Redemption of Shares (German GmbH)
Exclusion of Shareholders, Defense & Compensation
In Germany, disputes between shareholders of a GmbH (German limited liability company) often lead to resolutions of redemption of shares (Einziehung von Geschäftsanteilen). Sometimes “redemption” is also referred to as withdrawal of shares. Through the redemption of shares, a shareholder is excluded from GmbH as they lose their shareholder status. The redemption of shares is generally resolved in the shareholders' meeting. If the redemption resolution is validly passed, the affected shareholder is entitled to compensation from the company. However, in the event of disputes, the compensation must be claimed in court.
Legal Expertise in Shareholder Disputes
The specialist lawyers for corporate law and tax advisors at ROSE & PARTNER have many years of experience in numerous international shareholder disputes and disputes between companies and members of management. We provide support throughout Germany in contentious shareholders' meetings and advise on legal and tax issues relating to severance payments. Our advice covers the following key areas:
- Strategic advice and planning share redemptions. We represent you throughout the entire legal proceedings and in arbitration proceedings.
- Support for shareholders' meetings
- Expert opinions on planned redemption of shares
- Legal representation of companies and shareholders in connection with withdrawal, vesting and leaver clauses, as well as conducting arbitration proceedings.
- Tax advice in connection with severance payments to shareholders and the redemption of shares.
Legal Requirements for Share Redemption Resolutions
Under the statutory provision in Section 34 (1) of the GmbHG (German Limited Liability Companies Act), an attack in the form of redemption of company shares can only take place if it is permitted in the company's articles of association. If the possibility of redemption shares is not provided for in the articles of association of a GmbH, a shareholder can only be excluded from the company through legal court action – in this case, an exclusion lawsuit must be filed. Since such a lawsuit is usually associated with significant time and financial costs, the possibility share redemption should already be included in the company's articles of association when establishing a company in Germany.
Share Redemption: How does it work?
In German corporate law, under the provision in Section 46 No. 4 of the GmbHG, the shareholders' meeting decides on the redemption of a GmbH shareholder’s shares. Unless otherwise stipulated in the articles of association, the decision on the share redemption is generally made by a majority of the votes cast. However, to protect minority shareholders, the articles of association may also stipulate a higher quorum for redemption resolutions.
Deviating from the provision in Section 46 No. 4 of the GmbHG, the authority to decide on the redemption of shares may, through a statutory deviation in the company's articles of association, be transferred to other corporate bodies, such as the supervisory board, advisory board, or even the managing Directors. If such an alternative competence structure exists for redemption matters, the decision must be made by the designated corporate body. Otherwise, the redemption resolution may be subject to legal challenge in Germany.
Any redemtion of shares may only take place for good cause (wichtiger Grund). If the mandatory share redemption is carried out for good cause, it is recognized that the affected shareholder is excluded from voting, as they would otherwise be acting as a "judge in their own case."
When is the Redemption Effective in a German GmbH?
If a redemption resolution is successfully challenged due to defects in the resolution (Beschlussmängel) or if there is a complete lack of a redemption resolution, the share redemption is generally ineffective under German law. In such cases, the affected shareholder remains a shareholder in the company. The usual statutory provisions for challenging shareholder resolutions apply in this regard.
According to the ruling of the Federal Court of Justice (BGH), contrary to the previously prevailing view, the payment of compensation is not a prerequisite for the effectiveness of the redemption. The affected shareholder loses their shareholder status as a result of the redemption, regardless of whether the compensation has been paid.
The invalidity of the redemption resolution may arise if, at the time of the redemption, it is clear the compensation owed to the departing shareholder cannot be paid from the company’s free assets and such a payment would violate the principles of capital maintenance under German law.
As a general rule, the loss of shareholder status occurs as soon as the resolution on the redemption is passed and the decision is communicated to the affected shareholder. The managing director of the company must notify the affected shareholder of the redemption if they did not attend the shareholders' meeting in which the redemption was resolved.
Liability Risks for Remaining Shareholders
In contrast to the fact that the shareholder affected by the redemption resolution loses their shareholder status and exits the company, regardless of the payment of their compensation by the company, they may hold the shareholders who adopted the redemption resolution personally liable for the payment of their compensation if these shareholders prevent the compensation claim from being fulfilled. Therefore, when a redemption resolution is adopted, the remaining shareholders in the German GmbH should consider the liability risks they face under German law if the company might be unable to compensate the exiting shareholder.
No Notary Requirement
The redemption resolution does not generally need to be notarized. There is no requirement for a notary to be present at the shareholders' meeting where the redemption is decided. This allows for a high degree of flexibility, and no notary fees are incurred for the redemption. With the redemption, the affected shares are effectively destroyed.
Importance of the Shareholders' List in Redemption Disputes
The shareholders' list (Gesellschafterliste) plays in German Corporate law a crucial role when shareholders of a GmbH attempt to enforce mandatory share redemptions. Following a redemption resolution, the initiating shareholders often seek to modify the shareholders' list. If they succeed in removing the shareholder whose shares have been redeemed, the affected GmbH shareholder immediately loses their shareholder rights in relation to the GmbH (voting and dividend rights). In the context of redemption resolutions, disputes frequently arise over control of the shareholders' list (“Kampf um die Gesellschafterliste”).
Forced exclusions with significant financial consequences often lead to lawsuits against the GmbH in Germany. Such legal disputes can result in court proceedings that last for months or even years. Especially when the excluded shareholder is seeking a substantial compensation payment, litigation funding may also become a consideration.
If you have any questions regarding shareholder disputes, redemption resolutions, or litigation funding, feel free to contact us by phone or email, or use our contact form for a non-binding consultation.
Q&A – Share Redemption in a German GmbH
With just one click, you will find answers to the most important questions regarding share redemption in a German GmbH.
When can a shareholder be excluded from a German GmbH?
A shareholder can only be excluded through redemption of shares if the company’s articles of association explicitly allow it and there is a valid reason (good cause).
How does the redemption of GmbH shares works?
The redemption must be resolved in a shareholders' meeting, usually by a simple majority. Affected shareholder is not allowed to vote on their own exclusion to avoid a conflict of interest.
When does a share redemption become effective?
The redemption becomes effective once the resolution is passed and communicated to the affected shareholder. Payment of compensation is not a condition for effectiveness.
Is notarization required for the redemption?
The Redemption resolution itself generally does not require the involvement of a notary.
Does a planned redemption resolution need to be announced in advance?
The resolution for a redemption must be announced prior to the shareholders’ meeting; otherwise, the affected shareholder would not have the opportunity to prepare for any allegations (legal right to a fair hearing).
What risks do remaining shareholders face?
If the company fails to pay the compensation, the excluded shareholder may hold the remaining shareholders personally liable - especially if the German GmbH becomes insolvent. Redemption decisions therefore carry both legal and financial risks.