108	3  Limited Liability Company (GmbH)

well as their nominal value subscribed by each shareholder. Besides the prescribed mandatory contents, the GmbHG leaves a great deal of leeway for further optional provisions, e.g. for establishing an advisory board or for specific clauses protecting minority shareholders.

3.6.2  Clauses to Protect Minority Shareholders

3.6.2.1  Need for Supplementary Protection

In contrast to the stockholders of anAG, shareholders of a German limited liability company do not have the same level of statutory minority protection. However, a similar need for minority protection rules often arises since many issues, such as the management of the GmbH (see Sec. 47, para 1 GmbHG) are subject to majority voting requirements. This means that a minority shareholder can be easily overruled.

On the other hand, compared to a stockholder in an AG, it is more difficult for a GmbH shareholder to leave the company. GmbH shares (unlike shares in partnerships) are, in principle, freely transferable.102 Any sale of such shares does, however, require notarization.103 Section 15 para 5 GmbHG defines special requirements necessary for the transfer of GmbH shares, in particular regarding approval. Such restrictions on the transferability of GmbH shares are, in practice, very popular (so-called Vinkulierung). In contrast to the transfer of stock of anAG, there is no organized public market or market price for GmbH shares (in contrast to a stock exchange where stock of anAG can be traded daily).AGmbH shareholder is, therefore, typically bound more strongly to the GmbH than the stockholder to the AG.

For this reason, it is often either desirable or advisable to implement additional protective measures for minority shareholders in the articles of association.

3.6.2.2  Overview of the Minority Protection Rules for GmbH Shareholders

Following is a brief outline of statutory and judge-made minority protection rules for GmbH shareholders.

Statutory Minority Protection

Section 50 GmbHG entitles shareholders, whose shares together amount to at least one tenth of the share capital, to request that a shareholders’ meeting be called. If such request is not complied with, the minority shareholders may themselves convene the meeting pursuant to Sec. 50 para 3 GmbHG.

In addition, Secs. 51a and 51b of the GmbHG grant each shareholder the right to receive information on the affairs of the company to be provided by the managing directors, as well as a right to inspection of the company’s books and records.

102  Sec. 15 para 1 GmbHG.

103  Sec. 15 paras. 3 and 4 GmbHG.

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Finally, Sec. 53 GmbHG requires a majority of three quarters of the shareholders’ votes cast for any amendment of the articles of association in order to protect minority shareholders; the regular ‘simple majority’ of Sec. 47 para 1 GmbHG is not applicable.

Minority Protection developed in Case Law

In addition to the statutory protection of minority shareholders outlined above, there also are minority protection rules developed by the German courts.

Since the so-called ITT decision of the German Federal Court of Justice104, the courts have imposed a duty of loyalty on the majority shareholder to take the minority shareholder’s interests into consideration. Thus, the shareholder majority may only intervene in the rights of minority shareholders if it is in the interest of the company; furthermore, they must balance the necessity and proportionality of such intervention. In effect, the courts have defined certain requirements for majority intervention into minority shareholder rights.

3.6.2.3  Minority Protection through Clauses in the Articles of Association

Finally, minority shareholder protection can also be achieved by a variety of drafting options in the articles of association, some examples of which are outlined below (with ‘ShareholderA’being used as a minority shareholder).

Restriction on the Transferability of GmbH Shares

Restrictions on the transferability of GmbH shares (Vinkulierung) are a popular way of making a change to the existing GmbH shareholders difficult (thereby also protecting minority shareholders if their consent is required). As a result, the transferability of such GmbH shares is made subject to the approval of the shareholders’ meeting or other executive bodies.

Example

‘Each disposal of shares or parts thereof, including the sale, assignment in trust (treuhänderische Übertragung) and each other encumbrance is only permissible with the prior approval of the shareholders’ meeting with unanimous consent. Any disposal occurring without such approval shall be null and void.’

Restriction on the Revocation of Managing Directors

Pursuant to Sec. 38 para 1 GmbHG, the appointment of a managing director is revocable at any time. The articles of association may, however, restrict the right of revocation of the managing director.

104  BGHZ 65, 15, 5 June 1975, II ZR 23/74– ITT.

110	3  Limited Liability Company (GmbH)

Example

‘The managing directors may only be removed from their office for cause.’

