Duties and Rights
Financial Duties
- duty to pay their contribution
- shares need to be payed to the company
- if not the shares are re-sold on the market
- AG no additional payments necessary
- except contracts between shareholders
Duty of Loyalty
- “do not compete with own company in its line of business”
- no exact definition → principles and guidelines
- interest of company not relevant in manager compensation
- dividends are okay
- not if liquidity is not sufficient
- standard → spirit, rule → wording
- standard → power with judges
Financial Rights
- shareholder wants profits
- voting rights just align with aim
- right to receive a dividend → only if distributable profits
- ratification (i.e. Is there distributable profits?) by AG → board of supervisors, GmbH → members
- profits distributed in accordance to financial investment
- receiving parts of Liquidation (Insolvency)
- new shares (shares split)
- current shareholders need to receive extra shares (to stay at same relative ownership)
- or current shareholders need to buy extra shares cheaper than rest to offset downsides
Voting Rights
- shareholders free to exercise their voting rights
- duty of loyalty
- equal treatment principle
Types of Shares
- one share on vote
- each share has equal voting rights
- double shares, double voting rights
- only default rule, almost mandatory rule in AG
- basis for hostile takeover
- one member one vote
- shareholder (person) has equal voting rights
- double shares, same voting rights
- mostly applied in GmbH
- preferential shares
- no voting rights
- just financial rights (but dividend priority)
- voting rights return after no dividends for 2 years
- voting caps
- generally: double shares, double voting rights
- a lot of shares → still capped voting rights
- 40% shares, but cap is at 10% voting rights (will receive 40% of profits)
- deter large investors and hostile takeovers impossible
Right to Information
- how vote without information?
- asymmetric information
- AG: in annual meeting information can be forced from managers
- otherwise not
- will likely comply anyway, their job is at stake
- information in GmbH widely available
- threat: competitor buys 1 share and gets access to all trade secrets
- limit here → often before court
Shareholder Resolution
public limited company
- AG
- general meeting within 8 months
- extraordinary meeting if urgent (capital, merger)
- 28 days before announcement in “Amtsblatt”
- slow, cumbersome
- strict Agenda
- notary presence
- shareholder → right to participate
- attendance low
- large stakeholders attend
- small stakeholder typically not → Rational Apathy
- if unhappy with company, most just sell → Wall Street Rule
- too expensive for institutional investors
- measures to increase attendance
- digital meetings → error prone, falsifying result
- proxy → vote cast by third party
- pressure → violation in duty of care
- proxy advisor → advise company which vote(s) to cast
private limited company
- GmbH
- more powers from voters
- less formalities than AG
- quorum of at least 10%
- written solutions permitable, but physical meeting may be requested
Minority Stakeholder Protection
- Majority and Minority Shareholders
- private benefits of control
- control premium
- change in statutes: unanimous → but can be only supermajority
- change in business line: unanimous
- blocking minority from 25% and up
- minorities may request higher supermajorities or stronger relative voting rights
- duty to justify → treating shareholders equally, otherwise justification
- duty to loyalty - also to other shareholders
- every shareholder may bring claim against decision and to court → risky
Minority Rights
- call in meeting or append points to agenda
- request a special investigator (with 10% shareholder support)
- investigator may see all books, can uncover violations
Board Representation
- may appoint independent (from majorities) members of board of supervision
- independent members recommended with free float
-
20% 1 member
-
50% 2 members
-
Tunneling
- Tunneling bad for minorities
- form of hidden distribution
- “related party transactions” in general meeting
- shareholder in benefit may not vote
- determination if at arms length
Transfer of Membership
- cannot sell shares back to company
- shares sold on market to exit company
public limited company
private limited company
Involuntary Transfers
- shareholders forced to transfer shares
- Squeeze-Out
- compensation based on Company Value
- hard to pinpoint value
- if no agreement can be found → court, expensive and prolonged
- otherwise no other measure of forcing shareholder to transfer shares
- exception GmbH: competition with company