Exclusion of a Shareholder from a Two-Member GmbH

In a two-member German Limited Liability Company (Gesellschaft mit beschränkter Haftung – “GmbH”), one shareholder may exclude the other shareholder through a shareholder resolution if there is just cause in the person of the excluded party. If both sides have violated their obligations, an overall evaluation of the behavior of both shareholders is required.

Background

Two partner shareholders, one a majority shareholder with 75% and one a minority shareholder with 25%, were shareholders of the GmbH bringing the action. The majority shareholder first recalled the minority shareholder as managing director, and also refused to pay outstanding claims of the minority shareholder resulting from his office. Subsequently, the minority shareholder tried to sell his shares to a third party without offering these to his co-shareholder as required in the articles of association. In addition to this right of first refusal, the articles of association also provided for a right to reserve approval (so-called restriction of transferability clause). The majority shareholder used this clause and refused to agree to transferal, and at the same time did not exercise his right of first refusal. When the minority shareholder then unsuccessfully made a request to collect the company shares of the majority shareholder or to have these transferred to him, the majority shareholder passed a resolution to exclude the minority shareholder from the company in exchange for paying a settlement.

The judgment of the Brandenburg Higher Regional Court dated 28 January 2015, docket no. 7 U 170/13

The Brandenburg Higher Regional Court (Oberlandesgericht – “OLG”) declared the exclusion of the minority shareholder from the GmbH to be invalid, in absence of a just cause for the exclusion. Although the complete breakdown in the personal relationship between shareholders can be a just cause for exclusion, an overall assessment of the behavior of both shareholders is crucial for the decision. Hence the disagreement must not have been caused entirely or primarily by only one of the shareholders in question. In addition there should not be a just cause for exclusion in the person of the shareholder who has initiated the exclusion. If the shareholder's behavior is not sufficient to justify exclusion, however, the disagreement could nevertheless be an incentive to see the circumstances under which the exclusion is pursued in a softer light, so that they no longer justify exclusion.

The OLG Brandenburg therefore also acknowledged the behavior of the majority shareholder. His strategy, apparently, was to "starve out" the minority shareholder financially. In contrast, the latter’s attempt to transfer his shares to a third party in violation of the right of first refusal appeared in a much softer light. An exclusion of the minority shareholder, therefore, was not justified.

Comment

When founding a company, shareholders usually do not consider how they will later end their joint collaboration. Frequently, therefore, regulations which are highly important in two-member companies are either taken entirely from contract templates or books of forms without further examination, or are not concluded at all.

This judgment, which is fully in line with the jurisprudence of the German Federal Court of Justice and of other Higher Regional courts, clarifies once more the importance of carefully designed shareholder agreements, since the courts place especially high requirements on the acceptance of a just cause for exclusion from a company. Specific individual reasons justifying an exclusion, such as a shareholder suffering a financial collapse or the seizure of his shares, can be defined in the shareholder agreement.

If a shareholder is excluded due to an "unspecified" just cause (such as a deep disagreement) from the company, the overall situation must be reviewed with special care before passing a resolution. It is often difficult to determine who caused the disagreement, and a successfully contested (unlawful) exclusion can in and of itself be the reason for an exclusion.