The rights and equitable treatment of shareholders and employees

Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Under German law, one must differentiate between the two most popular legal company forms: the stock corporation (AG) and the company with limited liability (GmbH).

The members of an AG’s supervisory board (ie, non-executive directors) are elected by the shareholders during a general meeting. The members of the management board (executive directors) are appointed by the supervisory board – not by shareholders. This basic structure cannot be altered. Unless the articles of association provide otherwise, members of the supervisory board are elected by a simple majority of votes and can be removed with a 75 per cent majority. Unless the AG has entered into a control agreement with its parent company, the supervisory board and the management board act independently and cannot be required by the shareholders to pursue a particular course of action.

Unless its articles of association stipulate otherwise, a GmbH only has managing directors and no supervisory board. The managing directors can be appointed and removed by shareholders with a simple majority vote. The shareholders’ meeting can instruct the managing directors to pursue a particular course of action.

The legal forms of a European stock corporation (SE) and a partnership limited by shares (KGaA) are, to a large extent, comparable to an AG.

Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The following selected decisions are reserved by law for the shareholders of an AG:

  • election and removal of the supervisory board members;
  • appointment of an auditor;
  • appropriation of profits;
  • formal approval of action for members of both the management board and the supervisory board;
  • in listed companies, approval of the remuneration policy and the annual remuneration report; and
  • fundamental decisions, in particular:
    • amendments to the articles of association;
    • liquidation of the corporation;
    • mergers and demergers;
    • changes of legal form;
    • sale of substantially all the corporation’s assets; and
    • conclusion of corporate agreements (eg, control agreements, and profit and loss transfer agreements).

 

The following decisions are reserved by law for the shareholders of a GmbH:

  • election and removal of the managing directors and conclusion of their service agreements;
  • approval of annual accounts;
  • appointment of an auditor;
  • appropriation of profits;
  • formal approval of action for managing directors;
  • fundamental decisions; in particular, amendments to the articles of association, liquidation of the corporation, mergers, demergers, changes of legal form, sale of substantially all of the corporation’s assets and conclusion of corporate agreements (control agreements, profit and loss transfer agreements); and
  • instructions to the managing directors.

 

Matters that are subject to a non-binding shareholder vote are uncommon in German law, except for resolutions on the remuneration policy.

Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

In an AG, one share cannot carry more than one vote (in the case of shares without nominal value) or one vote per euro of nominal value (in the case of shares with a nominal value). The articles of association of a non-listed AG can provide for limits on exercising voting rights.

In a GmbH, disproportionate voting rights or limits on exercising voting rights are allowed.

Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

In an AG, an SE and a KGaA, shareholders cannot act by way of written consent without a meeting. Meetings of shareholders in which attendees are present physically and by using electronic means are permitted if provided for in the company’s articles of association and subject to the covid-19 law. The articles of association can provide for a requirement to register within a time frame of at least six days prior to the general meeting. In the case of listed companies, this registration must be made by way of a specific depositary statement referring to the shareholding on the 21st day prior to the general meeting.

In a GmbH, all shareholders and, subject to the covid-19 law, the majority of shareholders can act by way of written consent without a meeting. Virtual meetings of shareholders are permitted.

Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

In an AG, an SE and a KGaA:

  • shareholders holding at least 5 per cent of the registered share capital can require meetings of shareholders to be convened; and
  • shareholders holding at least 5 per cent of the registered share capital or shares with a nominal value of at least € 500,000 can require resolutions to be put to a shareholder vote against the wishes of the management board or the supervisory board, if this request is received by the company 24 days prior to the general meeting or, in the case of a listed company, 30 days prior to the meeting.

 

Shareholders’ requests to add items to a general meeting’s agenda must be published, typically together with a statement from the management and supervisory board.

Counterproposals made by shareholders to resolution proposals made by the management and supervisory boards must be submitted to the shareholders, potentially together with a statement of the management and supervisory board. In the case of listed companies, counterproposals and the company’s statements regarding them must be published on the company’s website.

In a GmbH, shareholders holding at least 10 per cent of the registered share capital can require shareholders’ meetings to be convened or resolutions to be put to a shareholder vote against the wishes of the company’s managing directors.

Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

All shareholders have a fiduciary duty towards the company and other shareholders. The fiduciary duty of controlling shareholders is more intense than that of non-controlling shareholders.

In an AG with a controlling shareholder, the controlling shareholder and its boards are subject to certain additional statutory duties. Enforcement actions can be brought against controlling shareholders and, under certain circumstances, their representatives for breach of these duties.

Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Based on corporate law, shareholders can only be held responsible for acts by or omissions of the company under exceptional circumstances. This may happen where the company acts through its shareholders. For example, if the GmbH has no managing directors, the shareholders are obliged to file for insolvency if the company is insolvent. Failure to do so will result in liability of the shareholders.

There are certain other areas of law that provide for the responsibility of shareholders for acts or omissions of their company, including antitrust law, data protection law and criminal law.