Removing a Shareholder of a Limited Company in Germany

Removing a shareholder from a limited company against their will in Germany can be a complex process and typically requires certain legal grounds for the removal. A shareholder can be removed from a German company using an exclusion, and it requires two steps to take place. Firstly, the other shareholders need to decide to carry out the exclusion. Secondly, the company needs to bring an exclusion action against that shareholder.

Just as in other methods of removing a shareholder, there must be an important reason for the company to take this step. Essentially, the other shareholders will need to demonstrate that it is unreasonable for the other shareholders to have that shareholder remain. Important reasons vary from case to case, but in this method, it needs to be clearly demonstrated. Important reasons include stealing from the company, breaching rules relating to non-competitive clauses or where the shareholder has breached the company’s regulations, such as in the articles of association.

Companies are strongly advised to consult with their current articles of association to ensure that they have mechanisms within them to bring about such an eventuality. The process regarding the conditions for exclusion, the procedure and how it should be regulated should be listed within them. Companies can find it difficult to exclude a shareholder without proactively providing a way to do this. Similarly, shareholders should closely examine their company’s articles of association to ensure the action was carried out appropriately. If the company has breached its own rules in excluding a shareholder, they need to consider legal counsel on the matter.

It is important to note that removing a shareholder against their will is a serious matter and should only be done when there are legitimate legal grounds for the removal. It is recommended to seek the advice of a corporate lawyer to ensure that the process is conducted correctly and per the relevant laws and regulations.

The process for removing a shareholder from a limited company in Germany can vary depending on the specific circumstances of the situation. However, generally, it involves first reviewing the company’s shareholder agreement. This agreement should outline the exact terms and conditions for removing a shareholder. Amongst these provisions should be the permitted grounds for removal. Such reasons can include breaching the shareholder agreement, violating statutory requirements, or an incapacity to fulfil their obligations to the company. It is essential to identify the reason for removal before taking action.

Once the company has determined the grounds for removal and has the other shareholders’ consent, it can focus on drafting the resolution. The board of directors or other shareholders must then approve this resolution. This document must be expertly prepared and thoroughly crafted. Once it has been drafted, the shareholder being removed must be given notice of the resolution in writing, along with the reasons for their removal and the effective date of the removal.

Should the shareholder removal be carried out through a shareholder meeting, the meeting must be called and held per the company’s articles of association. If the board of directors is carrying out the removal, a board meeting should be held. Once the shareholder has been removed, the company must take any necessary steps to update its records and ensure that the removed shareholder’s rights and obligations are appropriately transferred to any remaining shareholders.

There are many benefits involved with working with our corporate law team in matters of shareholder removal in Germany. Firstly, our lawyers will provide the necessary advice regarding the legal requirements and procedures involved in the process and ensure that the company acts per the relevant laws and regulations. This action may include assessing the shareholder agreement to identify provisions regarding shareholder removal.

Our team can then advise the company about their removal plan. Our lawyers will analyse the reasons for removal and assess whether they are sufficient for the company’s purposes. We will ensure that your company is fully aware of the rights and obligations of both parties in such matters. Furthermore, our lawyers will provide legal alternatives should shareholder removal be deemed unsuitable to the current situation. Our lawyers will represent you in negotiations with the other party if a conflict arises. Our team provides expert support in conflict resolution mechanisms, including out-of-court settlements, arbitration and litigation.

Our aim is to provide expert guidance and support throughout the entire process. We aim to protect our client’s interests and ensure that they act in a legally compliant manner.

The shareholder can also decide to resign or terminate their position. The importance of the company’s articles of association plays a significant role in accomplishing this.

Should the articles of association not provide any limitations regarding termination, the shareholder can resign without notice. However, with careful drafting, the articles of association can provide companies with a notice period whereby the shareholder has to warn them in advance of their plans. The articles of association can also outline provisions relating to how such a decision will impact severance payments.

Extraordinary termination (termination without notice) is possible under German law should an important reason exist. Such “important reasons” can be outlined in the articles of association but generally are seen as conditions that make it unreasonable for the shareholder to continue in their position.

