The service contract of a shareholder-director in a share deal

PrintMailRate-it

​​published on 19 May 2022 | reading time approx. 3 minutes

 

In a share deal, shareholders of a German limited liability company, GmbH, selling their shares often also act as a directors in the target company (further: shareholder-director). In order to retain the existing know-how, share purchasers usually have an enormous interest in the management remaining at least temporarily in the target company after the transaction. As a result, after selling his shares, a shareholder-director becomes the so-called Third-party managing director. As regards the previous director's service contract, this change makes a profound difference. In addition to the matters regulated therein, this change is also valid from the perspective of the future social security status of the former shareholder-director.

 

The fate of the director's service contract

As a rule, most service contracts of shareholder-directors are structured in favour of the shareholder-director, who negotiated that contract with himself. In addition to highly attractive remuneration components, these service contracts often contain long commitment periods, severance pay clauses in the event of termination of the employment relationship and extensive liability exclusions in favour of the director. Special health care benefits, such as extended salary continuation periods in the event of incapacity for work, additional sick pay and survivors' benefits are usually quite common in the contract of a shareholder-director. Such extensive benefits are typically not granted to Third-party managing directors.

 

From a civil law perspective, a share deal does not affect the contractual relationship between the director and the target company. This is because share deals are subject to the principle of continuity of contractual relationships. The buyer of the shares should therefore think about how to handle this service contract in the future. If it is to be terminated unilaterally, a notice of termination is the only option. However, long periods of notice often have to be observed. If the shareholder-director is to remain – at least temporarily – with the target company as an Third-party managing director, the acquirer will usually want to conclude a new director's service contract corresponding to that of an Third-party managing director. Ultimately, therefore, the seller and the acquirer will need to find an amicable solution. The fate of the director's service contract is therefore often a prerequisite for the execution of the share purchase agreement.

 

Social security implications

In addition to the terms and conditions of the service contract, the future social security status of the director must also be considered. If the selling director was the majority shareholder in the target company, he was previously not subject to any social security obligation. However, his future position as an Third-party managing directorhas a significant impact on his exemption from social security contributions. This is because Third-party managing directors are generally subject to social security contributions, as they cannot influence the decision-making of the shareholders' meeting – to whose instructions directors are subject.

 

If, after the share deal, a shareholder-director continues to hold shares in the company which, however, represent less than half of the share capital (so-called minority shareholder), he may continue to enjoy the social security exemption under certain circumstances if the voting rights are structured accordingly in the articles of association. This requires a so-called “substantial blocking minority” on the part of the minority shareholder, which allows him to influence decisions of the shareholders' meeting.

 

In any case, a so-called optional status determination procedure should be carried out with the German Pension Insurance (Deutsche Rentenversicherung) if the level of the shares held by the shareholder-director changes or if he becomes an Third-party managing director. This makes it possible to determine the employment status of the director in a legally secure manner and thus to avert unexpected claims for additional contributions from the social security institutions.

 

The consultancy contract as an alternative

Due to the issues described above, the parties often resort to the alternative of structuring the contractual relationship as a freelance consultant rather than as an Third-party managing director. But here, too, the concrete structure of the consultancy contract needs to be carefully examined in terms of whether disguised self-employment exists. The name and content of the contract alone cannot rule out the possibility that an employment relationship will be created under social security law. It is rather the actual form of the contractual relationship that is decisive for the assessment whether disguised self-employment exists. It can be affirmed that self-employment is genuine if the consultant is not only not integrated into the business of the sold company and enjoys entrepreneurial freedom – meaning in particular that he must not be bound by any instructions with regard to time, place, type and subject matter of the activity – but he must also bear an actual entrepreneurial risk. However, it is exactly this entrepreneurial risk that is usually the missing element. According to the prevailing view of the social security tribunals, the existence of the entrepreneurial risk is assessed on the basis of the individual contractual relationship. For this risk to exist, it is necessary, for example, that the consultant makes his own investments, for which he bears the risk of failure. In the case of a consultancy contract, it is therefore also worth conducting a detailed check and, if necessary, an optional status determination procedure.

 

Conclusion

What happens to the director's service contract of the selling shareholder-director is of essential importance in a share deal. This applies in particular if he is to remain with the company as an Third-party managing directoror as a consultant in order to pass on the existing know-how. With regard to the future social security status of the former shareholder-director, it must be carefully examined on the basis of the specific individual case what consequences result from the intended changes and what structuring options are available.  

 From the Newsletter

Contact

Contact Person Picture

Victoria Caliebe

Attorney at Law (Germany)

+49 911 9193 1626

Send inquiry

 Experts explain

Deutschland Weltweit Search Menu