German Corporate and Stock Corporation Law

Landmark Decision for Private Equity Structures

With a concise judgment, the German Federal Court of Justice (BGH) has provided significant legal certainty regarding the structuring of management participation programs (so-called management models). The core issue was whether managers holding shares as partners in a corporate group may be terminated from the company upon cessation of their professional activity without the existence of a specific objective cause.

Fundamental Invalidity vs. Objective Justification

The II. Civil Senate clearly rejected calls from parts of legal literature for a pure exercise control and adhered to its established case law: so-called free termination clauses in German partnerships and the limited liability company (GmbH) are subject to a content review according to § 138 Para. 1 of the German Civil Code (BGB) and are generally void. A termination right not tied to any requirements acts like a Sword of Damocles, hindering the affected shareholder in the free exercise of their membership rights.

However: The Senate ruled in a practice-oriented manner that such a clause is exceptionally justified objectively, and thus effective, if the shareholder status was granted to the manager primarily due to their executive function. If the professional bond ceases, the justifying purpose of the participation—namely motivation and loyalty to the company—also ceases upon overall assessment.

Development of the Law for Exit-Driven Models

Particularly relevant for German M&A practice and legal drafting are two clarifications by the court regarding the legally secure design of Leaver Schemes:

• Lack of ongoing profit participation is harmless: The fact that a manager typically only participates in the proceeds of a later company sale (exit) and receives no ongoing profits does not counteract the incentive function. This structure is rather inherent to Private Equity models aimed at maximizing value increase rather than ongoing returns.
• Economic risk does not tip the justification: Even if the manager acquires shares at market value and thus bears the entrepreneurial risk of loss in value, this does not necessarily give their membership status such independent weight over the management function that the termination clause would become inadmissible.

Impact on Advisory Practice

The judgment strengthens structuring practice and shifts the legal focus from the fundamental "whether" of the exclusion to the "how." The corporate law termination (e.g., as a call option) remains effective in itself if there is a clear functional link to the service or executive relationship. The legal protection of the departing manager is realized instead on two other levels: first, in the isolated control of the severance clause (reasonableness of the repurchase price in Good Leaver or Bad Leaver events) and second, via exercise control (§ 242 BGB). The latter intervenes if the exclusion is abusive in an individual case, such as occurring at an inopportune time to specifically deprive the manager of their monetary fruits shortly before a foreseeable, lucrative exit.

Guiding Principles

The Federal Court of Justice clarifies the principles for determining the value of the subject of attorney activity in appeals on points of law in German commercial register matters, where value-independent fixed fees apply for the court.

• Basis of Value Determination: If court fees are not calculated according to a value in dispute but according to fixed fee rates (here: according to the Commercial Register Fee Ordinance), the court determines the value in dispute for attorney fees separately pursuant to § 33 Para. 1 RVG.
• Applicable Norm: § 23 Para. 2 S. 1, Para. 3 S. 2 RVG is decisive for the determination. These provisions also apply to the appeal on points of law as a special appeal procedure if the court fees are not based on the value.
• Determination at Equitable Discretion: The value is to be determined at equitable discretion, taking into account the interest of the appellant. If sufficient factual clues for an estimation are missing, the catch-all value of €5,000 is to be assumed (§ 23 Para. 3 S. 2 half-sentence 2 RVG).
• Deviation from Catch-all Value: A deviation from the standard value of €5,000 (upward or downward) requires special circumstances, such as the significance, scope, or level of difficulty of the matter.
• No Analogous Application of GNotKG Provisions: An orientation toward the value provisions of the GNotKG (e.g., § 105 Para. 4 No. 1 GNotKG) is inadmissible, as this would circumvent the specific valuation decision of § 23 Para. 3 RVG.

Practical Note

For attorney activity in appeals on points of law in German commercial register matters where value-independent fixed fees apply for the judicial proceedings, the catch-all value of § 23 Para. 3 Sentence 2 RVG in the amount of €5,000 is generally to be used for calculating attorney fees. A higher value can only be enforced if special circumstances such as an extraordinary scope, special economic significance, or high legal complexity of the matter are presented and recognized by the court.

