Shareholder Lawsuit, Action to Contest Resolutions of the Annual Shareholders' Meeting
Who can delay or prevent Resolutions in the AG by Contestation in Germany?
The German Stock Corporation Act (AktG) makes the shareholders - despite their position as owners - appear to a large extent to be tame paper tigers: The management board can act without instructions from shareholders. In german practice, the supervisory board, which has been designated as the guardian of shareholders' interests, usually appears to be a mere water passer for the management board. And shareholders have only a handful of more or less limited rights. One important, if not the most important, right is the right of contestation.
The right of contestation allows individual shareholders in Germany to submit resolutions of the annual shareholders' meeting to judicial review against the will of major shareholders/majority shareholders and against the will of the management board and supervisory board. This can delay or even prevent the implementation of a resolution passed by the annual general meeting.
The following section provides practical information on when and under what circumstances a shareholder can file a corresponding action in german court and what the management board should bear in mind when adopting resolutions at the annual general meeting.
Our Legal Expertise in Shareholder Actions, Actions for Contestation, Actions for Deficiencies in Resolutions
Our highly qualified and specialized team of lawyers and certified specialists for german corporate law at our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne will advise you on all matters relating to the annual general meeting.
Members of our team are also academically involved in stock corporation law, so we have special know-how in this area. Your first contact persons are:
- Dr. Ronny Jänig, LL.M. (Durham), Attorney at law, Certified specialist for corporate aw
- Finn Dethleff, Attorney at law
- Dr. Boris Schiemzik, Attorney at law, Certified specialist for corporate law
- Dr. Nicolas Eberle, Attorney at law
- Dr. Jens Nyenhuis, LL.M. (Cape Town) Attorney at law, Certified specialist for corporate law
For a non-binding inquiry, please contact one of our experts directly by phone or e-mail or use the contact form at the bottom of this page.
Our Advice for Shareholders, Management and Supervisory Boards in Germany
Our highly qualified and specialized team of lawyers and specialists in german corporate law will advise you on all matters relating to shareholder actions, quickly and competently.
- Preparation, advice and support of shareholders in the run-up to general meetings, including drafting of relevant counter-motions and questionnaires for the general meeting
- Accompanying, advising and supporting the management board / supervisory board in the preparation of shareholders' meetings, in particular on lawsuit avoidance strategies
- Assistance, advice and support in avoiding the consequences of possible invalid resolutions
- Legal assertion of grounds for nullity and contestation against resolutions of the annual shareholders' meeting
- Measures of interim legal protection (preliminary injunction) with regard to preventing the implementation of resolutions of the shareholders' meeting
- Measures of interim legal protection against actions for defects in resolutions (release proceedings)
Click here for an overview of all services and topics relating to the german AG: German Stock Corporation Law
Who can file a Lawsuit (Legal Standing) in Germany?
In principle, every shareholder in Germany who appears at the annual shareholders' meeting is entitled to contest the resolutions adopted by the annual shareholders' meeting if he or she had already acquired the shares before the agenda was published and has declared an objection to the resolution in the minutes.
The list of attendees, which is to be prepared by the chairman of the meeting for each annual shareholders' meeting, is the first decisive factor in determining who is present at the annual shareholders' meeting. Personal attendance is not required. The shareholder who is represented (by a proxy) or the shareholder who participates in the annual shareholders' meeting by means of electronic communication is also entitled to file a lawsuit in Germany.
According to prevailing opinion, on the other hand, "postal voters" should not be entitled to bring an action against resolutions of the annual shareholders' meeting.
Under the German Stock Corporation Act, the challenging shareholder must also have acquired his shares before the agenda was published. This is primarily intended to prevent abusive lawsuits. In german practice, the shareholder wishing to contest the agenda must therefore usually have acquired his shares no later than on the day preceding the announcement of the agenda and be able to prove this accordingly. However, in the case of listed stock corporations, this requirement (prior ownership requirement) is of little significance, as significant resolution items are usually made known to the public in advance of the announcement of the agenda as part of the ad hoc publicity obligations (WpHG).
In addition - according to the german courts - the contesting shareholder must remain a shareholder during the period of the legal action. Holding a single share is sufficient in this respect.
