This content is from: Local Insights

Bypassing minority blocking

The completion of take-private transactions in Germany was traditionally lengthy and prone to attack from professional minority shareholders who took advantage of the rule that every shareholder of a German stock corporation can file an action to set aside a shareholder resolution for violation of the law or the articles of association

Dr Wolfgang GrobeckerDr Eva Nase
The completion of take-private transactions in Germany was traditionally lengthy and prone to attack from professional minority shareholders who took advantage of the rule that every shareholder of a German stock corporation can file an action to set aside a shareholder resolution for violation of the law or the articles of association. All take-private measures as well as other corporate transactions, which need to be registered with the commercial register in order to take effect (for example statutory mergers with and into a non-listed entity, domination and profit and loss transfer agreements or squeeze-out resolutions) could be blocked by the filing of a shareholder claim even if only initiated by one single minority shareholder. Although a special court procedure to overcome the blocking effect of shareholder suits (Freigabeverfah-ren) has been offered for some time by the German Stock Corporation Act, this release procedure was time consuming, going over two court instances and sometimes lasting more than 12 months.

By enactment of the Law regarding Implementation of the EU-Shareholders' Rights Directive (ARUG), the German legislator shortened and simplified the release procedure with positive practical effects.

Instead of two instances, the higher regional court is the first and final instance for the procedure. The company is successful in the procedure if it can either demonstrate that the shareholder claims are inadmissible or manifestly without merits or that the disadvantages to the company resulting from the blocking outweigh the disadvantages for the claimant if the measure is executed (the so-called balancing rule). According to the Act, when weighing the interests of the company against the interests of the claimants, the court should now in general only consider economic interests. This will typically result in the economic interests of the company prevailing over the economic interests of the minority shareholders who have filed the claim.

The Act introduces a minimum shareholding quorum. Shareholders holding less than €1,000 ($1,260) of nominal value, will no longer be able to block a resolution adopted by the shareholders meeting.

The Act also brings in various procedural alleviations to prevent a delay of the release proceeding. For instance, service of process in the release proceeding is simplified and corporations are given the right to inspect the files in court at an early stage.

Court practice positively assumed the statutory amendments. The release proceedings of various higher regional courts in Germany rendered since the enactment of the Act have been completed in a timeframe of two to five months. For planning purposes, a timeline of four to five months from the date of the shareholders' meeting should be sufficient to complete a release proceeding and to effect registration of the shareholder resolution and the taking-private transaction with the commercial register.

Wolfgang Grobecker and Eva Nase

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