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GRP Rainer Rechtsanwälte – Assessing a settlement clause after termination of managing director??

April 2019 - Corporate & Commercial. Legal Developments by GRP Rainer LLP.

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A settlement clause may be invalid if material circumstances are withheld from a termination agreement between company and managing director.

A company that wants to part ways with a managing director often concludes a termination agreement. This agreement typically includes a settlement clause, according to which the parties agree to indemnify each other against all mutual claims. We at the commercial law firm GRP Rainer Rechtsanwälte note that the managing director might nonetheless be held liable. For the purposes of assessing whether liability has been effectively excluded, the key factor is whether all of the material circumstances were disclosed within the framework of the termination agreement. A ruling of the Oberlandesgericht (OLG) München, the Higher Regional Court of Munich, from April 18, 2018 demonstrates that if circumstances of this kind are fraudulently concealed, the managing director may continue to be liable and required to pay damages (Az.: 7 U 3130/17).

In the instant case, a GmbH and its managing director had terminated the managing director’s employment contract. The termination agreement featured a settlement clause, according to which all mutual claims arising from the employment contract were said to have been satisfied. The employment contract included provisions pursuant to which the managing director was required to first obtain the written approval of the general meeting of the shareholders before concluding rental agreements with a term of longer than three years and annual rent of more than 24,000 euros.

However, the managing director did not comply with these requirements; instead, several weeks before his employment contract was terminated, he concluded a rental agreement with a ten-year term and an annual rent of around 51,000 euros. He failed inform the general meeting of the shareholders of this, even while concluding the termination agreement. The rental agreement was terminated in return for payment of compensation in the amount of 60,000 euros. The GmbH later demanded that this amount be reimbursed by its former managing director.

The OLG München awarded the GmbH the damages. By concluding the rental agreement without seeking the approval of the general meeting of the shareholders, the managing director was said to be in breach of his obligations. The Court held that he could not invoke the settlement clause in the termination agreement, because he had exceeded his authority by concluding the rental agreement. The OLG München went on to state that he failed even at a later date to inform the shareholders of his actions and instead opted to fraudulently conceal them. The settlement clause was consequently found to be inapplicable.

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