German law provides for private and public companies. A general distinction can be made between:

• partnerships (Personengesellschaften), such as commercial partnerships (OHG and KG) and civil law partnerships (GbR); and
• corporations (Kapitalgesellschaften), such as stock corporations (AG), societas europaea (SE) and limited liability companies (GmbH).

In between, there are hybrid forms, such as partnerships limited by shares (KGaA), as well as combinations of legal forms, such as limited partnerships with a limited liability company as general partner (GmbH & Co KG) or partnerships limited by shares with a societas europaea as general partner (SE & Co KGaA).

Generally, stock corporations, societas europaea and partnerships limited by shares are designed for large numbers of investors and can be listed on stock exchanges, while limited liability companies are designed for smaller groups but allow for a more flexible legal design. The following sections will focus on stock corporations and limited liability companies. In terms of shareholders’ rights, the comments on stock corporations also apply to (primarily dualistically structured) societas euopaea with a registered seat in Germany.

In general, there are no restrictions on the types of companies that are open to foreign investors. However, foreign investors will often – depending on the purpose of their investment – opt to invest in stock corporations.

Stocks can be traded on stock exchanges and are thus accessible without any significant barriers. Therefore, investing in stock corporations is evidently the easiest option for foreign investors. In addition, the investment generally does not have to be disclosed to the public, unless:

• reporting thresholds under capital markets law are exceeded; or
• information about the ultimate beneficial owner has to be disclosed in the transparency register.

Another type of company favoured by foreign investors is the limited liability company. Such companies are usually preferred by foreign companies when establishing German subsidiaries or joint ventures. Generally, they allow for a much more flexible design compared to stock corporations. Partnerships, on the other hand, will usually be less attractive due to the personal liability of their partners (with the exception of limited partnerships with a limited liability company as general partner).

Stock corporations may issue bearer shares (Inhaberaktien) or registered shares (Namensaktien), each as ordinary shares (Stammaktien) and, in certain volumes, preferred shares (Vorzugsaktien).

Bearer shares are easy to transfer and are therefore suitable for listed stock corporations. Registered shares seem more suitable for family-owned companies and are often subject to statutory transfer restrictions (see 3.2 Share Transfers).

In contrast to ordinary shares, preferred shares are non-voting shares with a preference when it comes to profit distribution. The issuance of preferred shares may be considered, for instance, when certain majority ratios should be maintained. In the case of a capital increase, for example, the issuance of ordinary shares may lead to changes in the majority ratios if the existing shareholders do not exercise pre-emption rights (Bezugsrechte); this can be prevented by issuing preferred shares. For limited liability companies, there are no statutory distinctions between types or classes of shares, but the articles may include further provisions.

The shareholders’ membership rights can generally be divided into administrative rights (Verwaltungsrechte) and proprietary rights (Vermögensrechte). Administrative rights include the right of participation in shareholders’ meetings, voting rights and rights to certain information. Proprietary rights include the right to participate in the distribution of the annual profits of the company. The membership rights are mostly set out in the relevant statutes and can – to some extent – be further stipulated in the company’s articles of association.

There are significant differences between stock corporations and limited liability companies. For stock corporations, the possibilities for deviating from the regulations of the Stock Corporation Act are very limited (the so-called principle of formal strictness (Satzungsstrenge)). The membership rights deriving from a share in a stock corporation are rather standardised, in particular with respect to listed companies, where the stocks are designed to be tradeable by a large variety of investors (including less-experienced investors).

In contrast, the articles of association of limited liability companies are not bound by the principle of formal strictness, which leaves much greater room for individual arrangements best suited to the individual shareholders concerned. Thus, limited liability companies are predestined for smaller numbers of shareholders, such as joint ventures or family-owned companies. Moreover, it is possible to conclude shareholder agreements outside the articles of association (Gesellschaftervereinbarungen), so that further variations to the shareholders’ rights can be agreed upon. In this respect, however, shareholders of listed stock corporations should closely watch the regulations on so-called acting in concert.

When establishing a corporation, a minimum capital must be raised:

• for a stock corporation, the minimum capital is EUR50,000; and
• for a limited liability company, the minimum capital is EUR25,000.

When establishing a partnership, there is no minimum capital that the partners must contribute to the company’s account prior to formation. However, the members of a partnership can, in principle, be held liable for the company’s liabilities with their personal assets.

Corporations can be formed with only one shareholder; such corporations are usually limited liability companies. In contrast, the minimum number of partners for a partnership is two. A partnership with only one partner is not possible under German law.

In principle, there are no restrictions regarding the nationality, residence or status of shareholders for any type of company. However, the articles of association may provide for certain restrictions. Further restrictions may result from foreign trade regulations in certain industries (eg, for companies in the defence sector).

Shareholders’ agreements are a common instrument for co-ordination between shareholders of limited liability companies and – to a lesser extent – between shareholders of stock corporations. In stock corporations, shareholders’ agreements are often made as an instrument to agreeing on regulations which by statute cannot be regulated in the articles of association. However, when implementing shareholders’ agreements between shareholders of listed stock corporations, the regulations on acting in concert must be taken into account (see 1.4 Variation of Shareholders’ Rights).

Typical provisions in shareholders’ agreements are:

• appointment rights for the members of the board of management and/or supervisory boards;
• co-disposal rights (tag-along) and co-disposal obligations (drag-along);
• agreements on voting; and
• information rights.

