4.3.5.5 Freeze-out

A further important ground for exit is present if the majority shareholder abuses his controlling power at the expense of a minority shareholder.1 The answer to the question whether the majority shareholder has abused his power depends on the circumstances of the case. It is of interest that not every violation of the interests of the minority shareholder by the majority shareholder justifies an exit right.

The most common example of abuse of majority power is the freeze-out (Aushungern) of the minority shareholder.2 In this situation, profits are not distributed by way of dividends, but accumulated within the company. As appears from § 29 and § 46 No. 1 GmbHG, a resolution about the distribution of the profits has to be adopted by the general meeting by majority of votes. It is in the discretion of the general meeting to resolve for distribution or for reservation of profits. A prima vista, the shareholders are free to resolve to reserve the profits repeatedly.

Nevertheless, the freedom to determine the destination of profits is constrained by the duty of loyalty. This duty demands that a resolution is adopted in a sensible and commercial way. From this perspective, a balance has to be struck between the interest of the company in reservation of profits and the interests of the shareholders in distribution of profits.3 How this balance is to be struck depends on the circumstances of the case, while it is difficult to devise universal rules on distribution of profits.

Excessive accumulation of profits can be regarded to be in conflict with the duty of loyalty towards the co-shareholders. A shareholder can challenge the resolution for reservation at the court. This may lead to the nullification of the decision. German courts have shown to be willing to intervene in this situation.4

Additionally, the excessive accumulation of profits may form an important ground in justifying the exit of the shareholder, since the repeated nullification of resolutions will make it very unattractive for the shareholder to remain in the company. In this situation, a shareholder is allowed to exit.5 Busch indicates that, in this respect, the German exit remedy and the English unfür prejudice remedy run parallel.6 However, a shareholder who invokes the oppression remedy too readily, by claiming that the reservation of profits is excessive, runs a major risk of being dismissed in his claim by the court.7 If the accumulation of profits is not excessive, no important reason is present.8