Austria: Corporate Recovery - Shareholders’ Duty Of Participation In Capital Measures In Financial Crisis

Capital measures are common reorganisation measures when a capital company is in financial crisis, including eg injection of fresh capital by way of a capital increase. The implementation of capital measures during financial crisis is often a source of dispute amongst shareholders, in particular if the capital measures are driven by a financially strong majority shareholder. The question thus arises if and to what extent a shareholder: (i) may be under an obligation to contribute additional capital in the course of such capital measures, (ii) may be under an obligation to support capital measures, and (iii) can be excluded from subscribing shares in a capital increase.

Duty to contribute additional capital

Austrian corporate law generally only provides for the shareholders' obligation to pay to the company a capital contribution corresponding to their participation in the company. If a company is in financial crisis, the question may arise whether the shareholders are nevertheless obliged to contribute additional funds to the company. Such an additional contribution obligation may be explicitly provided for in the company's articles of association or a shareholders' agreement. However, because the Austrian corporate law lacks specific provisions about an additional contribution obligation of shareholders, the prevailing view in Austrian legal commentary is that shareholders generally do not have an obligation to contribute additional funds (eg, by injecting cash or by waiving receivables) to the company, even if the company is in financial crisis.

Duty to support capital measures

Based on the shareholders' duty of loyalty, the German Supreme Court¹ has held in an unprecedented ruling that a (minority) shareholder is not obliged to vote in favour of a capital measure but is also not allowed to block a resolution on capital measures as part of a financial recovery concept that is required to preserve the company in financial crisis and that is desired by a majority of the shareholders. In such case, the court reasoned, a shareholder must subordinate his interests to the company's benefit. That duty, however, only applies if the failure of the contemplated recovery measures would inevitably result in the breakdown of the company, and if the shareholders would be worse off as compared to the sale of their shares in case of a successful recovery and restructuring of the company. A shareholder may thus have to accept a dilution of his participation in the company to the benefit of preservation of the company as a whole. Austrian legal commentators have opined that the above principles established by the German Supreme Court also apply under Austrian corporate law.

Finally, the court held that shareholders blocking the capital measures can be held liable for damages if they intentionally violated their duty of loyalty to their co-shareholders.

Exclusion from subscription right

Under Austrian corporate law, shareholders of capital companies have the right to participate in a capital increase and subscribe shares newly issued by way of a capital increase in proportion to their existing participation quota. The statutory subscription right is aimed at protecting existing shareholders from a dilution of their existing participation, both in terms of influence and control in the company and their participation's economic value. However, the shareholders' subscription right can be excluded by a resolution of the company's general assembly with a qualified majority. In addition to an increased majority requirement, a resolution on the exclusion of shareholders' subscription right must be: (i) justified on objective grounds, (ii) suitable to reach a particular goal, and (iii) adequate in view of the potential deterioration of the affected shareholders' membership rights in the company.

It is generally accepted under Austrian corporate law that the necessity of restructuring measures during financial crisis qualifies as an objective justification of an exclusion of shareholders' subscription rights if, for example, some shareholders are prepared to contribute additional capital to the company, while other shareholders may not be willing or capable to do so. An exclusion of the subscription right may also be justified to attract new investors that are willing to become shareholders and contribute new capital to the company by way of a capital increase.

Conclusion

Capital measures can be an effective and attractive tool to achieve the recovery of companies in financial crisis, even if not supported by shareholders that are not willing or willing to support such capital measures. In case of a persistent dispute amongst shareholders as to the funding of a company in crisis, a capital increase can be implemented as a preparatory measure to facilitate a subsequent squeeze-out of minority shareholders with a view to clearing up the shareholder structure of a capital company tied in a deadlock.

Based on the shareholders' duty of loyalty, the German Supreme Court has held in an unprecedented ruling that a (minority) shareholder is not obliged to vote in favour of a capital measure but is also not allowed to block a resolution on capital measures as part of a financial recovery concept that is required to preserve the company in financial crisis and that is desired by a majority of the shareholders.

Footnote

1. BGH 20.3.1995, II ZR 205/94, BGHZ 129, 136

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