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Liability trap “de facto management” - strategies to avoid liability

Specialist article in corporate law

Liability risks of “de facto management”: dangers and protective measures

Shareholders of medium-sized companies are often unknowingly exposed to the risk of falling into the liability trap of so-called de facto management. In this article, I explain the legal basis of this form of liability, the specific risks associated with it, and the measures I can take to avoid my personal liability.

Liability risk of de facto management: protective measures for shareholders from a lawyer's perspective

In corporations, the principle applies that shareholders are not liable for the company's risks with their private assets.

However, this limitation of liability does not apply if a shareholder is classified as a so-called de facto managing director because he has assumed significant management tasks.

Particularly in small and medium-sized enterprises (SMEs) and family businesses, the distinction between the role of a shareholder and operational management is often difficult to recognize.

If shareholders actively intervene in management decisions without being formally appointed as managing directors, they risk being classified as de facto managing directors – a risk that is often underestimated.

Case law has introduced the concept of the de facto managing director to ensure that persons who act like managing directors in practice also bear the corresponding liability risks.

Especially in times of crisis, when shareholders assume increased responsibility to stabilize the company, there is a risk of personal liability with their private assets.

Liability risks of de facto management: extent and consequences

The liability risks for de facto managing directors are comprehensive and encompass both civil and criminal law. De facto managing directors are liable to the same extent as formally appointed managing directors for all decisions and actions they take within the scope of their operational activities.

Civil liability and obligation to file for insolvency

A fundamental obligation that also applies to de facto managing directors is the timely filing of an insolvency application in the event of insolvency or excessive indebtedness of the company.
Failure to comply with this obligation to file for insolvency may result in significant claims for damages, which will be consistently asserted by the insolvency administrator.

Criminal law risks

In addition to the risks of civil liability, de facto managing directors must also fear criminal consequences if they violate legal obligations.
A well-known example of this is the insolvency of Schlecker.
The children of company founder Anton Schlecker were classified by the court as de facto managing directors and sentenced to prison terms for their misconduct.

The three most important strategies for avoiding liability risks for shareholders.

In order to effectively reduce or completely avoid the aforementioned liability risks of de facto management, prudent action is of utmost importance. By observing essential principles, I can significantly reduce my personal liability risk.

The following three strategies prove to be particularly effective:

Clear separation between shareholder role and management

A clear distinction between my role as shareholder and the operational management of the company is essential.
To avoid liability risks, only formally appointed managing directors should take over the management of the company.
Furthermore, I think it is advisable to carefully document decision-making processes.
In the event of legal liability proceedings, it can be proven that the management responsibility lay with the formal managing directors.

Legal training for shareholders

A sound understanding of the legal framework is an important component in avoiding liability.
I should regularly inform myself about the risks of corporate management and the principles of managerial liability.
In family businesses in particular, ongoing training and workshops on corporate law, commercial law, tax law and insolvency law are offered in order to always remain up to date with the latest knowledge.

Long-term asset protection

Asset protection measures should be planned for the long term and not implemented only in times of crisis.
Short-term asset transfers in times of crisis can result in civil and criminal consequences, particularly due to creditor disadvantage.
Timely planning of asset protection prevents such measures from being considered illegal and triggering criminal investigations.

Avoid liability risks! As a lawyer specializing in commercial and corporate law, I can help you safely avoid the liability trap of de facto management.

Limiting liability through D&O insurance: essential protection for managing directors and shareholders

In addition to the most important liability avoidance strategies, Directors and Officers Insurance (D&O insurance) is an important tool for reducing personal liability risk. This special insurance protects not only formally appointed directors but also de facto directors who unexpectedly have to assume responsibility in crisis situations.

The D&O policy provides protection against financial risks that may result from wrong decisions or management errors.

However, it does not cover all risks. Intentional misconduct or gross negligence are generally excluded from insurance coverage. Therefore, it is crucial for shareholders and directors to understand the precise terms and conditions of the contract and ensure that the insurance coverage corresponds to the specific liability scenarios they may face.

D&O insurance should be viewed as a complementary measure to the liability avoidance strategies already mentioned. It provides additional protection, but does not replace the need to minimize personal risk through prudent behavior and legal protection.

Legal perspective: Avoiding liability as a de facto managing director

The liability figure of the de facto managing director will continue to play an important role in family businesses and medium-sized companies in the future, as the distinction between the role of shareholder and operational management is often unclear.

Despite the different standards applied by civil and criminal courts when assessing this liability, the personal liability for affected shareholders is significant – as the Schlecker case clearly demonstrated. Therefore, it is of utmost importance to consistently avoid liability as a de facto managing director.

A clear separation of responsibilities between shareholders and management is essential to reduce the risk of personal liability. Furthermore, regular training should be conducted to raise shareholders' awareness of potential liability risks.
Preventive legal advice and careful structuring of corporate governance are further crucial measures for successfully avoiding the risk of de facto management. This proactive approach not only protects my personal assets but also contributes to the legal security of the entire company.

As a lawyer specializing in commercial and corporate law, I will guide you safely through legal pitfalls: Avoid unexpected liability through sound advice on de facto management.