A GmbH,
i.e. a company with limited liability, is a favoured form of corporate entity
in both Austria and Germany.
While stock
corporations (Aktiengesellschaften,
AG) are required for certain purposes – such as if the company is to be listed,
if it is a bank, insurance company or is engaged in other regulated industries
– they are subject to numerous structural restrictions, including those limiting
the shareholders’ direct influence on the management of the company.
The laws
governing a GmbH, on the other hand, are intended to be far more flexible
and to allow a broad spectrum of structural and strategic constellations. This goes far to explain why there are over
100,000 companies formed as a GmbH in Austria and only slightly over 1,000
stock corporations. Statics for Germany show a very similar picture, with only 1.3%
of German corporate entities taking the form of AGs.
However,
the devil is in the detail. If too creative an approach is taken when setting
up the corporate governance structure and, therefore, courts disallow it, the consequences
– both for a pending dispute and for the future of the company – can be painful.
Setting Up the Procedure for Choosing the
Managing Directors
Probably
the most important structural decision when determining the governance of the
GmbH is the process through which the company’s managing directors are
appointed. If rules established by the company’s founders on this issue are
unclear, insufficient or prove to be invalid for any number of reasons, the
operation of the company can end up being blocked in the event of a dispute,
potentially requiring interim injunctions and/or court-appointed emergency
managing directors.
Under both
Austrian and German law, if the articles of association contain no special
rules, managing directors are appointed by shareholder resolution (Sec
15 of the Austrian Act on Companies with Limited Liability; Sec 46 of the
German Act on Companies with Limited Liability).
Various alternative permutations are generally held also to be
permissible, e.g.:
How Far Can the Articles of Association Go?
In Austrian
– and German – legal literature, the views as to the admissibility of further
alternative forms of influencing who runs the company differ greatly. The gamut of opinions runs from disallowing
any delegation of nomination or appointment rights away from the shareholders
to permitting broad delegation of such rights to other organs (to advisory
committees, to the Supervisory Board, even to other managing directors) or (in
Germany) even to outsiders.
Recent Supreme Court Ruling
In a
recent ruling (OGH 6 Ob 183/18g), the Austrian Supreme Court had to decide whether
a provision providing that the Supervisory
Board bindingly nominates managing directors is valid.
The
Facts:
When
establishing the corporate governance structure, the founders in this case had
decided that, in effect, managing directors were to be chosen by a simple majority
in the Supervisory Board. Under the company’s articles of association, the
shareholders were obliged to vote to appoint the managing directors in
accordance with the Supervisory Board’s proposal. However, a group of
shareholders holding 50% of the shares had declined to vote in accordance with
the Supervisory Board’s proposal. The result: The other 50% group of
shareholders, who clearly dominated the Supervisory Board, were unable to push
their candidate into the directorship.
The
Ruling:
The Austrian
Supreme Court deliberated extensively, also taking a look across the border at
Germany, and finally based its decision on the primacy of the shareholders will: Because the appointment of managing directors must
be directly based on the will of the shareholders, the Supervisory Board cannot
be effectively entrusted with appointing or even bindingly nominating the
managing directors of the company.
The Consequences:
Since the offending
provision in the articles of association was accordingly held to invalid,
neither of the warring 50% groups was or will be able to successfully push
through the appointment of their candidate as the articles of association now
stand. Agreement on amending the articles of association is generally difficult
to achieve at this point of a dispute.
In the
case reported above, there were other managing directors on the board, so the
company was able to continue to operate. In situations where this is not the
case, this kind of stand-off can jeopardize both the immediate management and
the long-term future of the company.
Our Recommendation
To avoid this kind of complication, it is advisable when establishing a
company or acquiring shares in a company, to
For information on Austrian corporate law, please contact Katrin Hanschitz or your customary relationship professional at KNOETZL.
6Ob183/18g : https://www.ris.bka.gv.at/Dokument.wxe?Abfrage=Justiz&Dokumentnummer=JJT_20190321_OGH0002_0060OB00183_18G0000_000
§ 15 GmbHG: https://www.ris.bka.gv.at/Dokument.wxe?Abfrage=Bundesnormen&Dokumentnummer=NOR12023001
