Terminating a shareholder: How to exclude a shareholder

What options do you have for excluding shareholders?

The withdrawal of a shareholder from a GmbH or another type of company such as a GbR is often a legally challenging process. Whether by ordinary or extraordinary termination, redemption of shares, action for exclusion or action for dissolution, there can be many ways and reasons. The legally correct way depends in particular on the legal form of the company. From a legal point of view, the term “termination” is usually only used when shareholders give notice in order to leave the company themselves. If a shareholder is to be removed by the other shareholders due to misconduct, i.e. is to be “dismissed”, this is not usually referred to as a termination.

In this guide, we shed light on the various ways in which you as a shareholder or managing director can proceed if it becomes necessary to exclude a shareholder. We offer an insight into legal provisions, notice periods and the role of the articles of association in order to organise the departure of a shareholder in an efficient and legally secure manner.

Find out how a shareholder can give notice and what steps to take in the event of a shareholder dispute. We will also give you helpful tips on preparation and implementation, including questions relating to compensation claims and the sale of shares. This article is aimed at GmbH shareholders as well as members of a partnership under civil law (GbR) and other company forms.

What you should bear in mind in the event of a shareholder dispute regarding the exclusion of a shareholder

A shareholder dispute can block the company and jeopardise its future. While in some cases an amicable settlement is possible, there are situations in which the exclusion of a shareholder must be considered.

This step is not only organisationally but also legally complex and therefore requires careful planning and implementation. We look at what you should know about the withdrawal of a shareholder in the event of a shareholder dispute, from the role of the articles of association to the possible legal consequences.

Reasons for the exclusion or cancellation of a shareholder

There are many reasons that can lead to the exclusion or cancellation of a shareholder. These include, among others:

Serious breaches of duty
A number of less serious breaches of duty which, taken together, are unreasonable for the other shareholders.
A culpably caused disruption of the relationship of trust (irremediable rift between the shareholders).
Breaches of contract or breaches of the articles of association.
Harmful or unethical behaviour that puts the company or the other shareholders at a disadvantage.
Economic problems caused by the shareholder concerned.
Ongoing conflicts or disputes that impair the efficiency and working atmosphere in the company.

Depending on the nature and severity of the problem, ordinary or extraordinary termination by the shareholder may be considered. In the case of more serious offences, an action for dissolution or exclusion can also be filed. In the case of a GmbH, there is also the option of withdrawing shares if there is good cause to do so.

What you should know about cancelling a partnership agreement

Terminating a partnership agreement is a serious step with far-reaching consequences for the company and its shareholders. Whether you want to terminate as a shareholder yourself or want to remove a shareholder from the company, it is crucial to know the legal framework and apply it correctly.

Significance of the articles of association upon withdrawal

The articles of association play a central role in the termination of a shareholder’s membership. It usually contains specific provisions and conditions for the withdrawal, exclusion and termination of a shareholder. In addition, it may also contain provisions on compensation and the further distribution of company assets.

A well-drafted partnership agreement should set out clear procedures for the withdrawal of a shareholder in order to minimise legal uncertainties and potential disputes. It is therefore advisable to seek legal advice, both when drawing up and cancelling a partnership agreement.

Notice periods for shareholders

The notice period for shareholders varies depending on the conditions set out in the articles of association and the type of company. A GmbH, for example, often provides for longer notice periods, while the notice periods may be shorter in a civil law partnership (GbR).

It is important to check the notice period in the articles of association carefully, as non-compliance can lead to legal consequences. In some cases, statutory notice periods may also apply, for example if the articles of association do not contain any specific provisions.

By observing the notice period and complying with all contractual and legal requirements, you can ensure that the withdrawal or cancellation of a shareholder runs as smoothly and legally securely as possible.

Steps to terminate a shareholder

The cancellation of a shareholder is a delicate process that requires several steps and compliance with various legal and contractual provisions. To ensure that the resignation or removal of a shareholder goes smoothly, the following steps should be carefully planned and executed.

Legal advice before cancellation

Before you take any concrete steps, it is crucial to seek legal advice. An experienced lawyer specialising in company law can support you not only in interpreting the articles of association, but also in assessing whether the termination is possible for good cause or other legal aspects. In addition, the lawyer can inform you about any compensation claims that may arise and the notice periods to be observed.

Legal advice not only provides legal protection, but can also help you find the best way to resolve the shareholder dispute or get rid of a problematic shareholder.

