Exclusion of a shareholder

Exclusion of a shareholder - Gesellschafterausschluss

June 06, 2024

Joining a German limited liability company (GmbH) is not a covenant for life that can only be cancelled by the death of the shareholders. There are therefore legal ways for a shareholder to leave the company, particularly in view of the limited fungibility, i.e. tradability, of GmbH shares. After all, the shareholders have a legitimate interest in who is included in the group of shareholders. The situation is different in the case of a public limited company, which has a so-called impersonal form of organisation and where the co-determination and participation rights are structured differently than in the case of a GmbH, so that the composition of the group of shareholders has a different weight.

There are two ways of leaving a GmbH: voluntarily or involuntarily. Involuntary means nothing other than the ejection of a shareholder. The possibility of such an ejection is a necessary security instrument for the functioning of a company. In a dispute situation, it can and must be possible to prevent a shareholder from blocking or even boycotting the company.

The law only rudimentarily regulates special cases of shareholder exclusion in connection with the payment of the capital contribution, § 21 II of the Limited Liability Companies Act (GmbHG) and the breach of obligations to make additional contributions, § 28 I in conjunction with § 21 GmbHG and § 27 I GmbHG. § 21 GmbHG and § 27 I 2 GmbHG. Of practical relevance is the redemption, § 34 GmbHG. However, this requires a corresponding provision in the articles of association. But what can be done if there is no such provision in the articles of association? The GmbHG does not recognise a general right of exclusion. However, it is generally recognised that such a right must exist, even if the articles of association do not provide for this. The question of how a general right of exclusion can be justified dogmatically is the subject of controversial debate due to the lack of anchoring in the law. However, this is irrelevant in practice.

Criteria for exclusion

Exclusion is possible in any type of limited liability company. In contrast to capitalist structures, personalistic structures are more prone to disputes, especially if the shareholders' personal performance is at the forefront. (In two-tier companies, i.e. there are only two shareholders, exclusion is only possible if there is either a provision in the articles of association for this case or there is good cause in one of the two shareholders. Exclusion is not permitted if there is good cause on both sides. In this case, an overall assessment of the behaviour of both shareholders must be made). An exclusion can be directed against both minority and majority shareholders. It is justified if there is good cause. Such a reason must make the continuation of the company with the excluded shareholder appear unreasonable for the other shareholders, taking all circumstances into account. The company bears the burden of demonstrating and proving the existence of good cause. The good cause must generally lie in the person of the shareholder to be excluded. Exceptionally, within a trust relationship, reasons in the person of the trustor and reasons in the person of a representative who is not only a short-term representative may also be decisive.

The important reasons can be divided into personal and behavioural reasons, whereby the boundaries here are fluid. Case law in particular has created a distinct but not conclusive casuistry in this regard.

Behavioural reasons include numerous minor or particularly serious breaches of duty, breaches of non-competition clauses, criminal acts, prolonged unavailability, behaviour that damages the reputation and honour of fellow shareholders, causing a rift and behaviour that betrays trust. Personal reasons include disorganised financial circumstances, lack of creditworthiness, loss of family affiliation, loss of professional qualifications, inability to work loyally together and persistent serious illness.

If there is a valid reason, the next step is to carry out an overall assessment. For example, personal reasons generally carry more weight in personalistic companies. Although fault on the part of the shareholder is not necessary, it must be included in the overall assessment. In two-tier companies, i.e. there are only two shareholders, exclusion is not possible if there is an important reason in the person of the remaining shareholder. This applies even if the fault of the shareholder to be excluded predominates. In this case, only dissolution can be considered instead of exclusion. The principle of equality must also be observed. For example, the company must adhere to the prohibition of arbitrary unequal treatment when dealing with similar cases and, in particular, when there are several candidates for exclusion. Exclusion is always the ultima ratio for resolving a conflict of interest. In this respect, a conflict of interest must be analysed for alternative, equally suitable and milder means. Possible measures in this regard include the transfer of the share to a trustee and the transfer of the exercise of participation rights to a representative. The influence of the shareholder can also be sufficiently reduced by an amendment to the articles of association or a partial redemption as a milder measure. It should also always be checked whether voluntary withdrawal in return for payment of an appropriate settlement is an option.

