Cases of urgent legal protection in connection with virtual general meetings

In its decision of May 26, 2020, the Munich I Regional Court (5th Chamber) - Case No. 5 HK O 6378/20 - ruled that it is possible in principle to prohibit the holding of a virtual shareholders' meeting by means of an interim injunction if the applicant can credibly demonstrate that the resolutions to be adopted by the shareholders' meeting would be void as a whole.

However, the nullity of the resolutions of the General Meeting cannot be justified on the grounds that the Executive Board made incorrect use of the discretion granted to it by Section 1 (1) of the COVID 19 Act. On March 26, 2020, i.e. before the COVID 19 Act came into force, the Administrative Court of Frankfurt - Case No. 5 L 744/20.F- had already rejected urgent legal protection, albeit in the other direction, by not prohibiting a physical shareholders' meeting that had still been announced at that time.

Background

In the Munich case (Case No. 5 HK O 6378/20), a shareholder sought interim legal protection to prohibit the holding of a virtual shareholders' meeting. The Munich Regional Court I dismissed the application for a corresponding temporary injunction. However, the shareholder has the option of subsequently challenging the resolutions adopted at the planned shareholders' meeting by filing an action for annulment. The decision of the Executive Board to hold a virtual General Meeting is purely a discretionary decision and as such is also subject to judicial review with regard to a possible misuse of discretion. Against this background, it was also conceivable in principle that the resolutions could be challenged in the event of a misuse of discretion - for example in the case of companies with a very small group of shareholders. Nor was such a challenge precluded by Section 1 (7) of the COVID 19 Act. In the specific case to be decided, however, there was a lack of sufficient factual evidence.

The Administrative Court of Frankfurt had to decide whether the physical General Meeting, which was still announced as a major event at the time, was to be banned in summary proceedings in view of the pandemic, and rejected this in view of the COVID 19 Act, which was already being prepared at the time, and the declaration by the Board of Management that it would then go the virtual route.

A classification of the two decisions

The decisions of both courts are not objectionable from a legal dogmatic point of view. However, with regard to shareholder democracy, the decision of the Munich I Regional Court leaves an element of uncertainty - above all because of the blanket reference to the action for rescission. After all, the COVID-19 Act severely curtailed the rights of shareholders. Above all, the shareholders' right to ask questions in the dialog was practically excluded and replaced by an advance opportunity to ask questions. The Board of Management then answers these questions at its own dutiful discretion. The legislator has also implicitly excluded shareholders' rights to submit motions at a virtual shareholders' meeting. And the right of challenge also exists only to a limited extent. If the rights of shareholders - already reduced by the COVID-19 Act - are violated at a virtual shareholders' meeting, they are only entitled to contest the meeting if the Executive Board has acted intentionally. Grossly negligent violations of these rights do not result in resolutions being voidable. Shareholders are therefore left with little leverage under the COVID-19 Act to assert legal violations in connection with a virtual shareholders' meeting in court.

On the one hand, this shows that the general introduction of virtual shareholders' meetings, which has often been called for in the past, should not just be carried out with an update of the COVID 19 Act beyond the current exceptional situation. On the other hand, a company that appropriately takes the current situation into account when deciding how to conduct the General Meeting can invoke the applicable legal options without having to fear prohibitions.

Practical tip

In terms of legal policy, it is therefore to be hoped that companies will always make moderate use of the relief provided by the COVID 19 Act, which is certainly correct and necessary in view of the exceptional situation. When considering the form of the General Meeting, the Board of Management should not only take into account the threat posed by the pandemic, but also the shortening of shareholders' rights as a result of the COVID 19 Act. From a lawyer's point of view, companies are advised to document the consideration process and its main considerations regarding the question of holding a virtual shareholders' meeting.