There is no general statutory obligation for public disclosure of shareholders’ agreements. Furthermore, according to the current predominant view in legal commentary, shareholders’ agreements can be enforced by action for performance (Erfüllungsklage). This also includes voting agreements (Stimmbindungsvereinbarungen).

Nevertheless, the enforcement of a titled claim poses particular problems. In many cases, enforcement proceedings would take too long since the shareholders’ meeting relevant for the vote will generally have taken place in the meantime. The possibility of granting interim injunctive relief is still highly controversial, leading to the conclusion that the enforceability of shareholders’ agreements remains (to a certain extent) limited in legal practice.

There are two types of shareholders’ meetings:

• ordinary shareholders’ meetings (“annual general meetings” in stock corporations); and
• extraordinary shareholders‘ meetings (“extraordinary general meetings” in stock corporations).

In ordinary shareholders’ meetings, the shareholders will decide on:

• the distribution of profits based on the annual financial statements; and
• the discharge of the board members.

The annual general meetings of stock corporations must be convened at least 30 days in advance; provisions in the articles of association that shorten the 30-day period are inadmissible.

Shareholders’ meetings of limited liability companies must be convened at least one week in advance; provisions in the articles of association that shorten the one-week period are also inadmissible.

Extraordinary shareholders’ meetings in both types of companies can be convened for special purposes – eg, for resolving a matter that cannot be postponed until the next ordinary shareholders’ meeting (such as an urgently required decision about a capital increase).

As regards the notice period, in general there are no differences between the annual general meeting and the extraordinary general meeting. In particular, in urgent cases, resolutions can also be adopted without adhering to the statutory notice period if all shareholders are present or represented by proxies in the general meeting and no shareholder objects. However, this only seems practicable in stock corporations with only small numbers of shareholders.

Beyond that, in the extraordinary situation of a general meeting following a public offer to acquire the company’s shares, the Securities Acquisition and Takeover Act provides for a shorter statutory notice period. The general meeting may then be convened with a notice period of at least 14 days.

In stock corporations, the general meeting can be requested or called by the management board, the supervisory board or a group of shareholders.

• The general meeting is usually convened by the management board. The corresponding resolution has to be adopted by a simple majority.
• In some cases, the supervisory board can – and is obliged to – convene a general meeting, if it is required in the company’s best interests.
• Shareholders whose shares amount to 5% of the share capital may request that the general meeting be convened. The articles of association may set the threshold for convening the general meeting to a lower proportion of the share capital. If the stock corporation does not call a general meeting after a legitimate request has been made, the competent court may authorise the shareholders who have made the request to convene the general meeting by themselves.

For limited liability companies, shareholders’ meetings are usually called by the managing director(s). However, shareholders are entitled to request a shareholders’ meeting if their shares correspond to at least 10% of the share capital. If such request is not complied with within an appropriate period, the shareholders themselves may call a shareholders’ meeting without making a court request. The articles of association may lower the threshold for convening the shareholders’ meeting, but they may not lift it to a higher proportion of the share capital.

The convocation of a general meeting of a stock corporation is required to be published in the company’s gazettes (Gesellschaftsblätter/Bundesanzeiger). However, if all names of the shareholders are known to the company, the general meeting can also be convened by registered letter.

At the general meeting, each shareholder of a stock corporation may request information on the company’s affairs from the executive board. Circumstances outside the company are deemed to be affairs of the company if they have a legal or factual connection to the company. However, informational requests can generally only be made to the extent necessary for a proper assessment of the items on the agenda of the general meeting.

The convocation of a meeting of the shareholders in a limited liability company can be made by registered letter (if the articles do not require otherwise). Information rights of shareholders of limited liability companies are much more extensive compared to stock corporations; the managing directors have to provide each shareholder, upon their request, with all information on the company’s affairs and allow them to inspect the books and company documents.

Information rights are also not limited to the shareholders’ meeting but can be asserted at any reasonable time. The right to inspect the books and company documents can also be asserted without making reference to or specifications on specific objects. The shareholders’ meeting, however, may resolve to refuse provision of information or inspection if there is a concern that the shareholder may make use thereof for non-company purposes and thereby put the company at a significant disadvantage. Such a resolution may be considered, for instance, if a shareholder requesting information works for a competitor.

In response to the COVID-19 pandemic, the German legislature introduced virtual general meetings for stock corporations. Following the initial years of experience with virtual general meetings (which overall were good from the authors’ point of view), the legislature made certain adjustments enhancing the shareholders’ rights in general meetings. Currently, holding a virtual general meeting is only permissible if:

• the option to do so is provided for in the articles of association;
• such option is limited in time to a maximum period of five years; and
• certain further conditions are met.

The latter conditions include (among others) that:

• the entire general meeting will be transmitted by video and audio;
• the shareholders’ voting rights can be exercised by means of electronic communication or by proxy voting;
• the shareholders participating virtually in the general meeting can submit motions and election proposals by means of video communication;
• the shareholders participating virtually in the general meeting can request information and exercise their information rights electronically; and
• the shareholders participating virtually in the general meeting can express their objections to any of the resolutions of the general meeting by means of electronic communication.

In limited liability companies, there is no comparably detailed legislation on virtual shareholders’ meetings. However, the legislature has passed a law stipulating that shareholders’ meetings may be held by video if all shareholders consent thereto in text form (even if the articles of association do not provide for virtual shareholders’ meetings). Beyond these statutory provisions, the shareholders can agree on further provisions in the articles of association.

