Deadlock in a German GmbH

Shareholder Dispute with a 50-50 Partnership Structure

In German limited liability companies (GmbHs), important decisions are made at shareholders' meetings by way of shareholder resolutions. Since resolutions are passed by a majority of voting rights, the majority shareholder typically holds decision-making power within the company. However, a 50-50 partnership structure is common in German business practice. A system of equal shareholders can bring both advantages and challenges. While the even distribution of shares may foster a sense of fairness and equality, it also carries the risk of deadlock situations, especially when it comes to making critical decisions within the company.

Below, we would like to outline the shareholder dispute problem of deadlock and important solutions to avoid a blockade in Gaman corporate practice.

Resolutions & Shareholder Meetings in a German GmbH

The management of the company is carried out through resolutions in the GmbH shareholder meeting. Resolutions generally follow the principle of majority voting. 

Consequences of a GmbH Deadlock (lack of Majority Resolution)

A deadlock occurs when shareholders with equal shares have differing opinions on the required resolution and cannot reach an agreement. Such differing opinions between the two shareholders lead to the inability to pass majority resolutions, which can significantly impair the operational capacity of the GmbH. Blockages in the GmbH shareholder meeting can result in delays, uncertainty, and a standstill in management or necessary financing measures.

However, deadlocks in German companies are not only caused by differing opinions between the two shareholders. The blocking power of a 50% shareholder is often used in practice for power demonstrations or may reflect a generally damaged business relationship between the two shareholders. Intensified disputes between equally involved shareholders can even lead to existential risks for the GmbH and its workforce.

Disputed Resolutions in a 50-50 Deadlock Situation

Paralyzing deadlocks in 50-50 shareholder structures often arise when deciding on profit distributions, the appointment or dismissal of managing directors, or resolutions regarding the level of managing director compensation, especially when only one of the two shareholders also acts as the managing director running the company's operations. Resolutions that have far-reaching effects on the company's policy are particularly prone to disputes. These conflict-prone situations can be structured as follows:

1. Strategic Decisions: Market entry, product development, strategic acquisitions of (competing) companies

2. Financial Measures: External financing, capital increases, profit distributions

3. Personnel Issues: Release of the management, appointment/dismissal of managing directors, details in managing director contracts, termination agreements, and severance payments for managing directors

4. Contract Amendments: Changes to the articles of association or internal regulations

Alternative Dispute Resolution (German ADR) for 50-50 Shareholders

A deadlock situation – regardless of the level at which it occurs – can pose an existential threat to the GmbH and its employees. Therefore, shareholders can generally resort to various alternative dispute resolution procedures (Streitbeilegungsverfahren). To avert dangers to the company resulting from blockades, mediators or moderators can be involved.
Mediation is a voluntary, structured process in which a neutral third party, the mediator, supports the shareholders in finding a mutually agreeable solution to their conflict. Such mediation is particularly suitable when the disputes are not limited to specific issues but are of a deeper nature. The mediator works together with the shareholders to uncover the underlying interests and needs. The mediator encourages the shareholders to jointly develop and assess different solution options. In the case of a successful mediation, the shareholders will agree on a solution that is then recorded in a mediation agreement with the assistance of the mediator.
There is a wide range of alternative dispute resolution procedures. One less formalized option is facilitation. Moderation is a process in which a neutral moderator structures and guides the discussion process without offering any solutions of their own.

Coercive Measures in Deadlock Situations

If differing shareholder interests cannot be reconciled even after multiple attempts at reaching an agreement, open shareholder disputes can quickly arise. In the course of escalating conflicts, shareholders will sooner or later resort to coercive measures to resolve blockades and financial threats to the company. Such coercive actions may also take destructive forms. If one of the shareholders is unable to push through important resolutions, such as the discharge of management or a profit distribution, this often triggers a series of reactions:

Coercive measures begin with the convening of an extraordinary shareholders' meeting, during which hostile and forceful actions may be taken, such as exclusion from the company (redemption or compulsory transfer of shares), or the extraordinary termination of the managing director’s service agreement and removal for good cause, particularly if the opposing shareholder also serves as managing director. Please note that even a shareholder holding only 50% can enforce such coercive resolutions if sufficient grounds exist – for instance, if the opposing shareholder breaches fiduciary duties. In such cases, the affected shareholder is prohibited from voting on resolutions concerning themselves. This voting prohibition enables the 50% shareholder to adopt valid resolutions. It should also be noted that if the articles of association do not provide for the redemption of shares, a judicial exclusion action is required instead of redemption.