A further prerequisite for the right of challenge is that the shareholder concerned or his representative must declare an objection to the minutes of the annual shareholders' meeting during the meeting. The objection does not need to be substantiated. The objection must merely state clearly (in layman's terms) that an "illegality, invalidity, ineffectiveness or violation of the Articles of Association or similar" is being objected to.
What are the reasons for taking legal action?
When taking legal action against resolutions of the annual general meeting in Germany, a distinction must be made between grounds for invalidity and grounds for contestation.
Grounds for invalidity are - to put it simply - "particularly serious" defects in resolutions which, without further circumstances being present, lead to the invalidity of the relevant resolution by the annual general meeting and which may still be enforced in court months or even years after the annual general meeting.
By contrast, grounds for avoidance are "less serious" defects in resolutions which only lead to the invalidity of the relevant resolution by the annual shareholders' meeting if further circumstances arise and which must be asserted in court within one month.
Grounds for Invalidity
The grounds for invalidity ("particularly serious defects") are listed conclusively in the AktG. The most essential of these in Germany are as follows:
- Errors in convening the annual general meeting
- Error in the certification of the annual general meeting
- Violation of the essence of the joint stock company, protection of creditors, public interest
- Immorality of the resolution of the annual general meeting
Grounds for Contestation, in particular Breach of Information Duties
The grounds which constitute "usual" grounds for contestation and are particularly relevant in german practice can be divided into 3 groups:
- Violations of the law or the articles of association
- Procedural errors in the passing of resolutions
- Deficiencies in the content of the resolution
With regard to violations of the german law or the articles of association, it should be noted that the term "law" encompasses all laws, legislative decrees and also general clauses. The latter also include the duty of loyalty under company law and the principle of equal treatment under german stock corporation law.
A contestation due to a procedural error can always be considered if statutory provisions or provisions of the articles of association relating to the passing of a resolution by the annual shareholders' meeting have been violated.
These include, in particular, errors in the preparation of the annual general meeting (e.g. incorrect meeting venue, announcement errors, lack of proposed resolutions), in the conduct of the annual general meeting (e.g. restrictions on the right to attend, expulsion from the meeting, (unequal) limitation of speaking time) and in the passing of resolutions (e.g. incorrect calculation of the necessary quorum, incorrect consideration of voting prohibitions).
The most important and in german practice most relevant procedural error is the violation of information duties on the part of the management board / supervisory board. According to the german law, a resolution of the annual general meeting can be challenged due to "incorrect, incomplete or refused provision of information" if "an objectively judging shareholder would have considered the provision of information as an essential prerequisite for the proper exercise of his participation and membership rights".
From the perspective of the management board/supervisory board in Germany, this means that it is imperative to obtain all relevant information in advance of the annual general meeting and to make it available to the shareholders in advance or during the annual general meeting.
From the shareholder's point of view, this means creating potential grounds for challenge by skilfully using the right to ask questions at the annual general meeting. Careful preparation of an annual general meeting is therefore essential for both sides.
The german courts consider that a contestation on the grounds of a procedural error can only be considered if the specific procedural error is relevant.
In german practice, substantive defects in resolutions of the annual general meeting mostly relate to the violation of the duty of loyalty under company law / stock corporation law and the principle of equal treatment under stock corporation law. The duty of loyalty obliges every shareholder to exercise his rights only with due regard for the interests of the other shareholders. In individual cases, this can lead to a voting obligation, i.e. a shareholder's duty to vote in a certain way. The principle of equal treatment under german stock corporation law obliges the management of the stock corporation (management board/supervisory board) to treat shareholders equally under the same conditions. This becomes particularly relevant in the case of the new phenomenon of shareholder activism, where the management board has disclosed information to financial investors in discussions (so-called one-on-one discussions) and withholds this information from the wider shareholder community.
Special Features - Election of Supervisory Board Members, Capital Increase, Approval of Annual Financial Statements
The german law provides special regulations for actions against the election of supervisory board members, the appropriation of net income, capital increases and the adoption of the annual financial statements (in the rare case of adoption by the shareholders' meeting).
