Voting agreement, pooling agreement under german law

Special agreements between german shareholders

By means of voting agreements, shareholders undertake among themselves to exercise the voting rights to which they are entitled from their shares in the company in a certain way. In german practice, the shareholders can "pool" their voting rights and in this way obtain blocking minorities or even a majority of voting rights.

Voting pooling agreements among shareholders are widespread in Germany. There are many reasons for binding votes. They can have the purpose of avoiding gift and inheritance taxes or securing the power positions of a shareholder group. In the GmbH, contractually secured voting obligations serve as fighting and defense instruments against hostile shareholders and shareholder tribes in the context of a shareholder dispute. However, voting commitment agreements also play an important role in management participation or employee participation programs and trust agreements.

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Our expertise in voting trust agreements and pooling agreements in Germany

Our attorneys, certified specialists for german corporate law and tax advisors have many years of experience in dealing with shareholders' agreements in general and with voting trust and pooling agreements in particular. We regularly attend shareholders' meetings and general meetings and advise on pooling of company shareholdings motivated by german tax law:

  1. Advice on the introduction and redrafting of shareholders' agreements as well as voting trust and pooling agreements
  2. Examination of existing voting agreements and pooling agreements under german company law with regard to their effectiveness and scope for action
  3. Drafting and negotiation of shareholders' agreements, syndicate agreements and side letters
  4. Planning and design of employee participation programs in accordance with pooling agreements in which employee voting rights are pooled
  5. Out-of-court conflict management within the shareholder group
  6. Enforcement of shareholder rights in court (in particular preliminary injunctions) as well as defense against attacks before and in GmbH shareholders' meetings and AG shareholders' meetings. Voting agreements are found in german corporate law practice above all in participation agreements and shareholder agreements
  7. Advice on company successions with GmbH shareholdings of less than 25%

Why are voting agreements needed in german practice?

The shareholders who use the instrument of voting agreements are usually concerned with their influence on the existing power relations and the securing of concrete voting results. In the german medium-sized business sector, voting agreements are very often found in family-owned companies, which are intended to prevent a fragmentation of the corporate relationships. In shareholder agreements and investment contracts, financial investors in particular use voting pool agreements to secure their influence vis-à-vis existing shareholders or management or to ensure the enforceability of certain targets.

Pool agreements are essentially a preventive mechanism against a possible loss of power of one or more pool members. Since the pool members are forced by the contractual provisions to first coordinate among themselves and reach agreement - if necessary by majority resolution - the aim is often also to avoid an escalation of disputes within the pool and vis-à-vis the other GmbH shareholders. In the best case, possible conflicts within a pool do not leak out due to the pool agreement. Ideally, a united group of shareholders is formed which speaks with one voice to the outside world.

Voting commitments in the appointment of board members (managing directors, advisory board and supervisory board members), on the other hand, often have a minority-protecting character if a shareholder group can appoint a representative to the advisory board or the management board.

From a tax perspective under german law, voting agreements contained in pooling agreements can be used to achieve preferential treatment in the transfer of company shares, which is generally reserved for testators or donors who hold more than 25% of the nominal capital of the company (Sec. 13b (1) No. 3 Sentence 2 ErbStG). In the case of critical participation levels, consistent monitoring is required here in order to avoid a tax-damaging drop below this threshold (e.g. as a result of capital increases).

Legal limits of voting trust agreements in Germany

Although the permissibility of voting agreements is generally recognized by  german case law, certain legal limits must be observed in voting agreements.

  • Voting agreements must comply with the so-called prohibition of spin-offs, which was developed by the highest court. According to this, a company shareholding may not in principle be separated from its accessory voting right.
  • Also invalid are violations of the ban on cartels and common decency ( Sec. 138 German Civil Code (Bürgerliches Gesetzbuch - BGB)). A violation of morality is said to exist, for example, in the case of a voting commitment based on a vote purchase.
  • Finally, voting trust agreements in Germany may violate the duty of loyalty under the articles of association. Such a breach of fiduciary duty may occur, for example, if the binding is designed to damage the company in competition.

Character and form of voting trust agreements and pool companies under german law

In  german practice, voting commitments can be regulated in the articles of association. Since these regulations are published in the german commercial register in the case of corporations, most voting agreements in the case of GmbHs and AGs very rarely find their way into articles of association and partnership agreements.

In german practice, vote binding is regulated both as a main contractual obligation in a specially drafted agreement, the vote binding agreement, or as a secondary contractual obligation in a shareholders' agreement or a trust agreement. Outside the partnership agreement, an agreement in the case of a voting obligation is a contract under the german law of obligations which is not subject per se to any notarization requirement.

In the case of partnerships (GmbH & Co. KG, OHG, GbR), however, voting trust agreements are regularly anchored in the partnership agreement because the partnership agreements of partnerships are not published in the german trade register.