There is no general statutory quorum for general meetings of stock corporations.

The legal situation is similar for limited liability companies, to a certain extent: there is also no statutory quorum, though the articles of association may provide for a quorum.

Regular resolutions by the general meeting of a stock corporation require a majority of the votes cast.

However, for structural measures, such as amendments of the articles of association (including capital measures) or measures under the Transformation Act (UmwG) (such as mergers, splits or changes of the legal form), there are further requirements. As such, the resolution adopted by the general meeting additionally requires a majority of at least 75% of the share capital present at the time of the resolution.

The articles of association may impose further requirements and stipulate a different majority ratio of capital, though this may only be a greater majority ratio if the matter involves a modification of the companies’ statutory purpose or objects.

In limited liability companies, the situation is similar: resolutions of the shareholders’ meeting regularly require a majority of the votes cast. For an amendment to the articles of association, a majority of 75% of the votes cast is required.

The majority requirements are mostly determined by the statues. The articles of association may provide different or further majority requirements. However, regarding stock corporations in particular, the articles of association may only require higher thresholds for passing resolutions. Beyond that, shareholders’ agreements may even provide for further requirements.

Apart from the above-mentioned resolutions to be resolved by all shareholders with voting rights, additional resolutions to be resolved only by certain shareholder groups can be required. For example, in addition to the resolution of the general meeting in a stock corporation, a resolution of the holders of preferred shares can be required in special situations (eg, when issuing further preferred shares or when making changes to the rights attached to such shares). 

There are situations in which a resolution of the general meeting of a stock corporation is required (Hauptversammlungszuständigkeiten). Such requirements are mostly stated in the Stock Corporation Act (AktG), but there are also unwritten competencies, which have evolved from case law of the German Federal Supreme Court (Bundesgerichtshof).

Any amendments to the articles of association, the dissolution of the company and the appointment of the members of the supervisory board require a resolution of the general meeting. Also, inter-company agreements (Unternehmensverträge) may enter into force only with the consent of the general meeting with a majority of at least three quarters of the represented share capital (the articles of association may stipulate an even greater majority requirement).

Additionally, a resolution of the general meeting is also required for measures under the Transformation Act.

Regarding unwritten competencies of the general meeting, the Holzmüller and Gelatine doctrine of the German Federal Court (Bundesgerichtshof) is of importance. According to this, there is an unwritten requirement for the approval of the general meeting in cases of any significant structural measures that trigger an effect of mediatisation to the detriment of the shareholders. The threshold of significance is exceeded if at least 75% of the company’s assets are affected by a structural measure.

Shareholders may vote in person or be represented by an authorised representative. A shareholder is generally free to determine their authorised representative.

In this regard, in stock corporations it also permissible to appoint an authorised representative who has been proposed by the company itself (proxy voting). However, there are limits to such proxy voting, which derive from possible risks of conflicts of interest. In particular, the authorisation of a representative proposed by the company requires the issuance of instructions on each of the agenda items by the shareholder. Furthermore, board members should not be proposed by the company to act as authorised representatives.

The applicable voting method is governed by the articles of association. In practice, the voting method is usually determined by the chairman of the general meeting.

The voting right is then exercised based on the nominal amounts of the shares, and in the case of no-par-value shares is based on their number. Under current law, dual-class shares (ie, shares carrying more than one voting right per share) are prohibited in stock corporations. Instead, a “one share, one vote” principle prevails. Only a few exceptions to this principle exist under current law – eg, as follows.

• Stock corporations can issue non-voting shares with a preference on profits (preferred shares).
• Partnerships limited by shares generally comprise two groups of shareholders, whereby the so-called general partner(s) has the responsibility and power to manage the affairs of the company while the limited shareholders are comparable to the shareholder in a regular stock corporation. In practice, such structures can be seen in listed family companies where the family members (or the original shareholders) remain in control of the affairs of the company by assuming the role of or by controlling the general partner(s) while third-party investors can acquire limited shares.

However, the “one share, one vote” principle may be abolished or reduced in the future. In fact, there is draft legislation proposing dual-class shares. Such proposed legislation thereby intends to address practical needs, particularly for start-ups and growing businesses with high capital demands.

In limited liability companies, the voting requirements are generally less strict and not as regulated as they are in stock corporations. In particular, the articles may stipulate that certain shares can bear voting powers deviating from their actual share in the nominal share capital of the company.

The exercise of voting rights by means of electronic communication is possible in virtual shareholders’ meetings (see 2.5 Format of Meeting).

The executive board of a stock corporation manages the affairs of the company in its own responsibility, meaning that shareholders are, in principle, excluded from the management. Nevertheless, the supervisory board may appoint a shareholder as a member of the executive board.

In addition, the shareholders only have a right to request that a specific issue be considered at the general meeting if the requesting shareholders’ combine shares equal to at least 5% of the total share capital of the company or a proportionate amount of EUR500,000 of the share capital. Each agenda item must be accompanied by a statement of reasons or a draft resolution and be received by the company at least 24 days (for a listed company, at least 30 days) prior to the general meeting.

The situation in limited liability companies is different. Not only are managing directors directly appointed by the shareholders’ meeting, but the shareholders’ meeting may also issue instructions to the management at any time. This gives the shareholders’ meeting of a limited liability company much greater influence over the management of the company compared to a stock corporation. Shareholders whose shares amount to at least 10% of the total share capital are entitled to request the convocation of a shareholders’ meeting. In the same way, they are entitled to demand that new agenda items be announced.

