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Newsletter Kanzlei Schiedermair

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Introduction

Over the past few years, German entities organized as a Limited Liability Company (“GmbH”) have tended to issue a relatively large number of shares upon formation. Keeping in mind that the minimum share capital of a standard GmbH in Germany is EUR 25,000, it is becoming increasily common for a GmbH to issue 25,000 shares, each with a nominal value of EUR 1. Such a set up allows a shareholder to easily sell only a portion of his shareholding to a buyer, or to transfer interests with different nominal amounts to several buyers. Because the German legislature, however, only recently introduced statutory provisions allowing for shares with small nominal amounts (replacing much stricter provisions on the nominal value of share amounts and their divisibility), companies with a large number of issued shares are still in the minority. In line with former statutory provisions, the typical German GmbH still has only a few issued shares, each with higher nominal values; in fact, the majority of shareholders of a German GmbH hold only one share. If they want to sell a portion of that share, or if they want to transfer it individually to several buyers, they must first split the share.

Splitting Shares in a GmbH

Until about five years ago, a shareholder was subjected to a rather cumbersome procedure when splitting a share and transferring a portion of the split share to a buyer. This required the company to consent to the split (as declared by its managing director), to provide, in such declaration, all details on the seller and buyer, the nominal value of the share and the values into which it was being split as well as the number of shares each buyer would acquire. The shareholders also had to consent to the split by way of a resolution. The entire procedure has now become much easier. The respective statute requires only that the shareholders pass a resolution, i.e., the statute states that the shareholders are competent to decide on the share split. Unlike before, however, no provision sets forth the requisite specificity of this resolution.

The New Judgement

Because there are no statutory provisions setting forth what the shareholders must include in the resolution, courts had some difficulty coming up with a definitive decision. The German Federal Court of Civil Justice (“BGH”) (Docket No.: II ZR 21/12) eventually rendered an opinion on December 17, 2013.

In the case before the BGH, the shareholders had merely stated in the respective resolution that “Shareholder X may transfer all or parts of his shares to Y GmbH. Nothing more. The Higher Regional Court of Karlsruhe opined that this was insufficient because the resolution should have at least mentioned the nominal value of the portion of the share the shareholder was transferring. The BGH, however, held that this was not necessary and that the resolution, as drafted, did indeed suffice. In particular, the BGH held that the purchase agreement between the seller and buyer would specify what portion of the share the buyer was purchasing, and that the shareholders had referred to that agreement in the resolution. According to the BGH, the shareholders may generally consent to a share split that may be specified in detail later, as long as the shareholders identify the seller and buyer in the resolution.

Comments and Recommendation

The BGH took a rather flexible approach as to what the shareholders must include in the resolution regarding a share split. No longer requiring the shareholders to set forth in the resolution the nominal value of the partial shares into which the initial share is being split is surprising. In fact, the majority of legal commentators did not subscribe to this view. It is quite possible, of course, that these commentators were still being influenced by the former rather strict statutory regime discussed above. What truly supports the BGHs decision is that the German legislature has virtually abolished any specific requirements as to the content of the shareholders’ resolution.

Prudent practice may, nevertheless, dictate that shareholders specify the details of the split in their resolution, including the nominal value of the new portions of the split share. The reason for this is that the BGH may have gone too far with its ruling. The statute says that the shareholders are competent to “determine” the split. Given this statutory starting point, it requires some intellectual flexibility to allow for a general consent to a split because the shareholders are merely referring to a purchase agreement between seller and buyer - that they have not yet concluded - in their resolution. As a result of the BGH’s opinion the share split could be seen as not a subject for the decision of the shareholders as a corporate body of the company, but instead for the individual shareholder(s) involved.

Though the matter is legally resolved for the time being, there is no assurance that the BGH will not change its opinion in the future. If cautious shareholders know all of the details of a split when making their decision, they will include this information in the resolution.


If you have questions on the foregoing, please contact any of the following individuals (each is qualified as an attorney and as a notary):

Annegret Bürkle
Franz-Josef Kolb
Klaus J. Müller
(Author)

This newsletter is not meant to replace legal counsel. You should seek specific advice before taking any action with regard to the matters discussed above.