EPP Rechtsanwälte Avocats clarifies complexities of managing foreign subsidiaries in France and Germany

LEADERS LEAGUE: Understanding the Leadership Structure of Foreign Subsidiaries seems to be a crucial Post-Deal Step?
Marianne Grange: After acquiring a foreign subsidiary, the buyer must carefully consider how to manage the existing leadership structure, particularly if organizational restructuring is on the horizon. German companies, when dealing with French subsidiaries, often encounter a unique scenario: the management team of the French subsidiary might hold both a corporate mandate and an employment contract. This dual arrangement stems from specific legal and social security norms in France, which can complicate the management process.

Why do French subsidiary managers hold both corporate and employment contracts?
MG: In France, it's common for the managing director (gérant) of a limited liability company (SARL) or the executive body (President or Directeur Général) of a simplified joint-stock company (SAS) to hold both a corporate mandate and an employment contract. This dual role primarily serves to protect the individual, as French law allows these executives to be dismissed by shareholders at any time, without notice and without severance pay. However, if they are solely corporate officers, they are not entitled to unemployment benefits post-dismissal. Unlike in Germany, French shareholders cannot issue binding instructions to a SARL manager, which further complicates the leadership dynamics.

Balancing independence and job security: How is this achieved in France?
MG: The dual role of a French executive, where they are independent in their corporate capacity but subordinate in their employment role, is a carefully constructed compromise. Typically, this is managed by assigning a specific operational function—such as technical or sales director—in the employment contract, distinct from their corporate responsibilities. This operational role is subordinate to another superior within the company. If this division of roles is clearly established and the executive receives separate compensation for each role, French social security authorities are likely to recognize the dual status. If there is uncertainty about the legality of this arrangement, companies can seek an advance ruling from the social security authorities.

What Happens when it’s time to part ways?
MG: The dual role arrangement has significant implications in the event of termination. If a French subsidiary manager holding both a corporate mandate and an employment contract is dismissed, the standard labor laws governing employee termination apply. This includes following a formal process, and the potential financial claims can be considerable—ranging from compensation for unused vacation days to severance pay and possible damages. For this reason, some companies prefer that the French manager holds only a corporate mandate, allowing for the terms of dismissal to be contractually defined. However, any severance payment stipulated in the contract must be reasonable, as an excessively high amount could be viewed as infringing on the shareholders' right to dismiss the executive at will.

Is there an alternative approach in SAS structures?
Anja Hergesell: The governance structure of a SAS offers more flexibility for German parent companies. For instance, the SAS allows the appointment of a legal entity, such as the German parent company itself, as the President. This setup enables the German parent to maintain indirect control over the subsidiary while designating the on-site management in France as the Directeur Général. This dual structure provides continuous oversight and control, which can be advantageous for the parent company.

How does Germany handle managerial contracts differently from France?
AH: In contrast to the French system, it is uncommon in Germany for an executive to hold both an employment contract and a corporate mandate. German law typically employs a management contract, a special form of service contract that delineates the rights and responsibilities of the managing director. If the director was previously an employee, the contract must address how the old employment relationship is resolved, whether through termination or transition to the new role.

Another critical difference is the handling of non-compete clauses. In Germany, these clauses often remain in effect after the contract ends, and the company cannot unilaterally waive them immediately. The company must respect a reasonable notice period during which the executive is typically compensated for adhering to the non-compete restrictions.

What Are the Rules for Dismissing a Manager in Germany?
AH: Dismissing a manager in Germany is generally more straightforward than in France. A manager can usually be removed at any time by a resolution of the shareholders' meeting, without the need to provide a reason. Unless otherwise specified in the management contract, the dismissed manager is not entitled to compensation, even if there is no just cause for the dismissal.

What About the Role of a Prokurist in Germany?
AH: Germany also recognizes the role of a Prokurist, which does not have an equivalent in France. A Prokurist holds a legal power of attorney (Prokura) that allows them to perform all judicial and extrajudicial acts related to the business operations, with some exceptions like changing the company name or signing the annual financial statements. This role offers significant authority but is distinct from the managing director's responsibilities, providing another layer of management in German companies.

In conclusion, managing foreign subsidiaries requires a nuanced understanding of the legal frameworks in both the parent and host countries. The complexities discussed by Marianne Grange and Anja Hergesell highlight the importance of tailored legal advice in navigating these challenges, ensuring that both corporate governance and the rights of executives are effectively balanced in cross-border operation

Interview with Marianne Grange, Avocate, and Anja Hergesell, Rechtsanwältin, EPP Rechtsanwälte Avocats