When a managing director signs a contract in which he represents both parties, this is referred to as a self-dealing transaction. Caution is advised here: anyone who fails to comply with the strict rules of Austrian corporate law risks having the contract declared invalid and also exposes themselves to liability.
1. What exactly is a self-dealing transaction?
The concept of a self-dealing transaction generally encompasses two scenarios in which there is an equal risk of a conflict of interest:
- Self-contracting: The managing director enters into a contract with himself on behalf of the limited liability company (“LLC”) (e.g., Company A purchases the managing director’s private car from him).
- Dual representation: In a business transaction, the managing director represents both parties involved. This can be as a representative of either a natural person or a legal entity (e.g., the managing director of Company A signs a supply contract with Company B, of which he is also the managing director).
In both scenarios, the question arises: Whose interests is the managing director currently representing? Those of Company A, or his own — or those of Company B?
2. Basic rule: inadmissibility in the event of a conflict of interest
As a general rule, self-dealing is prohibited when there is a potential conflict of interest. The legislature assumes that a natural person cannot be equally loyal to two parties at the same time. To rule out any doubt regarding a conflict of interest, the validity of self-dealing transactions is subject to strict legal requirements.
3. What makes self-dealing transactions permissible and valid?
In particular, there is no risk of a conflict of interest (and a self-dealing transaction by a LLC is therefore permissible) if the risk of harm to the company is virtually nonexistent. This is the case when:
- the business of the represented LLC only brings benefits;
- there is no risk of harm to the represented LLC; or
- the represented LLC explicitly approves the transaction.
In addition, the intention to enter into a contract must be expressed in such a way that the declaration is unambiguous and cannot be irrevocably withdrawn. Documentation is therefore particularly important for the managing director involved. A mere thought or a verbal “yes” is not sufficient.
If a self-dealing transaction is entered into without complying with the relevant safeguards, it is provisionally invalid. This means that the transaction has no legal effect unless it is subsequently approved. This is a risky situation for the managing director, as he may be held personally liable for any damages.
4. Who must give their approval in a LLC?
Obtaining consent — whether in the form of prior consent or retroactive approval — is the best way to ensure that a self-dealing transaction is on solid legal ground. In the case of a LLC, a distinction is generally made based on the structure of the management:
- Sole Managing Director: If there is no other managing director, approval must be obtained either from any supervisory board or from the shareholder(s). However, compliance with the formal requirements for shareholder resolutions is not required.
- Several managing directors: If there are additional managing directors, all other managing directors must give their consent — regardless of their other powers of representation as recorded in the commercial register.
Important: The managing director in question cannot grant approval to himself. This may sound logical, but in practice it is a common mistake in single-member LLCs, where the line between “me as the boss” and “me as a private individual” often becomes blurred. See point 5 below for more on this.
5. Special considerations regarding transactions with a single shareholder of a LLC
If a sole shareholder enters into a transaction with the company — whether as a managing director, authorized signatory or other authorized representative — a written record of the transaction must be prepared immediately. This record must include key details such as how the transaction came about, the date of execution and the amount and nature of the consideration.
An exception applies: If the transaction is part of ordinary business operations and was concluded on arm’s-length terms, no written document is required. Case law cites as a specific example legal transactions involving goods or services that have a market or exchange price. Accordingly, where an objective market price exists, the risk of harm to the principal is ruled out. This is because the terms of the transaction are not subject to arbitrary determination by the agent, but are dictated by the market. The transaction is thus concluded on terms that would have been agreed upon between independent third parties (at arm’s length).
6. Conflicts of interest and liability risks
In addition to formal dual representation, there are also cases of a substantive conflict of interest. This occurs when the managing director is not a direct party to the contract but has a significant personal interest in the transaction — for example, because the contract is being entered into with a close relative or a company in which he holds a significant stake (related-party transcations).
The consequences of such an improper related-party transaction are far-reaching:
- Civil law: Invalidity of the contract and the managing director’s liability for damages to the limited liability company (Section 25 of the Austrian Limited Liability Companies Act (GmbHG)).
- Criminal law: If a person intentionally causes harm to the company’s assets, they may quickly face charges of embezzlement (Section 153 of the Austrian Criminal Code (StGB)).
- Corporate law: An impermissible self-dealing transaction often constitutes good cause for the immediate removal of the managing director.
7. Conclusion: compliance saves you headaches
Self-dealing or related-party transactions are commonplace in business practice. The assumption that, as the “boss,” one is allowed to sign anything and everything can prove costly for the CEO. Protecting the company’s assets takes precedence over the convenience of short decision-making processes.
Therefore, when conducting business that involves themselves or related individuals or companies, managing directors should, ideally, obtain the necessary approvals in writing in advance. Only compliance with legal requirements and proper documentation can protect against future liability claims and criminal consequences.
We help you avoid liability issues and invalid transactions
Are you planning to enter into contracts between your LLC and yourself or affiliated companies? Or do you have doubts about the validity of agreements that have already been concluded? As experts in business law, we will review your specific circumstances in detail and advise you on any necessary adjustments.
Contact LEUKOS Attorneys at Law in Vienna. We help you resolve conflicts of interest in a legally compliant manner and proactively minimize liability risks.