In addition, the AktG specifies selected grounds or subjects of resolutions that preclude a challenge or are not amenable to a challenge. These include breaches of information duties under Art. 30a et seq. of the German Securities Trading Act (WpHG), votes on management board compensation ("say on pay") and the priority of the appraisal proceedings in the case of so-called valuation complaints (SpruchG).
When can an action be brought in Germany (time limits for bringing an action)?
An action to contest a resolution of the annual shareholders' meeting must be brought within one month of the resolution being passed. Failure to meet this deadline always renders the action unfounded. In contrast to shareholder resolutions of a limited liability company (GmbH), it is generally accepted that neither the defendant company nor the parties collectively nor the court can disregard the time limit for bringing an action to challenge resolutions of the annual general meeting.
The german law does not provide for a general time limit for actions based on "particularly serious" defects in resolutions. However, in the case of actions already brought by other shareholders, the law restricts the scope for action by other shareholders.
Actions against the validity of a merger resolution, a cross-border merger resolution, a spin-off resolution and a resolution on a change of legal form must be brought within one month after the passing of the resolution. This applies both to "particularly serious" defects in resolutions (grounds for nullity) and to "less serious" defects in resolutions (grounds for contestation)
Where can Legal Action be taken in Germany?
In principle, actions against resolutions of the annual shareholders' meeting must be brought before the german regional court where the company's registered office is located. The registered office is determined by the registered office of the german stock corporation. What are the consequences of a declaration of nullity/invalidity?
The concrete consequences of a finding of nullity must be determined on the basis of the specific subject matter of the resolution. For example, void supervisory board elections are void from the outset, so that the supervisory board member in question was never a member and any votes cast are void. If the (null and void) vote was relevant to a majority in resolutions of the supervisory board, the corresponding supervisory board resolution is also invalid. Capital increases must be reversed. Conversions (e.g. mergers, demergers, changes of legal form), on the other hand, are protected after entry in the german commercial register.
Preventing the Consequences of ineffective Resolutions (Confirmation Resolution)
To prevent the adverse consequences of any ineffective resolutions, it may be advisable for the management board / supervisory board and interested shareholders in Germany to pass a confirmation resolution. If the annual general meeting adopts a resolution confirming a previous resolution, the invalidity of the first resolution can then no longer be invoked.
The prerequisite is, of course, that the second resolution itself is valid and effective. If the first resolution violates the german law or the articles of association or has/had content-related defects, these cannot be remedied by the confirmation resolution (as this second resolution suffers from the same defects). In german practice, a resolution of confirmation is therefore mainly considered in the event of procedural errors.
Release Procedure, Register Suspension - Squeeze Out & Co. in Germany
The filing of a lawsuit against resolutions of the annual shareholders' meeting, which are to be entered in the german commercial register, leads to the german registration court suspending the registration procedure. This in turn means that the resolutions in question do not become effective due to the lack of entry in the commercial register. The resolutions and their implementation are therefore blocked. This is referred to as a register block.
This blocking of the register can be removed - above all from the point of view of the company - with the help of the so-called release procedure. As a special fast-track procedure in Germany, the release procedure allows a rapid (provisional) decision to be made on the progress of the register procedure and thus on the (provisional) validity of the relevant resolution by the annual shareholders' meeting.
The release procedure can only be used with regard to the following (contested) resolutions of the annual shareholders' meeting, i.e. only in these cases a lifting of the register block can be considered:
- Capital measures such as capital increase, capital reduction
- Inter-company agreements such as domination agreements, profit transfer agreements - incorporations
- Exclusion of minority shareholders (squeeze-out)
The prerequisite for the removal of the register block is that the action for contestation has no prospect of success, i.e. is "inadmissible or manifestly unfounded"; the contesting shareholder has held a pro rata amount of at least 1,000 EUR since the announcement of the convening of the annual shareholders' meeting (de minimis threshold) and the german stock corporation has an overriding interest in the implementation of the contested resolution of the annual shareholders' meeting (balancing of interests). In german practice, there is a tendency for the courts to value the interest of the stock corporation more highly than the interest of the contesting shareholder.
Parties to the release procedure are the corporation on the one hand and the shareholders who have challenged the resolution in question on the other. For the shareholders in Germany, the release procedure gives rise to additional cost risks, which are mitigated solely by the statutory limitation of the amount in dispute relevant for the calculation of costs.