Shareholders' Rights & Shareholder Activism 2020

Last Updated September 23, 2020

Germany

Law and Practice

Authors



Freshfields Bruckhaus Deringer LLP is a global law firm with a long-standing track record of successfully supporting the world's leading national and multinational corporations, financial institutions and governments on ground-breaking and business-critical mandates. The firm's lawyers deliver results worldwide through its own offices and alongside leading local firms. The firm's commitment, local and multinational expertise, and business know-how means its clients rely on the firm when it matters most. The firm's lawyers advise both institutional investors and listed companies on ongoing governance issues, so appreciate the pressures that both sides face. The firm is well versed in giving boardrooms and senior managers around the world advice on shareholder activism, engagement and litigation, including in the USA, Europe, the Middle East and Asia. In addition, with social and environmental concerns coming to the fore, the firm is helping senior leaders pivot to business models that are not only sustainable but also anticipate where shareholder pressure might arise.

The spectrum of legal forms for companies under German corporate law comprises two major categories:

  • Corporations (Kapitalgesellschaften) such as the limited liability company (Gesellschaft mit beschränkter Haftung or GmbH), the limited liability entrepreneurial company (Unternehmergesellschaft or UG), the stock corporation (Aktiengesellschaft or AG) or the European Company (Societas Europaea or SE); and
  • Partnerships (Personengesellschaften) such as the general partnership (offene Handelsgesellschaft or oHG), the limited partnership (Kommanditgesellschaft or KG) or the civil law partnership (GbR).

The above-mentioned companies are treated as legal entities separate from their shareholders and have their own rights and duties as well as the ability to enter into contracts and initiate or be the subject of legal actions and court proceedings (see 3.1 Separate Legal Personality of a Company). However, only stock corporations and European companies are able to have their shares listed and admitted to trading on a German stock exchange. European Companies are very similar to stock corporations, but, unlike stock corporations, additionally allow for a one-tier board system and, further, are more flexible in terms of co-determination. Companies that have their shares listed on a German stock exchange are subject to the supervision of the German Federal Financial Supervisory Authority (BaFin), in particular regarding insider trading, market abuse and ad hoc notification obligations.

In general, no restrictions apply to individuals or entities being a German company’s shareholder. However, the acquisition of shareholdings in German companies by foreign entities or individuals outside the EU may be subject to a foreign direct investment approval by the German Federal Ministry of Economic Affairs and Energy. A person becomes a shareholder of a German company by way of a transfer of shares or partnership interest in the company to that person.

The following description of shareholders’ rights focuses on German corporations, as the legal framework and especially the rights in German partnerships are focused on the partners, who are able to handle all business transactions and lead the business themselves in all respects (Selbstorganschaft). Furthermore, changes to the composition of partners requires the consent of all partners under statutory law, which in general impedes activists to invest in and try to influence the corporate governance framework or specific measures in a German partnership.

General

Shares in German companies pursuant to statutory law grant each shareholder equal rights pro rata to their respective shareholding ratio with regard to profit or dividend payments entitlement, liquidation proceeds and voting rights. However, the company’s articles of association may provide for somewhat preferred shares by way of providing for a different dividend entitlement split or limiting or excluding certain shares’ or shareholders’ voting rights. Shares in German companies generally are non-redeemable in the ordinary course of business and only upon the decision of an individual shareholder, as a capital increase or decrease is a structural measure of substantial importance that has to be decided on by the shareholder meeting.

Limited Liability Companies

The German Limited Liability Companies’ Act does not provide for different kinds or classes of shares regarding rights to dividend entitlement, voting rights or rights to appoint certain key management positions. However, a limited-liability company’s shareholders are to a broad extent able to implement transfer restrictions or different rights to dividend entitlement or voting rights in the articles of association.

Stock Corporations

Shares in German stock corporations may be issued as registered shares (Namensaktie) or non-registered shares (Inhaberaktie). As opposed to registered shares, the latter cannot be subject to transfer restrictions under the articles of association. Non-registered shares allow an easier and faster transfer and are favourable for stock corporations aiming at a broader group of shareholders. However, as know-your-shareholder requirements and transparency in general are being treated with more diligence lately, stock corporations increasingly issue registered shares.

Rights and obligations of German companies’ shareholders arise under statutory law as well as the companies’ articles of association and further contractual arrangements (see 1.5 Shareholders’ Agreements/Joint-Venture Agreements). Applicable statutory law comprises the German Limited Liability Companies’ Act, the German Stock Corporation Act, the German Commercial Code, the German Civil Code, The German Securities Trading Act, The German Securities Acquisition and Takeover Act, the Regulation on the Statute of the European Company (EC 2157/2001) and the Market Abuse Regulation (EU 596/2014).

Any changes to the articles of association require 75% of votes cast in a limited-liability company’s shareholders’ meeting or 75% of the share capital represented at a stock corporation’s general meeting. Subsequently, the amended and restated articles of association have to be registered with the commercial register.

The most fundamental shareholders’ rights arising under statutory law or as amended by the company’s articles of association are those regarding profit or dividend payments, to participate in shareholders’ meetings and ask questions, to pass votes on shareholders’ decisions and to receive proceeds in the case of the company’s liquidation.

As mentioned in 1.2 Type or Class of Shares, the company’s articles of association may provide for a preferred position regarding proceeds, but also may limit certain shareholders’ voting rights. Any changes and restrictions to the rights attached to certain shares in a company, irrespective of further requirements as to majorities, require the votes of the shareholders whose rights are affected by that decision. However, certain rights, especially of minority shareholders regarding information, document access or to convene a shareholders or general meeting and to put certain topics on the agenda, may not be limited in the articles of association or by other way (see also 1.7 Access to Documents and Information).

