Section 37 Restrictions on the power of representation
(1) The directors shall be obligated vis-à-vis the company to observe those restrictions which have been set out in the articles of association as regards the extent of their power to represent the company or, unless otherwise provided therein, by resolutions passed by the shareholders.
(2) A restriction of the directors’ power to represent the company shall have no legal effect in respect of third persons. This shall in particular apply to those cases in which the representation is restricted to certain business or types of business only or only under certain circumstances or for a certain period of time or in specific places, or where the consent of the shareholders or a company organ is required for the conduct of specific business.
Information for non-professionals
Relevance for legal relations
Section 37 para. 1 GmbHG involves the issue about what a managing director is permitted to do as far as the shareholders' meeting is concerned, while para. 2 involves the issue about what the managing director can do in the external relationship.
1While paragraph 2 hardly plays any role in practice because managing directors are issued either individual or (non-genuine) joint power of representation, paragraph 1 is important. Paragraph 1 describes in effect that a managing director can be bound by the company in the internal relationship despite having generally unrestricted power of representation in the external relationship. A GmbH managing director is different in this respect from a member of the executive board [Vorstand] of a German stock corporation (section 76 German Stock Corporations Act [Aktiengesetz, "AktG"]) who generally conducts the business under his own responsibility. The company can in theory impose far reaching restrictions on the managing director in the internal relationship, for example, that even transactions above a very low threshold in value require the consent of the shareholders' meeting. However, the possibility then can no longer be precluded that the managing director is bound in the internal relationship in such a manner that, in the final analysis, the underlying service agreement must be classified as an employment contract. However, aside from this consequence, any restriction in the internal relationship is possible.
2The restriction is normally not imposed in an individual directive from the shareholders and instead is normally established in the articles of association or on the basis of procedural rules issued for management. The important aspect for the managing director is that such restrictions are only valid if they have been disclosed to the managing director. On the other hand, it is also important for the managing director to absolutely comply with the restriction because exceeding the restriction generally constitutes a violation of duties in the office of a managing director (on this point, section 43 GmbHG), or the violation can lead to termination of the service agreement. A sample set of procedural rules is included following the comments.
Information for legal professionals
3Section 37 para. 1 GmbHG involves the issue about what a managing director is permitted to do as far as the shareholders' meeting is concerned, while para. 2 involves the issue about what the managing director can do in the external relationship. The issue of legal authority involves the issue of the scope of statutory representative power. This is generally unrestricted, which is a result of the need to protect legal transactions. Internally, i.e. with regard to the issue about the extent to which the managing director is permitted to use the power of representation, the articles of association and rules of procedure, however, can impose broadLenz, in: Michalski, GmbHG, 2 ed. 2010, section 37 no. 10 restrictions on the managing director.
4a) Scope of management authority
Actions of management consist of all measures and decisions necessary to pursue the purpose of the company, i.e. the management of the company.Zöllner/Noack, in: Baumbach/Hueck, GmbHG, 20 ed. 2013, section 37 no. 2 The term is broad and is limited by the tasks which are assigned to the shareholders' meeting or other corporate bodies on the basis of law or the articles of association.
3) Differentiation, casuistics
21Application of section 37 GmbHG in the case law of the BGH
BGH, judgement dated 30 May 2015 – II ZR 236/03
The sale of the largest part of the company assets of a GmbH is a business action out of the ordinary course of business which also requires a resolution even if the measure does not involve any change in the subject of the business.BGH, judgement dated 30 May 2015 – II ZR 236/03, http://juris.