In start-up companies as well as, more generally, in small to medium-sized limited liability companies, it often arises that one or more shareholders are also appointed as managing director of a company. This dual position with different interests and duties raises the question of whether a director and majority shareholder has voting rights on individual issues at the general meeting or is subject to a prohibition on voting.
1. Basic principles
Firstly, the principle of the free exercise of voting rights enshrined in Section 47 (1) of the Limited Liability Companies Act applies, i.e. that shareholders should be able to exercise their voting rights according to their own free will. There are limitations, in particular where corporate loyalty, the principle of equal treatment (e.g. in the case of unjustified differential dividend payouts) and company objectives are undermined, cf. Bayer in: Lutter/Hommelhoff, GmbHG (Limited Liability Companies Act), 17th edition 2009, Section 47, margin note 12.
For example, the FCJ recently ruled that in order for a dependent company to conclude and also to terminate a control and profit transfer agreement, a decision by that company's general meeting was required in which the controlling majority shareholder also has voting rights. This is a legal transaction with a shareholder, but internal matters such as a termination of this kind are usually excluded from the voting prohibition. In this case the personal interests of individual shareholders do not predominate, cf. FCJ NZG 2011, 902; FAZ of 21.09.2011, page 21.
2. Limited voting rights
Limitations to the voting rights apply above all where the dual position of director and majority shareholder puts the company's internal decision-making at risk and the company's assets need protection against the special interests of individual shareholders. A managing director who is also a majority shareholder may use his majority voting rights to his own advantage in the making of decisions, e.g. formal approval of his actions as managing director, thereby damaging the company.
2.1 Legal regulation
For this reason, section 47 (4) of the Limited Liability Companies Act provides that a shareholder whose actions are to be formally approved or who is to be released from an obligation, does not have voting rights in this case, and similarly should not exercise voting rights in respect of others. The same applies to a decision that relates to undertaking a legal transaction or the initiation or settlement of a legal dispute against a shareholder.
2.2 Limitaions of voting rights
Section 47 (4) of the Limited Liability Companies Act does not, however, provide a general prohibition on voting for all conflicts of interest, cf. BGHZ 56, 47, 53; Karsten Schmidt, in: Scholz, GmbHG (Limited Liability Companies Act), Commentary, Volume II, 9th edition 2002, Section 47, margin note 101. Two main areas of conflict are covered, self-dealing and ruling on one's own issue. Self-dealing is where the shareholder excluded from voting is involved in the transaction on which the decision is to be made. Ruling on one's own issue is where the shareholder is affected by the measure to be decided upon.
Section 47 (4) 1 of the Limited Liability Companies Act covers, for example, the formal approval of the actions of a shareholder in his capacity as managing director, member of the supervisory board, liquidator, etc. This voting prohibition falls under the category of "ruling on one's own issue" and
makes sense, as in giving formal approval the company is renouncing claims for damages against directors who act counter to their obligations, etc. Other cases of ruling in one's own issues, which result in a voting prohibition for the director and majority shareholder include in particular decisions on the compulsory confiscation of a share in the company (forfeiting), the exclusion of the shareholder for compelling reasons, the confiscation of a share in the company for compelling reasons, removal from the position of managing director for compelling reasons, extraordinary termination of the contract of appointment as managing director (not, on the other hand, in the case of normal removal from the position or termination), cf. Bayer, in: Lutter/Hommelhoff, GmbHG (Limited Liability Companies Act), op. cit., Section 47, margin note 28, 38, 40.
2.3 Voting rights of the director and majority shareholder
Accordingly, voting rights exist in particular for the shareholder to appoint him- or herself to a corporate body, i.e. as managing director, including the associated decision on the terms and conditions of the appointment, in particular the remuneration including retirement pay (BGHZ 18, 205, 210; BGHZ 51, 209, 215), and vice versa in the case of removal from membership of a corporate body, unless this is for compelling reasons (BGH NJW-RR 1990, 99, 100).
The director and majority shareholder also has voting rights in the case of subsequent changes to the terms and conditions of appointment or retirement conditions following departure from the position on the corporate body, and in the case of normal termination of the contract for appointment, cf. Zöllner in: Baumbach/Hueck, GmbHG (Limited Liability Companies Act), Commentary, 19th edition 2010, Section 47, margin note 86.
The extent to which the voting prohibition of a director and majority shareholder in accordance with Section 47 (4) of the Limited Liability Companies Act applies in individual cases can therefore not be expressed in general terms and requires examination in each individual case.
We would be pleased to advise you further in specific cases.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.