Question

Who hasn't thought about leaving, quitting their job, resigning and leaving for new shores right now? If this thought is not just a passing whim, but a concrete plan, then its implementation must be very well thought out.

 

Can the managing director and the executive board member leave the company just like that, with short notice or even without notice? Civil law recognizes the concept of “untimeliness” (German: “zur Unzeit”) in several places. However, there is no stautory definition of the term. Nevertheless, it is of considerable importance for managing directors and board members. If a resignation or termination is untimely, this can result in claims for damages due to a breach of special fiduciary duties.

 

Contracts must be observed 

Contracts must be observed by all parties, i.e. also by the managing director and the executive board member. If notice periods or fixed contract terms have been agreed, then not only the company must adhere to these, but also – of course – a board member or a managing director. A termination of contract without notice can only be brought about unilaterally by the managing director or the management board if there is an important reason for doing so. Very high requirements must be placed on this good cause, because the cessation of the managing director’s or board member's activities from one moment to the next regularly leads to considerable operational, legal and economic difficulties for the company. Only serious breaches of contract on the part of the company can constitute good cause for termination without notice. 

 

If the executive terminates the contract without notice and without good cause, the company may claim damages in accordance with Section 628 of the German Civil Code (damages for dissolution). If the termination is also untimely, the company may also claim further damages in addition to the damages for dissolution if it would have been reasonable for the executive to wait to terminate the agreement and thus avert further damage.

 

In addition, if there is no good cause, the company can demand that the managing director/board member does not join the competition until the next possible ordinary end of the contract. The contractual non-competition clause continues to have effect beyond the unjustified termination of the contract without notice. This is a trap often overlooked by the terminating executive.

 

Resignation from office is always effective

In Germany, it is important to differentiate between resigning from the corporate office and terminating the underlying service or employment contract. Other than with the underlying contract (as described above), resignation from office by the board member or managing director is not subject to the existence of good cause. If the executive resigns from office, the resignation is effective immediately, even if there is no good cause. However, the existence of an important reason for resignation is important insofar as legal consequences are attached to it. If there is no reason for resignation, the company may be entitled to claim damages. These include, for example, costs for interim management, contractual penalties that the company has to pay to business partners due to the expiry of deadlines, etc. The company may also be liable for damages. Although the aggrieved company must take into account the saved remuneration of the renegade managing director/board member, the costs for dissolution and premature termination damages regularly go far beyond this. 

 

If, in addition, the resignation is untimely, claims for damages in favor of the company that go beyond the mere dissolution and premature termination damage are conceivable. In addition, the unjustified resignation from office may constitute grounds for termination of the employment contract without notice, again with the consequence of possible claims for damages against the managing director/board member.

 

No insurance coverage

If a resignation from office and/or termination is untimely and this behavior triggers claims for damages by the company against the executive, these claims by the company are not covered by the D&O insurance that regularly exists for the benefit of the executive. The insurance is not liable in the event of a willful breach of duty. Therefore, the executive cannot rely on insurance coverage in the event of its renegade behavior.

 

Competitive violation

The same applies in the event that, for example, the competitor company which has poached the board member/managing director promises to cover any losses incurred by the former employer if the board member quits now and joins the competition. Such behavior would not only be in breach of contract on the part of the management board member/executive director, but would also be a significant competition law infringement on the part of the hiring competitor. There is a risk of severe penalties and injunctive relief!

 

Resignation and untimely termination are abuse of rights 

The law has no definition of the term "untimely". Case law has ruled on numerous cases in which resignation from office and termination of one's own employment without notice have been deemed untimely. For example, a resignation from office in a serious corporate crisis, when the company is close to insolvency, in particular when the resigning managing director or board member is the only managing director or board member, takes place untimely and is therefore an abuse of rights. Whenever the company is unable to obtain the urgently needed services of the managing director or board member elsewhere at short notice, the "untimely" condition is met. However, German stock corporations can by law temporarily appoint members of the supervisory board to the executive board, so that in the case of the “AG” in particular it is usually possible to fill the executive board position largely without interruption.

 

No abuse of rights if good cause exists

If the managing director or the executive board member has good cause for resigning from office and terminating the employment contract without notice, case law rules out the criterion of untimeliness. If the company behaves in such a way in breach of contract or law towards the managing director or the executive board member that there is good cause for resignation or termination, the company cannot raise the objection of abuse of rights. Then, the company cannot assert a claim for damages.

 

However, it is only in a potential lawsuit for damages that it can be established with legal certainty whether the resignation or termination of the board member was based on good cause. It is hardly possible to make a reliable forecast as to the existence of good cause at the time of resignation or termination.

 

Summary

Immediate resignation from management and the board of directors and termination of the underlying employment contract without notice must be very carefully considered, especially when the company is in crisis. Ill-considered actions may not only result in damages, but also in restrictions on competition. Any claims for damages by the company against the managing director and the executive board member are in most cases not covered by the D&O insurance.

 

It is important to note that resignations and terminations that are abusive, i.e. untimely, are also legally valid, albeit with considerable consequences in terms of damages.

 

The amicable separation is therefore always the preferable way, not least because the new employer will legitimately ask himself the question: Will the managing director/board member also leave me at some point in the future in breach of contract?

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