When a shareholder is expelled from a limited liability company under German law (GmbH) and his share redeemed, he is entitled to receive compensation. The amount of said compensation depends on the fair market value of the leaving shareholder’s share at the time of redemption. Hidden reserves are generally taken into account for calculating the compensation.
Determination of disposable assets
For reasons of creditor protection, the share capital of the GmbH cannot be used to pay the compensation. The total amount of the compensation to be paid must be available at the time when the shareholder’s expulsion is decided. This applies even if the parties have agreed to pay by installments. However, the company’s hidden reserves are not taken into account in determining whether or not the company has sufficient assets to pay the compensation from its disposable assets. Because in this case, unlike the calculation of the share’s fair market value, a pure accounting approach applies.
Lack of assets invalidates resolution
If, at the time of the resolution on the expulsion of a shareholder, the disposable assets are not sufficient to pay the compensation, the respective resolution will be void. The fact that both the company and the remaining shareholders are liable for the payment of the compensation does not change anything.
Hence, before adopting a redemption resolution, you should check the company’s asset situation and, if necessary, previously release hidden reserves. Our attorneys specialized in German corporate law will be happy to assist you.
Federal Court of Justice (BGH), judgement of June 26, 2018, file ref.: II ZR 65/16