The Challenge of Shareholders' Resolutions in Arbitration

Dr. Ulrich Lohmann, LL.M. (USA)

Until recently, resolutions adopted by the shareholders of German corporations(1) could be challenged(2) in court but not in arbitration.(3) The courts were concerned that an award declaring void a shareholders' resolution would violate the right to be heard of those shareholders who had not been a party to the proceedings.  The statutory provisions(4) dealing with the challenge of shareholders' resolutions in court, on the other hand, provide for rules ensuring that all shareholders will be heard and that the resulting judgment is effective for and against all shareholders and officers of the corporation.(5) The position of the courts was that as long as there was no express statutory provision in German arbitration law that would protect the officers and other shareholders in arbitration proceedings in the same fashion as they would be protected in court proceedings, arbitration clauses in articles of association would not apply to challenges of shareholders' resolution.  

In April of 2009, the German Federal Court of Justice revised this position.  It noted that the legislator had completely rewritten German arbitration law in 1998 without addressing the issue of challenging shareholders' resolutions, and had made it known that the courts should deal with this issue.  The Federal Court of Justice concluded that it was now the courts' turn to move ahead and resolve the issue.  

According to the judgment, disputes concerning the challenge of shareholders' resolutions are now arbitrable.  Arbitral awards dealing with such challenges are now deemed to be effective for and against the officers and all shareholders of the corporation in the same fashion as court judgments,(6) provided that the arbitration clause:

• is contained in the articles of association of the corporation or in a separate agreement made by all shareholders and the corporation itself;
• ensures that each shareholder and the corporation must be kept informed of the commencement and the status of the arbitration proceedings so as to be able to intervene at any time;
• provides that each shareholder who elects to participate in the arbitration proceedings at the time they are commenced may also participate in the selection of the arbitrators, unless a third party, such as an arbitration institution, is requested to appoint the arbitrators; and
• ensures that all disputes relating to the same object, notably relating to the (alleged) nullity of the same shareholders' resolution, are dealt with in the same proceedings by the same arbitral tribunal.

The decision is of importance for Limited Liability Companies, where the agreement to arbitrate can be included in the articles of association.  There is authority that arbitration clauses cannot be included in the articles of association of a Stock Corporation to the extent that the Stock Corporation Act assigns certain matters to the courts;(7) it remains to be seen whether, on the basis of the decision, arbitration clauses dealing with the challenge of shareholders' resolutions can be included in the articles of association of a Stock Corporation, now that such disputes are arbitrable.  In any event, the shareholders in Stock Corporations may enter into a separate arbitration agreement, to which the corporation should be made a party, provided their number is small enough to bring this about.  
Arbitration clauses in the articles of association of German corporations and in agreements between shareholders in German corporations should now be reviewed to ensure that they protect the shareholders and the officers in the same fashion as they would be protected in court proceedings, taking into account the detailed requirements set out in the decision of the Federal Court of Justice.
Finally, there is authority(8) that arbitral awards have effect erga omnes only if they have been declared enforceable.  It remains to be seen whether the decision of the Federal Court of Justice revives the discussion of this issue.
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1. German corporations basically come in two forms:
   Stock Corporations, in German Aktiengesellschaften, may list their shares on a stock exchange.  A German stock corporation has two boards, a management board and a supervisory board.  The supervisory board is elected by the shareholders, but cannot manage the corporation itself.  It, in turn, appoints and supervises the management board, which manages the corporation with certain discretionary powers.  As a result, the shareholders have no direct influence on the management of the corporation.
   Most German corporations are limited liability companies, in German Gesellschaften mit beschränkter Haftung or GmbH (Limited Liability Companies). Limited Liability Companies often have a simple structure consisting of just one or more shareholders and one or more managing directors.
   Stock Corporations may be publicly or privately held.  Limited Liability Companies are normally privately held.
2. Anfechtungsrecht in German
3. BGH, judgment dated 23 March 1996, II ZR 124/95, BGHZ 132, 278 ? Schiedsfähigkeit I
4. §§ 248 (1) and 249 (1) of the German Stock Corporation Act (AktG), which apply also with respect to Limited Liability Companies
5. A judgment declaring void a shareholders' resolution actually has effect erga omnes, not just the other shareholders and the officers of the corporation, Karsten Schmidt in Scholz, Kommentar zum GmbH-Gesetz, 10. Aufl. 2007, § 45 Rdnr. 171.
6. on the basis that §§ 248 (1) and 249 (1) of the German Stock Corporation Act apply by analogy
7. § 23 (5) of the German Stock Corporation Act; Schmidt/Lutter, Aktiengesetz Kommentar, Köln 2008, § 23 Rdnr. 57 with further citations
8. Karsten Schmidt, l.c. (footnote 5)