Getting rid of minority shareholders through a restructuring plan

Eliminating co-shareholders who simply do not wish to participate in the future financing of the company is legally impossible under German corporate law. So what can be done if a company requires financing from the shareholders to close a future liquidity crisis and not all shareholders are willing to provide such financing? This article shows how it is possible to exclude minority shareholders under restructuring law. Minority shareholders in German legal entities should be aware of this risk.

No solution under company law

Under German corporate law, it is generally not possible to get rid of shareholders simply because they do not wish to participate in further financing. If the articles of association do not provide for an obligation for additional contributions, a shareholder must have committed a serious breach of duty to be dismissed, and they are then entitled to compensation. Why can insolvency law allow more? Because imminent insolvency and thus a shift of duties justifies a different approach. 

EU Directive and preventive restructuring procedure

EU Directive 2019/1023 created the possibility of restructuring companies outside of insolvency proceedings in a harmonised manner across Europe. Germany implemented this through the „Gesetz über den Stabilisierungs- und Restrukturierungsrahmen für Unternehmen (StaRUG)“ on 01 January 2021 shortly before restructuring proceedings were defused in favour of contractual partners. This is one of the reasons why the procedure at first was only used very little. Companies are now increasingly taking advantage of the possibilities. 

Getting rid of minority shareholders

A restructuring plan requires the majority approval of 75% of those affected by the plan. In contrast to an insolvency plan, not all creditors have to agree – only those that the debtor company determines to be affected. It is possible that only the shareholders of the debtor company are involved in the restructuring process. Shareholder who hold less than 25% of company shares can be outvoted.

Voting rights – company law versus restructuring law

Special voting rights do not apply when voting on a restructuring plan. Only the amount of participation in the nominal capital is decisive. Restructuring law therefore overrides company law. 

For example, in the case of an insolvency application due specifically to imminent illiquidity, shareholders are required to approve the advertisement. The majorities are based on company law. It is not yet clear whether the voting rights for this are determined by restructuring law. However, the question is important because it concerns the main application of the restructuring procedure.

Advice

Minority shareholders should be on their guard of the potential negative impact to them. It is even more important to hold at least 25.1 % of company shares. It should be noted that individual EU countries have implemented the EU Directive differently, including regarding voting rights requirements.

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Thorsten Hunsalzer is an attorney, specialist solicitor for insolvency law, managing partner and associate at Gehrke Econ, and a former insolvency administrator. He has almost 20 years’ experience in corporate restructuring, turnaround, M&A and due diligence. His focus is on avoiding insolvency proceedings.