Redemption

Redemption - Einziehung

December 15, 2022

The redemption of shares can lead to the exclusion of a shareholder from the Limited Company (GmbH). The redemption of shares is thus a proven means of excluding an "unwelcome" shareholder. In practice, it becomes particularly relevant if insolvency proceedings are opened over the assets of a shareholder and his/her shares are to be seized or if a shareholder dies - because then there is a threat of (potentially) undesirable intrusion into the group of shareholders by an insolvency administrator or heirs. The redemption of shares can prevent this. A further possibility is to stipulate the company's right to redeem shares as a sanction for breach of the provisions in the participation agreement (especially vesting) and for conduct detrimental to the company.

The basic possibility of a redemption of shares is provided for in section 34 Limited Liability Act (GmbHG), which, however, makes hardly any statements regarding the prerequisites and the procedure itself, but leaves this to the regulations in the articles of association. This results in a high potential for disputes and consequential problems, which can be avoided above all by a well-considered regulation in the articles of association.

Confiscation must be permitted in the statutes

Pursuant to section 34 GmbHG, a redemption may only take place if it is permitted in the articles of association. Such a basis in the articles of association can also be created retrospectively, whereby according to case law all shareholders must agree in the case of both voluntary and compulsory redemption. In all other respects, the general provisions on amendments to the articles of association apply, the corresponding resolution must be notarial certified and the amendment must be entered in the commercial register.

The redemption is initially to be distinguished from the exclusion or withdrawal of a shareholder. These measures do not necessarily have to be regulated in the articles of association and lead to the withdrawal of the partner as a person, but not to the expiry of his/her shares. Rather, they continue to exist after the exclusion without a bearer and now require "exploitation". A possible solution is the "destruction" of the shares by redemption or assignment to the remaining shareholders (or the company itself or third parties). In this case, the redemption does not require a basis in the articles of association. A redemption of the shares thus leads to the withdrawal of the shareholder, just like exclusion and resignation, but also regulates what is to happen to his/her shares.

Reasons for a redemption

In the case of voluntary confiscation, it is sufficient to allow this possibility in the statutes on a generalized basis. However, a higher degree of concretization is necessary for compulsory confiscation: The facts of the redemption must be formulated so precisely that the shareholder concerned was able to recognise when joining the company in which cases his/her shares can be withdrawn and what legal consequences result for him/her. Exclusion or withdrawal must not be left to the discretion of the other shareholders. However, it is permissible to create a kind of general clause in which redemption "for good cause" in the person of the shareholder is permitted. Such a clause can be reviewed in court and is fulfilled if the whereabouts of a shareholder have become unreasonable due to his/her misconduct, taking into account all circumstances of the individual case. This can be the case, for example, in the misappropriation of company assets, deceiving co-partners about existing knowledge or characteristics, disseminating insulting or discrediting information about shareholders or the company, i.e. in the case of "profound, incurable disagreements". However, it can often be useful to make explicit individual provisions for cases in which confiscation is to be justified. These do not necessarily have to reach the threshold of "good cause". In practice, for example, the violation of a non-competition clause is often accepted as a ground for recovery. Other particularly important reasons are the deterioration of assets or the death of a shareholder.

Implementation of the confiscation

First of all, it should be noted that shares may not be redeemed pursuant to section 19, Subsection 2, GmbHG, if the shareholder in question has failed his/her obligation to make a capital contribution to the share capital. However, the other shareholders can pay in the deficit amount in order to create the conditions for redemption. If these are present, a corresponding resolution and the subsequent declaration to the shareholder concerned is required before the withdrawal. Pursuant to section 46 No. 4 GmbHG, the resolution is generally adopted by the shareholders' meeting with a simple majority. However, the responsibility can also be transferred to an advisory board or only to one partner, and different rules can also be laid down for the majority requirements. Whether the shareholder concerned has a voting right has not yet been conclusively clarified by the supreme court, but in the event of a forced withdrawal for an important reason in the person of the shareholder, the Federal Court of Justice denies this in any case. It might therefore be advisable to agree on a general voting ban for the shareholder concerned in the articles of association.

