Newsletter Issue #1 2015

Dear Sirs and Madams,

This bilingual Redeker Newsletter informs you about important decisions rendered by the German Federal Supreme Court (BGH) in 2015 regarding the termination of company agreements, the design of subordination agreements and the liability of shareholders of limited liability companies.

Best regards

Team Corporate

Annulment of a company agreement with a dependent limited liability company (GmbH)

Federal Supreme Court, ruling handed down on 16 June 2015 – file no. II ZR 384/13

The Federal Supreme Court (BGH) addressed a decision generating considerable attention involving the annulment of a profit‐and‐loss transfer agreement (PLT) with a dependent GmbH within a company group during the year. The BGH decided that under § 296, section 1, subsection 1 of the German Stock Corporation Act (AktG), such a company agreement may only be annulled at the end of the business year or otherwise in accordance with the settling‐up period stipulated in the agreement.

In the case tried before the BGH, after the (secondary) insolvency proceeding was opened on the assets of the GmbH, the insolvency administrator took action against the sole shareholder to force payment of compensation for losses purportedly owed under the PLT as of a stipulated date during the year. Thus, the GmbH and its sole shareholder had concluded an agreement during the year to annul the PLT effective immediately in the course of transfer of the shares of the GmbH within the group. A term until the end of the respective calendar year involved, which was at the same time the business year, was originally provided for. The loss for the year was significantly lower at the end of the business year than the amount at the agreed‐upon annulment date.

The BGH ruled that the annulment agreed upon with immediate effect on the PLT was null and void as a result of the respectively applicable arrangement laid down in § 296, section 1, subsection 1 of the German Stock Corporation Act (AktG) and the end of the business year was to be used to determine compensation for losses (§ 302, section 1 of the AktG) (upholding Munich Higher Regional Court, 16 March 2012 – file no. 31 Wx 17/12; pursuant to the business lease agreement, see however Zweibrücken Higher Regional Court, 29 October 2013 – file no. 3 W 82/13). The restriction on annulment of the agreement, noted the BGH, had been provided for in order to ensure legal security and clarity. Nor was this opposed by the fact that in other cases of termination of an agreement during the year (insolvency, termination as a result of an original contractual agreement) a balance sheet drawn up as of a specific date suffices. In these cases, the interest in terminating the company agreement during the year outweighs other considerations, which means that the disadvantages associated with such must be tolerated (cp. regarding a retroactive annulment of a company agreement, which is also not allowed, already BGH, 5 November 2001 – file no. II ZR 119/00). The question as to whether the sale of the share by the controlling company constitutes an important reason for immediate termination of the profit‐repatriation agreement in accordance with § 297, section 1, subsection 1 of the Stock Corporation Act remains unresolved. This is because even if this was a possible important reason, according to the BGH the continuation of the PLT would at any rate not be unreasonable because in the specific case the share had been transferred within the company group. The previous court instance had held that the sale was to be assigned to the sphere of the controlling company and that this company should not have as a result control over termination of a company agreement that had become undesirable, which was a reason against assuming that there was an important reason warranting termination.

In effect, there is (even more) clarity regarding the applicability of § 296, section 1 of the Stock Corporation Act to company agreements with a dependent GmbH following the ruling. In the field of practice, the task is to keep this in mind when designing profit‐and‐loss transfer agreements (in particular: termination clauses). In order to bring about a term for a company agreement that is shorter than the one originally agreed upon, a short business year must generally first be decided upon and the annulment of the company agreement agreed to take place at the end of this short business year. This generally requires, however, that the company statutes be changed and entry of this in the Commercial Register (this is mandatory before the point in time when the short business year ends). Furthermore, the switchover of the business year to a period of time differing from the calendar year is recognises for tax purposes only if such is performed with the consent of the Tax Authorities.

