CAN A SHAREHOLDER STOP THE MANAGEMENT FROM SELLING THE COMPANY’S ASSETS?
When disputes between shareholders escalate, one of the shareholders may be tempted to transfer the business to a new entity. Can the shareholder be stopped if he succeeds in obtaining a majority vote?
In a recent Austrian case, shareholder A (47.5%), sold the assets of a company with limited liability (GmbH) shortly after becoming the sole managing director with the support of the minority shareholders (5%). The sale was approved by a shareholders’ resolution, passed with the support of the same minority shareholder (5%), i.e. with a simple majority. The purchase price of the assets was only minimally higher than the company’s debts, which the company retained in the deal.
Shareholder B (also 47.5%), the former, recently displaced managing director, objected, and applied for a prohibitory injunction against both the company and its managing director, additionally requesting interim injunctive relief to stop the sale. The injunctions were aimed at prohibiting the implementation of the shareholders’ resolution and stopping the Purchase Agreement.
In deciding whether to issue these interim injunctions, the Austrian Supreme Court took the opportunity to clarify a number of corporate and procedural issues:
1. INTERIM INJUNCTION – IRREPARABLE DAMAGE
Sec 48 para 4 of the Austrian Act on Companies with Limited Liability provides that if there is a risk of irreparable damage to the company (not to a shareholder!), the courts may issue an interim injunction prohibiting the implementation of a shareholders’ resolution.
In a recent decision, the Supreme Court had denied an interim injunction aimed at preventing the sale of the company’s customer list, holding that the company had obtained a fair price for the sale which it could invest, thus compensating for the deprivation of ongoing proceeds from these listed customers during the proceedings. Practitioners criticized this decision, pointing out that once the customer base is lost, it cannot simply be “re-purchased”, and as it is lost for good, the damage is actually irreparable.
The Supreme Court cited this criticism in the current case and held that the sale of the entire assets of the company at a price only marginally higher than its debts (which were not part of the sale) does not, in any event, compensate the company for the lack of ongoing proceeds. Even if the Purchase Agreement were to be reversed in the main proceedings, the company would not be able to recover the damage incurred. Moreover, the court noted, the assets sought to be sold included an extremely advantageous lease of business property. Under the Austrian Rental Act, if the tenant sells essentially all its assets to a third party, the landlord is entitled to raise the rent substantially. This, the court acknowledged, caused further, potentially irreversible, damage to the company.
In view of these otherwise non-recoverable damages, the lower court’s interim injunction against the company was held to be justified.
2. INTERIM INJUNCTION AGAINST MANAGING DIRECTOR
A particularly controversial issue in this case was the question of whether a minority shareholder could apply on behalf of the company for an interim injunction against the managing director, against whom the shareholder himself had no direct claims.
It is a settled principle under Austrian law that an individual shareholder of a corporation is not entitled to directly instruct the managing director(s). The proper forum to address such matters is the shareholders meeting or through circular written resolutions. (Certain exceptions apply for companies with limited liability if all the shares are held by a sole shareholder.) The managing director has no legal relationship with the shareholders; his legal relationship is with the company. He is, moreover, generally liable only to the company and not to the shareholders. Consequently, shareholders are generally unable to force the managing director(s) to act (or not act) in a certain way, also not by way of injunctions, interim or otherwise.
However, the corporate senate of the Austrian Supreme Court reasoned in this case that the point of the interim injunction is to secure the enforceability of the judgment in the main proceedings. If this aim can be served by an injunction that is enforceable directly against the managing director, it is irrelevant whether the shareholder applying for the injunction has a material right to prohibit the managing director from implementing the contract. The managing director, on the other hand, can have no independent interest in implementing the shareholders’ resolution on the sale of the assets during the pending proceedings. As a result, the minority shareholder’s application for an interim injunction against the managing director was allowed.
SALE OF SUBSTANTIAL ASSETS REQUIRES PRIOR APPROVAL WITH INCREASED MAJORITY
A further problematic issue was whether a simple majority was sufficient for a resolution approving the sale of all assets of a GmbH.
Sec 237 of the Austrian Stock Corporation Act requires that the transfer of all of the stock corporation’s assets requires prior approval in the form of a shareholders’ resolution. Failure to obtain such approval will make the transfer agreement invalid.
There is no corresponding rule for companies with limited liability (GmbHs).
In this context, the lower courts had applied the so-called Holzmüller Doctrine that was developed as case law in Germany and has been discussed at length in Austrian and German professional literature. Under this doctrine, management-initiated structural measures that severely impact the rights of the shareholders require the approval of the shareholders. Examples of the doctrine’s applicability include the sale of important subsidiaries and pushing substantial business units down to subsidiaries. According to the Holzmüller doctrine, in such cases the management is required to obtain prior approval, regardless of whether such approval is required under the company statutes; failure of such approvals can result in the management being subject to liability, provided however, that any contracts will remain valid.
The Supreme Court in the instant case, however, refrained from applying the Holzmüller doctrine and instead focused on Sec 237 of the Stock Corporation Act. After citing the Austrian and German legal literature at some length, the Supreme Court found that Sec 237 of the Stock Corporation Act applies mutatis mutandis to companies with limited liability (GmbHs), explaining that there is no reason to differentiate between stock corporations and GmbHs, as in both corporate forms extensive changes to the company’s structure require the shareholders’ prior approval. The sale of substantially all assets of the company, therefore, requires the prior approval of the Assembly with a majority of at least 75%. Consequently, the Purchase Agreement was held to be invalid and the application for prohibitory injunction allowed.
Austrian Supreme Court OGH 6 Ob 38/18h
Litigators and corporate practitioners will welcome that the Austrian Supreme Court has provided shareholders with an effective tool to prevent the de facto dismantling of a company during ongoing proceedings. In the case at hand, the acting managing director/shareholder had sold the company’s assets to a company directly under the influence of relatives of the director’s husband and had clearly intended to quickly finalize the sale. She, presumably, had little interest in the remaining shell of the GmbH, and in all likelihood intended to pursue the business in the new entity without interference from her former, warring, co-shareholder. An interim injunction against the company itself is, in such situations, often toothless. An enforceable injunction against the acting managing director/shareholder, on the other hand, has a more profound effect: Individuals are as rarely as indifferent to severe monetary fines issued against themselves personally as they may be about fines issued against the – exposed – company.
Some disappointment may result from the Austrian Supreme Court remaining reluctant to take a stance on the Holzmüller doctrine. The corporate senate of the Austrian Supreme Court appears to feel more comfortable applying an analogy to “written law”, i.e. to the provisions of the Stock Corporation Act, to the slippery slope of “unwritten law”. For now, practitioners will have to continue living with legal uncertainty as to when, over and above the instances set out in the company’s statutes and written law, structural measures will have to be submitted to the shareholders meeting for approval.
For more information on appropriate compliance measures and on internal investigations, please contact Katrin Hanschitz or your customary relationship professional at KNOETZL.