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.:
- Shareholders themselves may be appointed as managing director directly in the company’s articles of association for the duration of their position as shareholder.
- Individual shareholders or groups of shareholders may be given consent rights.
- Shareholders can be granted the right to submit a non-binding proposal to the shareholders;
- Shareholders can be given the right to nominate managing directors in binding form, i.e. so that the shareholders are obliged to appoint the duly nominated person as managing director (provided the proposal is not inconsistent with the company’s interests).
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.
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 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.
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.
To avoid this kind of complication, it is advisable when establishing a company or acquiring shares in a company, to
- decide on modes of securing influence over important processes in the company that will endure in the event of a dispute, i.e. with a sufficient degree of legal certainty; and
- include methods to resolve stand-offs between shareholders in the articles of association from the beginning, in order to achieve an orderly and quick resolution of this kind of dispute.
For information on Austrian corporate law, please contact Katrin Hanschitz or your customary relationship professional at KNOETZL.