I. Principle of the immorality of shareholder exclusion clauses (Hinauskündigungsklauseln) and the exception recognized by the Federal Court of Justice for management models

Pursuant to the established case law of the Federal Court of Justice (Bundesgerichtshof, BGH), a provision in the articles of association that grants a shareholder, a group of shareholders or the majority of shareholders the right to exclude co-partners from a partnership or a limited liability company (Gesellschaft mit beschränkter Haftung, “GmbH”) without objective grounds (so-called shareholder exclusion clause (Hinauskündigungsklausel)) is in principle immoral pursuant to sec. 138 para. 1 German Civil Code (Bürgerliches Gesetzbuch, BGB) and therefore null and void. The same applies to contractual provisions supplementing the articles of association. The free possibility of exclusion could, like a “sword of Damocles”, prevent the shareholder concerned from exercising its membership rights and fulfilling his membership obligations.
However, the BGH makes exceptions to the principle of immorality insofar as there is an objective reason for the free possibility of exclusion due to the special circumstances of the case.
The BGH has recognized so-called management models as an objective reason if a managing director is granted a minority shareholding with regard to his position as managing director, for which he only has to pay remuneration in the amount of the nominal value and which he has to re-transfer for a severance payment limited in amount upon termination of his position as managing director. The BGH justified the existence of an objective reason for linking the position as managing director and the shareholding as follows:
“As a result, the manager participating in the company in this way acquires a position similar to that of a fiduciary, the economic value of which – with conceivably little risk of his own – lies in the considerable potential for profit distribution during the period of his commitment to the company as a corporate officer and under his service contract. With the termination, it is self-evident that the continued participation loses its justifying meaning – commitment to the company, increase of motivation and reward for successful effort. Only the reassignment will […] open up the possibility for the successor in the office of managing director to participate in the same way and thus continue the business model in the long term.”

II. The judgments of the Regional Court (Landgericht) Munich I and the Munich Higher Regional Court (Oberlandesgericht), respectively

The Regional Court Munich I (in first instance, file no. 10 HK O 6998/18) and the Munich Higher Regional Court (in second instance, file no. 7 U 1844/19) had to decide on a case in which the participation of a shareholder of a holding GmbH was linked to the existence of his position as managing director of the operating subsidiary. At first glance, this may look like a “management model”, because typically managers are motivated by sharing in profits or company value growth and are tied to the company by this, as well as by vesting and leaver arrangements. However, the Munich courts found that the requirements defined by the BGH for the existence of an objective reason were not met.
The dispute was based on the following simplified facts:
The claimant and 16 other natural persons and legal entities were shareholders of the defendant, a holding GmbH. The GmbH acquired all shares in the operating target company. In addition to the articles of association, the shareholders concluded a shareholders’ agreement, which included so-called CEO supplementary provisions as an annex. The claimant held 25% of the shares in the company; in addition to the share capital proportionate thereto, he, like the other shareholders, made a “contribution to the reserves” (the so-called CEO acquisition price) which – in the claimant’s case – amounted to EUR 300,000. The CEO supplementary provisions contained an irrevocable offer by the claimant to sell his shares in the defendant to the defendant or a third party against payment of the CEO acquisition price in the event of any termination of his management position in the target company.
After two years, the other shareholders dismissed the claimant as managing director of the target company with immediate effect and duly terminated his managing director employment contract. At an extraordinary shareholders’ meeting of the defendant, the other shareholders resolved to acquire the claimant’s shares by the defendant on the basis of the CEO supplementary provisions.
The claimant challenged the resolutions as well as the share purchase and transfer agreement based on them. Due to the free recallability as managing director (sec. 38 para. 1 German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG)), the supplementary CEO provisions would de facto constitute an immoral shareholder exclusion clause (Hinauskündigungsklausel), and the resolutions and contracts concluded were therefore null and void. The background to his exclusion as a managing director and shareholder was that the target company now had a market value of EUR 10 million, of which EUR 2.5 million was attributable to the claimant, while the defendant only wanted to pay him the CEO acquisition price of EUR 300,000 due to his exclusion.
The Munich courts granted the claim on the grounds that the facts of the case differed significantly from the cases decided by the BGH. While the BGH had assumed an objective reason, for example, if a managing director’s participation of up to 10% had the function of binding the managing director more strongly to the company according to the corporate concept, the present situation was obviously different:

(1) the participation of 25% and the participation structure of the defendant make it possible that the claimant can de facto enforce his ideas in the shareholders’ meeting – the claimant is therefore not excluded from the outset from participation in the company;

(2) the claimant had paid more than just the nominal value of his shareholding with the CEO acquisition price and had thus taken a genuine entrepreneurial risk;

(3) there was no indication that a management participation model was intended, for example, the shareholders’ agreement referred to all shareholders without distinction as “investors” – the participation of the claimant was therefore not to be seen as a mere annex to his management activities in order to motivate him and bind him to the company.

The appeal is pending before the BGH under file no. II ZR 107/20.

III. Consequences and outlook

In view of the previous case law of the BGH, the ruling is not surprising, as the differences at the factual level in the case at hand are quite clear in all categories taken as a basis by the BGH.
Though the Munich Higher Regional Court confirms in principle the admissibility of linking a management shareholding to the existence of a managing director’s office, but the decision is limited to a reference to the previously defined conditions for the existence of an objective reason.
For practical purposes, it remains to be seen whether and when instruments other than those mentioned so far can qualify the participation of a manager as a “mere annex” to his office as managing director and justify an objective reason for shareholder exclusion (Hinauskündigung). It may, for example, be desirable for tax reasons to pay a consideration in excess of the nominal value.
It remains to be seen whether the pending decision of the BGH will confirm the previous case law as a fundamental decision or provide indications for the permissibility of a further differentiation in the structuring of corporate management shareholdings.
For old cases dating back three years or more, it will have to be examined on a case-by-case basis whether the remedial provision of sec. 242 para. 2 German Stock Corporation Act (Aktiengesetz, AktG), which is applied analogously to the GmbH, applies or whether a bona fide acquisition pursuant to sec. 16 para. 3 GmbHG has taken place in the meantime.