Shareholders’ agreements and joint-venture agreements can be concluded between individual or all shareholders to govern the relationship between each other with respect to their rights in the company outside of the articles of association. These agreements constitute contractual obligations and are enforceable. However, the actual court enforceability of, eg, voting rights' pooling agreements is limited due to the usually short timeline to reach a decision, as well as the prohibition of the main proceeding’s anticipation (Verbot der Vorwegnahme der Hauptsache) under German statutory law, which only allows the court to take a final decision in outstanding cases.

Shareholders’ agreements and joint-venture agreements are commonly seen because they do not have to be filed with, and thus are not publicly available from, the commercial register. They also can be amended more easily and only have to be executed by the parties to it, as opposed to the articles of association. However, regarding, eg, voting rights' pooling agreements, shareholders should have in mind and assess the possibility of being considered as “acting in concert” and its various implications regarding, eg, voting rights' disclosure obligations under statutory law. This, amongst other reasons, is why shareholders’ agreements are rather unusual in listed companies as opposed to the practice in non-listed companies.

There are several shareholders’ rights which can only be exercised with a certain percentage of the shares (quorum). However, thresholds can be amended to some degree in the articles of association.

Examples for stock corporations (AG):

  • request to convene a general meeting (5%);
  • put specific topics on the agenda of the general meeting (5% or EUR500,000 of the share capital);
  • appointment of a special auditor (1% or EUR100,000 of the share capital);
  • admission to enforce claims for compensation by the company against board members (1% or EUR100,000 of the share capital).

Examples for limited-liability companies (GmbH):

  • request to convene a shareholders' meeting (10%);
  • request a shareholder resolution on specific topics (10%);
  • action for dissolution for cause (10%);
  • appointment of a liquidator for cause (10%).

Limited-Liability Companies

Upon request, the managing directors must immediately provide each shareholder with information on the company's affairs, business matters, financial statements, internal and external correspondence and permit inspection of the books and records. In very limited cases, such as a conflict of interest between a shareholder seeking information and the company itself, information and inspection rights may be limited by way of a shareholders’ resolution. However, rights to information, inspection and access to company documents cannot be amended in the articles of association.

Stock Corporations

Each shareholder, upon request, is to be provided with information by the board of directors at the general meeting on the company's affairs, to the extent that such information is necessary for a proper evaluation of the items on the agenda. This also includes the relationship with the stock corporation’s affiliated companies. The provided information must be compiled with sufficient care and diligence and must be accurate and complete. In addition, all shareholders have to be treated equally as regards the disclosed information. For example, any information provided to a shareholder by reason of his or her status as a shareholder outside of a general meeting has to be disclosed to all shareholders in the course of a general meeting.

Limited-Liability Companies

The German Limited Liability Companies’ Act explicitly states, inter alia, the following measures that require the approval of the shareholders:

  • preparation of the annual statements;
  • amendments to the articles of association;
  • division, combination and withdrawal of shares;
  • appointment, removal and discharge of managing directors;
  • monitoring the managing directors;
  • enforcement of certain of the company’s compensation claims against the managing directors.

Approval is given through a shareholders’ resolution. The resolutions adopted by the shareholders’ meeting require the majority of the votes cast (simple majority) unless a greater majority or further requirements are applicable under the articles of association or statutory law.

Stock Corporations

Under the German Stock Corporation Act, the following measures, inter alia, require an approving shareholders’ resolution passed at a general meeting:

  • appropriation of profits;
  • appointment of supervisory board members;
  • appointment of the stock corporation’s auditor;
  • amendments to the articles of association;
  • capital measures;
  • entering into domination or profit-and-loss pooling agreements;
  • corporate measures under the German Transformation Act.

In addition, pursuant to case law established by the German Federal Court of Justice (Bundesgerichtshof), a business measure that would usually fall within the discretion of the board members but is to be regarded as equally important to the corporation, as a change to its articles of association also required the general meeting’s participation (for example, transferring the company’s most valuable asset to a subsidiary – Holzmüller/Gelatine case law). In these cases, an unwritten competence of the general meeting is invoked and its decision on the issue is mandatory. This general principle also applies to limited liability companies.

Stock Corporations

In general, the board of directors usually calls the general meetings, which – together with the supervisory board – issue resolution proposals that have to be laid down in the invitation (see below). As mentioned in 1.6 Rights Dependent Upon Percentage of Shares, a 5% quorum of shareholders may also request to convene a general meeting. Such a request must be addressed to the board of directors of the company in writing and shall state the reasons for the requested general meeting.

The general meeting has to be convened 30 days prior to the scheduled date at the latest. The invitation to the general meeting, which has to be published in the companies’ register, must set out the company’s name, its seat, as well as the time, place, agenda and certain pre-requisites to participate and vote in the general meeting. If set out in the articles of associations, shareholders have to sign up to attend the general meeting at least six days prior to the date of the general meeting.

In accordance with COVID-19-related legislation, a general meeting can also be held remotely in 2020, even without being provided for in the articles of association or rules of procedure. A virtual general meeting can be convened by resolution of the board of directors with approval of the supervisory board. In a virtual general meeting, the shareholders’ right to request information can be limited or replaced by the opportunity to ask questions by means of electronic communication, which – at the discretion of the board of directors – must be submitted two days prior to the general meeting. In the event of a virtual general meeting, the board of directors may decide to convene the general meeting no later than the 21st day prior to the day of the general meeting.

Limited-Liability Companies

In a limited-liability company, minority shareholders with a stake of at least 10% in the company may request to hold a shareholders’ meeting. In order to be able to pass effective resolutions, the meeting has to be convened one week prior to the scheduled date at the latest. If, however, no shareholder challenges an invitation received later than a week prior to the shareholders’ meeting, resolutions nevertheless are effectively passed. In a limited-liability company, shareholder resolutions also may be passed in writing or electronically (Textform), if all shareholders agree.

