Company & Commercial - Austria Fifty-fifty shareholder structures entail the risk of deadlock situations. Unless a dispute resolution mechanism kicks in, the conduct of the management can be of crucial importance in such a situation if the dispute relates to a matter within the managing directors' competence or control.
The Supreme Court recently rendered a judgment dealing with the distribution and allocation of profits to reserves in a case involving such a 50-50 ownership structure.(1) The dispute arose in the context of the distribution of profits of an Austrian stock corporation (AG). The sole shareholder of the stock corporation was an Austrian limited liability company (GmbH), 50% of which was owned by two families. For several years the dividend policy of the AG had been to distribute a share of its profits to the GmbH and to carry the remainder forward. Departing from this, one of the shareholders of the GmbH requested in the 2004 annual meeting that a resolution be passed to instruct the management of the GmbH to vote for the AG to distribute its entire profit. Due to the 50-50 ownership structure of the GmbH, no majority was obtained for this and no resolution instructing the GmbH's management was passed.
The managing directors of the GmbH subsequently voted for only a partial distribution of the AG's profits to the GmbH, in line with previous years. The AG's supervisory board approved this. One of the GmbH's shareholders filed a claim for damages, arguing that the GmbH should have received approximately ˆ2.5 million more in profit.
The Supreme Court ultimately dismissed the claim. Generally, the court held, the entire profit must be distributed to the shareholders unless the articles of association provide otherwise. While there was no such deviating provision in the articles in this case, the court still accepted that a deviating decision could be taken by the unanimous decision of all shareholders. The court also confirmed that profits carried forward could constitute a damage for which redress can be sought. The fact that shareholders had voted for a distribution of the entire profit did not by itself exclude a potential liability of the management for a violation of their fiduciary duties. However, the Supreme Court found that the GmbH's managing directors had not violated their duties. Most importantly, the court found that in the case of a deadlock situation in which the shareholders could not decide, the management would also be authorized to decide upon matters which are normally the prerogative of the shareholders, provided that they based their decision on objective grounds. The management had followed the same practice for several previous years and no reason had been demonstrated to warrant deviating from this rule on objective grounds. Thus, the management of the GmbH could not be punished for their decision.
ILO | 
