November 22, 2011
Practice Group:
Bona fide rights protection demystified in
Germany
Corporate
– No purchase of company shares, which have already been assigned with yet to
be fulfilled transfer conditions, through a bona fide secondary purchase –
Summary
In its decision, dated 20 September 2011, the German Federal Court of Justice (Bundesgerichtshof –
BGH) has removed an uncertainty that has existed since the changes made to the law on limited
liability companies (GmbHG) by the German Act to Modernize the Law on Private Limited
Companies and Combat Abuses (MoMiG), namely shares in a business, which have already been
assigned with yet to be fulfilled transfer conditions, cannot be purchased by a bona fide secondary
purchaser before the fulfillment of these conditions. The registry court is entitled in this respect to
reject a shareholders list, which does not show changes to the persons of the shareholders or the scope
of their participation, but rather only announces them. The Federal Court of Justice has thereby
confirmed that the expectancy right of the first purchaser concerning a share in a GmbH (limited
liability company) is protected more strongly than his full legal rights would be and the Supreme
Court of Justice has in its decision rebuffed the various efforts to highlight transfer restrictions. In the
future, in the case of the assignment of limited liability company shares with delayed terms, it will be
sufficient to file the revised shareholders list with the commercial register (Handelsregister) after the
fulfillment of the terms of the share transfer.
Initial Situation
In the deciding case, the notary concerned with a share purchase agreement for a limited liability
company filed a shareholders list with the commercial register with the comment that the shares in a
limited liability company of either of the two shareholders are “assigned with transfer terms which are
yet to be fulfilled”. The registry court advised the notary that the filed list could not be admitted since
it did not already contain any actual changes. In spite of this advice, the notary adhered to his request
for the acceptance of the filed shareholders list and justified this with the possibility of a bona fide
secondary purchase, in case the delayed conditional assignment would not be accepted in the list of
shareholders. Consequently, the registry court rejected the acceptance of the list into the registry file.
The notary’s complaints directed against this were rebuffed by the responsible Higher Regional Court
(Oberlandesgericht – OLG) of Hamburg as they were deemed to be unfounded.
The Federal Court’s Decision
Der The Federal Court confirmed the opinion of Hamburg’s Higher Regional Court and clarified that
the registry court, which may examine whether a filed list corresponds to the legal requirements, is
entitled to reject a new list, which shows no change to the persons of the shareholder or the scope of
their participation, rather only announces such changes. The Court asserts that it is not at the
participation’s discretion to deviate from the explicit statutory provisions in the contents of their filed
shareholders list in order to add further elements. This also opposes the principles of the register’s
clarity. This is to be distinguished from the case that an amendment, which is to be incorporated into
Bona fide rights protection demystified in Germany
the list, has already occurred, for which the law provides no compelling guidelines for the presentation
of these changes in the shareholders list (the same senate of the Federal Court had correspondingly in
a decision from 1 March 2011 considered the renumbering of assigned shares in the shareholders list
as an accepted change in the registry file).
The Federal Court further implemented in its decision, dated 20 September 2011, that it is the notary’s
duty to file an updated shareholders list with the commercial register immediately “after the coming
into force of every change” to the persons of the shareholders or to the scope of their participation. By
the assignment of a business share under transfer conditions which have yet to be fulfilled, this applies
only after the fulfillment of the terms, namely with the coming into force of the changes in the persons
of the shareholders.
The Federal Court is concerned in detail with the possibility of a bona fide secondary purchase and the
existing danger of an interim loss of rights for the primary purchaser of shares in a business with
conditions which are yet to be fulfilled. For this purpose, the Federal Court clarifies that such a loss of
rights does not threaten the primary purchaser, since shares in a limited liability company, which have
transfer conditions that are yet to be fulfilled, cannot, by act of law, be purchased by a secondary
purchaser in good faith until the fulfillment of the conditions. According to the Court, whether the
bona fide purchase by a secondary purchaser of shares in a limited liability company, which have
already been assigned, albeit with yet to be fulfilled transfer conditions, and thereby the breach of the
basic valid priority principles is possible, is to be determined according to the regulations regarding
the purchase of company shares from persons without the authorization to sell the shares, and the
scope of the bona fide rights protection for the shareholders list, which were introduced with the
German Act to Modernize the Law on Private Limited Companies and Combat Abuses (MoMiG).