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Submission of a notice of cancellation

After legal advice, the next step is to formally submit a notice of termination. This must be in the form agreed in the articles of association and should clearly and unambiguously include all relevant points, such as the reason for termination and compliance with the notice period.

The submission of the notice of termination is usually the starting point for further processes, such as the calculation of severance payments, the transfer of shares or the liquidation of the company, depending on what was stipulated in the articles of association.

What are the differences between dissolution and exclusion of shareholders?

The terms dissolution and exclusion of shareholders are often used in the context of shareholder disputes or changes in the composition of the company. Both approaches have specific legal consequences and procedures that must be observed.

Action for cancellation or exclusion

While an action for dissolution aims to liquidate and wind up the entire company, an action for exclusion relates specifically to the removal of one or more shareholders from the company. An action for dissolution usually leads to the termination of the company and the distribution of assets among the shareholders.

An action for exclusion, on the other hand, aims to remove a shareholder from the company while the company continues to operate. Both actions can be complicated and always require the initiation of court proceedings. The situation may be different if the articles of association provide for this.

An action for dissolution can be seen as a last resort if the shareholder dispute can no longer be resolved and the continuation of the company is no longer considered sensible. An action for exclusion is often used if a particular shareholder significantly disrupts the functioning of the company or poses a threat to the company.

Company’s right of choice in the event of withdrawal or cancellation

The company’s right to choose in the event of a shareholder’s withdrawal or cancellation is often regulated in the articles of association or partnership agreement. The company can decide whether the departing shareholder is compensated or his shares are sold to the other shareholders or third parties. In some cases, namely with the legal form of a GmbH, the shareholders can also decide to withdraw the share, especially if there is an important reason.

This option should be exercised at a shareholders’ meeting and all remaining shareholders should be involved in the decision. Depending on the circumstances and the provisions set out in the articles of association, certain quorums or majorities may be required for the decision.

Coercive measures for the removal of a GmbH shareholder

There are situations in which the shareholders can no longer co-operate with each other and an amicable solution to the shareholder dispute seems unlikely. In such cases, coercive measures can be considered as a means of removing a disruptive shareholder. The two most common mechanisms are the redemption of shares and compulsory assignment. It is important to note that both processes usually have clear legal and contractual frameworks.

Redemption of shares

The redemption of shares is a powerful tool for removing a shareholder and is usually applied when there is good cause, such as gross breach of shareholder duties. This process leads to the shares of the shareholder in question being cancelled, which results in exclusion from the company.

A corresponding shareholder resolution is required for the cancellation of shares, and the conditions are often set out in the articles of association. Instead of cancelling the shares, the articles of association may stipulate that the shares are to be transferred to co-partners at a purchase price, which must also be regulated in the articles of association. Otherwise, the possibility of bringing an action for exclusion remains.

Financial aspects when a shareholder leaves the company

Another key aspect in the context of a shareholder leaving the company is the financial arrangements. These concern not only the amount and calculation of a possible severance payment, but also other financial details and consequences that may be relevant for both the departing shareholder and the remaining members of the company.

Severance payment entitlement for departing shareholders

Severance pay for a departing shareholder is an issue that touches on both legal and financial aspects. As a rule, the amount of the severance payment is specified in the articles of association or results from the law. In principle, it can be assumed that the market value of the departing shareholder’s shareholding is always payable as compensation unless the articles of association stipulate otherwise.

Alternatives and consequences

Apart from the severance payment, there are other financial aspects and alternatives that should be considered. These include, for example, the possibility of selling the shares to a third party or to the remaining shareholders. This can be a sensible option, especially if the sales proceeds are higher than the potential severance payment.

Both alternatives, whether compensation or sale of the shares, have far-reaching financial and tax implications. It is therefore advisable to obtain not only legal but also tax advice in order to determine the best course of action and avoid unpleasant surprises.

Conclusion

The exclusion or termination of a shareholder is a process that can be not only legally, but also financially and emotionally costly. In this comprehensive overview, we have highlighted the most important steps and aspects that should be considered when terminating a shareholder relationship. From the reasons for an exclusion to the financial aspects and the steps to take after the exclusion – every detail counts.

Well thought-out and legally sound advice can minimise conflicts and make the transition as smooth as possible for everyone involved. Excluding a shareholder is rarely a simple decision, but with the right preparation and support, it can lead to a viable solution for all parties involved.