CORPORATE Prohibition of voting in shareholders’ meetings

BGH (German Federal Court of Justice) strengthens the principles on the prohibition of voting in own matters – the prospects of success of legal action in liability matters are irrelevant

When passing a resolution on initiating a legal dispute against a third-party company or on the out-of-court assertion of claims against the third-party company, those GmbH shareholders who hold all shares in the third-party company are subject to a voting ban.

BGH, judgement of 08/08/2023 – II ZR 13/22 (Bamberg Regional Court)

What were the facts of the case: Shareholder resolution on legal action against another company of a shareholder managing director.

Two shareholders of a multi-person German limited liability company (GmbH) were the sole shareholders of another GmbH 2. One of these shareholders was the managing director of both companies. GmbH 1 was also the general partner of another GmbH & Co. KG (a German limited commercial partnership), in which other partners were involved as limited partners. Another shareholder in GmbH 1, the plaintiff in the legal dispute, was also a limited partner of GmbH & Co. KG.

GmbH & Co. KG had been licensing rights of use to parts of its trademarks protected by the DPMA (German patent and trademark office) to GmbH 2 since 1994. From August 2017, the managing director, Ms D., registered various competing trademarks for GmbH 2 with the DPMA.

At the shareholders’ meeting of GmbH 1 in July 2019, the items on the agenda included the following resolutions:

• Assertion of claims for damages against the managing director, Ms. D., under Section 46 No. 8 GmbHG (German limited liability companies act) due to unlawful competitive activity with GmbH 2 and due to the registration of the competitor trademarks, including their commercial use by GmbH 2, including the appointment of a legal representative to enforce the claims for damages in court under Section 46 No. 8 Alt. 2 GmbHG
• Assertion of claims for damages against the shareholder Mrs M. due to unlawful competitive activity
• Assertion of claims for damages against the GmbH 2

Counting the votes of Mrs. D. and Mrs. M., the chairman of the meeting determined that the resolution on the agenda above had been rejected. In his action to contest the resolution, the plaintiff sought to have the rejected resolutions declared null and void and sought a declaration that the rejected resolutions had been passed.

Reasons for the decision: The managing director and the shareholder, also holding an interest in the third-party company, are subject to a voting ban. It does not matter what prospects of success the intended pursuit of the claim has.

While the Court of Appeal still assumed that the resolution was duly passed with the participation of Mrs. D. and Mrs. M. as managing directors, the Federal Court of Justice (BGH) clarified that no one might be a judge in their case. According to Section 47 (4) sentence 2, case 2 of the German Limited Liability Companies Act (GmbHG), a managing director has no voting rights when passing a resolution on initiating a legal dispute. When passing resolutions on the out-of-court assertion of claims, the shareholder managing director is prohibited from voting. This regulation also applies under § 46 No. 8 Case 2 GmbHG for the resolution of the appointment of the person in charge to represent the company in the pursuit of claims. This regulation also applies if a GmbH shareholder is the sole shareholder of a third-party company or several GmbH shareholders together hold all shares in the third-party company, as in this case, the economic connection is so strong that the personal interest of the GmbH shareholders can be equated with the third-party company.

In the opinion of the Federal Court, whether the intended pursuit of the claim has any prospect of success is optional. In principle, it should be sufficient for the shareholder requesting the vote to outline in detail what the breach of duty and the contribution to the offense by the individual co-shareholders consist of. Incidentally, the prospects of success in the matter are then irrelevant, as such an examination would make it unreasonably difficult to enforce claims for compensation if it had to be clarified again in court in the rescission proceedings and, in the absence of an extension of legal force, in the subsequent liability proceedings whether the reason for liability exists.

Therefore, the votes cast by Mrs. D. and Mrs. M. were null and void and should not be counted. As the ballots cast were also partly responsible for the negative shareholder resolution due to the majority situation, this was null and void.

Furthermore, the BGH clarified that the company’s interests were affected by the allegations and the company’s pursuit of claims for damages based on them, not the self-serving or abusive purposes of the shareholder who cast a vote. Only if a shareholder pursues exclusively self-serving purposes or uses his majority power to harm fellow shareholders or to obtain unjustified particular advantages can an exclusion of voting rights be considered based on the duty of loyalty under company law.

Practical advice:

With its case law, the BGH creates clarity and facilitates the preparation of recourse proceedings against shareholders or managing directors, as the prospects of success of the actual liability proceedings are irrelevant.

The liability regime for managing directors and board members is strict. They have the burden of proof in the legal dispute to demonstrate that they have behaved following their duties (Section 43 (2) GmbHG in conjunction with Section 93 (2) sentence 2 AktG -German stock corporation law). It is sufficient for any co-shareholders who wish to bring an action if they can demonstrate in detail what the breach of duty and the respective contribution to the offense by the board members concerned consist of. Although this goes beyond a simple allegation, it is not necessary to make any statements as to whether the company has suffered any damage and whether the case itself could have any prospect of success. It will, therefore, be important for the party bringing the action to prepare the facts of the case based on claims for information (Section 51a GmbHG; Section 13 AktG). In any case, the case law of the BGH makes it easier for shareholders to take action against board members or co-shareholders. Managing directors and board members can only be advised to continue to build up sufficient evidence for their decisions and actions in the company’s context due to the burden of proof incumbent on them (Section 93 (2) sentence 2 AktG). Otherwise, a D&O insurance policy may be the only option.