In addition, preliminary injunctions (einstweilige Verfügungen) may also be considered in specific situations as instruments of relief or attack to lift a blockade. Finally, a court-appointed emergency managing director may be installed to break the deadlock and provide new momentum.

Special Considerations in German Deadlock Situations: Mutual Coercive Resolutions

The situation in a two-tier GmbH, where both shareholders can block each other due to their 50/50 ownership, is in German corporate system legally unique. If matters escalate and both shareholders attempt to force each other out of the company (for example, through resolutions on the redemption of shares / Einziehungsbeschlüsse), both mutual coercive resolutions must be combined and submitted for a vote simultaneously. This requirement has been established by the German Federal Court of Justice (BGH) in order to prevent a “race to the courthouse” scenario. The goal is to avoid a situation in which Shareholder A submits a resolution for the redemption of Shareholder B’s shares first in order to exclude B purely on a technicality. If B supplements the notice of the meeting with a counter-resolution to redeem A’s shares, both mutual redemption resolutions must be combined under one agenda item for voting.

Ultimately, it is the courts that decide which redemption resolution is legally effective. These principles are not limited to mutual redemption resolutions. If both shareholders also serve as managing directors, we recommend that mutual dismissals for good cause also be combined in the same manner.

Chairperson, Action for Annulment & Positive Resolution Determination Action

If an agreement between the shareholders cannot be reached, coercive measures will eventually be decided. Any shareholder who considers a resolution to be inadmissible or unlawful can challenge at the regional court. Action for nullity and action for annulment can be filed for various reasons, such as formal errors in the convening or conduct of the shareholders' meeting, violation of participation rights, or breaches of provisions in the law or the articles of association.

It is important to note that resolutions made without formal determination by a chairperson must be submitted to the german court in the form of a so-called positive resolution determination action (positive Beschlussfeststellungsklage).

In two-tier GmbHs, where both shareholders are equally involved, disputes typically arise without formal resolution by a chairperson. When appointing a chairperson, both competing shareholders will generally block each other.

Contractual Solutions vs. GmbH Deadlock Situation

To avoid deadlock situations, shareholders in Germany should ideally make contractual arrangements when founding the GmbH. However, changes to the articles of association can always be made with a qualified majority. There are various measures that can help prevent deadlocks and blockages in the day-to-day operations of the business.

• The simplest way to avoid a 50-50 shareholding structure is for the shareholders to agree that one shareholder is granted the majority of the shares. Holding 51% of the shares ensures the majority of votes, which prevents a deadlock even in the event of a dispute between the shareholders. It is even possible for both shareholders to be equal in terms of assets, while one shareholder still holds a majority of the voting rights (so-called disproportional share holding / disquotale Beteiligungsverteilung).

• A similar outcome can be achieved through voting agreements or pooling agreements. In this case, the shareholders may grant one of the shareholders preferential voting rights for certain resolutions. Additionally, an agreement may allow for the transfer of voting rights to an advisory board in case of disagreement. Finally, the shareholders may include a chairman with a casting vote in the shareholder meeting and set anti-blockade procedures in the articles of association.

• In practice, exit provisions can prevent deadlocks. Such provisions may allow for the exit of a shareholder in case of insurmountable differences (for example, the sale of shares to the co-shareholder or to third parties can be triggered). However, contractual exit mechanisms should be used with caution as they may violate the prohibition against forced exit under german higher court rulings.

By implementing such contractual mechanisms, shareholders can proactively manage conflicts and ensure the GmbH’s ability to act even in contentious situations. Careful contract design and open communication between the shareholders are essential.

Q&A - Deadlock between 50-50 GmbH Shareholders in Germany

With one click, you can find the answers to the most important questions about deadlock situations between shareholders in a German GmbH.