Guiding Principle

If an attorney represents multiple clients as co-litigants who are jointly affected only with regard to a part of the procedural claims, the value in dispute for the multiple representation surcharge according to No. 1008 VV RVG is measured solely by the value of the joint part. This applies even if the total value in dispute of the proceedings for court fees is significantly higher.

Practical Significance

The decision of the II. Civil Senate concerns a pure fee law issue and has no direct impact on substantive German corporate law (such as GmbHG, AktG) or director liability. However, the decision is significant for procedural and cost practice in complex disputes with multiple parties.

• Differentiated Value Calculation: In cases of subjective expansion of a claim or with co-litigants who are not affected by all prayers for relief, the value for the calculation of attorney fees must be able to deviate from that of the overall proceedings.
• Decisiveness of Joint Participation: For the calculation of the increased fee when representing multiple clients (No. 1008 VV RVG), the total value in dispute of the proceedings is not decisive, but only the value of that part of the subject matter in which the clients are jointly involved.
• Separate Determination under § 33 RVG: If the subject of the attorney's activity deviates from the value relevant for court fees, the court may, upon application, set the value for the attorney fees separately. As the case shows, this is particularly relevant for the correct calculation of the multiple representation surcharge.

Guiding Principle

Regarding the interpretation of a waiver of the statute of limitations defense by a managing director against whom a claim was asserted by the insolvency administrator pursuant to § 64 GmbHG (old version).

Core Statements

The Federal Court of Justice (BGH) clarifies that a time-limited waiver of the statute of limitations defense declared by a managing director to the insolvency administrator regarding liability claims under § 64 GmbHG (old version) also remains effective against a subsequent purchaser (assignee) of this claim. A contrary interpretation would contradict the interests of the insolvency administrator and the purpose of the insolvency proceedings.

• Interest-Based Interpretation: The interpretation of a waiver must consider the interests of both sides. Limiting the effect of the waiver solely to the person of the insolvency administrator is one-sided and therefore legally erroneous.
• Interest of the Insolvency Administrator: The insolvency administrator acts in the interest of the collective body of creditors (§ 1 InsO) and must realize the estate in the best possible way. A purely person-bound waiver of the statute of limitations would inadmissibly restrict his options for action, particularly the profitable sale of the claim, and force him to conduct high-risk litigation himself. It is not to be assumed that an insolvency administrator would agree to such a restriction.
• Claim-Related Character of the Waiver: The mention of the insolvency administrator in the waiver declaration usually only serves to specify the claims concerned. The waiver is thus related to the claim and not the person.
• Interest of the Managing Director: The primary interest of the managing director in a waiver of the statute of limitations is to gain time to review the allegations made against him and to avoid a court dispute. The person of the creditor is irrelevant for this goal.
• Abuse of Rights: If the managing director nevertheless raises the defense of the statute of limitations after the assignment of the claim to a third party, he acts in bad faith, as the waiver also works in favor of the legal successor.

Practical Note

The judgment significantly strengthens the position of insolvency administrators. It creates legal certainty in the realization of liability claims against managing directors. A negotiated waiver of the statute of limitations defense remains effective even after a sale of the claim, which increases the value and liquidity of such claims. Insolvency administrators do not need to explicitly negotiate an extension of the waiver to legal successors, as this corresponds to the standard case of an interest-based interpretation. For managing directors against whom claims are asserted, this means they cannot invoke the statute of limitations after a sale of the claim if they previously waived it toward the insolvency administrator.

Guiding Principle

The liability of a managing director for intentional damage violating public policy by supporting a fraudulent investment system operated by the company also includes investment contracts concluded only after his removal from office, if he was still active in another leading function within the system after leaving office or if the conclusion of the contract was initiated during his time as managing director.

Core Statements

The Federal Court of Justice clarifies the conditions under which a departed managing director is liable for damages arising from a fraudulent business model he supported, even if the damages occur after his departure from office. Liability under § 826 BGB is not automatically terminated by removal from office if the damaging act of the managing director was causal for the damage occurring later.

The decisive factor is whether the later damage still originates from the sphere of danger created by the managing director in a morally offensive manner. This is particularly the case if:

• the managing director continued to be active in another leading function for the system after leaving office, or
• the damaging conclusion of the contract (here: the investment decision of the injured party) was significantly initiated during his term of office.