In general, resolutions adopted by the general meeting (in a stock corporation) or shareholders’ meeting (in a limited-liability company) require the majority of the votes cast (simple majority) unless the articles of association or statutory law provides for greater majorities being required (eg, regarding structural measures or for purposes of amending the articles of association). As a general rule (see 1.2 Type or Class of Shares), voting rights are parallel to and calculated on the basis of the nominal number of shares held in the company. Voting rights may also be exercised by a representative by way of a power of attorney. In the event of a virtual general meeting, shareholders shall exercise their voting right through electronic communication (postal vote or electronic participation) or grant a power of attorney.

Under statutory law, changes to the articles of association (see 1.3 Primary Sources of Law and Regulation), the transfer of all of the company’s assets, liquidation resolutions, resolutions regarding transformation measures under the German Transformation Act or the conclusion of domination or profit-and-loss pooling agreements, are subject to a voting majority of at least 75% in a limited-liability company and a simple majority as well as a majority of at least 75% of a stock corporation’s share capital represented in the general meeting.

A quorum of 5% or EUR500,000 of the share capital (10% in a limited liability company) may request to put specific topics on the agenda of the general or shareholders’ meeting, see 1.6 Rights Dependent Upon Percentage of Shares.

General

As a general rule under German corporate law, it is the managing directors’ (in a limited-liability company) or board of directors’ (in a stock corporation) responsibility and duty to manage the company in all its affairs internally, as well as to represent and act on behalf of the company towards third parties.

Limited-Liability Companies

Shareholders of limited liability companies may participate directly in the decision-making process of the company’s management, as the managing directors are obliged to adhere to the shareholders’ instructions laid down either in the articles of association or issued by way of a shareholders’ resolution. In addition, a list of reserved matters may be implemented (either in the articles of association or in the management rules of procedure) that provides for an approving shareholders’ resolution being required in order to carry out any reserved matter.

Reserved matters may include business transactions outside the ordinary course of business when exceeding a certain transaction value or that is not already provided for in the annual budget. However, this approval requirement must not undermine the managing directors’ management responsibility in such an extensive way that they are not able to pursue the company’s affairs in the ordinary course of business without the shareholders’ approval.

Stock Corporations

In a German stock corporation, shareholders in general are unable to instruct the board of directors to take certain actions, unless the stock corporation entered into a domination agreement with its shareholder. Shareholders are instead represented in the general meeting, which only decides on management measures and transactions of extraordinary importance, such as the transfer of the corporation’s any and all assets. Regarding more usual business transactions, the general meeting may only indirectly override the board of directors through the supervisory board, the members of which are appointed by the general meeting (as far as labour co-determination law does not provide for an election right of the workforce). The supervisory board in turn appoints, removes and monitors the board of directors and may establish a list of reserved matters that requires the supervisory board’s prior consent.

Limited-Liability Companies

Pursuant to German statutory law, it is the shareholders’ sole responsibility and is within their sole power to appoint and remove a limited-liability company’s managing director by way of a shareholders’ resolution. Shareholders’ resolutions may also be passed in writing and unconnected to a shareholders’ meeting (see 1.9 Calling Shareholders' Meetings). There also is no specific notice period to observe prior to the decision to appoint or remove a managing director.

If a limited liability company has established a supervisory or advisory board (which, subject to labour co-determination law, is not mandatory in a German limited liability company), the articles of association may delegate the power to appoint and remove a managing director to the supervisory or advisory board. However, this power to appoint and remove managing directors cannot be vested with the managing directors themselves, as this would undermine the shareholders’ abilities to exercise their control effectively over the company.

Stock Corporations

In German stock corporations, the supervisory board appoints and removes the board of directors’ members, which cannot be delegated to another (whether mandatory or optional) corporate body, ie, neither to the general meeting, nor to the board of directors itself. Therefore, the shareholders may only indirectly, by exercising their voting rights in the general meeting regarding the composition of the supervisory board, influence the composition of the board of directors  and thus the management of the stock corporation.

It is the sole decision of a German stock corporation’s general meeting to appoint its statutory auditor (upon a resolution proposal by the supervisory board), which cannot be delegated to another corporate body or external decision-maker. A limited-liability company’s articles of association, to the contrary, may provide for a deviating responsibility of another corporate body, eg, an optional supervisory board (see 1.12 Shareholders’ Rights to Appoint/Remove/Challenge Directors).

Listed Companies

Under the German Securities Trading Act, shareholdings in listed companies exceeding or falling below certain thresholds (starting from 3%) have to be notified to the German Federal Financial Supervisory Authority (BaFin) as well as to the issuer of shares and subsequently have to be published by that issuer. As shareholdings are attributed to controlling holding entities, even indirect shareholders under certain circumstances have to be disclosed.

Non-listed Companies

The identity of shareholders in a non-listed stock corporation in general are neither registered with the commercial register nor otherwise available to the public. However, shareholders under the German Stock Corporation Act are required to notify a stock corporation as soon as they hold more than 25% or more than 50% of all outstanding shares, which subsequently has to be published by the stock corporation receiving the notification.

As opposed to the aforementioned, limited-liability companies upon establishment and further upon any change in their shareholding have to submit a current and complete shareholders’ list to the commercial register, which is available to the public. However, that shareholders’ list only shows the direct shareholding in the company and does not contain information on the company’s indirect and ultimate shareholders. 

In general, shareholders in German companies (as opposed to German partnerships, where all shareholders’ consent is required) may grant security over and dispose of their shares individually and without the consent of all or a certain quorum of the other shareholders. However, the articles of association may deviate from this general rule and provide for shareholders’ approval (with a certain majority or a unanimous resolution) being required prior to giving effect to granting security over or disposing of shares (Vinkulierung). The articles of association of a limited-liability company may even provide for a prohibition to transfer any shares in the company. However, disposing of shares, eg, by way of transfer to the other shareholders, must always be possible for cause, if it cannot be reasonably expected from the ceasing shareholder to co-operate further with the other shareholders.

