25.11.2014Unanimous Shareholders Resolution Required for Company Documents to be Provided to Competitors for Due Diligence Investigations
The Higher Regional Court in Cologne has decided that a unanimous shareholders’ resolution is required before company documents can be provided to competitors for a due diligence investigation.
The Higher Regional Court (Oberlandesgericht – OLG) in Cologne has decided in a proceeding for interim measures that a unanimous shareholders’ resolution is required for company documents to be provided to competitors for a due diligence investigation (resolution dated October 31, 2013, Case No.: 18 W 66/13).
I. Facts of the Case
The plaintiff and the second defendant are both shareholders of a brewery as well as shareholders of the first defendant, a limited liability company (Gesellschaft mit beschraenkter Haftung – GmbH) which was responsible for distributing the products of the brewery. The plaintiff held an interest in the first defendant of 25.1 % and the second defendant the remaining 74.9 %. The articles of association of the first defendant included a prohibition of competition with respect to the distribution of other products than those of the brewery.
Underlying the court proceeding was the planned sale of the first defendant, within which both the managing director of the first defendant and the managing director of the second defendant had allowed representatives of a competitor to carry out a due diligence investigation with respect to the first defendant. The plaintiff was of the opinion that releasing information would also allow conclusions to be drawn about details of its business operations which is why the duty of loyalty necessitated obtaining the consent of all the shareholders, i.e. also of the plaintiff, prior to the release of the information. This has not taken place.
The regional court dismissed the plaintiff's action, causing the plaintiff to file an immediate objection with the Higher Regional Court.
II. Decision
The OLG allowed the plaintiff's action and considered it necessary in the present case to obtain the consent of all the shareholders prior to providing information to competitors for a due diligence investigation. Releasing information without the corresponding consent infringes the duty of loyalty under corporate law pursuant to § 242 German Civil Code (Buergerliches Gesetzbuch – BGB).
The duty of loyalty for the first defendant and its management results from the relationship of the company with its shareholders, while the duty of loyalty for the second defendant results from the relationship of the shareholders amongst themselves.
The OLG made clear that there were particular circumstances in the present case which went beyond the usual requirements for maintaining confidentiality. This was based on the fact that there were close business relationships between the plaintiff and the first defendant which was also made clear by the prohibition of competition explicitly included in the articles of association of the first defendant. The close business relationships also allowed competitors to draw conclusions very easily about details of the plaintiff's business operations from information which primarily only concerned the first defendant. As a result, it was required to obtain prior consent before releasing the information.
III. Practical Advice
The situation of the case in this OLG ruling had a number of particular circumstances so that it is not possible to use the ruling as a reference for every case where information is released for due diligence investigations to be carried out. Therefore, numerous questions remain unanswered with respect to releasing information for due diligence investigations.
In practice, it is therefore advisable to always obtain a shareholders’ resolution prior to carrying out a due diligence investigation. On the one hand, this is to protect the management of the company which makes the information available from possible liability as such resolution releases the management accordingly from its general duty of confidentiality vis-à-vis third parties resulting indirectly from § 85 German Limited Liability Law (GmbH-Gesetz – GmbHG) for the management of a GmbH and from § 93 Subsection 1 Sentence 3 German Stock Corporation Act (Aktiengesetz – AktG) for the management board of a stock corporation (Aktiengesellschaft). On the other hand, the shareholder of a company with several shareholders who is pushing the intended sale can also comply with his/her duty of loyalty towards his/her fellow shareholders and inform them about the situation.
A resolution with a simple majority of votes will probably be sufficient in many cases. However, it can be a different scenario if, as in the present example, the rights of minority shareholders can only be guaranteed by obtaining their consent to release the information. The corresponding consent must be obtained in advance in such cases which can result in a unanimous shareholders’ resolution depending on the number of shareholders.
In order to avoid any disputes or uncertainty it can be considered whether the articles of association should include corresponding consent requirements not only for transferring shares, i.e. so-called restricted transferability (Vinkulierung), but also beyond that for the steps preparing such a transfer, i.e. particularly for carrying out a due diligence investigation. The majority requirements should be agreed depending on the shareholder structure of the respective company and can vary between a simple or qualified majority and unanimity. The rules of procedure of the management rather than the articles of association can also regulate a requirement for consent which is only to be imposed on the management and/or board of management. That would probably offer sufficient protection for companies with a single shareholder, and no notarized amendment of the articles of association would be required. If the articles of association already stipulate the possibility to adopt rules of procedure for the management, such rules can be adopted respectively amended accordingly to reflect the consent requirement.
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