Key Takeaways

• Arbitration clauses for disputes over shareholder resolutions in German law companies must comply with the following requirements specifically developed by the German Federal Court of Justice:
  • The arbitration clause must be approved by all shareholders of the company. The arbitration clause can be agreed in the articles of association or in a shareholders' agreement, however, with consent of all shareholders.
  • All shareholders must be informed about the initiation and the further development of the arbitration proceedings and must be given the right to participate in the arbitration.
  • All shareholders must be entitled to participate in the process of selecting and appointing arbitrators, unless the arbitrators are being appointed by a neutral third party.
  • If there is more than one dispute concerning the same resolution, these disputes must be brought together before one arbitral tribunal and parallel proceedings must be avoided.
• These requirements apply to corporations as well as certain partnerships under German law. They apply to German law partnerships only if the articles of association provide that legal actions in disputes over shareholder resolutions are to be directed against the company and not the shareholders. According to the general but non-binding concept of German statutory law, disputes over shareholder resolutions in partnerships must generally be directed against all other shareholders.
• Arbitration clauses in articles of associations that do not comply with the above-listed requirements will not be enforceable for disputes over shareholder resolutions. Respective shareholder disputes would be subject to regular litigation before ordinary civil courts.
• In arbitration clauses regarding shareholder disputes in German law companies the shareholders may inter alia opt for the arbitration rules of the German Arbitration Institute (Deutsche Institution für Schiedsgerichtsbarkeit, "DIS") or the rules of the International Chamber of Commerce in Paris ("ICC"). The arbitration rules of the German Arbitration Institute provide for "Supplementary Rules for Corporate Law Disputes" (DISERGesS). These rules reflect the requirements developed by the German Federal Court regarding shareholder disputes over shareholder resolutions. The DIS arbitration rules same as the rules of the ICC allow for the free choice of the language and the place where the arbitration is held

1. Upsides of Arbitration on Shareholder Disputes over Litigation before Civil Courts

Generally, shareholder disputes in German law companies are subject to litigation before ordinary civil courts. If shareholders wish to resolve disputes by way of arbitration they must agree on an arbitration clause in the articles of association or in a separate shareholders' agreement. Also, after the dispute has already arisen the shareholders can still agree to arbitrate and not to litigate over their specific dispute. Particularly in shareholder disputes, arbitration may be more attractive to shareholders than litigation, considering the following aspects.

a) Confidentiality

Trials before ordinary courts in Germany are generally public while arbitration is not. Arbitration proceedings can therefore be preferable specifically for shareholder disputes because sensitive company internals and internals relating to the relationship between the shareholders, which are discussed in the dispute, are not publicly negotiated. Potential negative effects of media publicity can be a relevant factor in the overall assessment of shareholder disputes.

b) Expertise

Shareholder disputes often require special expertise in the field of corporate law and practical experience can be essential for finding a reasonable decision on shareholder disputes. The parties to a litigation before an ordinary court in Germany have no influence on the choice of the judges. The corporate law experience and know-how of judges in at ordinary courts in Germany can vary significantly. In arbitration the parties to the dispute or an arbitration institution involved can appoint persons who have the above-mentioned relevant specific knowledge required in the individual case.

c) Speed of the Proceedings

In shareholder disputes, especially in the case of complaints about shareholder resolutions, the parties are often interested in resolving the dispute as quickly as possible, because the business operations of the company concerned are suffering from the dispute or there is legal uncertainty regarding the validity of the resolution until a final decision is made. Litigation before ordinary courts in Germany can extend to at least two, possibly even three instances until a final decision is made. A dispute over all three instances can take easily up to four to six years. In arbitration, the parties can get to a final decision more quickly since there is only one instance.

The arbitration rules of the German Arbitration Institute include rules for expedited arbitration, which the shareholders can include in the arbitration clause. According to the DIS Arbitration Rules, the arbitral tribunal may also order provisional or conservatory measures. For instance, the shareholder challenging a shareholder resolution might apply for a temporary suspension of the implementation of the controversial shareholder resolution.

d) Flexibility

The flexibility of arbitration proceedings brings relevant upsides especially for disputes with an international dimension and involving foreign investors in German companies. The shareholders can freely specify the place where the arbitration shall be held. While the language of proceedings before German courts is generally German, the parties can freely choose the language of the arbitration. The shareholders can further choose such procedural rules for the arbitration which are particularly suitable for shareholder disputes, such as the DIS special procedural regulations specifically designed for shareholder disputes. The shareholders can also determine the number of arbitrators to be involved and the procedure for their appointment, which can have an impact on the overall costs generated by the procedure.