Such justification varies from case to case, as it is examined whether the reasons for the termination are so serious that they outweigh the company’s interests and are therefore worthy of preference.

Those considering this action should strongly contemplate consulting with a lawyer beforehand.

Following the extraordinary termination of the shareholder, that shareholder can receive compensation for their shares, and this is generally based on their market value. Depending on the circumstances, the shareholder may also be entitled to a severance payment.

Our lawyers have supported both shareholders and companies in such shareholder disputes and can examine your case closely to determine how best to achieve a resolution. If you require our support, please do not hesitate to contact us directly.

The compulsory redemption of shares held by a shareholder can be utilised in situations where the company’s articles of association allow it. Such a step generally leads to the company acquiring those shares from the shareholder. The articles of association must clearly define the conditions under which the company can consider such a step, and the shareholder must be in breach of those conditions.

The shareholder agreement can also include a buyout provision whereby the remaining shareholders may have the option to buy out the shares of the removed shareholder at a predetermined price.

The other shareholders can bring this action at the shareholders’ meeting, but they must plan it carefully. It is not uncommon for that shareholder to consider legal action if they believe the others are acting outside what the articles of association permit. Determining that the exact conditions have occurred can also be a challenge.

Should that shareholder remain part of the company is another essential question that needs to be answered in advance. Is the company redeeming all their shares or only some of the shares? Other questions relating to that shareholder’s position in the company, relating to compensation for the redemption and their ability to participate in decision-making, also need to be considered in advance.

If there are no provisions in the articles of association or shareholder agreement that require the removed shareholder to sell their shares, the shareholder may choose to retain ownership of their shares. However, in practice, if the relationship between the shareholder and the company has become contentious, the shareholder may choose to sell their shares in order to sever ties with the company.

The compulsory transfer of shares follows a similar path, as this action is generally decided at a shareholders’ meeting. Once again, this step must be provided under the company’s articles of association.

A compulsory transfer of shares is usually introduced to protect the company’s interests. This clause is generally introduced for cases such as the death of a shareholder, changes of control within the company, the retirement of the shareholder or cases of mental or physical incapacity of the shareholder.

At Schlun & Elseven Rechtsanwälte, our corporate lawyers are available to shareholders and companies in such disputes. We regularly advise businesses relating to their articles of association and are available to draft such provisions to ensure that companies have the right tools in such disputes.

For shareholders caught in such disputes, our team can advise them regarding legal actions available to take both in and out of court.

Following the removal of the shareholder from the limited company in Germany, the fate of their shares depends on the specific circumstances of the removal and the provisions of the company’s articles of association or shareholder agreement. Here are some of the possibilities:

• Buyback by the company: If the articles of association or shareholder agreement allow for it, the company may buy back the shares of the removed shareholder. The company can do this at a price determined by the company or based on an agreed-upon formula.
• Buyout by the remaining shareholders: If the articles of association or shareholder agreement include a buyout provision, the remaining shareholders may have the option to buy out the shares of the removed shareholder at a predetermined price.
• Transfer to a third party: If the removed shareholder chooses to sell their shares, they may be able to find a buyer for them on the open market or negotiate a private sale with a third party.

Additionally, the German Stock Corporation Act (AktG) includes provisions regarding the rights of shareholders and the transfer of shares, which should be considered.

Shareholders under German law have certain rights linked to the company type with which they are involved. They are also based on the number of shares and types of shares held by that shareholder.

Shareholders of stock corporations have statutory rights protecting them, whereas generally, the rights of those in GmbHs are provided within the articles of association. German stock corporation law provides rights relating to receiving information from those in charge of the stock corporation, the annual general meeting, the enforcement of claims against the management board and supervisory board and the right to a special audit.

Generally, across all forms of limited liability companies, shareholders have the following rights:

• voting rights in shareholder meetings,
• the right to alter the articles of association,
• the ability to call annual general meetings and other special meetings,
• the right to raise or reduce the company’s capital,
• receive payment during liquidation,
• participate in profits,
• pass ordinary or special resolutions for the company.

Shareholders’ rights can also vary depending on what is stated within the company’s articles of association. However, the articles of association cannot limit or completely ignore specific core shareholders’ rights.