An infringement of administrative rights (eg, voting rights) is often linked to a respective deficiency in the shareholder resolution concerned, which can be asserted by way of an action regarding resolution deficiencies (Beschlussmängelklage). The further specifics mainly depend on the company’s legal form and the seriousness of the resolution’s deficiency. The following description will focus on the stock corporation (AG).

Serious general meeting resolution deficiencies can be asserted by way of an action for annulment (Nichtigkeitsklage). An action for annulment may be brought by any stockholder without restriction.

Less serious general meeting resolution deficiencies can be asserted by way of an action for avoidance (Anfechtungsklage). The action for avoidance essentially requires that the stockholder:

• attended the general meeting (in person or by proxy);
• purchased their shares prior to the publication of the agenda of the general meeting; and
• raised an objection concerning the resolution and had it recorded in the minutes of the general meeting.

There is no requirement for a certain quorum, however. The action for annulment and the action for avoidance are therefore also available to minority stockholders.

There are several different intensity levels of shareholder influence. To enforce their strategies, investors or other shareholder groups usually first reach out to the company’s management directly (eg, by writing letters to the management with certain requests). In stock corporations, they may in a subsequent or additional step request information from the executive board at the general meeting. The prerequisite for such request in the general meeting is that the requested information needs to be necessary for the proper assessment of a specific agenda item. Information can therefore only be requested on items on the agenda (including the agenda item for discharge of the management). Ultimately, investors can attempt to appoint special auditors to examine the company’s management.

Shareholders have the option of appointing an authorised representative to exercise their voting rights and information rights at the general meeting. The following types of representation may be relevant:

• representation by a person proposed by the company (see 2.9 Voting Requirements);
• representation by another representative appointed by the shareholder; and
• representation by proxy advisers.

In principle, such representative may exercise all shareholder’s rights at the general meeting. Beyond only appointing a representative, a shareholder can also transfer their shares to a nominee or trustee. However, following the transfer of the shares, the former shareholder loses their direct voting and information rights vis-à-vis the company, such that they are limited to asserting their rights vis-à-vis the nominee or trustee. Therefore, appointing authorised representatives is usually preferable to transferring shares to a nominee or trustee.

Accordingly, an alternative to transferring shares to a nominee or trustee could be the appointment of a so-called proxy adviser to act as a representative. Regarding such proxy advisers, the recent Act Implementing the Shareholder Rights Directive II (ARUG II) established information and transparency obligations for proxy advisers in stock corporations addressing their growing influence in general meetings. For example, proxy advisers have to submit annual declarations on compliance with a certain code of conduct and on how they prevent and manage potential conflicts of interest. In addition to this, they have to inform their clients of any conflicts of interest without undue delay.

In stock corporations, resolutions must generally be passed in a general meeting. In principle, there are no resolutions without holding a general meeting. However, in limited liability companies, it is not unusual for written resolutions to be passed without holding a meeting. In this regard, three different ways of doing so can be distinguished. Either:

• the shareholders agree (in text form) to the proposed resolution; or
• the shareholders agree (in text form) to at least a written voting procedure; or
• the articles of association provide for the possibility of taking resolutions outside a shareholder meeting.

When issuing new shares, the existing shareholders have a pre-emption right (Bezugsrecht). Pre-emption rights provide that a shareholder can acquire a number of new shares, so that they keep their participation rate even after the capital increase. This applies both to stock corporations and to limited liability companies.

In principle, pre-emption rights can be sold and transferred to third parties (provided no transfer restrictions exist). However, pre-emption rights can be excluded by resolution of the general meeting with a qualified majority. Such resolution may then be subject to court review as set out in the so-called Kali und Salz decision of the German Federal Court (Bundesgerichtshof). According to this decision, the court will have to examine whether the exclusion of the pre-emption right:

• is in the best interests of the company;
• is to be regarded as necessary for realising the best interests of the company (ie, no less severe measures would realise the best interests of the company); and
• is overall proportionate (ie, the negative impacts for the shareholder seem appropriate compared to the best interests of the company requiring an exclusion of the pre-emption right).

However, such assessment by a competent court does not apply if:

• the capital increase does not exceed an amount equal to 10% of the nominal share capital; and
• the issuing amount of the new shares is not significantly lower than the current price of the existing shares listed on the stock market.

Regarding the transfer or pledge of shares, the provisions for limited liability companies are stricter than those for stock corporations. A disposal of shares in a limited liability company requires notarisation. Such requirement primarily intends to prevent speculative trading and to facilitate proof. Moreover, the disposal of shares can be further restricted by the articles of association. For example, it is not unusual for the disposal of shares to be subject to approval by the shareholders’ meeting or by the company (Vinkulierung). Such transfer restriction protects co-shareholders or the company from undesirable changes. This can be of particular interest in family-owned companies. In addition, pre-emptive rights (Vorkaufsrechte) can be established in the articles of association.

For stock corporations, bearer shares (Inhaberaktien) or registered shares (Namensaktien) may be issued, each as ordinary shares and, in certain volumes, preferred shares (see 1.3 Types or Classes of Shares and General Shareholders’ Rights). Bearer shares are the easiest to transfer and are therefore particularly suitable for listed stock corporations. Registered shares are often subject to statutory transfer restrictions. According to Section 68 of the Stock Corporation Act, the articles of association may make the transfer subject to the consent of the company (vinkulierte Namensaktien). Subject to the provisions in the articles, such consent can be given by the executive board, the supervisory board or the general meeting.

