While a shareholders’ resolution is still required, the FCJ left open the question of whether notarization of the resolution is necessary.

The German Federal Court of Justice (FCJ) decided on 8 January 2019 that Section 179a (1) of the German Stock Corporation Act (AktG) does not apply mutatis mutandis to a German GmbH (II ZR 364/18). The decision contradicts the prevailing view in legal literature so far, pursuant to which a notarized shareholders’ resolution approving the sale and transfer of all or substantially all assets of a GmbH was required.

Background

Section 179a (1) AktG provides that an agreement, pursuant to which a German stock corporation undertakes to transfer all of its assets requires an approving shareholders’ resolution. If a respective agreement is executed without such resolution, it remains provisionally invalid until it is approved by way of a shareholders’ resolution in accordance with Section 179a (1) AktG. If the shareholders refuse to approve such agreement, it becomes permanently void.

The prevailing view in legal literature so far had derived from Section 179a (1) AktG a universal and generally applicable principle of the law of association and required a notarized shareholders’ resolution not only for the sale of all assets of a stock corporation but also of a GmbH.

Such view was initially confirmed by FCJ case law. In 1995, the FCJ decided that Section 179a (1) AktG (at that time Section 361 (1) AktG) was applicable to all kinds of partnerships, in particular limited partnerships (KGs). Hence, it was considered a logical consequence that Section 179a (1) AktG had to be applied mutatis mutandis to GmbHs. The FCJ has now rejected such consequence in its recent decision.

The Case

In the case underlying the FCJ’s decision, the only two shareholders of a GmbH in liquidation decided to sell the GmbH’s business premises. The company did not own any other notable assets. One of the shareholders was interested to buy the asset. Nevertheless, the other shareholder sold the business premises to a third party, the defendant, and had a priority notice entered in the land register in favor of the defendant. Thereupon, the GmbH sued the purchaser and defendant for cancellation of the priority notice on the grounds that the purchase agreement was invalid due to the lack of a shareholder resolution in accordance with Section 179a (1) AktG.

The FCJ’s Ruling

The FCJ concluded that the purchase agreement was not invalid, since Section 179a (1) AktG was not applicable to GmbHs. According to the FCJ, there was neither an unintentional loophole nor a similar legal interest that would require an application of Section 179a (1) AktG to GmbHs. The court based its decision on the following aspects:

  • A fundamental principle of German commercial law is the “unlimited power of representation” of managing directors vis-à-vis third parties, which is laid down in Section 37 (2) of the German Limited Liability Company Code (GmbHG) for GmbHs. Section 179a (1) AktG limits that principle and therefore cannot be applied globally.
  • The shareholders of a GmbH are less in need of protection than the shareholders of a stock corporation, as they have significantly more extensive participation, control, and information rights.
  • The shareholders of a GmbH can be protected by applying the existing principles regarding the abuse of powers of representation: The transfer of all or substantially all assets of a company constitutes a particularly material transaction, the conclusion of which requires a managing director of a GmbH to obtain shareholder approval for such transfer, even if the articles of association do not explicitly set forth such requirement. While the obligation to obtain shareholders’ consent limits the managing director’s powers in the internal relationship with the shareholders, the lack of a respective approval has no direct effect on the validity of the purchase agreement due to the abovementioned principle of unlimited power of representation of the managing director vis-à-vis third parties. However, the lack of a shareholders’ resolution has an impact vis-à-vis third parties and leads to the invalidity of the purchase agreement if the contracting partner’s trust in the validity of the transaction is not worthy of protection. This is the case if the contracting partner knew or should have known that the managing director abused his power of representation. The FCJ highlighted that the contracting partner may not simply argue that he was unaware of the lack of required shareholder approval. In case of circumstances indicating an abuse of the power of representation by the managing director, the contracting partner has the duty to conduct further enquiries.

Practical Consequences

If all or substantially all assets of a GmbH are sold and transferred, a shareholders’ resolution will in most cases continue to be required, as this should generally qualify as a particularly material transaction. However, the lack of an approving shareholders’ resolution does not necessarily render a transaction invalid pursuant to the new case law. Only if the preconditions for an abuse of the power of representation are met, the respective purchase agreement is void. Thus, if a purchaser has any indication that the object of a transaction constitutes all or substantially all assets of a GmbH (e.g., in case of an acquisition from an SPV), it should be confirmed that the shareholders of the seller have approved the deal.

In its ruling, the FCJ did not answer the question of whether a shareholders’ resolution regarding the sale of all or substantially all assets of a GmbH requires notarization. While ratio decidendi suggests that the FCJ does not assume a notarization requirement, legal uncertainty remains in the absence of a clear statement.

Further, the FCJ judgment makes no explicit statement on the applicability of Section 179a (1) AktG to limited partnerships. Even if parts of the judgment could be applied to limited partnerships, the judgment also contains indications that the FCJ could uphold its previous ruling and continue to require a respective shareholders’ resolution. For precautionary purposes, managing directors should maintain the present practice and seek an approving shareholders’ resolution for the sale of all or substantially all assets of a limited partnership.