4.5 Debate about exit right at will

It is interesting to note that in Germany the introduction of an exit right at will (ordentliches Austrittsrecht) has been subject to an extensive debate. Some legal authors, such as Teichmann and Reuter, have pleaded for the introduction of an exit right at will. In the opinion of Teichmann, though, an exit right at will is only preferred if the interests of creditors have been sufficiently taken into account. Reuter added that an exit right at will would help creating a market for shares in private limited companies.1 Both authors draw a parallel with the exit right at will applying to partnerships.

The position adopted by Teichmann and Reuter has been heavily criticized by other German legal authors. According to the leading opinion in legal literature, shareholders of a GmbH have no exit right at will.2

Becker points to the fact that an exit right at will infringe the rule that contracts should be obeyed: pacta sunt servanda.3 Moreover, Becker points to the fact that a shareholder may abuse an exit right at will.4 Abuse is present if a shareholder uses his exit right at will and claims for compensation in anticipation of a bankruptcy of the company. In this way, the hierarchy between creditors and shareholders with respect to entitlement to the company's equity may be blurred.

Müller has further elaborated the pros and cons of the exit right at will in his dissertation. He examined whether differences between a partnership and a GmbH justify taking distinct positions towards an exit right at will. His views can be summarized as follows.

First, attention is drawn to the fact that a civil-law notary is involved when a shareholder joins a GmbH. Assuming that the civil-law notary duly informs the shareholder, further to his duty to inform parties (Belehrungspflicht), the shareholder may be aware that an exit is not easily enforced. Müller highly doubts whether this sole argument justifies a distinct treatment.5

Furthermore, Müller holds that the argument that the justification of the distinction must be found in the liability of partners in a partnership on the one hand and the limited liability of shareholders in a GmbH on the other hand is not convincing.6 In this respect, he points to the fact that the liability of a limited partner of KG (Kommanditgesellschaft) is limited, but this limited partner stil has an exit right at will.7

Thirdly, Müller considers that in the case of an exit from a partnership, the interest (Anteil) of the exiting partner is added to the remaining interests in the partnership.8In contrast to the partnership, the GmbHG prescribes which rules have to be complied with either by withdrawal of shares of purchase of own shares by the GmbH.9 These rules particularly relate to the maintenance of the capital of the company. Müller holds that many German companies will not have sufficient distributable equity to assist in the exit of a shareholder. Moreover, he points to the fact that a decrease of the capital of the company is complicated and due to the requirement of a minimum capital of €25,000 will often not be possible. Furthermore, in his opinion, a decrease of capital may lead to negative publicity and a lower creditworthiness of the company. Therefore, Müller holds that the interest in maintaining its shareholders or partners is more of value to the GmbH than to the partnership. According to Müller this justifies an exit of a shareholder only if an important reason is present.

In addition, Müller puts forward that there is a risk of arbitrary use of the exit right at will. A restricted exit right, though, may afford protection against a significant burden on the equity of the company. He disagrees with Reuter, who has put that an exit right at will may increase the readiness of investors to become shareholders.10 Müller asserts that an exit right at will undoubtedly increases the number of exits, and doubts whether the compensation obtained will be reinvested in companies. Besides, the risk of instability of the capital of the company may make the GmbH even less attractive to invest in.

Another relevant aspect put forward by Müller is the risk of abuse of the exit right at will by the minority shareholder.11 Currently, the majority tule is adhered to in order to deal efficiently with control within companies. Minority shareholders are afforded protection against majority abuse by means of the duty of loyalty. An exit right at will may negatively affect this balance. The threat of using an exit right at will may be a powerful means to influence the decision-making process in the company. According to Müller:

Lastly, Müller pays particular attention to transfer restriction clauses. Transfer restriction clauses intend to create stability in the company and control on who joins the company. Shareholders are free to choose whether they want to include transfer restriction clauses in the articles of association or not. In the opinion of such commonly used transfer restriction clauses badly fit in with an exit right at will, which violates this stability. According to Müller, shareholders that benefit from transfer restriction clauses also have to cope with the downside of these clauses, unless this leads to unreasonable consequences.13

Schmidt shares the view of Müller that an exit right at will is not in line with transfer restriction clauses. He points to the risk that a shareholder, onder the threat of using his exit right at will, may request his co-shareholders to approve the transfer of his shares in accordance with the transfer restriction clause.14 Moreover, Schmidt puts forward that it is hard to justify that the coshareholders must carry the burden in the situation that the shares cannot be sold.15