Agree on exit clauses already during foundation
This can be considered a kind of marriage contract. Already during the foundation, when everyone believes in luck and success, people should think about what actually happens in the so-called “worst case” or in an exit (i.e. a separation). If exit clauses are well balanced and well regulated, all parties know how to do it, feel safe and fairly treated. The more balanced the wordings of exit clauses are structured in a friendly atmosphere, the easier it will be to settle disputes later.
If there are no regulations on exit or recovery, trouble is certain to follow. And a shareholder dispute involves considerable risks.
What risks are to be expected in the event of a shareholder dispute?
Oftentimes, a shareholder dispute is long and expensive and sometimes reminds of a War of the Roses. Initially, it does not matter what it costs, the most important thing is that the other shareholder is gone. But this does not mean that you want to give the other shareholder as much money as possible for his or her separation. On the contrary: He or she should receive as little as possible. What is expensive is the duration of the procedure, because the company is blocked during this time.
The commitment of the shareholders also changes significantly in the event of a dispute. In most cases, this is at the expense of the company. Sometimes the company is deliberately damaged or there is even a violation of the non-competition clause.
The reasons for the dispute are diverse. It is often due to a lack of communication and the shareholders’ limited ability to take criticism.
Generally, the managing director is also involved in the shareholder dispute, which additionally blocks the company.
Leaving the company voluntarily
It is generally possible to sell shares and thus leave the company as a shareholder. This works by assigning the shares in the company. This transaction must be certified by a public notary. Of course, it is important to pay attention to how the details of the sale are regulated in the articles of association. The assignment may be subject to further conditions. For instance, it may be necessary for the other shareholder to agree to the sale or to have a right of first refusal.
It is also possible to leave the company by means of a withdrawal. If it is unreasonable and unbearable for the shareholder to remain in the company, this is always a possibility. However, withdrawal is the ultimate permissible option. Only if other possibilities, such as the sale of the share, are not possible even under unfavorable conditions, does it take effect. Withdrawal takes place by means of a notice of resignation by the partner who wishes to leave.
Basically, it is also possible to terminate the company, if this is provided for in the articles of association. The contract must regulate the legal consequences of the termination. This is the shareholder’s resignation, otherwise the entire German limited liability company is dissolved.
Redemption of shares / exclusion
If the redemption/exclusion is provided for in the articles of association, the shares of the partner from whom one wishes to separate can be redeemed. But this can only be done by force if the requirements have already been included in the articles of association before the acquisition of the shares. Most of the time, these are precisely the “important reasons” which can justify a redemption in the articles of association.
Only in cases in which partners have not paid in their capital contributions on time is the exclusion of a partner provided for by law. But it is also considered permissible that a shareholder may be excluded for good cause. Such a good cause would be if the other partners could no longer be expected to continue the company with the excluded partner because of his or her conduct or personality. The continued existence of the limited liability company would be made impossible or at least seriously endangered by his membership. A culpability is not necessary, but the deficiency must be so strong that it could not be solved in any other way, e. g. not by redemption.
Compensation
The person who has to leave the company usually receives a compensation. As long as no provisions have been made in the articles of association, a legal right to compensation arises when the shareholder leaves the company. This claim is directed against the limited liability company, the amount of which is to be determined from the balance sheet for compensation.
Ideally, the amount of the compensation should already be regulated in advance in the articles of association. Provisions on amount, calculation, payment modalities etc. can be precisely formulated here.
The complete exclusion of a compensation is ineffective because of violation of moral principles.
How can a shareholder dispute be avoided?
It is not possible to completely avoid a shareholder dispute. On the other hand, you have to deal with people who are subject to different influences. As mentioned at the beginning, it is helpful in any case to define exit scenarios that are as comprehensive as possible already in good times, so that the “laws of the game” are at least clear in the event of a dispute.
Mediation or escalation? How can a shareholder dispute be terminated?
Considering mediation in a dispute can be very helpful in calming disputes and shareholders and finding a reasonable solution. But in many cases, mediation is not (no longer) appropriate when the situation is messy.
It can be useful to have arbitration proceedings. The arbitrators here are often especially knowledgeable people. This can also be helpful. However, arbitration proceedings are neither faster nor cheaper than normal court proceedings, and oftentimes there is no longer access to courts.
Practical tip
It is always worthwhile to prepare as detailed a statute as possible in advance with a view to later disputes. If exit arrangements are clearly formulated, disputes can be avoided later on.
Disputes between shareholders should never be carried out without the advice of a lawyer. The subject matter is too complex for that and, above all, a gut issue.
Further information on this and other corporate law topics can be found on my YouTube channel “Recht hat er!” (“He is right!”), especially here.
Sometimes escalation can help in completely messed up situations. Then you have to take the seemingly hopeless case to court. In this case, an independent third party, namely the judge or the chamber, decides. Viewed from the outside, it is sometimes easier for these third parties. And sometimes it is also easier for the advising lawyer in the interest of his client to bring this escalation to court, because you often do not know whether the opposing party’s lawyer is not even stirring up the dispute.
