who nominated them. This means that managing directors must exercise independent judge - ment, act in the best interests of the JV, and avoid favouring the interests of their appointing shareholder or their own personal interests. Conflicts typically arise in situations such as participation in competing busi - nesses or involvement in related-party transactions, or when commercial decisions disproportionately benefit the appointing shareholder. To manage such situations, good practice requires full disclosure of the conflict to the other manag - ing directors or, where relevant, to the shareholders’ meeting. The conflicted managing director may be required to abstain from voting or from participating in discussions on the matter, and certain transactions may need prior shareholder approval. JV agreements often reinforce these principles by including specific conflict-of-interest provisions, setting out disclosure requirements and approval processes to ensure trans - parency and mitigate risks. It can be inappropriate for an individual to take a board seat if their position within a JV party creates a struc - tural conflict that makes it impossible for them to act independently in the interests of the JV. For example, if the individual’s role within the JV party obliges them to always prioritise that JV party’s interests, this would undermine the individual’s fiduciary duties toward the JV. While contractual mechanisms such as con - sent rights or reserved matters can help balance the interests of the shareholders (ie, the JV parties), they cannot replace the requirement for managing direc - tors to act autonomously in the JV’s best interests. Accordingly, suitability for board positions should be assessed carefully to ensure that managing directors can genuinely fulfil their duties to the JV.
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