2. Arbitration Clauses for Shareholder Disputes in German Law Companies

The German Federal Court (Bundesgerichtshof) has established binding requirements for arbitration clauses for shareholder disputes over shareholder resolutions. Arbitration clauses which do not comply with these requirements are generally not enforceable. Only recently the German Federal Court amended its legal practice on the requirements for arbitrability of shareholder disputes over shareholder resolutions.

2.1 Requirements for Arbitration Clauses on Shareholder Disputes

Shareholder disputes in German limited liability companies (GmbH) can be subject to arbitration (decision file number II ZR 255/08). Up until this decision it was common legal practice that disputes over shareholder resolutions are generally excluded from arbitration and could only be resolve by way of litigation. This was confirmed by a prior prominent decision of the German Federal Court of March 1996 (decision file number II ZR 124/95).

In its court order of April 2009, deviating from the existing legal practice, the German Federal Court ruled that shareholder disputes can generally be subject to arbitration, however, the court stipulated specific requirements for the arbitrability of disputes over shareholder resolutions. The arbitration procedure must be structured "in a manner equivalent to litigation before state courts". Specifically, arbitration clauses for shareholder disputes over shareholder resolutions must comply with the following requirements in order to take effect for all shareholders and corporate bodies in the affected company:

• All shareholders must have approved the arbitration clause, i.e. the arbitration clause must be included in the articles of association upon approval by all shareholders or it must be made in a separate shareholders' agreement.
  
  In case of a transfer of shares, submission to the arbitration clause by the joining shareholder would be required for the arbitration clause to remain valid. The articles of association or the shareholders' agreement, respectively, should provide for an obligation of the transferring shareholder to procure that the joining shareholder expressly confirm submission to the arbitration clause in written form to the company. Depending on the concrete corporate form of the company, e.g. in case of a German limited liability company, even effectiveness of the transfer could be made subject to such submission to the arbitration clause by the joining shareholder.

• All shareholders must be informed about the initiation and the further development of the proceedings and must be given the opportunity to participate in the arbitration.
• All shareholders must have the opportunity to participate in the process of selecting and appointing arbitrators, unless the arbitrators are being appointed by a neutral third party.
• Disputes concerning the same resolution must be brought together before an arbitral tribunal and parallel proceedings must be avoided.

The protection of shareholders was one of the major motives of the German Federal Court for setting-up these requirements.

In litigation concerning German limited liability companies and German stock corporations, shareholder claims must generally be filed against the company, i.e. the company is the defendant. While the fellow shareholders are not necessarily involved in corporate litigation, they are granted certain participation and information rights under German civil procedure law. However, such procedural laws only apply to litigation and not to arbitration. By way of the above-stated requirements the German Federal Court aimed to adjust the legal status of the fellow shareholders in case of arbitration to their level of rights in litigation proceedings.

2.3 Requirements for Arbitration Clauses extended to certain German Law Partnerships

According to the Federal Court's legal practice since April 2017 the above-mentioned specific requirements for arbitration clauses for shareholder disputes also apply to German law partnerships and not only to German law corporations (file number I ZB 23/16).

In a further court order of September 23, 2021 (file number I ZB 12/21), the German Federal Court narrowed the scope of application of the named requirements to partnerships. These requirements apply only if the shareholders have agreed that shareholder claims must be brought against the company and not against the group of the fellow shareholders.

The partners of a German law partnership are generally entitled to choose between two different concepts of structuring dispute resolution. Pursuant to the concept of statutory law, claims against shareholder resolutions must generally be brought against the group of all fellow partners and not against the company. This concept is different from the structure of shareholder disputes in case of German corporations mentioned above where claims must be brought against the company and not against the shareholders. However, the concept of statutory law is not strictly compulsory and the partners of a German law partnership may agree in the articles of association to deviate from such concept of statutory law regarding shareholder disputes. The partners can agree that claims must be brought against the company, similar to the above-mentioned concept applicable to corporations, and not against the fellow shareholders.

Pursuant to the latest legal practice of the Federal Court, the named specific requirements regarding arbitration clauses must only be applied by partnerships which have provided in their articles of association that shareholder claims must be brought against the company, deviating from the general concept under statutory law.

In its decision of August 2021 the German Federal Court has further provided more insight on the consequences from non-compliance of arbitration clauses with the named requirements: while non-compliant arbitration clauses will not be enforceable for disputes over shareholder resolutions, arbitration clauses applying to "all disputes arising out of or in connection with the shareholding in the company", will remain valid and enforceable for other objects of disputes apart from those over shareholder resolutions. This applies all the more if the articles of association contain a severability clause.