Dear Sirs and Madams,
This Redeker Newsletter informs you about current decisions rendered by the German Federal Court of Justice (BGH) regarding the obligation of a shareholder of a GmbH to consent to a management measure, regarding personal liability risks on the part of the director of a Private Limited Company (England and Wales) under the German Limited Liability Companies Act (GmbHG), and regarding the failure to meet the obligation to pay in the original contribution.
Federal Court of Justice, ruling handed down on 12 April 2016 – file no. II ZR 275/14
The German Federal Court of Justice (BGH) had to preside over challenging of shareholders resolutions and at the same time the limits on the obligation of a shareholder to consent to motions for resolutions (Media‐Saturn Holding GmbH case).
In this case, the plaintiff, a minority shareholder of the group holding company against which the action was being taken, sought a ruling by the court in a nullification and declaratory judgment action establishing that the shareholders meeting had consented to certain management measures (opening of new sites / conclusion or continuation of certain lease agreements with second‐tier subsidiaries) even though the majority shareholder had voted against the proposed resolution or had abstained in the vote. As it were, the majority shareholder had declared before the vote that he would vote against the resolution or abstain merely for formal reasons because of the actual resolution itself because he was of the opinion that the measure was not supposed to be resolved by the shareholders meeting.
In the previous instance, Munich Higher Regional Court (ruling handed down on 14 August 2014, file no. 23 U 2744/13) had found that it is a breach of fiduciary duties if a shareholder votes against a resolution proposed by the management requesting consent for a measure planned by the management even though he or she approves of the measure. In the opinion of the Federal Court of Justice, the party holding the majority stake was allowed to vote against the site‐related measure, however. A shareholder, according to the Federal Court of Justice, is generally free to vote as he or she sees fit. The fiduciary duty only obligates a shareholder to vote in a certain manner if this is objectively and irrefutably necessary to maintain the value of assets that have been created and such is reasonable to expect of the shareholders taking into account their own interests warranting protection. The site‐related decision, held the Federal Court of Justice, was not irrefutably necessary in that case.
Although the Federal Court of Justice rejected any obligation on the part of the shareholder to consent to the proposed resolution in the specific case, it nevertheless confirmed that an obligation to provide consent can result from the fiduciary obligation in the case of management measures from the perspective of company law as well. It set out strict preconditions for this, however. In actual practice, other constellations such as, for instance, the obligation to provide consent to the dismissal of a managing director for an “important reason” will therefore probably remain the most important group of cases in binding voting behaviour as a result of the fiduciary duty.
Dr Markus Dierksmeier, Rechtsanwalt, Bonn
German Federal Court of Justice, ruling handed down on 15 March 2016 – file no. II ZR 119/14
The German Federal Court of Justice (BGH) had to rule in a case in which insolvency proceedings were opened by a German local court on the assets of a private company limited by shares (Limited) registered in the Commercial Register in Cardiff (Companies House). A German branch of the Limited was registered in a German Commercial Register, while the Limited (debtor) was also primarily active in Germany.
The German insolvency administrator took action against the Director of the Limited to obtain compensation for payments that she had effected after the Limited became insolvent (§ 64, section 1 of the German Limited Liability Companies Act). Since the European Court of Justice had ruled regarding questions submitted to it by the Federal Court of Justice regarding the interpretation of Art. 4 of the European Insolvency Regulation and Art. 49 TFEU and 54 TFEU inter alia that this regulation did not run counter to the application of corresponding arrangements laid down in the German Limited Liability Companies Act (European Court of Justice, ruling from 10 December 2015 – case C‐594/14 “Kornhaas”), the Federal Court of Justice ruled that § 64, section 1 of the German Limited Liability Companies Act applied to the Director of a Limited upon whose assets an insolvency proceeding has been opened in Germany.
The purpose of the regulation is to prevent reductions in assets in the run‐up to the insolvency proceeding and in the event that the managing director does not meet his or her obligation to secure the assets of the company by making sure that they are replenished so that they are available in the insolvency proceeding to all creditors of the company in their proper priority and all debtors of the company can be equally satisfied. This does not generally cover damage to the company, but rather to future creditors of the insolvent company. This purpose of the law also applies to the company form of the Limited, in the opinion of the Federal Court of Justice. It is therefore justified to treat the managing director under German law and the director under English or Welsh law equally with regard to liability in the case of such payments.
From the perspective of the field of practice it should therefore be kept in mind that a director of a Limited is also subject to considerable liability risks under the German GmbH Act. It is therefore advisable for directors of Limiteds that have domiciles in Germany (in the form of branch offices) to keep an eye on the German legal situation regarding managing directors liability. Personal claims against directors within the framework of insolvency proceedings have now been facilitated greatly through this decision rendered by the Federal Court of Justice.
Nomen Nescio, Rechtsanwalt, Bonn, and Dr Markus Dierksmeier, Rechtsanwalt, Bonn
Federal Court of Justice, ruling handed down on 19 January 2016 – file no. II ZR 61/15
In this case, the German Federal Court of Justice (BGH) had to rule on the effectiveness and valuation of the payment of an original capital contribution by a shareholder within the framework of an increase in the capital of a GmbH by means of a so‐called “back‐and‐forth payment”.
In this case, the insolvency administrator of a GmbH took action against a shareholder (defendant) in the GmbH to obtain payment of the cash deposit due from him in the amount of EUR 100,000, which had not been properly paid in by the shareholder in the opinion of the insolvency administrator. The defendant had effected two payments of EUR 50,000 each with the reason for payment being stated as “increase in capital” and “deposit” to the account of the GmbH in March 2008 prior to the resolution adopted to increase capital at the end of April 2008. At the beginning of June 2008, the GmbH remitted the defendant EUR 100,000 with the stated reason for payment being “repayment”. Only five days later, the defendant once again remitted EUR 100,000 to the GmbH with the stated reason for payment being “capital deposit”. After registering the increase in capital in the Commercial Register at the end of June 2008, an insolvency proceeding was opened on the assets of the GmbH in October 2010.
The Federal Court of Justice ruled that the payments effected by the defendant from March 2008 were so‐called “prepayments” on the later increase in capital which were not to be attributed the effect of redemption. As a result of the payment, however, the defendant had obtained a claim against the debtor for unjustified enrichment. The defendant, according to the Federal Court of Justice, had deposited this claim in the GmbH by means of a hidden contribution in kind. Although the payment of EUR 100,000 generally speaking constituted a cash deposit and not a payment in kind, the Federal Court of Justice continued, from an economic perspective and against the background of the close temporal connection between repayment and (re‑)depositing (a span of five days) this constituted a hidden payment in kind of the claim to enrichment. The defendant had thus met his deposit obligation in general, but only in the amount that the invested claim was (still) worth at the point in time of the deposit. The Federal Court of Justice referred the question regarding the current value of the claim back to the Higher Regional Court holding jurisdiction to be clarified by it. Against the background of the later insolvency, it can be assumed, however, that the claim will not be assigned all too much value.
In actual practice, then, given this ruling, the shareholders in a GmbH which has a need for “fresh capital” should therefore only pay in their capital contributions following a respective resolution being adopted to raise the capital and not provide the company financial resources prior to such.
Nomen Nescio, Rechtsanwalt, Munich, and Nomen Nescio, Rechtsanwalt, Bonn