Authorised capital with exclusion of subscription rights in the public limited company

Authorised capital with exclusion of subscription rights in the public limited company

Authorised capital with the exclusion of existing shareholders‚ subscription rights is now a basic feature of a public limited company – Aktiengesellschaft – (hereinafter with the German abbreviation „AG“). As a fast and flexible way of increasing capital, authorised capital has almost replaced the ordinary capital increase. The main advantage of authorised capital with the exclusion of subscription rights is that the Management Board can react to spontaneous developments in the fast-moving business world. Examples include company acquisitions through the issue of new shares with the exclusion of subscription rights or the procurement of liquidity. The downside is that by authorising the Management Board, the Annual General Meeting and thus the shareholders relinquish their central right to decide who, when and how becomes a shareholder of the AG. The resulting tension between the shareholders on the one hand and the Management Board on the other is a constant source of dispute.

The basic conflict

The authorisation of additional capital with the exclusion of subscription rights has two decisive advantages: in the first step, it only requires authorisation by the Annual General Meeting by way of a resolution, while the subsequent implementation of the capital increase can be carried out independently by the Management Board in the second step. However, the prerequisite is always that the articles of association of the AG provide for authorised capital. If the articles of association do not provide for the creation of authorised capital, the articles of association must first be amended. On the other side of the conflict are the shareholders. A capital increase through the issue of new shares with the exclusion of subscription rights means that the relative share of the existing shareholders in the share capital decreases (the „dilution“ of the shares). For this reason, the decision on the total number of shares is a central right of the shareholders, which is generally exercised at the Annual General Meeting. The transfer of this right to the Executive Board therefore represents a significant restriction of shareholders‘ rights. In order to protect shareholders from being disempowered, the law only provides for a limit on the amount of authorised capital and a time limit in section 202 (1) AktG: The authorised capital may not exceed half of the share capital and the authorisation is limited to a maximum term of 5 years.

Case law to date

The law itself therefore only contains minor hurdles for the authorisation of new capital with the exclusion of subscription rights. At the same time, this can have far-reaching consequences for shareholders. It is therefore not surprising that case law has already had to deal with the question of what further requirements must be placed on the authorisation resolution of the Annual General Meeting on several occasions

The authorisation of new capital with the exclusion of subscription rights is only justified if it is justified by objective reasons in the interests of the company, taking due account of the consequences for the shareholders excluded from subscription rights. The conditions for the exclusion of subscription rights had to be determined and disclosed at the time of the resolution in such a concrete manner that the Annual General Meeting can definitively assess them. With the Siemens/Nold decision (ruling of 23 June 1997 – II ZR 132/93), the „Bundesgerichtshof“ (German Federal Court of Justice, hereinafter with the German abbreviation „BGH“) deviated from this case law. A concrete description of the circumstances justifying the measure would make it impossible for the management board to react quickly to favourable offers or other opportunities that arise. In order to give the authorised capital the necessary flexibility, an abstract description of the measure that the Management Board is to be authorised to implement is sufficient within the framework of the authorisation resolution.

On 10 October 2005, the BGH issued two judgements (Mangusta/Commerzbank I and Mangusta/Commerzbank II) on the subject of authorised capital with the exclusion of subscription rights in a stock corporation. In its first decision Mangusta/Commerzbank I (ruling of 10 October 2005 – II ZR 148/03), the BGH took a position on the question of whether and to what extent the Executive Board must inform the shareholders of the exclusion of subscription rights and the reasons for this before exercising its authorisation. The BGH answered in the negative. A written report to all shareholders would, on the one hand, lead to a considerable time delay and, on the other hand, undermine the necessary confidentiality in the event of a company acquisition. It is therefore sufficient for the Executive Board to report on the details of its actions at the company’s next Annual General Meeting after exercising the authorisation and to answer questions.

In the second decision Mangusta/Commerzbank II (ruling of 10 October 2005 – II ZR 90/03), the BGH then commented on the legal protection options available to shareholders against the improper use of authorised capital with the exclusion of subscription rights. In this respect, the judges in Karlsruhe rejected an action for rescission as well as an action for annulment under stock corporation law, but granted the plaintiff shareholders the option of a general declaratory action. Although the resulting judgement would then have no direct beneficial effect for the shareholders, it could form the basis for the assertion of specific secondary claims by way of legal action and corresponding motions at the Annual General Meeting, for example to refuse to discharge the Management Board and Supervisory Board, to dismiss the members of the Supervisory Board or to assert claims for compensation.

The current decision and its consequences

With its recent decision (ruling of 23 May 2023 – II ZR 141/21), the BGH continues its generous case law in favour of the Management Board. On the one hand, the justifying reasons for the exclusion of subscription rights do not have to be listed exhaustively, but only by way of example. Furthermore, this list does not have to be included in the authorisation resolution of the Annual General Meeting itself. It is sufficient if the exemplary reasons are made available to the Annual General Meeting in an Executive Board report in accordance with section 203 II and section 186 IV sentence 2 AktG.

In the case of a merely exemplary list, it appears problematic to what extent the exclusion decision of the Executive Board can still be traced back to the legitimising resolution of the Annual General Meeting. Ultimately, such a list only provides a fragmentary information basis for the Annual General Meeting to pass an authorisation resolution. At the same time, under these circumstances, a challenge to the authorisation resolution with reference to non-compliance with the requirement of objective justification appears difficult to justify. The BGH counters the impending loss of legal protection for shareholders by referring to possible secondary claims against the AG and the possibility of refusing to discharge the Management Board and Supervisory Board.

Even if the current decision of the Federal Court of Justice brings with it far-reaching simplifications for the authorisation resolution, this is not a free pass for the Management Board. The specific reasons for an exclusion of subscription rights must result from the authorisation resolution or at least from the Management Board report. In this respect, the Management Board report can be used to interpret the authorisation resolution. The reasons for exclusion determined in this way determine the limits of the Management Board’s room for manoeuvre when deciding on the exclusion of subscription rights.

Should the Management Board act in breach of duty, the shareholders continue to have legal protection options such as (preventive) injunctive relief and a general declaratory action or secondary claims such as refusal to discharge the Management Board and Supervisory Board, the dismissal of Supervisory Board members or the assertion of claims for compensation.

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Authors: Dr. Andreas Menkel, Constantin Dorschu