§ 37 Restrictions on power of representation

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.