Does an employment contract exist between a director and a private limited company in formation?

A German GmbH (a company incorporated under German law) planned to incorporate a new private limited company ( Ltd.) A legal person of which the registered capital is divided in shares
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private limited company
in the Netherlands and authorised the appellant to do so. After its incorporation, the appellant (hereinafter called the authorised representative) would become a director of the new Dutch private limited company. However, the GmbH changed its plans and decided not to incorporate the private limited company. In the meantime, the director in the making had already paid himself some salary. The question is whether an employment relationship already existed or whether the authorised representative had acted prematurely. Labour Law Lawyer Sander Schouten explains the ruling of the Dutch Court of Appeal.

Dutch company in formation

The facts of this case were as follows. The authorised representative in this case was a director of the company X BV Nederland. The GmbH was the majority shareholder in X BV Nederland and the respondent in the case. In 2014, the GmbH planned to incorporate a separate company in the Netherlands for a new business segment. It had approached the authorised representative to become a statutory director of this company to be incorporated (hereinafter referred to as “private limited company in formation”) on the basis of an employment contract. In anticipation of this, the GmbH had appointed the authorised representative to prepare the incorporation of the private limited company in formation.

Did an employment contract exit?

At some point, the GmbH decided not to proceed with the incorporation. The GmbH had already paid an amount of € 25,000 into the bank account of the private limited company in formation for the authorised capital. Afterwards, it appeared that the authorised representative had paid himself more than € 10,000 by way of a salary from the account of the private limited company in formation. At the request of the GmbH, the court ordered the authorised representative to repay this amount. According to the Dutch court, contrary to the authorised representative’s assertion, no employment contract existed between the GmbH and the authorised representative.

Is the GmbH jointly and severally liable?

On appeal, the lawyer of the authorised representative argued that he was justified in assuming that the new company had been incorporated. He also took the view that he could assume that the GmbH had already entered into an employment contract with him on behalf of the private limited company in formation. According to the authorised representative, the GmbH was jointly and severally liable for this employment contract because this legal act had not (yet) been ratified.

Failure with formal incorporation requirements

First of all, the Dutch Court of Appeal ruled that the private limited company in formation had not been incorporated and that the authorised representative was not justified in relying on this either. The incorporation of a private limited company in the Netherlands is subject to formal incorporation requirements. The authorised representative was aware of this and also of the fact that these requirements had not been met. For example, a notarial deed had not yet been drawn up.

No shareholders’ resolution

Nor did the Dutch Court of Appeal accept the argument that the GmbH had concluded an employment contract on behalf of the private limited company in formation. The name of the company that was to be incorporated was mentioned as the contracting party in the employment contract, not the GmbH. In addition, it was a requirement for entering into an employment relationship that the authorised representative would be appointed by a shareholders’ resolution as a statutory director of the private limited company in formation. This had not happened. Therefore, no employment contract had been entered into with authorised representative in anticipation of the incorporation of the new company.

Representative entitled to salary?

The authorised representative also argued in vain that he would have been entitled to payment from GmbH for the work involved in incorporating the company. The Court of Appeal was of the opinion that these activities fell under the activities that the director performed for X BV Nederland. He was already receiving a salary for this.