Proxy Directorship, Procuration (Prokura)

What is a proxy? Another way to divert the workload via a detour?

Well, not really. It is all about having the possibility to put the management's workload and some responsibility on another person's shoulders.

What may such proxy director do?

The legal framework for such director is found in §§48 – 53 HGB. Based on this, the proxy may perform any business inside and outside of court for everyday business of the principal's business. The lawmaker intends with the wording „principal's business” that the proxy director may work on a general basis for the company.

This sounds exactly what a normal representative may do on behalf of the company. What's the difference?

The difference between a proxy director and a representative lies in the legal quality and scope of the representation. A representative is only allowed to perform what the specific business of the power of attorney brings with it (§54 HGB). The proxy director on the other hand may obligate the company outside of its usual business.

How do I get a proxy director into my company?

This is a two-step process: 1) express appointment by the shareholders – orally or in writing (§48 I HGB) and 2) entry into Commercial Registry by application of the director (§53 HGB). The shareholders have to resolve on this topic and the new proxy can apply to have himself registered.

When is the candidate legally appointed as proxy director?

Once the principal either tells the candidate or gives him a letter that she is now working as a Prokurist. The entry in the Commercial Registry is only declaratory. However this may be, the director will still have to visit a notary to apply to have this appointment registered with the Registry.

What is the scope of his representation for the company?

§49 I HGB determines the scope of representation. The proxy director acts with full legal binding for and for the account of the company. Therefore, the company is liable for anything and all to which the proxy directors commits (§164 I BGB).

I do not want my proxy to do all my work. I only want him to close deals up to € 1000. How do I achieve that?

Not at all! Okay, almost not all. Since the proxy director belongs to the legal representatives, his power of attorney may not be limited to the public. There is no way to officially restrict his external representation (§50 HGB). Third persons are entitled by law to believe that the proxy may perform as he does. However, this is not the end of the story. Keep on reading!

What happens if the assigned proxy director acted outside of his competency and signed a contract?

Internally, it remains binding that your proxy may only engage in business deals up to € 1000. In the event, he signs a contract over € 2000, this contract is binding for you. The defense “The proxy was only entitled to do business up to €1000!” will not persuade any German judge! You have to pay the € 2000 – as a first step. However, you are entitled to damages following the rules on acting without power of attorney (§§177 et seq. BGB). These damages can be either the full amount (e.g. for something your company cannot at all use) or partially (e.g. you could have obtained the product / service for less. So much for the concept; the rest has to be discussed for the individual case.

What exactly is the proxy director entitled to do by law?

To wrap it all up: the right hand of the principal. His duties are:

to lead the correspondence,
lead cases in court,
oblige the company,
granting simple powers of attorney, i.e. not installing another proxy,
purchase, rent, lease real estate – but only with special permission §49 II HGB
hire and generally fire employees.

Are there certain tasks that he may not perform?

Sure! He might not do such activities that are those of the director or shareholder. This is especially:

business aiming at winding up the company,
signing balance sheets,
grant proxy directorships,
make applications towards the Commerical Registry,
apply for bankruptcy,
filing tax returns,

As procuration is strict and binding what about misuse? Is there protection against wrong calls?

The law provides protection against this in the following most typical cases and more:

Your proxy director and one or more persons secretly agree to act to harm you and / or your business. This interaction is null and void for violation of good morals pursuant to §138 BGB.
Your proxy acts outside of his internal competence and the business partner knows this. Though the legal argumentation is in discussion, all come to the result that such interaction is illegal and not binding for the principal.
A procuration is not or not yet or no longer registered in the Commercial Registry (§53 HGB). This situation is in discussion if it is illegal or not. It is a question if §15 I HGB is applicable, i.e. if a (missing) entry can be invoked against a third party. If this provision is applicable, then the above rules can make that business void.

When does a proxy end?

A proxy directorship ends:

with change of shareholders,
bankruptcy of company,
revocation,
cancellation of the proxy's employment contract,
end of business (aka liquidation),
procurator's legal incapacity,
sale of the company.

What happens to my power of attorney if the principal dies?

Nothing. You remain as proxy until for other reasons your power of attorney ends (§52 III HGB). The principal's death does not revoke the validity of the power of attorney.

What happens if the principal does not inform the Commercial Registry after firing the proxy? What should the proxy do?

Fact remains, the power of attorney is no longer valid but it might still be held against the proxy as long as it is still registered (§15 I HGB). The principal has to apply for the procuration to be deregistered. If he does not comply then you will have to take him to court.

Does the proxy have to indicate his position with “ppa” next to the signature? As the procuration is registered this should be enough, correct?

The reason is the law (§51 HGB). The proxy director's signature is complemented with the abbreviation “ppa.” – so German commercial tradition. The acronym is derived from Latin „per procura autoritate“, in English, with the power of procuration.