Procedure and legal consequences of exclusion

The exclusion procedure is initiated by a resolution of the shareholders' meeting [LINK]. The shareholder concerned is not entitled to vote on the resolution, Section 47 IV GmbHG (conflict of interest - principle: no judgement on one's own behalf). However, the shareholder must be given the opportunity to comment on and refute the allegations made. In this context, the required majority of votes is highly controversial. The Federal Court of Justice still assumes a three-quarters majority to amend the articles of association in accordance with the resolution on dissolution, Section 60 I No. 2 GmbHG. An opposing position takes the view that a simple majority is sufficient, as there are no compelling reasons for a qualified majority. Within a two-person GmbH, however, such a resolution is not appropriate due to frequent mutual exclusion efforts and is therefore unnecessary.

The far-reaching effect of the exclusion also makes it necessary to bring an action for exclusion. The plaintiff is the GmbH, represented by the managing directors. In the case of a two-person GmbH, the shareholders themselves are also authorised to bring an action. The absence of a shareholders' resolution renders the action unfounded, unless this is exceptionally dispensable. However, it is possible to obtain the shareholder resolution even after the action has been filed.

Furthermore, a decision may also have to be made on the compensation of the shareholder to be excluded. The sole purpose of the shareholder exclusion is to ensure the functionality of the GmbH and not to financially penalise the shareholder to be excluded. The amount of the settlement is generally based on the market value of the share at the time the action is filed. In order to protect the financial interests of the defendant, the prevailing opinion is that the exclusion is subject to the condition precedent of payment of the settlement. The shareholder position is therefore maintained until the condition is met. However, if the settlement amount is deposited before the judgement is pronounced, an unconditional judgement can be issued.

As the exclusion is not directly directed against the share, a disposal of the share is still required. It is up to the company to decide what consequences it draws from the exclusion. An automatic redemption previously advocated is contrary to the system. The decision must be made by the shareholders' meeting. Although this does not have to take place at the same time as the exclusion resolution, the remaining shareholders are obliged to endeavour to realise the shares without delay. In principle, they may consider acquiring, selling, redeeming [LINK ] or otherwise realising the share, provided that this does not affect the share capital.

Regulation in the articles of association

The question ‘But what to do if there is no such provision in the articles of association?’ has thus been answered in the event of a dispute. However, the legal process is lengthy, very complicated and fraught with risk due to the lack of legal requirements. It is therefore strongly recommended that such an action for exclusion be pre-empted by provisions in the articles of association.

On the one hand, the grounds for exclusion can be regulated more closely and thus specified with greater legal certainty. However, it should be noted that such provisions can also make exclusion more difficult, but it can never be completely ruled out. Termination clauses that grant one or more shareholders the right to exclude a shareholder at their own discretion are only permitted in special and objectively justified circumstances. The introduction and extension of grounds for exclusion is also possible at a later date with the consent of all shareholders.

The procedure can also be modified and significantly simplified by a provision in the articles of association. In particular, exclusion can be provided for by simple shareholder resolution, whereby the responsibility for exclusion can be transferred to other bodies and the required majority of votes can be determined. This allows the company to avoid going to court. An action for exclusion would be inadmissible in the event of such a regulation due to a lack of legal protection. The shareholder concerned is entitled to bring an action for rescission in accordance with Section 243 of the German Stock Corporation Act (AktG) analogously on the grounds that there is no reason for exclusion.

In addition, the articles of association may stipulate that the shareholder in question immediately loses their shareholder status irrespective of the payment of compensation. This is particularly important with regard to the otherwise continuing power of disposal of the departing shareholder. Furthermore, the type, amount, calculation and due date of the severance payment can be determined. Lower amounts, e.g. the book or nominal amount, can also be stipulated. These provisions in the articles of association are ineffective if they override the interests of the departing shareholder in an immoral manner. This can generally be assumed in the case of a gross disproportion between the amount of the settlement and the actual market value, but also in the case of an unreasonable duration of the payment period. It should be noted that an important reason for exclusion can also justify a lower severance payment than in other cases of resignation. Such a regulation can represent a considerable financial relief for the GmbH and also avoids an expensive and time-consuming determination of the market value.

Conclusion

It can be stated that it is always possible to exclude a shareholder even without provisions in the articles of association. Nevertheless, the requirements, the procedure and the economic consequences should be regulated in the articles of association. This should take into account the needs and existing structures of the company. In this way, lengthy and uncertain processes, overloading of liquidity and damage to the company by the departing shareholder during the suspension period can be avoided.

If you as a shareholder or managing director have any questions about the requirements, the procedure or the legal consequences of the exclusion of a shareholder, about the relevant provisions in the articles of association or about other questions relating to commercial law, please do not hesitate to contact us.

*If we use the generic feminine or the generic masculine in the future for better readability, this expressly includes all genders.