Shareholders in both German limited-liability companies and stock corporations are generally entitled to the proceeds remaining after the company has been liquidated, pro rata to their respective shareholding in the company. However, the articles of association may provide for a different split regarding the entitlement to any such liquidation proceeds.

Shareholders of both limited-liability companies and stock corporations may pass a shareholders’ resolution to liquidate the company that requires a majority of 75% of votes cast (the articles of association also may deviate from this rule and provide for the requirement of an unanimous resolution). The articles of association may also provide for circumstances other than eg, the opening of insolvency proceedings, the failure to reach the company’s purpose or the ending of the term of the company (if provided for in the articles of association), in which the company has to be liquidated.

German corporate law does not provide a special regulation for shareholder activism. Companies and activist investors are bound by the general provisions of corporate and securities law. As mentioned in 1.7 Access to Documents and Information, each shareholder, upon request, is to be provided with information at the general meeting by the board of directors on the company's affairs, to the extent that such information is necessary for a proper evaluation of the items on the agenda. However, other than that, shareholders’ information rights in German stock corporations are very limited. Therefore, in most cases, shareholder activists can only assess the company from an outside-in perspective based on publicly available (or specifically demanded) information. Also, as mentioned in 1.14 Disclosure of Shareholders’ Interests in the Company, under the German Securities Trading Act, shareholdings in listed companies above the 3% threshold have to be published, allowing the company to be aware of “stake-building” shareholders.

Legislation on the implementation of the Shareholder Rights Directive II (ARUG II) became effective on 1 January 2020, pursuant to which stock corporations are able to gather more information on their shareholders through intermediaries (eg, custodian banks - "know your shareholder" -, institutional investors, asset managers and voting rights' advisers) that are subject to increased transparency duties in order to mitigate conflicts of interest and to disclose the relevant shareholders to the company as well as the other shareholders. In addition, starting from 2021, shareholders will have an expanded influence on board-member compensation ("say on pay") through a mandatory vote on the company’s remuneration policy every four years, as well as the possibility to pass a vote in order to reduce the board of directors’ maximum remuneration.

Shareholder activism is on the rise in Europe. While there is a long and well-known tradition of activist shareholders in the US, the phenomenon has recently become more important in Europe – and Germany – as well and it can be assumed that this trend will continue in the foreseeable future. Activists have gained increasing acceptance amongst institutional investors and the public. Formerly regarded as aggressive “corporate raiders” seeking short-term profits at the expense of the company’s long-term value, activists are now often supported by institutional investors and proxy advisers, who believe them to address legitimate concerns or unlock hidden values for shareholders. Moreover, the demands of activist investors often fit into current public corporate governance discussions, such as changes to the board remuneration or environmental or other corporate social responsibility issues. However, according to a report by Activist Insights, market uncertainties due to the COVID-19 pandemic have caused a slow-down in activist investing in contrast to the general trend described before.

Prominent examples of activist investors include Active Ownership Capital’s (AOC) engagement in the pharmaceutical company STADA Arzneimittel AG (short-term activist), the investment of Cevian Capital in ThyssenKrupp AG (long-term activist), Cerberus Capital’s involvement in Commerzbank AG (long-term activist) or Muddy Waters Capital LLC’s short-sale attack on Ströer AG.

In general, there are four types of shareholder activists with different objectives.

Short-term activists focus on the strategy and the business orientation of the company. Their aim is to increase the value of the company to create an opportunity to sell the stake in the company at a premium in the short term. Targets that become subject to short-term shareholder activism typically show specific “vulnerabilities”, that make them an attractive target for activism (eg, corporate governance or balance sheet issues). In the recent past, short-term activists also often focused on M&A topics by opposing or – vice versa – pressuring companies to undertake M&A transactions.

Long-term activist shareholders also aim at the strategic orientation of the company, but, in contrast to short-term activists, they typically desire an improvement of the company’s key figures by supporting the company over a longer time, especially in turnaround and reorganisation situations. Long-term activist shareholders often also demand representation in the supervisory board the better to influence and implement the changes they are seeking in the long term.

Event-driven activists take strategic stakes in companies that are the target of a public offer and use that stake to agitate for a higher price (especially if the takeover is subject to a minimum acceptance threshold as closing condition) or to block post-takeover business integration measures, such as the conclusion of a domination and profit-and-loss pooling agreement. Moreover, often these event-driven activists aim at the realisation of profits through the court proceedings challenging the appropriateness of the consideration after a domination and profit-and-loss pooling agreement has been concluded.

Lastly, activist investors that execute a short-sale attack speculate for a notable deterioration in the share price. In contrast to long-term and short-term activist shareholders, aiming at increasing the company’s stock market value, the aim of short sellers is exactly the opposite. Short sellers usually try to create a negative market reaction with aggressive means, for example by a well-prepared public campaign including the issuance of obscure analyst “reports”.

Recently, according to statistics published by Activist Insights, the financial services, industrials and basic materials/energy sector have predominantly been targeted by activist behaviour. However, shareholder activism generally cannot be tied to a specific industry, as a broad range of companies are targeted by activist investors. In terms of market capitalisation, small-cap companies were mostly targeted, which shows a shift in comparison to 2019, where mid-, small- and micro-cap companies were almost equally targeted by activist behaviour.

Typical “vulnerabilities” attacked by activist investors include corporate governance issues, low revenue growth and/or dividend yield, significant cash reserves, multiple business segments (potential for divestment or spin-off), lack of clear business strategy or corporate social responsibility issues.

Typically, the most active group of shareholders are activist hedge funds (eg, Elliot or Cevian Capital). However, the number of activists publicly subjecting companies to demands has slightly decreased recently, according to statistics published by Activist Insights. Deutsche Bank AG currently has the most activist shareholders on their share register. Mostly, activist shareholders demand board-related measures by the company (ie, the resignation or appointment of specific board members).