Shareholders are generally entitled to grant security over their shares. In particular, the pledge of shares plays an important role as credit security in corporate and acquisition financing. However, the articles of association may establish restrictions for pledging shares.

The technical details of the pledge depend on the type of share. For stock corporations, pledging securitised shares (verbriefte Aktien) requires a transfer of the share certificate. Unsecuritised shares (unverbriefte Aktien) may be pledged by a contractual agreement free of formalities. However, special characteristics apply to registered shares with restricted transferability (vinkulierte Namensaktien); in this case, pledging requires the consent of the company (see 3.2 Share Transfers). 

Under German law, reporting duties regarding shareholder’s interests in the company depend on whether the company is listed on the stock exchange or not. For listed companies, the Securities Trading Act stipulates reporting obligations regarding the purchase or sale of shares if certain thresholds are exceeded. Said reporting obligations serve the purpose of ensuring, inter alia, that both the company and other shareholders are informed of the change in the distribution of votes. The reporting thresholds start at 3% and increase, in various stages, to 75%. Where such a threshold is met, share purchases and sales must be reported to the company and to the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin).

Apart from the reporting obligations under the WpHG, the Stock Corporation Act provides for additional reporting obligations that also apply to companies that are not listed on the stock exchange. According to Section 20 of the Stock Corporation Act, as soon as a company holds more than a quarter of the shares in a stock corporation having its seat in Germany, it must notify the corporation in writing and without undue delay. It should also be noted that German law provides for regulations regarding the allocation of shares, meaning that the above-mentioned thresholds can also be met if the shares are only held indirectly by the shareholder concerned.

Regarding limited liability companies, the commercial register (Handelsregister) keeps publicly accessible lists, which show the company’s shareholders as well as the nominal value of each individual share. Any change in the person of a shareholder or the extent of their participation needs to be reflected in the shareholder lists. Therefore, the managing directors are obliged to submit a new list of shareholders to the commercial register in any case of a change, without undue delay. Where a notary has been involved in making the changes, the notary is obligated to do so.

In addition, in all relevant cases information about the ultimate beneficial owner has to be disclosed in the so-called transparency register.

There are generally two options for cancelling shares after their issuance.

First, the so-called Kaduzierung represents the possibility of excluding a shareholder who does not pay the obligatory contribution, despite being requested to do so and a deadline being set.

Second, shares can be withdrawn (or, rather, eliminated) on the basis of a shareholder resolution (Einziehung); however, doing this (at least in a limited liability company) requires a provision in the articles of association, and the shareholder must be granted compensation for the Einziehung.

In stock corporations, there is also third option called squeeze-out: by means of which, a shareholder holding (generally speaking) at least 90% of the capital stock of a company can call in all remaining shares held by minority shareholders in return for an appropriate cash compensation. Further details and requirements depend on the squeeze-out being resolved as a squeeze-out under the Stock Corporation Act, the Transformation Act or the Securities Acquisition and Takeover Act.

Stock corporations and limited liability companies can both acquire and hold own shares. However, share buybacks are primarily important with regard to stock corporations. The following information therefore focuses on stock corporations.

Pursuant to Section 71 of the Stock Corporation Act, a stock corporation may acquire own shares up to an amount of 10% of its capital stock. Aside from certain exceptional cases, share buybacks require an approval by the general meeting. The approval has a maximum term of five years.

Listed companies are required to inform the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) about the approval itself, and may be required to publish an ad hoc announcement when the approval is actually used to buy back own shares.

Share buybacks lead to a reduced number of shares in circulation (free float). Therefore, in many cases rising share prices are to be expected. It should also be noted that shares bought back by the company:

• do not grant voting rights; and
• do not grant the right to participate in profits in the form of dividend payments.

Therefore, share buybacks increase the voting rights and the dividend per remaining share.

Every stock corporation and limited liability company has to prepare annual financial statements, which, depending on the size of the company, need to be completed three to six months after the end of the financial year.

In stock corporations, the executive board and the supervisory board may be allowed to allocate a share of the profits to the capital reserves of the company when preparing the annual financial statements, such that these amounts are no longer available for distribution to the shareholders. Once the amount of profits has been determined, the shareholders jointly decide on their appropriation. Usually, a resolution on the appropriation of profits determines which strategy is to be pursued. The following options are common at shareholders’ meetings:

• open distribution of profits;
• profit carried forward for the next financial year; and
• allocation as retained earnings.

If the shareholders decide to distribute profits, normally the amount each shareholder gets depends on the proportion of the company’s shareholding. If the articles of association stipulate a different distribution, this stipulation must be followed.

The general meeting of a stock corporation cannot appoint and dismiss the members of the executive board; it is the competence of the supervisory board to do so. Thus, shareholders may only influence the executive board indirectly by appointing and dismissing the members of the supervisory board.

However, if a company exceeds a threshold of 500 employees, one third of the members of the supervisory board shall be employee representatives, who are not appointed by the general meeting. If a company exceeds a threshold of 2,000 employees (including its subsidiaries), 50% of the supervisory board members shall be employee representatives, with the chair of the supervisory board regularly being a shareholders’ representative.

