05-12-2020  | Special newsletter Coronavirus

Facilitations for circular resolutions in the GmbH by the COVID Mitigation Act – overview and open questions




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The Act to Mitigate the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedure Law (“COVID-19 Act”) provides for the option of online general meetings (“virtual general meetings”) for AGs [stock corporations], which numerous small and large stock corporations, including DAX-listed corporations, are already frequently using. While the COVID-19 Act does not grant the option of holding virtual shareholders’ meetings to GmbHs [limited liability companies], Article 2 Section 2 COVID-19 Act provides for facilitating resolutions by way of circulation in 2020.

1. Previous legal status and facilitations by the COVID-19 Act

The Limited Liability Companies Act generally expects that resolutions are passed at shareholders’ meetings in the physical presence of shareholders (“attendance meetings”). The applicable provision in Section 48(2) Limited Liability Companies Act, however, already allows for resolutions to be passed outside of attendance meetings by way of casting votes in writing or in text form if all shareholders agree to the proposed resolution itself or at least to the procedure for passing resolutions (“resolution by circulation”).

As a result, however, a resolution by circulation is then impossible under current law if – just – one shareholder objects to the procedure. The COVID-19 Act now excludes this de facto “veto right” of each individual shareholder against a resolution passed by circulation. For this purpose, Article 2 Section 2 COVID-19 Act stipulates that in 2020, in deviation from Section 48(2) Limited Liability Companies Act, shareholder resolutions may be passed in text form or by submitting votes in writing even without the consent of all shareholders.

The objective of this provision is to facilitate the passing of resolutions by circulation, thus avoiding physical shareholder meetings.

2. Procedures of adopting resolutions

The details of how such resolutions may be adopted, however, are not further specified in the COVID-19 Act. To avoid the risk of appeals and the nullity of the resolutions adopted, particularly with respect to the protection of minorities, it is strongly recommended to observe deadlines and forms comparable to those of attendance meetings and to offer the possibility of debate.

2.1 Invitation with notification of the agenda and voting proposals

First of all, it must be ensured that all shareholders are in fact informed about the voting and agenda items. As with attendance meetings, invitations to vote and the agenda should be sent out in the form stipulated in the articles of association or by law. It is advisable to include written justification of the agenda items and proposed resolutions.

2.2 Video or telephone conference and deadlines

As mentioned above, debates should be made possible. The closest option to attendance meetings are video conferences, but telephone conferences should also allow sufficient opportunities for debate. It is important for shareholders to have the possibility to ask questions, put forward their views, and discuss the agenda items.

To give shareholders sufficient time to prepare and organize their time, video or telephone conferences should only be held after the periods for invitations to attendance meetings according to the articles of association and statutory period have expired. If the period according to the articles of association is two weeks, for instance, the video or telephone conference should in principle only take place after the expiry of two weeks from receipt of the request to pass a resolution by circulation. In individual, especially urgent, cases, however, it will certainly be possible to convincingly argue that a shorter period appropriate to the situation and the subject matter of the resolution would also be permissible, since such conferences can be organized more easily than attendance meetings.

2.3 Voting and deadlines

To ensure that the debate is included in the voting process and that the procedure is comparable to attendance meetings, voting should only take place after the debate. The shareholders should again be given sufficient time to submit their votes and to submit them by email, fax, or postal mail.

2.4 Determining majorities

The majority required by law or the articles of association must be obtained for resolutions to be passed. It is generally determined on the basis of votes cast, unless the articles of association provide otherwise. In addition, a quorum for attendance as stipulated in the articles of association for attendance meetings or other requirements for the passing of resolutions must also be observed. If the quorum is not reached on the basis of votes cast, new invitations to the meeting should be issued with the information that resolutions may now be passed irrespective of the number of votes cast.

3. Applicability in case of existing provisions in the articles of association?

It is unclear whether the facilitations of Article 2 Section 2 COVID-19 Act also apply to those companies whose articles of association already contain provisions on resolutions by circulation.

It is possible to deviate in the articles of association from the provision on resolutions by circulation in Section 48(2) Limited Liability Companies Act. Accordingly, many companies have adopted procedural simplifications or simply repeat the wording of the law in their articles of association.

There are different views on this topic. In line with the statements made by the German Notaries’ Institute, it is our opinion that the better arguments are in favor of a fundamental applicability of the facilitations, even where the articles of association contain other provisions. Since the purpose of Article 2 Section 2 COVID-19 Act is to facilitate the adoption of resolutions by circulation to the extent possible, this objective would largely not be achieved if companies with provisions in their articles of association would not be able to make use of the simplifications.

