Resolution deficiencies in the German liability company (GmbH) – what can I do?

Action against GmbH shareholder resolutions or cure of defects!

The shareholders‘ meeting holds significant importance as it is the central decision-making body of a German liability company (GmbH). During this meeting, crucial decisions concerning the economic future of the company are discussed among the shareholders. The outcomes of these discussions are documented as shareholder resolutions. In addition to deciding on the appointment or dismissal of the GmbH managing director, the managing directors receive instructions in the form of resolutions. These instructions hold significant importance for the present and future prospects of the company.

What are the special features of the law on defects in GmbH resolutions?

Despite the significant practical importance of resolution deficiency disputes in GmbH, there is currently no specific legal regulation regarding the GmbH resolution deficiency law that caters to the particular requirements of GmbH.

Instead, the law refers to the provisions on defective resolutions in a general meeting of a stock corporation stated in the German Stock Corporation Act (AktG) (Sections 241 and following by analogy), with some modifications concerning the nature of the GmbH. This leads to a catalogue of formal and substantive requirements that a lawful shareholder resolution must fulfil, which is hard to comprehend.

The available legal remedies for defective resolutions include an action for rescission and, in exceptional cases such as serious defects, an action for annulment. Passing resolutions during a shareholders‘ meeting is an intricate system of varying legal prerequisites.The foremost requirement is conformity with a number of formal requirements, as non-compliance can lead to resolution defects. Furthermore, it is possible that the content of the resolution may be illegal, leading to the overall illegality of the resolution.

What specific defects can a shareholder resolution suffer from?

Firstly, several formalities must be observed to avoid the shareholders‘ resolution being challenged or nullified. The board must properly convene the general meeting. Section 51 (1) of the German Limited Liability Companies Act (GmbHG) specifies that the invitation should be sent via registered post at least one week prior to the commencement of the general meeting. However, in practice, the articles of association may differ from this, allowing for a meeting to be convened via email. This can result in significant errors. Besides missing the deadline or holding a meeting chaired by an unauthorized individual, one should also take into account the absence of invitations for one or more authorized attendees. Additionally, the meeting’s time and venue may also be incorrect or missing.

Formal errors may arise during the meeting and lead to an inadequate resolution. These errors may include the unauthorised imposition of disciplinary measures by the meeting’s chair, which could potentially lead to a shareholder’s exclusion. Additionally, the presence of an individual who does not possess the right to attend the meeting may also contribute to formal errors.

The voting phase and subsequent adoption of resolutions is particularly prone to errors and is therefore often the subject of legal proceedings. According to Section 47 (1) of the German Liability Companies Act (GmbHG), shareholder resolutions are generally passed with a simple majority, unless the articles of association provide otherwise or the subject of the resolution requires an amendment to the articles of association. Each euro of a share entitles the holder to one vote (Section 47 (2) of the German Liability Companies Act (GmbHG)), although deviating regulations in the articles of association are also possible here. Common sources of error in this context are, above all, the invalidity of votes cast (e.g. due to voting bans or voting commitments), missing powers of attorney of representatives or voting behaviour in breach of the duty of loyalty to the company.

The meeting’s chairman, who is either specified in the articles of association or elected by a majority of shareholders before the meeting commences, bears the responsibility for resolution adoption. However, they may also commit errors, such as presuming an erroneous majority requirement or miscalculating the votes.

In the case of amending the articles of association, it should be noted that any resolutions made in this regard would require notarisation to be effective.

In addition to meeting formal requirements, the resolution must also adhere to substantive legality. Substantive illegality may arise from a breach of any law. Furthermore, resolutions contradicting provisions stated in the articles of association are inherently illegal. Additional factors contributing to illegality include, but are not limited to, breaches of fiduciary duty or immoral content within the resolution.

When can a resolution be considered null and void? What factors must be taken into account when initiating an action for its annulment?

The invalidity of a resolution is only relevant in case of significant shortcomings in the resolution and is a rare occurrence in practice. Of the aforementioned legal formalities, holding a meeting by an unauthorised person, neglecting to invite an authorised person, or having flaws in the arrangement of the meeting that are comparable to such faults in their range, along with non-compliance with the notarisation provision, may result in the nullification of the decision in certain instances.

Material defects in resolutions render them invalid if the content breaches mandatory creditor protection regulations or standards that aim to protect the public interest (such as the German Criminal Code (StGB), Competition Act (GWB), tax regulations, etc.). Additionally, the immorality of the resolution’s content can serve as a reason for nullity in exceptional circumstances.

