The list of shareholders recorded in the Commercial Register is decisive when the question arises whether GmbH shareholders may exercise their membership rights – in particular their voting rights – in the GmbH. According to a recent Federal Court of Justice decision, this also applies where shares have been redeemed but the redemption has not yet been entered in the GmbH’s list of shareholders.
In the law governing German limited liability companies, the list of shareholders has high priority. With a view to shareholders’ membership rights (including voting rights at shareholders’ meetings), only those shareholders who are entered in the list of shareholders recorded in the Commercial Register are actually considered shareholders (Section 16(1) Act on Limited Liability Companies). This even applies if the list of shareholders is incorrect, i.e., where the information in the list of shareholders does not correspond to actual ownership in the company. In practice, the most important application case is a change in the number of shareholders due to a sale and assignment of shares in the GmbH where the following applies: The former shareholders may no longer exercise their membership rights in the GmbH only when the change of shareholders is entered in the list of shareholders recorded in the Commercial Register, while the new shareholders in turn have to await the entry in the list of shareholders to exercise their membership rights.
The key difference between a change in the number of shareholders due to a sale and assignment of shares and a change due to redemption is that the relevant shares do not change hands in the event of redemption, but expire entirely upon notification of the redemption resolution to the shareholder(s) concerned. It had not yet been clarified and decided by the Federal Court of Justice whether the list of shareholders is therefore decisive for exercising membership rights even in the event of share redemption. Now, this question has been answered in the affirmative: As long as the redemption is not entered in the list of shareholders recorded in the Commercial Register, former shareholders whose shares were redeemed remain entitled to vote (Federal Court of Justice, November 20, 2018 – II ZR 12/17).
Consequences of the decision in practice:
Until the redemption of shares is entered in the list of shareholders, the company and the remaining shareholders have to accept the former shareholder’s exercising of the voting right in shareholders’ meetings, and the former shareholder has to continue to be invited to shareholders’ meetings. This is relevant, in particular, where the respective shareholder takes legal action against the effectiveness of the redemption and no entry is made in the GmbH’s list of shareholders in this interim period. In such cases, the period between redemption and entry of the change in the list of shareholders may last months, if not years. The acceptance of the former shareholder’s voting right during this long period is likely to be particularly difficult for the company and the remaining shareholders where the share redemption was based on personal reasons which seemed to make it unacceptable for the company and the remaining shareholders to continue to tolerate the former shareholder in the company.
The Federal Court of Justice ruling does leave a small “back door” open, however: Where former shareholders, whose shares were redeemed, positively know or must have known about the effectiveness of the redemption, it could be a violation of their duty of loyalty as shareholders if they nevertheless exercise their voting rights in the company. In such events, the former shareholders might be obligated to put on hold their voting rights.