In contrast, in limited liability companies the shareholders’ meeting appoints and dismisses the managing directors. Where the respective thresholds of 500 employees and 2,000 employees are exceeded, a limited liability company must – similar to a stock corporation – establish a supervisory board, and with it, shift the right to appoint and remove managing directors from the shareholders’ meeting to the supervisory board.

The general meeting of a stock corporation cannot challenge a management decision, but it may refuse to grant an annual discharge of the management. In contrast, the shareholders’ meeting of a limited liability company may issue instructions to the management at any time.

Certified auditors or auditing firms examine the annual reports (Jahresabschluss) and the management reports (Lagebericht) on an annual basis, making them an important institution for shareholders. Thus, in stock corporations, the general meeting resolves on the appointment of the auditor following proposal by the supervisory board.

Additionally, the supervisory board may appoint an audit committee (Prüfungsausschuss) that is to monitor the accounting process as well as the selection and the independence of the auditor. For limited liability companies, the auditors are also appointed by the shareholders; though the articles of association may deviate from this and shift the right of appointment to, for instance, an advisory board (Beirat/Aufsichtsrat).

The management board of a listed stock corporation must issue an annual declaration of compliance with the standards of the German Corporate Governance Code (DCGK). The DCGK represents essential legal regulations for the management and supervision of companies, and contains internationally and nationally recognised standards of good and responsible corporate governance. It is published by the Federal Ministry of Justice.

If a stock corporation deviates from the recommendations of the DCGK, it must justify this deviation in its declaration (the “comply or explain” principle). The declaration must be made permanently available to shareholders and all other interested parties on the company’s website.

Regarding the obligations of a controlling company, a distinction must be made as to whether or not an intercompany agreement exists between the companies.

Unless the companies are affiliated based on a profit and loss or control agreement, the controlling company which exercises a disadvantageous influence on the dependent company is legally obliged to compensate for these disadvantages. In principle, this obligation to compensate exists only towards the dependent company and not towards its shareholders. If the controlling company does not fulfil this obligation to compensate and the shareholders of the dependent company have suffered damage as a result, the shareholders can assert claims against the controlling company. In addition, shareholders of the dependent company can apply for a special audit. The independent special auditor investigates the business relationship between the controlling and dependent company.

If the companies are affiliated by way of a profit and loss or control agreement, the shareholder rights just mentioned do not exist. Instead, the shareholders have the right to demand financial compensation. This financial compensation can be realised in two ways:

• recurring payment to those shareholders who wish to remain in the dependent company; or
• one-time payment to those shareholders of the dependent company who wish to leave the dependent company.

As long as the company and not the shareholder themself becomes insolvent, there are generally no restrictions on the disposal of their shares. After the opening of insolvency proceedings over the assets of the company, the shareholder may exercise the rights arising from their membership as long as this is not contrary to the purpose of the insolvency proceedings. They retain the right to attend shareholders’ meetings, their voting rights and the right to information, and can still dispose of the company’s insolvency-free assets.

The remaining competences also include the decision on the continuation of the company if the insolvency plan provides for this. Pursuant to Section 225a paragraph 3 of the Insolvency Act, an insolvency plan enables any regulation permissible under corporate law to be implemented. This includes:

• the continuation of the dissolved company;
• the transfer of membership rights;
• changing the purpose of the company; and
• any amendment to the articles of association incumbent upon the shareholders.

The opening of insolvency proceedings against the assets of a stock corporation or a limited liability company leads to its dissolution. The general meeting is not involved and has no influence on the dissolution. Besides the insolvency, the general meeting can decide to dissolve the company. A 75% majority is required for this purpose, unless the articles of association stipulate further requirements.

Shareholders’ membership rights can be divided into proprietary rights (Vermögensrechte) and administrative rights (Verwaltungsrechte; see 1.4 Variation of Shareholders’ Rights).

In the case of an infringement of these rights, German law provides the shareholder with different appropriate legal remedies that depend on the nature of the right concerned. An infringement of proprietary rights (eg, dividend rights) can be asserted across all legal forms by way of an action for performance. Such action for performance may be brought by any shareholder without the requirement for a certain quorum and is therefore also available to minority shareholders. An infringement of administrative rights (eg, voting rights) is often linked to a respective deficiency in the shareholder resolution concerned, which can be asserted by way of an action regarding resolution deficiencies (Beschlussmängelklage) (see 2.11 Challenging a Resolution).

When shareholders are not satisfied with the company’s management, they have different means of exerting influence, depending on the company’s legal form.

In a stock corporation, the means for stockholders to exert influence on the company’s management are rather restricted. The executive board is appointed by the supervisory board and not by the general meeting. Furthermore, the executive board has the right and the duty to manage the affairs of the company in its own responsibility without following instructions from the general meeting. Therefore, the main way for shareholders to influence the executive board indirectly is by election of supervisory board members. Beyond that, the general meeting may appoint, in order to audit (inter alia) events occurring in the course of the management of the company’s affairs. There is also minority protection in this context. If the motion for the appointment of a special auditor is not carried at the general meeting, the court must – under certain conditions – appoint a special auditor upon a corresponding petition by stockholders, whose shares are at least equivalent to one hundredth of the share capital or to a stake of EUR100,000 at the time the petition is filed.