If any of the aforementioned grounds for nullity is applicable, both the shareholders and managing directors of the GmbH may initiate legal proceedings to have the resolution of the shareholders declared null and void. There is no time restriction on this action in principle, although it may result from the institute of forfeiture (Section 242 of the German Civil Code (BGB)), amongst other things.

When can an action for annulment be brought against a shareholder resolution?

In most cases, a resolution put forth by the shareholder can only be challenged. This applies to a multitude of procedural errors that occur during the voting process. These errors may encompass mistakes in organising the meeting, as long as they are not considered illegal, and the implementation of unwarranted disciplinary acts by the chairperson. Additionally, errors in voting or passing resolutions are also included.

It is worth noting that not all procedural errors will lead to the contestability of a resolution. As a prerequisite, there must always be a „material connection“ between the error and the resolution’s result. This implies that a shareholder’s right to participate and be involved has been affected by the procedural breach, and that the resolution’s legitimation has been undermined as a result. However, the legal precedent does not establish overly demanding criteria in this regard, and it suffices if it is not excluded that the procedural error influenced the outcome of the decision.

In principle, any breaches of the law, which do not already warrant the invalidity of the resolution, or contravention of the articles of association, can be viewed as substantial grounds for contestation. Furthermore, going against a prearranged decision option agreed by all shareholders during voting can also serve as grounds for contestation, on the condition that the shareholders acted with the intention to be legally bound.

Unlike an action for annulment, only shareholders, not managing directors, are authorised to challenge the resolution. Prior attendance at the relevant shareholders‘ meeting is not required for this. However, shareholders who previously approved the resolution, especially if they voted in favour of it, do not have the right to contest it. The defendant is the GmbH itself, typically represented by its management. In accordance with Section 246 (1) of the German Stock Corporation Act (AktG), which isn’t directly applicable to the avoidance action in the case of a GmbH, but serves as a guiding principle nonetheless, the avoidance action should be filed within one month of the passing of the resolution, unless special circumstances (such as the mediation process) justify a delay. The articles of association might also include an opposing provision. In terms of content, the claim must consist of, at minimum, the factual essence of all reasons for avoidance, as adding grounds immediately is typically not feasible. The district court of the area where the company’s registered office is based is commonly the appropriate jurisdiction.

Is it possible to cure void or contestable resolutions?

It is possible to rectify nullity grounds by applying Section 242 of the German Stock Corporation Act (AktG) in an analogous manner. Pursuant to Section 242 (1) of the German Stock Corporation Act (AktG), defects in notarisation may be fixed by recording them in the commercial register. Furthermore, Section 242 (2) Sentence 4 of the German Stock Corporation Act (AktG) stipulates that inadequacies in meeting convening can be resolved by obtaining subsequent consent from shareholders who were not duly invited. Finally, to ensure legal certainty, resolutions entered in the commercial register over three years ago are treated as cured in accordance with Section 242 (2) Sentence 1 of the German Stock Corporation Act (AktG).

With respect to reasons for challenging an action, Section 51 (3) of the German Liability Companies Act (GmbHG) specifies that if all shareholders are present and consent to the meeting and its accompanying resolution, the lack of invitation can be corrected. Additionally, any violations of a shareholder’s rights to participate and receive information due to illegal regulatory actions can be remedied by subsequent endorsement of the resolution by the affected shareholder.

Conclusion

Shareholder resolutions pose a significant risk of being contested or declared null and void, particularly because of the extensive formal requirements. In the interests of the company, it is essential to prepare thoroughly and maintain a close watch on complying with all formal requirements during the shareholders‘ meeting. Thus, it is recommended to keep detailed minutes of the proceedings.

Alternatively, shareholders who were wrongfully disregarded when the resolution was adopted can later obtain the contested resolution ex-post. Nonetheless, one must remain mindful of the verifiability of the alleged reasons for rescission and/or nullity, as well as compliance with the deadline for rescission or any forfeiture in the action for nullity. Overall, remedies for invalid resolutions provide a useful tool for shareholders to enforce their rights and interests under company law. This is particularly relevant for minority shareholders and in cases of shareholder disputes. Seeking professional legal advice at an early stage is always recommended.

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Authors: Lawyer Dr. Karl Brock, Research Assistant Constantin Dorschu