According to the wording of the law and the legislative intent, the scope of the bona fide rights
protection for the shareholders list encompasses, however, only the good faith towards the legal
ownership of the registered shareholders, i.e., that the persons recorded in the shareholders list are in
actual fact shareholders. In contrast, the Court maintains that the shareholders list is not suitable to be
used as legal semblance declaring that the shares listed within are free from encumbrances (e.g. in
relation to pledges or usufruct), that the shareholders are not restricted by the company’s articles in
their authority to have command over the company shares, or even, as in the present decision, that the
shareholders recorded in the list have at their disposal these, which are not already assigned with terms
which have yet to be fulfilled.
The Significance of the Decision
With its decision, the Federal Court has removed the uncertainty in practice, which has existed since
the changes to the law on limited liability companies (GmbHG) by the German Act to Modernize the
Law on Private Limited Companies and Combat Abuses (MoMiG), namely the assignment of shares
with terms which have yet to be fulfilled, as characterized in everyday larger M&A transactions with
the delay between signing and closing.
Firstly, the Federal Court allows the registry court a certain examination authority in respect of the
shareholders lists’ adherence to legal requirements. This authority was until now not undisputed, since
the registry courts were to some extent considered in the legal discussion as a pure depository without
their own rights of examination.
In addition, for the notarized share purchase agreement for the transfer of shares with terms which are
yet to be fulfilled, the decision contributes to the necessary clarity, that in such cases it is then
necessary for the notary to file an updated shareholders list with the registry court when the changes to
the persons of the shareholders come into force with the fulfillment of the terms.
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Bona fide rights protection demystified in Germany
Finally, with its decision, the Federal Court has put into perspective the revaluation of the
shareholders list as a contribution to the participation transparency in legal dealings, a point which
was to some extent inflated in the legal discussions, and at the same time it has confirmed a legal
curiosity, that was intensely discussed after the changes made to the law on limited liability companies
(GmbHG) by the German Act to Modernize the Law on Private Limited Companies and Combat
Abuses (MoMiG); a solution for this curiosity is being sought, namely that the bona fide purchaser of
a share in a limited liability company is less protected for a purchase from (still) authorized persons
than for a purchase from (completely) unauthorized persons and respectively that a purchaser of
shares with transfer terms which are yet to be fulfilled, who is not (yet) recorded in the shareholders
list, is protected against the bona fide loss of his legal status, whilst for the non-recorded holder of full
legal rights only the claim for damages against the non-authorized seller remains after a loss of rights.
The boundaries of the legitimization effect of the shareholders list regarding material encumbrances of
shares in a limited liability company and restrictions on control in the company agreement are thereby
clearly drafted by the Federal Court and the possibility of a bona fide share purchase in the case of
transfer restrictions has been rebuffed by the Supreme Court with reference to legislative intent.
Consequently, as there is no need for these, the Federal Court rejects all mechanisms developed in
practice for protection of the primary purchaser in order to highlight transfer restrictions (so-called
“Two-List-Models” and “Opposition Solution”). In the future, in the case of the assignment of shares
in a limited liability company under delayed terms, it will be sufficient that the revised shareholders
list is only filed with the commercial register after the fulfillment of terms. At the same time, there is
now clarity for M&A practice, as right up until the payment of the purchase price the purchaser of
shares in a limited liability company is not threatened by the risk of a loss of rights.
The risk of a loss of rights is also not necessarily applicable in the case of a possible delay in payment.
This development is very welcome, however, on the other hand the decision also once again provides
evidence that the legal security which would be gained through the implementation of the bona fide
rights protection for the purchase of shares is only a veneer and that despite extensive due diligence,
up-to-date information from the commercial register and of the shareholders list, the purchaser of
shares in a limited liability company is not protected against the preferential assignment of shares in a
limited liability company, which have yet to be fulfilled conditions upon them. The practice will adapt
in particular for the sale of shares to several potential bidders and corresponding mechanisms must be
developed for the protection of secondary purchases, which otherwise come to nothing.
Author
Dr. Mathias Schulze Steinen
mathias.schulze-steinen@klgates.com
+49.69.945.196.260
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Bona fide rights protection demystified in Germany
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