Severance pay

In principle, the withdrawing shareholder must be paid a settlement in the amount of the full market value of his or her shares. However, the articles of association may provide for different arrangements. In order to avoid disputes, the articles of association should provide a basis for calculation the compensation as concrete as possible and should regulate the procedure for payment. However, a limitation of the severance payment may not lead to a gross disproportion between the agreed value and the actual market value. Compensation at par value is null and void if it is far below the actual market value, even compensation at half of the market value runs the risk of being declared null and void. According to section 34, Subsection 3 and section 30, Subsection 1, GmbHG, it must also be possible to guarantee the payment of a severance payment from untied assets, i.e., assets that exceed the amount of the original capital contribution. A confiscation order, in which it is already establishes at the time of its drafting that the severance payment owed can not be paid from free assets, is null and void. In this case, it may be necessary to agree on payment in instalments. In literature and case law of the courts of first instance, it has sometimes been argued that the effectiveness of the confiscation is subject to the suspensive condition of full payment of the compensation. According to a ruling by the Federal Court of Justice (BGH) from 2012 (2012 - II ZR 109/11), the shareholder withdraws from the company as soon as the decision of exclusion is announced.

Personal liability of the remaining shareholders

The redemption of shares can lead to personal liability of the remaining shareholders. This is based on the idea that it would be contrary to good faith if the shareholders continued the company but refused to pay the compensation owed, citing the capital maintenance provisions of sections 30 I, 34 III GmbHG. Therefore, the remaining shareholders are personally liable for the compensation claim according to the jurisdiction of the BGH (2012 - II ZR 109/11; 2016 - II ZR 342/14). This means that if the compensation (or an instalment) can not be paid out of free assets, the remaining shareholders are liable if they continue to run the company in breach of trust, i.e. if they incorporate the added value of the retired share at the expense of the retired partner, but withhold their compensation from him/her. The remaining shareholders are not liable if the company is dissolved for economic reasons. They aren’t necessarily liable if insolvency proceedings are opened over the company's assets when the compensation becomes due or after its due, or if insolvency proceedings are opened and the application is not delayed in bad faith. Even if the company does not pay, although this would be possible in compliance with the capital maintenance regulations, this does not entail any personal liability; rather, the withdrawing shareholder bears this risk and must take legal action if necessary.

Difference between share capital and total nominal amounts

Ultimately, the redemption has the following consequence: The distribution of the share capital among the company shares results in nominal amounts, which are usually around one euro. (e.g. 25,000 shares with a nominal value of 1 euro each). If the shares of a shareholder are destroyed, these nominal amounts are no longer applicable and there is a difference between the share capital and the sum of the nominal amounts. However, Section 5 (3) sentence 2 of the Law for the Modernization of the Limited Liability Act (MoMiG) states: "The sum of the nominal amounts of all shares must equal the share capital". It was partly concluded from this that such a divergence leads to nullity or voidability unless measures are taken at the same time to avoid it. However, in a decision from 2014 (2014 - II ZR 322/13) the BGH clarified that this is not the case. A divergence between the share capital and the sum of the nominal amounts of the shares does not lead to the nullity or contestability of the shareholders' resolution on the redemption of a share, (even) if measures are not taken at the same time to prevent this divergence. Measures for adjustment include a capital reduction, a nominal increase of the remaining shares or the creation of new shares. The remaining shareholders may have an interest in awaiting the outcome of any litigation relating to the redemption before deciding on it. It is still a little unclear whether the registry court can insist that any divergence must be resolved before the redemption or further capital measures are registered there. Although there are some arguments against such a requirement, it may be advisable to ensure that the share capital and the sum of the nominal amounts are the same. Furthermore, a current list of shareholders must be submitted to the commercial register after the redemption.

If you as a shareholder or managing director have questions regarding the resolution to redeem shares, the corresponding provisions in the articles of association, the defence against the redemption of shares or other questions in commercial law, please do not hesitate to call us.