Dr Markus Dierksmeier, Bonn

Landmark decision on subordination agreements

Federal Supreme Court, ruling handed down on 5 March 2015 – file no. IX ZR 133/14

The Federal Supreme Court (BGH) has handed down a landmark decision on several legal questions that had previously been unresolved relating to the design of effective subordination agreements under German insolvency laws (see § 19, section 2, subsection 2, § 39, section 2 of the German Insolvency Code (InsO): i.e. leaving these agreements as liabilities out of the statement of overindebtedness).

The case upon which the ruling was based involved – to the extent this is of significance – a participation right agreement within the framework of mezzanine financing through a nominal loan to the amount of EUR 6 million and a subordinate loan from another outside creditor to an amount of EUR 2 million. In both agreements there was a subordination agreement with the same wording. The later defendant assumed the agreements on the creditor’s side. The BGH had to decide on interest payments by the debtor company to the defendant during the stage of factual insolvency, but at the same time took advantage of this opportunity to undertake the fundamental legal classifications described in the following.

Regarding the “duration” of a subordination, the BGH held – contrary to an opinion widely discussed before the ruling – that the subordination must not solely range to cover the insolvency of the debtor. A subordination agreement, according to the BGH, instead needs to be amended with a pre‐insolvency blockage against satisfaction of claims for the period of the impending factual insolvency.

With regard to the “depth” of a subordination, the BGH held that a subordination behind the creditors cited in § 39, section 1, nos. 1‐5 of the InsO was necessary, but also sufficient.

The BGH furthermore established that a subordination agreement involved an agreement to the benefit of third parties which beginning with the commencement of factual insolvency could only be terminated or annulled in other ways with the consent of all the creditors – which in de facto terms is generally speaking virtually impossible.

In the opinion of the BGH, no distinction is to be made, finally, between subordinations of shareholders and outside creditors.

From the perspective of the field of practice, existing subordination agreements should be subjected to a review in terms of their effectiveness under governing German insolvency laws taking into account the principles established by the BGH. This goes in particular for arrangements relating to the “duration” of respective subordination agreements and annulment possibilities that are potentially provided for.

Matthias Flotmann, Bonn

Forfeiture of a shareholding: liability of the “other shareholders” under § 24 of the German Limited Liability Companies Act (GmbHG)

Federal Supreme Court, ruling handed down on 19 May 2015 – file no. II ZR 291/14

In this ruling, the Federal Supreme Court (BGH) expressed its opinion regarding the liability for an unpaid contribution following compulsory exclusion of a shareholder in a GmbH. In this case, shareholder A had sold his – completely paid in – share to the other shareholder B. Shareholder B had not fully deposited his share at that point. After shareholder A left the company, the GmbH entered into insolvency. The insolvency administrator initially attempted – in effect unsuccessfully – to achieve payment of the unpaid contribution owed by shareholder B. Following forfeiture of the share, the insolvency administrator asserted a claim against shareholder A for the contribution owed by shareholder B.

In this case, the BGH rejected conceivable claims on the part of the insolvency administrator towards the shareholder A who had left the company before the insolvency. Shareholder A was thus neither the legal successor of the shareholder in the meaning of § 22 of the GmbH Act whose share had been forfeited, nor was he deemed to be another shareholder in the meaning of § 24 of the GmbH Act. The definition of the other shareholder in the meaning of § 24 of the GmbH Act is only met, according to the court, if this person is a shareholder at the point in time when the contribution debt becomes due. When shareholder A left the company, the contribution debt had not yet been (made) due, however. Although the insolvency administrator can declare the contribution debt due, this happened precisely after shareholder A had left the company, however, which meant that he was not deemed to be another shareholder.

The ruling by the BGH creates more clarity with respect to the GmbH regarding whether there are claims against shareholders who have left the company which can generally be asserted by insolvency administrators. Persons working in the field of practice can expect a better demarcation between defining aspects in the liability of the legal predecessor in the meaning of § 22 of the GmbH Act and the other shareholder in the meaning of § 24 of the GmbH Act.

Nomen Nescio, Bonn