Example

‘Shareholder A is appointed as managing director for life [until the age of 65]. His removal can only take place for cause.’

Position of Managing Director as a Special Privilege

The minority shareholder may be assigned the position of managing director by virtue of a special right or privilege105, which may only be withdrawn with her/his personal consent.

Example

‘Shareholder A is managing director by virtue of a special privilege. This privilege shall [not] pass to A’s legal successor. Shareholder A can only be removed from office for cause.’

Special Privilege for Sole Management or Representation

In addition, to the position as managing director, the minority shareholder may also be assigned the power of sole representation or sole management of the GmbH as a special privilege.

Example

‘ShareholderAis entitled as a special privilege to manage the company alone for as long asAis managing director of the company. This privilege shall [not] pass toA’s legal successor. ShareholderAis entitled as a special privilege to represent the company alone for as long as A is managing director of the company. This privilege shall [not] pass toA’s legal successor.’

Right to Appoint or Nominate Managing Directors

If the minority shareholder himself/herself does not wish to become managing director herself/himself, but would like to exercise influence on the person chosen as managing director, then a ‘right of appointment’ (Bestellungsrecht) or a ‘right of nomination’(Benennungsrecht) can be included in the articles of association.

105  See Sec. 35 BGB.

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Right of Appointment

The ‘right of appointment’ (Bestellungsrecht) gives the minority shareholder the right to appoint the managing director directly himself without the need for a shareholders’resolution.

Example

‘By virtue of a special privilege, Shareholder A may suggest a candidate to be appointed as managing director. Shareholder A alone is responsible for the removal of the person elected by her/him, unless an important reason within the meaning of Sec. 38 para 2 GmbHG exists to warrant the removal from office of this managing director.’

Right of Nomination

In the case of the so-called ‘right of nomination’the minority shareholder is granted a binding right of nomination to propose a managing director. The appointment of the managing director then takes place on the basis of a shareholders’ resolution. The co-shareholders are, however, normally obliged to vote in favor of the person nominated.

Example

‘By virtue of a special privilege, Shareholder A may suggest a candidate to be appointed as managing director. The appointment takes place on the basis of a shareholders’ resolution. With respect to this shareholders’ resolution, the coshareholders are obliged to vote in favor of the person nominated by ShareholderA, unless an important reason exists to the contrary within the meaning of Sec. 38 para 2 GmbHG.’

Example

The co-shareholders may only withhold their vote in favor of the nominated person for reasons relevant to and in the interest of the company.

Consent Requirements in Favor of the Minority Shareholder

Despite not being directly involved in the management of the company, minority shareholders can be kept informed about important business matters by means of consent requirements set out in the articles of association (Zustimmungsvorbehalte). The advantage of having such consent requirements is that any amendment to, or termination of, such consent requirements requires a shareholders’ resolution with a majority of three quarters of the votes cast (Sec. 53 para 2 sentence 1 GmbHG).

Consent requirements may also be laid down in separate rules of procedure for the management.

112	3  Limited Liability Company (GmbH)

Example

‘The shareholders can only release a managing director from the limitations of Sec. 181 BGB by means of a unanimous shareholders’resolution.’

Example

‘The managing directors are obliged to follow the instructions of the shareholders and, in particular, to comply with any Rules of Procedure introduced by them and to carry out any business requiring the shareholders’approval only with such approval.’

Increase of Number of Votes

Irrespective of the amount of the nominal value of her/his share in the company, a (minority) shareholder may be granted a (special) right to exercise a certain number of votes.

Example

‘Each EUR 1 of a share carries one vote. Notwithstanding the foregoing, each EUR 1 of the shares held by ShareholderAcarries [●] votes.’

Veto Right

(Minority) Shareholders may—again as a special company law privilege—be granted a veto right for certain decisions.

Example

‘The management needs the express prior approval of the shareholders’meeting for all business transactions which go beyond the ordinary course of business. This must be resolved with simple majority of the votes cast but, in any case, with the consent of ShareholderA.’

Casting Vote

Individual (minority) shareholders may also be granted the casting vote in the case of a tie.

Example

‘In the event of a tie, where resolutions are to be passed with a simple majority of the votes cast and result in a tie (Patt-Situation), Shareholder A shall be entitled to cast a second vote.’