Minority protection: Protecting minority shareholders in the GmbH.

 Does company law provide sufficient protection for minority shareholders in the GmbH?

Minority protection: Protecting minority shareholders in the GmbH.

In principle, majority shareholders in the GmbH guide the fortunes of the company. Minority shareholders have some, albeit little, protection. In view of this, supplementary provisions in the articles of association to protect minority shareholders make sense.

Protection of minority shareholders in corporate law

German corporate law is characterized by majority decisions. Yet protection of minorities is also enshrined in the law governing corporations. Conversely, minority shareholders enjoy far less protection in GmbHs, in particular.

What is the actual scope of minority shareholder protection for a GmbH?

Protecting minority shareholders of the GmbH

Essentially, majority shareholders in a GmbH can make many decisions with little or no input from the minority shareholders. The fundamental principle of majority decisions when adopting resolutions at the GmbH is anchored in Section 47 (1) of the Act on Limited Liability Companies (GmbHG).

However, there are exceptions to this rule:

  1. Loyalty obligations under company law
    Majority shareholders are bound by loyalty obligations under company law pursuant to Section 242 of the German Civil Code (BGB) which requires that they take into consideration the interests of the minority shareholders. This loyalty obligation requires shareholders, in particular majority shareholders, to give the interests of the company priority over their own interests. Therefore, the loyalty obligation protects the company from actions such as arbitrary majority decisions. Indirectly, this also protects the interests of minority shareholders.
    This also represents an effective means of preventing wrong decisions with severe consequences on the part of one or more majority shareholders.
    Nevertheless, major hurdles have to be overcome to bring action against a violation of this loyalty obligation. As such, invoking the violation of the loyalty obligation as a means of protecting minority shareholders represents a difficult option.
  2. Blocking minorities at the GmbH
    The Act on Limited Liability Companies (GmbHG) also explicitly defines the protection of minorities by means of blocking minorities, for example. In these cases, minority shareholders are capable of blocking some fundamental decisions with a share of at least 25% of the total votes.
    However, these cases are limited to corporate takeovers, mergers and amendments to the articles of association (Section 53 (2) of the Act on Limited Liability Companies (GmbHG)) or the dissolution of the GmbH (Section 60 (1) No. 2 of the Act on Limited Liability Companies (GmbHG)).
    Consequently, these blocking minorities serve as more of a “legal emergency brake” applicable to fundamental decisions than as an effective means of protecting minorities as part of the company’s day-to-day business.
  3. Other rights of minority shareholders
    In addition to blocking minorities, the Act on Limited Liability Companies also stipulates a number of explicit control rights which individual shareholders and minority shareholders can exercise.
    As such, all shareholders have a right to information from and to review the management. This right is enforceable in court and cannot be excluded (Section 51 a of the Act on Limited Liability Companies). Furthermore, shareholders with a combined voting share of at least 10% may demand that a shareholders’ meeting be convened if the situation requires (Section 50 of the Act on Limited Liability Companies (GmbHG)).
    Lastly, voting prohibitions or exclusions pursuant to Section 47 (4) of the Act on Limited Liability Companies (GmbHG) also enables minorities to exercise considerable influence on the company: If this regulation is used to a majority shareholder from voting on a resolution under this provision, then a simple majority of the remaining permissible votes is generally sufficient.
  4. Special audit as a control instrument
    This option is also especially interesting if minorities aim to initiate a special audit in order to have processes at the GmbH or the management/management practices audited by an external party.
    The corresponding right to call for a special audit is derived from Section 46 No. 6 of the Act on Limited Liability Companies (GmbHG). Essentially, any shareholder may initiate a subsequent audit of this nature. Initiating a special audit requires a resolution with a simple majority.
    If the intent is to examine the conduct of a majority shareholder, the special audit option appears to be legally blocked at first glance. However, the resolution must be adopted by a majority of the authorized votes. In this case, the shareholder whose conduct has led to the special audit is excluded from the vote on the special audit pursuant to Section 47 (4) of the Act on Limited Liability Companies (GmbHG).
    As a result, the majority of the authorized votes of the minority shareholders is required and also sufficient to adopt the special audit resolution.
    Therefore, the special audit can provide an efficient supervisory option for minority shareholders.

The articles of association offer numerous options

One thing is clear: Minority shareholders in a GmbH are protected. Nevertheless, the rights of minority shareholders are primarily restricted to “legal emergency brakes” in critical situations or for fundamental decisions.

In view of this, protecting minority shareholders needs to be given adequate consideration in the articles of association: Individual provisions can address the specific interests of all shareholders while also ensuring effective protection of minority shareholders in the GmbH.

Ultimately, this ensures effective protection of minorities which benefits the company as a whole by preventing an overly rigid majority dictate.

The loyalty obligations under company law together with explicit stipulations of the GmbHG provide minority shareholders of a GmbH with a certain level of protection. Yet, it is also important to incorporate effective and tailored protection of minority shareholders into the articles of association of a limited liability company.