There is no available data on a percentage or proportion of public activist demands that were met in the last year. However, from an outside-in perspective, companies seem to be very hesitant with meeting demands of activist shareholders. Examples of public activist demands that were met include Activist fund Cevian Capital, the second-largest shareholder in ThyssenKrupp AG, successfully pressuring ThyssenKrupp AG to restructure its steel operations and consider seeking a partnership in the business, also suggesting that Swedish steelmaker SSAB would be a suitable fit. North Point Talent, which owns a 12.7% stake in Esprit has successfully pressured Esprit to appoint several directors suggested by North Point. Furthermore, Cerberus, the second-biggest shareholder of Commerzbank AG, pushed for a shift in strategy which led to the resignations of both the CEO and the chairman of the supervisory board. However, defying Cerberus, Hans-Jörg Vetter was appointed as new chairman of the supervisory board.

From the company’s perspective, the best form of defence against shareholder activism is to be prepared, which can be assured by the following measures:

  • vulnerability study: in order to reduce vulnerability to shareholder activism, periodic risk assessments and the analysis of near-term and long-term strategic plans are essential. By considering the company’s situation from the perspective of an external investor, the management should become aware of the company’s vulnerabilities and prepare a rebuttal strategy for each identified example of vulnerability;
  • consistent and clear communication: the management board should, moreover, clearly communicate the company’s strategic vision and explain how this might maximise long-term value for shareholders. In order to understand the views of all major shareholders, a regular dialogue with the company’s shareholders is essential and keeps them informed about the management’s business strategy;
  • early warning systems: early warning systems should be used to screen important indicators for shareholder activism. These indicators relate, inter alia, to the composition of the company’s shareholder base, the number of shares or certain financial instruments being traded, the analysis of the results of the annual general meeting and statements of key investors or peer companies on the company. Companies should also undertake regular reviews of their governance framework and maintain high corporate governance standards, including compliance with regulatory requirements as well as best-practice policies;
  • response team: in order to secure preparedness, a response team (including internal personnel, financial advisers, lawyers, accountants and investor relations specialists) should be installed, which is able to form a response strategy and manage the relationship with stakeholders;
  • defensive manual: in order to avoid an immediate disadvantage of the company through giving the “wrong” response or through losing time because there is no clear process and the responsibilities are not allocated, it has proven to be effective to have a manual at hand that provides initial guidance by setting out the initial steps to be taken immediately after the company has been approached by an activist. There is a trend for companies to have a regular “dry-run” exercise with all advisers involved so that all relevant parties are best prepared in case of an activist attack.

Once the company has been approached by an activist investor, it has proven effective to be prepared with a clear strategy for initial guidance. Such strategy includes “knowing your opponent” and setting out key measures by allocating responsibilities and having a set process of initial steps being taken.

German corporate law has always been shaped by a clear distinction between the legal nature and personality of corporations or partnerships and the natural persons behind them. The spectrum of legal forms for companies under German corporate law comprises two major categories, corporations and partnerships (see 1.1 Types of Company).

Corporations (AG, SE, GmbH and UG) and partnerships (oHG and KG) are recognised by German corporate law as separate legal personalities. The same applies to a civil law partnership (GbR) if certain criteria are met (see in more detail below).

The distinction between corporations and partnerships is crucial for the question of personal liability of the shareholders:

The shareholders of a corporation (such as a GmbH or AG) are in general not personally liable for the corporation’s obligations. Only in a few exceptional circumstances can personal liability of shareholders be invoked (piercing the corporate veil – Durchgriffshaftung der Gesellschafter). This would be the case if abusive conduct by the shareholders to increase their profit were to lead to the corporation’s insolvency, thus leaving the corporation’s creditors without any protection. In this scenario of blatant misconduct, the shareholders’ personal liability is invoked to protect the creditors (Existenzvernichtungshaftung).

The partners of a partnership (oHG or KG), however, are in general fully liable for any obligations incurred by the partnership. In a limited partnership, personal liability can be limited to certain partners (at least one) acting as the general partner (Komplementär), while the others are able to limit their liability to the extent of their share (limited partners, or Kommanditisten). To make sure no natural person needs to risk unlimited personal liability, it is possible to leave the position of general partner to a corporation. The corporate form of “GmbH and Co. KG”, ie, a limited partnership where a limited liability company is the only general partner, is quite common in Germany.

Alongside the aforementioned partnerships, German corporate law recognises a civil law partnership (Gesellschaft bürgerlichen Rechts or GbR). Here, all shareholders are personally liable for the partnership’s obligations. The question as to whether a civil law partnership is a distinct legal entity depends especially on the following criteria:

  • whether the partnership presents itself as a separate entity towards others (as opposed to just one partner acting outwardly in his or her own name as a natural person without revealing the other partners in the partnership); and
  • whether there is a separate stock of assets for the partnership distinct from the personal assets of the natural persons behind the partnership.

If these criteria are met, the civil law partnership is classified as an outward civil law partnership (Außen-GbR). It was recognised by the German Federal Court of Justice that this kind of civil law partnership qualifies as a distinct legal entity, meaning it can acquire assets itself and incur liabilities in its own name. It is also capable of being a party in civil proceedings.

Before the end of the current legislation period (lasting until autumn 2021), the German government plans to strengthen further the legal autonomy of civil law partnerships in new legislation (known as the MoPeG – law for the modernisation of partnership law). The plan is to establish a civil-law partnership register (Gesellschaftsregister) serving as an equivalent to the commercial register (in which all corporations and commercial partnerships must be registered) to increase the awareness and market credibility of civil law partnerships – but registration is planned to be voluntarily, not mandatory. Nevertheless, registration is planned to ensure that the GbR will be treated under the law as a distinct legal entity, regardless of the above-mentioned criteria.