The voting pool agreement can be structured as a simple relationship under the german law of obligations or as a GbR internal company. The members of the pool each remain shareholders of the corporation with all associated rights and obligations. The pool agreement solely regulates the relationship between them (so-called internal GbR). GbR structures are often found in german employee pool companies. If the shares are contributed to the employee pool company and the latter thus has its own company assets, it may even be a complete GbR external company.

Regulatory content of the voting agreement in Germany

The central object of regulation is the voting agreement. As a rule, this contains the following elements:

  1. Obligation to vote uniformly
  2. Procedural regulations
  3. Power of attorney to exercise
  4. Contractual penalties
  5. Termination provisions
  6. Succession clauses
  7. Arbitration clauses

In detail: Pool members undertake in the agreement to vote uniformly on all (or certain) resolutions at GmbH level. Procedural provisions (form, deadline, etc.) in the pool agreement ensure that a resolution is passed by the pool members on voting behavior in advance of the "actual" shareholders' meeting of the german GmbH.

Frequently, the pool members authorize a spokesperson (e.g. the pool member with the strongest vote) to implement the pool resolutions in the shareholders' meeting of the investee by exercising the voting rights of all pool members. It should be noted that such a power of attorney cannot prevent the exercise of the voting right of a pool member in the shareholders' meeting/general meeting - in violation of the pool agreement. In particular, it is also inadmissible in Germany to grant irrevocable power of attorney. However, the shareholder bound by the pool regulations may be liable for damages if he votes on his own authority.

Voting pools usually also contain termination provisions, since a general exclusion of the right to ordinary termination is inadmissible. In german practice, minimum terms of between 15 and 30 years are discussed. The rights and obligations arising from a pool agreement are not linked to membership in the GmbH, but directly to the person of the pool member. They therefore do not automatically pass to a legal successor together with the membership in the german GmbH. In order to ensure that the pool is not dissolved by the death of one of its members, but that the heirs take its place, a so-called continuation and succession clause is required (also) in the pool agreement.

Finally, the contracts often contain arbitration clauses according to which disputes are to be settled before arbitration courts which do not meet in public.

Violations of voting agreements under german law: Consequences and legal protection

If a german shareholder has signed a voting agreement, he is obligated to cast his shareholder vote in accordance with the provisions of the voting agreement. If he or she breaches his or her contractual obligation, the employee in question is liable for damages on the merits. Since in german practice it is difficult to determine a specific amount of damage in the event of an improperly cast vote, voting agreements contain provisions on lump-sum contractual penalties. These can be enforced in court irrespective of any concrete proof of damage.

If a vote is cast in violation of the agreement, the following should be noted: In principle, the vote and the entire resolution adopted are valid. According to the case law of the German Federal Court of Justice (BGH), it is also generally not possible to challenge the resolution that violates the voting agreement. According to the BGH, in german practice, such a challenge can only be considered if all shareholders have submitted to a pooling of voting rights that amends the articles of association.

However, a shareholder who announces a vote in violation of the agreement can be forced by court order to vote in accordance with the agreement. Any member of a voting pooling agreement has the right to sue violators of the agreement to enjoin the vote in violation of the agreement or to comply with the vote in conformity with the agreement. Due to the long duration of court proceedings, interim legal protection is of great importance when a shareholder announces behavior contrary to the contract to third parties.

Caution - no complete security against a pool member pulling out in german practice

All ancillary agreements under german company law (side agreements, side letters, shareholders' agreements, pool agreements, etc.) have the deficit that they are generally not directly applicable at the GmbH level. A violation of the side agreement is therefore in principle not at the same time a violation of the partnership agreement in Germany. As a result, a shareholder can violate the pool agreement without fearing any sanctions under german company law.  

Voting in the shareholders' meeting in accordance with the pool agreement is enforceable and can be enforced. In german practice, however, an action will regularly not be able to achieve the desired objective quickly enough. Whether urgent legal protection by issuing an injunction is permissible is highly controversial. Over the years, some german higher courts have allowed interim legal protection before votes are cast. By no means can the possibility of interim legal protection for the enforcement of voting pools currently be regarded as unconditional. In any case, the hurdles for this are very high.   

Compliance with the pool agreement can therefore never be perfectly legally secured. The german practice remedies itself with the threat of high contractual penalties to sufficiently deter the pool members.

If you need advice from a lawyer to check the permissibility or possible scope of voting measures or to prevent voting in breach of contract in the run-up to meetings, please contact the corporate lawyers in our offices in Hamburg, Berlin, Munich, Frankfurt or Cologne. We represent and accompany our clients nationwide at GmbH shareholders' meetings and AG shareholders' meetings in Germany.

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