I. Redemption of GmbH shares and principle of capital preservation

The redemption of GmbH shares against the will of the person concerned requires in general a provision in statute which precisely determines any possible reasons for redemtion (§ 34 para. 1 and 2 GmbHG [Law on Limited Liability Companies]). In the case of a redemption, the GmbH has to pay a settlement to the withdrawing shareholder which – without a different regulation in the statute – corresponds to the market value of the redeemed share. The legal consequence of the redemption is that the redeemed share and all rights and obligations related to that share disappear and are proportionately accrued by the remaining shareholders.
For the protection of the creditors the principle of capital preservation applies within a GmbH which prohibits the disbursement of the assets of a company necessary for the preservation of the share capital to the shareholders (§ 30 para. 1 sentence 1 GmbHG). The reason for this prohibition of disbursements is that basically only the company assets are at the GmbH creditors’ disposal and that the shareholders of a GmbH are in general not liable to third parties after providing their initial contribution.
Therefore, the principle of capital preservation must not be violated against by paying the settlement even in the case of a redemption (§ 34 para. 3 GmbHG). This is the reason why the company is not allowed to pay a settlement if the company assets fall below the share capital by paying the settlement (so-called undercoverage). In addition, a redemption resolution is also null if it is already foreseeable at the time the resolution is adapted that satisfying the settlement claim would lead to an undercoverage (§ 241 no. 3 AktG [German Stock Corporation Act] analogously).

II. The previous case law of the BGH

With regard to the redemption of GmbH shares and the principle of capital preservation, there are two fundamental decisions of the Second Civil Division of the BGH which is responsible for corporate law to be named:
In 1953 the BGH decided that if there is an important reason, the redemption can be claimed even without a provision in the statute by filing an action, whereby the execution of the legally binding redemption judgment has to be subject to the condition that the settlement fee (to be quantified in the judgment) is paid out (BGH judgment dated 1 April 1953, file no. II ZR 235/52).
In 2012 the BGH decided that an effective redemption resolution becomes already effective as soon as it announced to the shareholder concerned and irrespective of whether his settlement claim is satisfied (BGH judgment dated 5 April 2012, file no. II ZR 109/11). By this decision the BGH rejected the so-called conditional solution which was previously represented by the prevailing theory and several Higher Regional Courts. According to the conditional solution, the legal consequences of a redemption resolution shall be subject to the condition precedent of a settlement payment. However, the BGH classified the interest of the shareholder (exercise of rights arising from the company shares up until payment of the settlement) as less important than the interest of the company and the other shareholders in avoiding a floating situation and in an effective exclusion of a shareholder who was given a reason for a redemption. The shareholder concerned was less worthy of protection due to the anticipated approval in the statute.
In the meantime however, the BGH declared the so-called “liability solution” applicable, according to which the remaining shareholders are liable on a pro rata basis for the settlement claim of the withdrawn shareholder, as long as it cannot be settled due to a prevailing undercoverage of the company. The withdrawn shareholder shall be placed in the same position as if the company had been liquidated upon his withdrawal. The personal liability is in this case dogmatically based on the “unconscionable continuation of the company”. It was also an unconscionable continuation of the company if hidden reserve were not liquidated for paying the settlement claim of the withdrawn shareholder. Whether all shareholders or only those who have voted for the redemption shall be affected by this liability, is controversial; the BGH has so far left this question unanswered.

III. The BGH judgment of 26 June 2018

The BGH has now decided in its judgment dated 26 June 2018 (file no. II ZR 65/16) that hidden reserves do not have to be taken into consideration when determining an undercoverage at the time of passing the redemption resolution.
In detail:
The claimant held 25 percent in the share capital of the defendant – a GmbH. The general meeting of shareholders of the defendant passed by resolution the redemption of the company share on 26 June 2000. At the time of passing the resolution in 2000, the defendant disposed of free assets in the amount of EUR 82,829 as well as hidden reserves in the amount of EUR 393,251. In 2006, as precautionary measure, it was again decided on the redemption. Just as found in the course of the subsequent legal proceedings, the settlement claim of the claimant amounts to EUR 231,750.
The BGH found that the redemption resolution of 2000 was null due to the prevailing undercoverage in analogous application of § 241 no. 3 AktG due to the violation of provisions, which serve the protection of creditors. When examining whether there is an undercoverage, a strictly formal consideration should be made on the basis of the book values, which do not take hidden reserves into account – the existence of hidden reserves is not equivalent to a sufficient endowment of the company with untied assets. There was no room for personal liability on the part of the remaining shareholders on account of the nullity.
The legal dispute was referred back to the Higher Regional Court of Dresden, which had jurisdiction in the previous instance and now has to examine whether the redemption resolution passed in 2006 was effective.

IV. Consequences for the practice

First of all, the judgment clearly shows that the liability of the remaining shareholders for the settlement to the withdrawn shareholder only comes into question when the redemption resolution is effective, which is not the case if the redemption fee is not available as free assets in the GmbH. The case on which the ruling of the BGH is based illustrates the significance of the risks that can arise from an impure resolution. In order to avoid unfair random results, the statutes, shareholder agreements and resolutions must be carefully drafted. With regard to the redemption of GmbH shares, special attention must be paid to the definition of the redemption reasons, the settlement claim and the payment modalities. In order to avoid undercoverage, it may be advisable to include contribution obligations of the remaining shareholders in the redemption resolution.