In the present case, it was sufficient for causality that an initial contract was sent to the investor during the defendant's term of office. The fact that she later signed a modified contract did not interrupt the chain of attribution. The BGH emphasizes that these principles are an application of general causality theory and do not create a new ground for liability. It draws a parallel to its case law on liability for delaying insolvency filings.

Practical Relevance

The judgment sharpens the liability risks for executive body members (managing directors, board members) of companies with dubious or fraudulent business models ("sham companies"). A mere resignation or removal from office does not automatically release one from liability for future damages based on the system established during one's own term of office.

In practice, this means that managing directors cannot rely on escaping liability for the system they created or promoted by a timely "exit." If they have set the causal chain for subsequent damage in motion—for example, by initiating contracts—liability under § 826 BGB remains in effect.

Guiding Principles

1. A violation of the right to be heard (Art. 103 Para. 1 German Basic Law) occurs if a court overstretches the requirements for the substantiation of a party's submission and disregards specifically referenced pleadings submitted as an annex. Reference to an inherently understandable annex, which does not demand unreasonable search work from the court, can effectively supplement the written submission.

2. In the interpretation of a corporate agreement clause regarding the exclusion of a shareholder, the wording is the starting point. If a clause stipulates that a shareholder can be excluded "by the remaining shareholders with 75% of all their votes," the voting shares of the shareholder to be excluded are not to be counted when calculating the required majority (neither in the numerator nor in the denominator).

Facts of the Case

The plaintiff, his divorced wife (Defendant 1), and her father (Defendant 2) are limited partners of a German GmbH & Co. KG. After a deep rift, particularly during the divorce, Defendants 1 and 2 resolved in a shareholders' meeting to exclude the plaintiff for good cause. The partnership agreement (§ 13 No. 1) required a majority of "75% of all their votes" of the "remaining shareholders."

The plaintiff filed an action for annulment against the exclusion resolution. The Court of Appeal granted the action. Although it saw the formal requirements for the resolution as fulfilled, it denied the existence of a good cause. The court evaluated the defendants' submission regarding allegedly unfounded claims made by the plaintiff against the company as insufficiently substantiated, as it merely referred generally to non-submitted pleadings from another proceeding. In the overall balancing of contributions to the rift, the Court of Appeal concluded that the plaintiff was not predominantly at fault.

Decision of the BGH

The BGH overturned the judgment of the Court of Appeal and referred the matter back for new trial and decision. It criticized the decision for two main reasons:

1. Violation of the Right to be Heard (Art. 103 Para. 1 GG)
   The BGH found that the Court of Appeal overstretched the requirements for the substantiation of the defendants' submission. The defendants had specifically referred in their pleading to certain pages of a pleading from a preliminary injunction proceeding and had also submitted this pleading as an annex to the procedural file. The Court of Appeal's assumption that the annex had not been submitted and the reference was general was contrary to the record and thus obviously incorrect. It constitutes pure formalism to require a party to transcribe the content of an understandable and specifically designated annex again. Since it cannot be ruled out that the Court of Appeal would have reached a different weighing of the good cause had this submission been considered, the violation of the right to be heard was decisive for the outcome.
2. Note on the Interpretation of the Majority Clause (Obiter Dictum)
   For the further proceedings, the Senate pointed out that the Court of Appeal's interpretation of the majority clause in § 13 was legally erroneous. According to the wording ("by the remaining shareholders"), the calculation of the 75% majority must be based exclusively on the votes of those shareholders voting on the exclusion. The votes of the affected shareholder themselves are not to be considered in determining the total number of votes (i.e., in the denominator of the calculation). In the absence of special circumstances justifying a different interpretation, the clear wording must be followed.

Practical Note

The decision underscores two important procedural and substantive aspects. First, the BGH reaffirms its constant case law that courts must take note of the content of annexes specifically referred to in pleadings and must not overstretch substantiation requirements. Overlooking or ignoring such references can constitute a serious procedural error. Second, the BGH provides a clear interpretation guide for typical exclusion clauses in German partnership agreements. The wording "by the remaining shareholders" leads to the affected party's voting shares being completely excluded from the majority calculation. This facilitates exclusion in constellations where the affected shareholder holds a high stake. This case law should be considered during contract drafting to avoid unintended results.