Avoidable mistakes in the german stock company

Mistakes made by board members and supervisory board members and their consequences are regularly brought to the public's attention in Germnay by listed stock corporations, not least through corresponding media reports. But even in the case of non-listed public limited companies, which number almost 15,000 in Germany, there are typical mistakes that often have to be remedied at considerable expense in terms of time and money.

Even if they make it into the german regional news at best, the executive board and supervisory board are threatened with personal liability if the errors are based on a breach of their duties under german company law and the company has suffered damage as a result. If mistakes are discovered, one hears again and again "we have always done it that way with our GmbH". In order to avoid typical mistakes and their consequences, typical mistakes made by the general meeting, executive board and supervisory board in Germany are outlined below.

1. No circulation of resolutions by the shareholders in Germany

Particularly in the case of a small group of shareholders, the holding of a formal general meeting is often dispensed with in german practice. Instead, the possibilities known from the german law on limited liability companies are used to hold meetings by telephone or by means of video communication, or the holding of a meeting is dispensed with altogether and resolutions are passed by signing a draft resolution in the so-called circulation procedure.

However, the german legislator has only granted such resolutions to the shareholders of a GmbH. The german law of a stock corporation lacks a corresponding provision, so that corresponding resolutions of shareholders do not have any effect.

Since, according to the wording of the new statutory provisions on virtual general meetings, a place of the general meeting has not been waived in the case of a joint stock company, it should still not be possible for shareholders in Germany to pass resolutions by video telephony or by circulation.

Meeting of executive board and supervisory board required by german law

In any case, a meeting of the executive board, the supervisory board and, if applicable, the auditor is necessary for the adoption of resolutions by the shareholders in Germany. In the case of a manageable group of shareholders, it follows from this that resolutions can in any case be passed effectively if the executive board and supervisory board meet for a general meeting and one person is authorised by all shareholders to vote. In Germany, shareholders who do not want to or cannot attend the general meeting themselves therefore have the possibility to cast their vote through a proxy or in advance by postal vote.

Furthermore, in german practice, resolutions can be passed without complying with the formalities of convening and holding a general meeting if all shareholders are present or represented.

2nd Danger in german practice: Defects in the Minutes

Every resolution of a general meeting in Germany must be recorded in so-called minutes. The german legal (minimum) requirements of such minutes include, among other things, the type and result of the vote as well as a formal statement of the result of the resolution. In the event of violations, the resolutions passed may become null and void.

This is particularly unfortunate if the resolution interferes with the competences of the corporate bodies, e.g. if it concerns the appointment of a supervisory board member. In Germany, a supervisory board member who has not been effectively appointed cannot effectively participate in resolutions of the supervisory board, so that their resolutions are also threatened with nullity.

Informations & Risks for Chairmen of Meetings in Germany

In the case of an unlisted company limited by shares, the minutes may be prepared by the chairman of the meeting, provided that no resolutions are passed for which the german law requires a three-quarters or greater majority.

As a potential chairman of the meeting, you are therefore well advised to familiarise yourself in advance with the content requirements for minutes by german law. Especially in order to avoid a possible personal claim for costs of a necessary follow-up meeting.

3. Payment of advance profits in Germany

Almost the rule with the GmbH and its shareholders, but inadmissible with the german stock corporation and on a regular basis: The payment of so-called advance profits.

This refers to payments made by the german company to its shareholders with which an expected annual profit is already distributed to the shareholders before the resolution on the final distribution of profits is passed. Usually in Germany, such payments are made during the current business year or after its end, but before the adoption of the annual financial statements.

At the end of the business year, the german shareholders then decide on the appropriation of the balance sheet profit, which is determined taking into account the advance profit distribution. Even though there is no legal regulation on this procedure for the GmbH, it is generally accepted in principle.

The situation is different in german stock corporation law, where with § 59 AktG (German Stock Corporation Act) there is a dedicated regulation for the "advance payment on the balance sheet profit". If the requirements there are not met, the shareholders, insofar as advance payments have been made, are in principle obliged by german law to repay the advance payments. If nothing can be obtained from the shareholders, such payments can end in a financial fiasco for the executive board and the supervisory board, as they are liable to the german company for the damage caused by the payment.

4. Defective resolutions on the appropriation of profits under german law

Whereas the shareholders of a german limited corporation (GmbH) also decide on the distribution of the annual surplus when they approve the annual financial statements, the shareholders of a German stock corporation (AG) only decide on the so-called balance sheet profit.

In very simplified terms, the net profit for the year shows the amount that the german company actually earned in the business year. The balance sheet profit merely specifies the amount that is distributed to the shareholders.

The background to these different resolution items is the obligation of the board of directors of a germsn public joint-stock company to use parts of the profit for the formation of reserves.

If the shareholders consequently decide on the net profit for the year, as is customary with the german GmbH, the executive board has violated its duties (and the supervisory board, in case of doubt, its duty of supervision) because no amounts were allocated to the reserve. In addition to the personal liability of the board members, there is also the threat of the nullity of the general meeting resolutions. If the shareholders have then already received their dividend, they may be obliged to repay it under german law.

5. Missing notifications of shareholdings in german practice

While shareholders of german listed joint-stock companies are obliged to notify the company if they hold more than 3% of the voting rights, this is only required for unlisted stock corporations if they hold more than 25% of the voting rights. If these notification obligations are not fulfilled in Germany, the shares concerned lose their rights. Affected by the loss of rights are in particular the right to vote, the right to participate in the general meeting, the right to speak and ask questions in the general meeting as well as the right to raise an objection and the right to contest.

Especially in german joint-stock companies with a small group of shareholders, a loss of voting rights can have serious consequences. Not only does the balance of power in the shareholder group shift. In addition, resolutions of the general meeting that take into account the votes that are actually subject to a loss of rights are in principle contestable in Germany.

However, the loss of rights also includes the right to appoint members to the supervisory board if the holders of certain shares are entitled to it, so that in case of doubt an improperly constituted body exists and acts.

6. Missing or incorrect german share register

If the german stock corporation has issued registered shares, it is obliged to keep a so-called share register (comparable to the list of shareholders in a limited liability company) and to keep it up to date at all times.

Since only those who are entered as such in the share register are deemed shareholders vis-à-vis the german joint-stock company, neglecting the share register has considerable consequences under german law.

If shareholders are invited to the general meeting even though they are not registered in the share register and if they then participate in the adoption of resolutions, the resolutions adopted by the general meeting are contestable in Germany, even though they correspond to the actual ownership situation. If an action for annulment based on this is upheld, the personal liability of the board of directors is likely to be obvious.

Conclusion: Good advice...

...can be expensive, but it does not have to be!

Anyone who chooses the legal form of a (non-listed) joint-stock company for their business activities in Germany and/or takes office as a member of the executive board or supervisory board should make it a point to familiarise themselves with the provisions of the German Stock Corporation Act.

Not only do past mistakes often occur much later in the sales process and then, under certain circumstances, become deal breakers. There is also the threat of personal liability for the persons acting if such errors have to be discovered and remedied, thereby incurring costs.