In a judgement of 16 September 2020 the Austrian OGH settled various controversial legal issues concerning the admissibility of statutory provisions regarding limitations of the compensation to be made to excluded shareholders in the event their shares are redeemed due to the opening of insolvency proceedings on the assets of this shareholder. In practise, particularly in companies based on the personalistic composition of their members, in order to prevent that executions creditors penetrate the company in the case of insolvency of one the company´s shareholders, usually there is a strong need to provide statutory clauses granting call options to the company or other shareholders in this event, as well as to limit the compensation payment to be made to the insolvent shareholder in order to preserve the company´s liquidity and in the end its survival.

For the legal practise, both positive and negative consequences can be gathered from the judgement. Certainly it must be considered positively that in principle statutory limitations of the compensation payment are considered lawful by the OGH, thus enabling the company to avoid an obligation to compensate the full fair value of the shares in the case its articles of association contain such provisions. Equally it is to be welcomed that the Supreme Court has finally created legal security on the issue that the prohibition of termination clauses based on grounds of insolvency established by the Austrian Insolvency Statute (§§ 25a, 25b IO) are not applicable to provisions contained in the articles of association due to latter´s multilateral character, neither is the shareholder´s insolvency administrator enabled to terminate “unilaterally” corresponding provisions in the articles of association pursuant to § 26 para. 3 IO.

However, the aforementioned positive aspects do not compensate the considerable disadvantages resulting from the judgement. Besides the fact that legal uncertainty still remains with regard to the possible amount of such a reduction of the compensation payment because this question lacked relevance in the case at issue, the legal solution offered by the OGH reveals particularly unsuitable in practise because the Court´s doctrine considers limitation clauses in the event of shareholders´ insolvency as null and void if they do not apply identically in all events of redemptions of the shares provided for in the articles of association (§ 879 Austrian General Civil Code (ABGB)). As a consequence thereof, the apparent facilitation with regard to the individual determination of the compensation amount will fizzle out. Because the shareholders are prevented from agreeing reasonable differentiations for different constellations, such as for incidence as it is common in legal practise and regularly desired and required by the clients, to stipulate a full compensation at a fair value in the event of a voluntary sale off the shares or in the event the shareholder´s exit is based on good grounds where the company or the other shareholders are at fault, however to agree reasonable limitations of the compensation if the exclusion is based on a good cause in the sphere of the withdrawing shareholder (for instance his decease or breaches of contract), amongst which the shareholder´s insolvency constitutes only one of many possible scenarios.

Consequently, who opts for the legal form of an Austrian corporations faces the dilemma to or risk a partial loss of the value of its share without compensation as a consequence of a statutory provision establishing this legal consequence indistinctly in all events, including those when he is not at fault or the fault is committed by a third party, or rather to assume the obligation to compensate the other shareholders at full, even though they breach continuously their obligations under the articles of association, decease or finally become insolvent.

Fortunately, this dilemma can be resolved if the shareholders decide to incorporate their company under the laws of another Member State of the UE, or even to transform or reincorporate an already existing Austrian corporation in such a foreign company. Because despite the fact that the international private law aspects of the commented judgement have not yet been the subject matter of court decisions, limitation clauses in a company´s articles of association have to be classified as belonging to the lex societatis, being consequently governed exclusively by the laws pursuant to which the respective company has been incorporated. On the one hand, this follows from the fact that the validity or voidness of provisions contained in a company´s articles of association govern exclusively the internal aspects of the mutual rights and duties contractually agreed upon between the shareholders, without affecting any rights and duties nor distributional issued within the context of the insolvency proceedings on the assets of one of its shareholders.

Furthermore, the classification of the statutory provisions on the compensation payment to the shareholder excluded as a consequence of its insolvency as company law is also strengthened by the legal grounds given by the OGH, because latter takes recourse to the general prohibition of clauses contrary to morality and the public policy (§ 879 ABGB) instead of the specific terminations rights granted to the insolvency administrator based on § 26 para. 3 IO neither their prohibitions in §§ 25a, 25b IO. At first glance, for these eventually a classification as insolvency law could be considered due to Art. 7 para. 2 lit e) EIR. Nevertheless, this interpretation must be excluded because due to systematic considerations, this conflict of laws provision is also subject to an interpretation that it may only applies to contractual exchange agreements, however not to multilateral corporative statutes such as articles of association. Additionally, an extension of the provision to statutory limitation clauses would be incompatible with primary law with the subsequent duty to interpret it in conformance of the latter, as pursuant to the ECJ´s legal doctrine, at least the whole internal relationships within a company are governed exclusively by its lex societatis.

The present limitation of the shareholder´s compensation treats the event of a shareholder´s insolvency only as one of numerous other causes for exclusion not related to any insolvency. In the context of a functional classification, the exceptional event of a shareholder´s insolvency is not capable of granting the clause a specific insolvency characterisation, and contrary to the Kornhaas case decided by the ECJ or the controversial issue of the German Existenzvernichtungshaftung, the strict duty of equal treatment between different causes of redemption established by the OGH does not refer to any specific duties to act or behavioural duties in the context of insolvency proceedings, so that in consequence a classification as insolvency or even tort law must be rejected.

For instance, the German Gesellschaft mit beschränkter Haftung (GmbH) or the Spanish sociedad de responsabilidad limitada (S.L.) enable the individual design of redemption clauses in the articles of association, differentiating between the causes of the shareholder´s exclusion.

Florian Deck, 21. February 2021