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Company/Commercial- Germany

The Holzmüller Doctrine

Pursuant to Section 76(1) of the German Stock Corporation Act, the management board of a stock corporation is solely in charge of the operations of the company. Unlike in private limited companies, the shareholders may not direct the management board with regard to the day-to-day operation of the company's business. However, in 1982 the Supreme Court held in a landmark judgment known as the Holzmüller decision that in certain cases the management board's competence to decide on management issues is restrained by an unwritten competence of the shareholders' meeting to decide on measures of particular importance.(1) The decision was based on a case where the management board of the defendant stock corporation transferred the most valuable part of its business, which amounted to approximately 80% of its total assets, to a subsidiary. The court held that the management board was not entitled to transfer the assets to the subsidiary without the consent of the shareholders' meeting, as this measure:

  • touched upon the core of the company's operation;
  • related to the most valuable part of the company; and
  • entirely changed the corporate structure.

 

However, the court also held that the lack of shareholder approval did not render the transfer null and void as the consent requirement was held to be purely of an internal nature. Thus, the consequence of lack of approval would be only claims for damages against the management board. The Holzmüller doctrine triggered a debate among German legal scholars and led to a high degree of uncertainty. For over 20 years it was entirely unclear which management decisions needed shareholder approval. As a consequence, German stock corporations tended to submit various measures deemed to be important to the shareholders' meeting for its approval; the sale of important subsidiaries in particular was frequently seen to fall within the Holzmüller doctrine.

 

The Gelatine Decision

In 2004 the Supreme Court finally had the chance to decide another case dealing with the unwritten right of the shareholders to resolve on important management decisions. In the so-called Gelatine decision(2) the court clarified some of the points at issue. The court stressed that the unwritten right to demand shareholder approval must remain an exception from the rule that the management board runs the company. The court clarified that the Holzmüller doctrine aims to protect shareholders from serious infringements of their membership rights and their financial position as shareholders. Such infringements only arise in cases (i) where the organizational structure of the company is substantially altered, and (ii) that are akin to a change to the company's articles of association. As changes to the articles of association require a majority of two-thirds of the shareholders in German law, the court concluded that matters falling under the Holzmüller doctrine would also need to be passed by such a majority. Furthermore, the court clarified that the Holzmüller doctrine aimed to protect shareholders from a so-called 'mediatization effect'. The term describes the loss of shareholders' influence on management, profit distribution and other decisions resulting from the creation of a group or holding structure where the actual operations are carried out on a subsidiary level. The court further held that a serious infringement of shareholders' rights comparable to the Holzmüller Case would occur only if the management decision affected approximately 80% or more of the company's assets. Decisions affecting fewer than 80% of the company's assets would not, in principle, trigger the requirement to obtain shareholder consent.

 

Although the Gelatine decision clarified various points that the Holzmüller decision had left open, there remained some uncertainty as to the scope of the Holzmüller doctrine. Particularly, it remained unclear whether the sale of subsidiaries to a third party might trigger a consent requirement.

 

Most recent decision

In its latest decision dated November 20 2006,(3) the Supreme Court dealt with this important remaining question in the briefest of ways. Rejecting the application for a further appeal, the court merely stated in a very short decision that a mediatization effect, which is now seen by the court as the central reason for the Holzmüller doctrine, does not occur in cases where a subsidiary is sold to a third party and that such cases thus do not fall within the scope of the Holzmüller and Gelatine doctrine.

 

Comment

This latest Supreme Court decision strengthens the position of the management board of stock corporations. Divestment decisions on the sale of subsidiaries may be passed by the management board without the consent of the shareholders. While some shareholders may bemoan this development, this latest decision does help to clarify the scope of the Holzmüller doctrine. As Holzmüller decisions - like any other decision by the shareholders' meeting - are fraught with the risk of being challenged and have in the past provided the background for numerous frivolous shareholder actions, the decision will help German stock corporations to run their business effectively and to use divestment opportunities when they arise without the need to convene extraordinary shareholders' meetings.

 

International Law Office