The case should only be different if it resulted from the interpretation of the provisions of the articles of association that even if Article 2 Section 2 COVID-19 Act were applicable, the resolutions by circulation would nevertheless have required the consent of all shareholders. In our opinion, however, such an interpretation is usually not justified if the articles of association only provide for procedural simplifications or only repeat the legal text.

Legal uncertainties , however, remain, which the legislator should clarify promptly.

4. Notarization of resolutions by circulation

It is further unclear whether the above-described simplifications for resolutions by circulation may also be used if notarization is required for the relevant shareholder resolution, such as in the case of amendments to the articles of association.

The COVID-19 Act does not contain any provisions in this regard. According to the sense and purpose of the simplifications established by the COVID-19 Act, the German Notarial Institute and some legal authors argue that the simplifications should also apply to resolutions that require notarization. Because according to prevailing opinion, resolutions to amend the articles of association that require notarization may, in principle, also be adopted by way of a written resolution under Section 48(2) Limited Liability Companies Act.

There are various options for implementing the notarization of resolutions by circulation in practice:

  • The shareholders may have their votes notarized separately by one notary (or several notaries). The notarized votes are then transmitted to a notary appointed to receive the votes who will notarize the result of the resolution.
  • In addition, it is even considered permissible for the respective votes of the shareholders to be only cast “privately” (i.e., in writing or in text form, without notarization or certification) and for the resolution to be determined on the basis of these votes to be then notarized by a person appearing before the notary (e.g., a meeting or voting chairperson appointed by the shareholders).

5. No notarization of resolutions in the event of compulsory attendance meetings / notarization based on proxies and “video-supported” notarizations

Adopting resolutions by circulation (requiring notarization) using the simplifications of the COVID-19 Act is not possible, however, if the law stipulates shareholder meetings and thus compulsory attendance. This applies to resolutions requiring notarization under the Conversion Act and the convocation of shareholder meetings in the event of the loss of half of the share capital in accordance with Section 49(3) Limited Liability Companies Act.

Where attendance meetings are to be held for notarization purposes, the following options for simplification exist on the basis of the applicable law:

5.1 Notarizations based on proxies

Notarization without the presence of all shareholders is possible on the basis of proxies. Thereby, all shareholders authorize one shareholder or an outside person in writing to cast the votes on their behalf in the course of the notarization. In practice, however, it needs to be taken into account with this option that in each case it is necessary for the proxy giver to exempt the proxy holder from the restrictions of multiple representation and self-contracting in accordance with Section 181 Civil Code. Such exemptions may often be problematic for legal entities.

Prior to notarization, it should be agreed with the notary whether proxies issued privately (i.e. in writing or text form) are in fact sufficient for the notary or whether notarization or at least certification of the proxy is required. This is of importance because practice has shown that notaries sometimes handle this issue differently.

5.2 No virtual, but “video-supported” certification

While current law does not yet provide for the option of “virtual certification” by means of video and audio connection of the parties to the certification, a practical remedy is offered by “video-supported” certification.

This is a procedure which is not governed by law, but practiced by some notaries, in which the parties authorize one (or more) individuals in writing to represent them in the notarization, while at the same time (informally) also being connected to the notarization by way of telephone or video conference. The parties added to the notarization by audio or video (i.e., the persons granting the proxy) may grant the authorized person in the notarization release for exercising the previously granted power of attorney. This reduces the physical presence of persons in the notarization, while still enabling all parties to participate in the actual process of the notarization.

In the case of “video-supported” notarizations, however, it should be noted that some notaries’ chambers take a critical view of the procedure, especially where consumers are involved. In individual cases, the possibility of “video- supported” notarization should therefore be agreed with the notary in advance.

5.3 Loss of half of the share capital

If half of the share capital is lost, general managers are obligated to convene a shareholders’ meeting in accordance with Section 49(3) Limited Liability Companies Act. In the sense of an early warning system, this is supposed to enable shareholders to resolve countermeasures and restructuring measures at an early stage.

When failing to do so, general managers are liable according to Section 43(2) Limited Liability Companies Act, if causal damage is incurred. In our view, however, general managers should be able to avoid this liability if they invite shareholders to a video conference in accordance with the above principles and then have resolutions passed by circulation. Legal clarification would also be useful in this respect.

CONCLUSION

In 2020, the legislator has made it easier to pass resolutions by circulation. There are open questions, however, regarding the procedure and its applicability to companies with specific provisions in their articles of association. The legislator should urgently provide clarity for these cases. In any event, the provisions applicable to attendance meetings should also be applied accordingly to resolutions by circulation to the extent possible. In addition, particularities need to be observed for resolutions that require notarization.

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