Legal remedies for a partner or shareholder against the company are based on two main types of shareholder rights:

First, in partnerships and corporations, there are property rights (Vermögensrechte) accruing from holding the share or stock. Partners/shareholders are entitled to partake financially in the profits, according to the company’s articles of association or under the applicable law. In partnerships as well as in the corporate form of the limited liability company, many of the details of profit-sharing between the shareholders could be regulated through individual agreements within the articles of association. In stock corporations, however, there is a more formalised approach and many aspects are regulated by law (Satzungsstrenge).

Possible examples of property-right infringements are: non-fulfilment of dividend rights or of the right to pre-emptive acquisition of new stocks or, in the case of liquidation of the company, the right to the relevant share of the liquidation profit. Property rights can be asserted by way of an action for performance pursuant to, for example, sec. 280, 823 or 826 of the German Civil Code or, in stock corporations, sec. 58, 186 or 27 of the German Stock Corporation Act. Any shareholder can exert these property rights concerning their own stocks; they do not have to meet a certain quorum.

Second, in partnerships and corporations, there are administrative rights (Verwaltungsrechte) accruing from the position as a partner/shareholder of the company (voting rights, participation rights such as attending the general meeting or calling for an extraordinary general meeting, and information rights). The following explanations of legal remedies in cases of administrative rights infringements focus on the stock corporation. It is, however, recognised in German corporate law that the provisions laid out below also apply to the limited liability company and its shareholder resolutions (by way of analogy).

If the shareholders’ administrative rights are infringed, shareholder resolutions based on the infringement can be challenged. Deficient shareholder resolutions can be contested in court by means of an action regarding resolution deficiencies (known as a Beschlussmängelklage).

This kind of action can be further divided into two subcategories:

  • major deficiencies such as mistakes in assembling the general meeting, the notarisation of the general meeting or violation of public interest or the nature of the stock corporation can be challenged by an action for annulment (Nichtigkeitsklage, sec. 249 of the German Stock Corporation Act). If this action is successful, the shareholder resolution is declared null and void, with the legal consequence that it never had any legal effect;
  • in practice, most violations of administrative rights are less crucial in nature. In this case, deficiencies can be challenged by an action for avoidance (Anfechtungsklage, sec. 246 of the German Stock Corporation Act). Examples are violations of corporate law or the articles of association and – relevant in practice – infringement of the shareholders’ information rights (for example, a resolution can be challenged if information was withheld that would have been deemed relevant to the appropriate use by an objective shareholder of their participation rights). Once there is a binding court decision, the deficient shareholder resolution loses its legal effect, ie, the court decision directly alters the legal situation and nullifies the previously effective resolution.

Challenged resolutions such as, eg, amendments of the articles of association, may not be registered with the commercial register and therefore may not become effective until a final court decision has been passed. However, in some circumstances such as capital measures or intercompany agreements like domination and profit-and-loss pooling agreements (Beherrschungs- und Gewinnabführungsverträge), the German Stock Corporation Act provides for fast-track proceedings (Freigabeverfahren) to overcome the blocking effect of contestation (see 3.7 Strategic Factors in Shareholder Litigation). Any shareholder can bring an action for avoidance, provided that they purchased their shares prior to the publication of the agenda for the relevant general meeting, were present in the general meeting themselves or via a proxy (or had been unjustly denied access to the general meeting), and, if they were present, raised an objection concerning the resolution during the general meeting that was recorded in the minutes.

The possibilities for legal action by the shareholders against the company’s directors depend on the legal nature of the company.

In partnerships, there is no separate management other than the partners, ie, the partners lead the business themselves (Selbstorganschaft). In partnerships, the partners can appoint procurators (Prokuristen) to represent the partnership in their dealings with third parties. However, the management of the partnership’s affairs remains within the scope of the partners’ duties. Should a partner abuse his or her rights to the disadvantage of the other partners, it is possible to exclude him or her from managing the partnership’s business or – under rare circumstances – remove him or her from the partnership if there is a major reason that would make it unbearable to continue the partnership with that partner.

In a limited liability company, management falls to the managing directors (Geschäftsführer) who are appointed by the shareholders. Whilst shareholders of a GmbH do not have to manage the company themselves (but could do so as managing directors), they can nevertheless exert major influence on shaping the company’s business decisions and have significant means to ensure their will is being implemented in how the company is managed. This is because the legal form of the limited liability company was designed by lawmakers at the time of its creation, especially for small- and medium-sized companies held by only a few shareholders personally involved in the company’s business. Consequently, the shareholders of a limited liability company are entitled to wide-ranging rights in the company (see 1 Shareholders’ Rights).

In a stock corporation, as opposed to a limited liability company, shareholders have only limited means of influencing the stock corporation’s management. The board members of a stock corporation are generally entitled to govern the affairs of the corporation at their own discretion pursuant to the Business Judgement Rule, with only a few exceptions. The board members are appointed by the supervisory board, not by the general meeting (see 1.11 Shareholder Participation in Company Management and 1.12 Shareholders’ Rights to Appoint/Remove/Challenge Directors). The general meeting is not entitled to give binding orders to the board members (for the general meeting’s responsibilities, see 1.8 Shareholder Approval).

Legal remedies for one shareholder against another are mostly based on a violation of the shareholder’s duty of loyalty (Treuepflicht) towards the other shareholders. In essence, this means that a shareholder shall not use their rights accruing from their share to the disadvantage of the company, for example by blocking a shareholder resolution that is clearly necessary for the good of the company. The extent to which legal remedies for shareholders against each other are permissible and relevant in practice differs according to the legal form of the entity.