In a limited liability company, the majority shareholders can exert stronger influence on the managing directors from the outset. First, the shareholders’ meeting has the right to appoint/dismiss the managing directors. In addition, the shareholders’ meeting can give instructions to the managing directors and thereby directly influence the company’s management.

Additionally, shareholders can bring derivative actions on behalf of the company against its board members if certain requirements are met (see 10.3 Derivative Actions). However, in principle there are no contractual obligations and no direct claims between the company’s directors/officers and the shareholders themselves.

In stock corporations, special cases of derivative actions on behalf of the company are regulated by the Stock Corporation Act. Aside from this, derivative actions are not permitted. Shareholders can only bring an action on behalf of the company if they first entered into proceedings for admission before a court, according to Section 148 of the Stock Corporation Act (Klagezulassungsverfahren). The court will give permission for a derivative action if certain requirements are met. In short, the main requirements are:

• achievement of a quorum – the shareholders must hold shares that are at least equivalent to one hundredth of the share capital or to a stake of EUR100,000;
• the shareholders must provide proof that they have unsuccessfully requested the company to bring an action itself;
• facts must be given that justify the suspicion that the company has suffered damage by dishonest conduct or by gross violations of the law or the articles of association; and
• there must be no overriding grounds in terms of the company’s best interests.

The shareholders of a limited liability company have the so-called action on behalf of the company (actio pro socio) available to them. Having its origins in partnership law, the action on behalf of the company has long been acknowledged for limited liability companies as a means to protect the minority shareholders, who can neither appoint/dismiss the managing directors, nor give instructions to influence the company’s management.

The action on behalf of the company therefore essentially requires that the managing directors who are responsible for the assertion of claims refuse to do so. However, in some cases, the assertion of claims does not lie within the sole responsibility of the managing directors, but requires a resolution of the shareholders’ meeting. In these cases (ie, if the resolution is not adopted), the action on behalf of the company is subsidiary to actions regarding the resolution.

German law provides for compliance with the general provisions of stock corporation and securities law, such as:

• the duty of loyalty (Treupflicht);
• the principle of equal informational treatment of shareholders (Gleichbehandlung); and
• the regulations concerning insider information.

In accordance with these regulations, shareholders generally have no access to internal information of the stock corporation and are therefore limited to assessing the corporate strategy from the outside – ie, on the basis of publicly available information such as the company’s annual financial statements, interim reports and ad hoc announcements. In addition, under German securities law, shareholders are required to report any changes in their shareholdings if certain thresholds are met, starting at 3%.

The regulations on so-called acting in concert must also be taken into account. These regulations apply when different investors co-operate to achieve a common objective. Under the provisions of the Securities Acquisition and Takeover Act, the shares of the co-operating shareholders are to be attributed to each of them, meaning that they will be required to make a mandatory offer for the purchase of shares (Pflichtangebot) if their combined share of voting rights reaches 30%.

In addition, legislative changes were implemented in 2020 which also affect activist shareholders. The Act Implementing the Shareholder Rights Directive II (ARUG II) regulates information rights and information duties between the company, its shareholders and intermediaries (eg, custodian banks). In particular, a listed company may request information about its shareholders from the custodian banks (“know your shareholders”). Additionally, the ARUG II established new transparency duties for institutional investors, asset managers and proxy advisers in order to align their actions more closely with investor interests and sustainable corporate governance.

So far, activist shareholders have not been as active in Germany as they are in the US market (in contrast to so-called predatory shareholders litigating against resolutions adopted by general meetings (räuberische Aktionäre)). However, there has been a significant upward trend in recent years, which was also visible in the last annual general meetings season. In fact, it was reported that 2023 may have been one of the most active years ever in terms of shareholder activism. Prominent examples include the following.

• Bayer AG: In view of the decline of its share price after the takeover of Monsanto, Bayer has become a target for activist shareholders. In 2019, the annual general meeting refused to discharge the executive board, while the supervisory board received only relatively minor approval of discharge. In the context of this rare incident, which attracted great public attention, there were corresponding recommendations from proxy advisers (Stimmrechtsberater). Afterwards, Bayer continued to be a target for shareholder activism. In 2023, it was reported that several activist investors had acquired shares (Inclusive Capital Partners, Bluebell Capital Partners) and demanded:
1. splitting up the company into a pharmaceuticals and an agrochemicals group;
2. selling certain other divisions; and
3. replacing the chair of the supervisory board.
• Brenntag SE: In 2023, the hedge fund Primestone demanded splitting up the group into a specialty chemicals and basic chemicals division, aimed at an increase of profitability and share price. Moreover, Primestone tried to place its own candidates on the supervisory board. Ultimately, Primestone was not successful with its demands.
• Deutsche Wohnen SE: At the general meeting, the hedge fund Elliott demanded a special audit to investigate a EUR2 billion loan from Deutsche Wohnen to its shareholder Vonovia. According to Elliot, the loan had been granted at unfavourable conditions below market conditions. Ultimately, Elliot was not successful with its demand.
• Another recent example for shareholder activism is the software company Teamviewer AG, where activist investor Petrus Advisers demanded that the company stop sponsoring the English football club Manchester United and a Formula 1 team in order to save money.

Further examples include shareholder activism at Fresenius (healthcare), SAP (software), ThyssenKrupp (steel production and steel processing) and Bilfinger (construction).

These shareholders’ activities are mainly economically driven. Activist shareholders typically aim at increasing the value of the company by changing its strategy – eg, by splitting up conglomerates that are perceived as cumbersome, thereby creating a profit for themselves.

