Challenging Shareholders' Resolutions in German and other European Privately-Held Corporations

European Affairs Committee of the New York City Bar Association

April 21, 2009

by Dr. Ulrich Lohmann, LL.M. (UC Berkeley)

The global financial crisis has made it difficult to raise funds for the acquisition of a company.  Acquiring a minority interest is an option to reduce the amount of funds required and may put an opportunity within reach that one would otherwise have to let go.

Acquiring a minority interest, however, makes the investor dependent on the majority shareholder.  That is acceptable if the Investor enters into an agreement with the majority shareholder, ensuring board representation and a veto for the Investor on certain important issues.

But what if no agreement can be made?  Or if an agreement has been made that is being violated by the majority shareholder? 

German and other European laws have a feature that would offer some protection even to a small minority investor in a corporation.  This is the right to have a wide range of shareholder decisions reviewed and, if need be, declared null and void by a court of law.  This right is called, roughly translated, Right of Avoidance (Anfechtungsrecht in German) and is the subject of this presentation.

We will explore how the Right of Avoidance works, what effect it has it on corporate governance and how it should make a non-German minority investor (Investor) feel more at ease.  The answer to the last question is yes. 

We will not go into other aspects of minority investments, such as disclosure requirements and take-over regulations.  We will focus on the minority Investor who has no board representation and no veto right and is unhappy with the direction the company is taking, considering formal issues, like the failure of the company management to provide information on issues before the shareholders meeting, and substantive issues, notably violations of fiduciary duties on the part of the majority shareholder.

If you are interested in the full text of the presentation, please download the pdf file.