In partnerships, given the mostly small nature of such entities, the duty of loyalty plays a very prominent role. Specific duties that arise from the general duty of loyalty encompass a restraint on competition, a confidentiality duty and, in some cases, a duty to use voting rights in the best interest of the partnership. If a partner violates the duty of loyalty, it is possible, depending on the severity of the violation, to exclude them from the partnership’s management or – under exceptional circumstances – remove them from the partnership if there is a major reason that would make it unbearable to continue the partnership with that partner (see 3.3 Legal Remedies Against the Company’s Directors).

In limited-liability companies, courts have considered the duty of loyalty of shareholders towards each other to be not quite as strong as within partnerships, but still stronger than in stock corporations. Hence, if a shareholder of a GmbH exerts his or her rights to the company’s disadvantage, there may be grounds for a claim by the other shareholders. Under exceptional circumstances, it is also possible to exclude the shareholder. As above, this is only an ultima ratio measure and requires a substantial violation of duty.

In a stock corporation, the standards for the shareholder’s duty of loyalty towards the other shareholders are comparatively low. It is recognised that, in most cases, shareholders of stock corporations, of which there may be thousands or even millions, are not personally invested in the corporation’s business, have no relationship to one another and see their share and the rights pertaining to it as a mere capital investment. Therefore, they can only be deemed to have violated their duty of loyalty towards other shareholders in exceptional circumstances. For example, a capital increase required to resolve a situation of threatening insolvency may need to be approved by a major shareholder under such a duty of loyalty, depending, however, on all circumstances at hand.

Minority shareholders can be excluded by means of a “squeeze-out” (sec. 327a of the German Stock Corporation Act). Unlike previous examples, however, no misconduct or violation of duty is necessary for a squeeze-out. The only provision is that there is one majority shareholder that exceeds the bar of a 95% share and that the excluded minority shareholders are appropriately compensated for their shares. The minority shareholders affected are entitled to have the compensation assessed by a court within the framework of an appraisal procedure (Spruchverfahren). This possibility exists not only for squeeze-outs but also for other measures pertaining to the rights of shareholders, such as the conclusion of a domination and profit-and-loss pooling agreement.

In practice, it is rather uncommon for shareholders of a stock corporation to enter into legal action directly against one another. In most cases, it is more common and effective to seek remedy against the corporation’s measure based on the shareholder resolution itself (see 3.2 Legal Remedies Against the Company). Taking legal action against fellow shareholders may be considered as a “last resort” remedy if the aforementioned approach has failed or seems unreasonable.

Legal remedies by partners or shareholders against auditors are uncommon, yet not unfeasible in general. The possibility of pursuing claims against the company’s auditors depends on the nature of the contract that has been entered into between the company and its auditors. It is legally possible to include shareholder interests in the contract with the auditors and make auditors directly liable to shareholders – yet, in practice, it is highly unlikely that an auditing firm will enter into such a contract.

It is, however, possible – albeit under rather rare and special circumstances – for a contract between a company and an auditing firm that does not explicitly include shareholder interests to be deemed by courts to be a contract with protective effect towards a third party (Vertrag mit Schutzwirkung zugunsten Dritter). The third party protected by the contract between the company and its auditors may be the company’s shareholders. This could be the case if, for example, an audit or tax advice is carried out in a “life-or-death” situation for the company where insolvency is a factual possibility. In such cases, the audit is deemed to be in the interest of shareholders as well. Furthermore, they may base their decision to hold or sell their shares in the company on the results of an audit. Under such limited factual circumstances, liability of auditors towards shareholders is conceivable.

Moreover, under some circumstances it may be possible for partners or shareholders via a resolution in the general meeting either to force the company to pursue claims against third parties such as auditors (sec. 147 para. 2 of the German Stock Corporation Act) or even to pursue a claim against auditors on behalf of the company themselves, by means of what is known as the claim admittance procedure (Klagezulassungsverfahren) pursuant to sec. 148 of the German Stock Corporation Act (see 3.6 Derivative Actions for further details).

Whether partners or shareholders are entitled to bring derivative actions against third parties on behalf of the company varies according to the company’s legal form.

For a stock corporation, special means for derivative actions apply under the provisions of sec. 147 and 148 of the German Stock Corporation Act. Pursuant to sec. 147 para.  1 of the German Stock Corporation Act, the general meeting can resolve with a simple majority that the corporation has to pursue a claim for compensation. Further, the general meeting can, also with a simple majority, appoint a special representative (besonderer Vertreter) to enforce the claim on behalf of the corporation. A special representative may be selected from outside of the corporation (for example a law firm) and appointed by a court in order to enforce the claim on behalf of the corporation. This can only happen if that appointment is being applied for by a quorum of at least 10% of shares or a share value of EUR1,000,000. In this case, the court located in the corporation’s seat can appoint special representatives to enforce the claim on the corporation’s behalf if the court deems this measure appropriate under the given circumstances. In this case, the corporation nevertheless bears all procedural costs (sec. 147 para. 2 of the German Stock Corporation Act).

Moreover, it is even possible for shareholders to apply before the court in the corporation’s seat for entitlement to proceed against third parties on behalf of the company but in their own name, by means of what is known as the claim admission procedure (Klagezulassungsverfahren) pursuant to sec. 148 of the German Stock Corporation Act. The threshold for triggering a claim admission procedure is relatively low, at a quorum of 1% of shares or a share value of EUR100,000. The court will grant claim admission to applicants if all the following criteria laid out in sec. 148 para. 1 of the German Stock Corporation Act are met:

  • the shareholders acquired their shares prior to when due diligence would have required them to have noticed the violations of duty being challenged in the desired claim on behalf of the corporation;
  • the shareholders can prove that they unsuccessfully requested the corporation within an appropriate deadline to take action itself;
  • facts are presented that indicate that the corporation incurred damage either due to a substantial violation of the law or the articles of association or through improbity (Unredlichkeit);
  • no preponderant reasons concerning the welfare of the corporation outweigh the interests of the shareholders to take over the claim’s enforcement (this can be possible if the corporation had well-found reasons to withhold entry into legal action).