In the past, activist shareholders often started their activities relatively quietly – eg, by keeping their stakes below the relevant reporting thresholds under German securities law. With a view to current law, however, it should be noted that listed companies are henceforth provided with information rights regarding their shareholders, which gives them the opportunity to detect activists at an earlier stage.

Aside from this, there are different intensity levels of shareholder activism. To enforce their strategy, activist shareholders usually first reach out to the company’s management directly (eg, by writing letters to the management with certain requests). If this is not successful, they often try to influence institutional investors and voting rights advisers (Stimmrechtsberater) by publicly campaigning against the management’s strategic decisions or by campaigning against the re-election of board members while placing their own opposing candidates. In this regard, however, it should be noted that the possibilities for influencing personnel decisions in Germany are generally fewer than in the USA.

First, supervisory board members in Germany are usually elected for four years. It is therefore possible that no supervisory board member be due for election at the appropriate time. Furthermore, in accordance with German co-determination law, a portion of the supervisory board members in large companies must be elected by the company’s employees (depending on their number).

Moreover, activist shareholders can attempt to appoint a special auditor to examine the company’s management (see 10.2 Remedies Against the Directors). For example, in 2018, US-based activist hedge fund Elliott unsuccessfully tried to appoint such a special auditor at German energy company Uniper. However, thus far this strategy has been quite uncommon in Germany. Aside from this, activists can threaten to bring claims for damages against the active management.

As mentioned in 11.3 Shareholder Activist Strategies, companies from different industries have been targeted by activists in the past: Bayer is a pharmaceutical and agrochemical company, Brenntag is a chemical company, Deutsche Wohnen is a residential property company and Teamviewer operates in the software industry.

In view of this, shareholder activism probably cannot be attributed to a specific industry sector. Rather, it seems that activists are looking across industries for – from the authors’ point of view – existing potentials for improvement in value and stock prices. Against this background, listed companies whose shares are in free float or who do not have a large anchor investor should be watchful. They might be well advised to develop defence strategies at an early stage.

The most active groups of shareholders are typically activist hedge funds – eg, the US-based hedge fund Elliott, which invested in (among others) ThyssenKrupp and SAP, or Sweden-based fund Cevian Capital, which invested in (among others) ThyssenKrupp and Bilfinger.

In recent years, however, activist hedge funds have been increasingly successful in promoting their strategies to institutional investors and proxy advisers (Stimmrechtsberater), which at the same time became more and more influential themselves. This applies not least to so-called index funds, which have become increasingly popular in recent years. These funds are managed passively and therefore cannot react to negative developments by selling shares.

Another factor is that the proportion of investors attending annual general meetings is declining overall. It should be noted, however, that the Act Implementing the Shareholder Rights Directive II (ARUG II) established new transparency duties for institutional investors, asset managers and voting rights advisers in order to take into account their growing influence (see 11.1 Legal and Regulatory Provisions).

The cases that dominate public perception suggest that the demands of activist shareholders are often only met reluctantly, if at all. This is demonstrated not least by the already mentioned personnel changes that took place following the acquisition of stakes by activists, which were ultimately based on the fact that there had been insurmountable differences of opinion between the activists and the management of the companies.

A few years ago, in the cases of ThyssenKrupp and Stada, the chairmen of the executive board and the chairmen of the supervisory board even resigned; in another case (Bilfinger), activists caused a replacement of the chairman of the supervisory board. In 2019, the Bayer annual general meeting refused to discharge the executive board.

A counterexample seems to be SAP. It is assumed that the increase in SAP’s profit targets was a measure designed to meet the demands of the activist Elliott – possibly even by hurrying ahead. However, there is no empirical data available allowing for a reliable answer as to what overall proportion activist demands were met (whether in full or in part).

A company can consider different strategies to prepare for the appearance of activist shareholders and to respond to them once they are invested. The most promising strategies include the following.

Know Your Shareholders

Make use of the new information rights which came into force with the Act Implementing the Shareholder Rights Directive II (ARUG II) and monitor your shareholder base (see 11.1 Legal and Regulatory Provisions). If a known activist appears, it is recommended to research their previous tactics. Once prepared, it may be useful to reach out to the activist at an early stage. Aside from this, it is generally advisable to get in touch with shareholders on a regular basis and to thereby address the interests and concerns of your shareholders before they escalate, and to communicate the advantages of the company’s strategy (particularly in an M&A context).

Take the Activist’s Perspective

Self-assess your business from the perspective an activist might take. Address any weaknesses with the help of external advisers where necessary to keep activist shareholders from investing at all. Otherwise, start promoting the advantages of your own strategic planning. In this context, it can be advisable to lobby proxy advisers (Stimmrechtsberater) and to team up with significant shareholders.

Establish Board Candidates

Monitor the terms of office and/or retirement ages of board members and try to anticipate at what point in time an activist shareholder might start campaigning for their own board candidates. Build up a strong pipeline of board candidates that cover different areas at an early stage, in order to improve the company’s position when faced with activist demands for board refreshment.

Develop a Defence Manual

Prepare a defence manual that should at least contain a set of communication guidelines and contact details from specialised consultants (eg, communication advisers, law firms). Larger companies can even consider setting up a response task force. If an activist shareholder launches an offensive, experience has shown that valuable time can be saved if the company acts according to a structured programme.