If all those criteria are fulfilled, the applicants are granted the right to pursue the claim on the corporation’s behalf. It is to be borne in mind, though, that the shareholders bear all procedural costs themselves, while the profits from the proceedings will only benefit the corporation on whose behalf they are pursuing the claim. Furthermore, the corporation may at any point take over the proceedings against the third party being pursued on its behalf. In this case, the shareholders who initially brought the action become an intervening party (Beigeladener) in the proceedings but can no longer decide on procedural measures (sec. 148 para. 3 of the German Stock Corporation Act).

In a limited liability company, however, a shareholder is not entitled to make use of this special procedure. Instead, they need to use the legal construct of actio pro socio, which means a shareholder may pursue a claim of the company if the managing director(s) of the company refuse(s) to take legal action. The requirements for an actio pro socio are as follows:

  • the claimant is a shareholder of the company;
  • the claim pursued is a “social claim” (Sozialanspruch) by the company against one of its shareholders – not against third parties (for example, if one of the shareholders does not pay his or her share according to the provisions in the articles of association);
  • the claimant is not entitled to pursue the claim in the name of the company itself; and
  • the claim must not be barred based on the duty of loyalty towards other shareholders (for example, if the claimant shareholder has previously agreed to the conduct that he or she is now trying to challenge by taking legal action – such behaviour contradicts the principle of good faith).

The actio pro socio is also applicable to stock corporations and partnerships. Thus, a partner can be entitled to pursue a claim of the partnership in his or her own name (under the same provisions as laid out above) if the partnership does not pursue the claim itself.

There are manifold – far beyond merely legal – aspects to be assessed before entering into legal action.

First, up until a few years ago, German corporate law had hardly any provisions to deal with issues resulting from the behaviour of “predatory shareholders” (räuberische Aktionäre) who acquired a minority share of a stock corporation solely to bring actions regarding resolution deficiencies, thereby blocking the resolution’s entry into the commercial register for as long as its legality had not been decided upon by a court. Since it is mandatory in order for some resolutions to become effective that they be inscribed into the commercial register (for example, a resolution regarding an increase of capital stock, sec. 184 of the German Stock Corporation Act), this “strategy” had been used to force stock corporations into entering into settlements so that these shareholders would drop their action challenging the resolution. Since 2005, however, this issue has to some extent been mitigated by establishing an “fast-track proceeding” (Freigabeverfahren, sec. 246a of the German Stock Corporation Act) which can be used to dismiss such abusive actions more easily and provides a mechanism to contain the delay to the resolution’s entry into the commercial register (see 3.2 Legal Remedies Against the Company).

Second, as described in 3.6 Derivative Actions, derivative actions under the claim admission procedure are an economical venture: the claimants bear the costs of litigation by themselves, but the earnings from an enforced claim will benefit only the corporation on whose behalf they pursued the claim. Only under rare circumstances will this pay off economically for the shareholders – yet, the threat of bringing such an action may, by itself, influence the corporation’s management to take legal action themselves. In this regard, it is noteworthy that there is a growing market trend towards “special audits” (Sonderprüfungen). With this mechanism, shareholders can force the investigation of concrete internal company affairs. Corporations will need to deal with such requests in the framework of their general meetings.

Third, any litigation against the corporation or other shareholders in public proceedings before state courts will likely lead to public exposure and media coverage. This may possibly harm the corporation’s business reputation and, hence, affect the share value when the stock markets react to this event. In connection with this, back-end speculation by activist shareholders will continue to occur in the area of public takeovers. Lately, there have been repeated instances of activist hedge funds acquiring stakes in listed companies and subsequently making efforts to obtain higher compensation in the framework of appraisal proceedings following the implementation of a domination and profit-and-loss pooling agreement or a squeeze-out.

Fourth, a further area that is prone to disputes concerns the new rules on related party transactions pursuant to sec. 111a of the German Stock Corporation Act. If certain conditions are met, these transactions are subject to the approval of the supervisory board (sec. 111b of the German Stock Corporation Act) and, in the case of listed companies, also subject to publication requirements (sec. 111c of the German Stock Corporation Act). Since these provisions have entered into force fairly recently and, by their nature, concern a wide array of potential transactions, they provide a gateway for disputes. Companies are well advised to be very careful and diligent when setting up such transactions, in order to minimise the potential for subsequent litigation.

Fifth and finally, one of the most important trends in corporate law is the “virtual general meeting”, introduced in March 2020 in the light of the COVID-19 pandemic. It remains to be seen whether the concept of the virtual general meeting will survive the COVID-19 pandemic. Shareholders might challenge that concept, particularly in the context of shareholder rights/participation.

Freshfields Bruckhaus Deringer LLP

Bockenheimer Anlage 44
60322 Frankfurt am Main
Germany

+49 69 273080

+49 69 232664

heiner.braun@freshfields.com www.freshfields.com
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Freshfields Bruckhaus Deringer LLP is a global law firm with a long-standing track record of successfully supporting the world's leading national and multinational corporations, financial institutions and governments on ground-breaking and business-critical mandates. The firm's lawyers deliver results worldwide through its own offices and alongside leading local firms. The firm's commitment, local and multinational expertise, and business know-how means its clients rely on the firm when it matters most. The firm's lawyers advise both institutional investors and listed companies on ongoing governance issues, so appreciate the pressures that both sides face. The firm is well versed in giving boardrooms and senior managers around the world advice on shareholder activism, engagement and litigation, including in the USA, Europe, the Middle East and Asia. In addition, with social and environmental concerns coming to the fore, the firm is helping senior leaders pivot to business models that are not only sustainable but also anticipate where shareholder pressure might arise.

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