In Reference II ZR 141/21 of May 23, 2023, the German Federal Court of Justice (FCJ) ruled that an authorization of the annual general meeting on the use of authorized capital that also provides for an authorization to exclude subscription rights does not have to expressly state the purpose of the meeting when the management board is authorized to exclude subscription rights. The cases when the management board is authorized to exclude subscription rights may also be stated in a nonexhaustive exemplary list in a management report to be made available at the annual general meeting in accordance with Section 203 (2) sentence 2 and Section 186 (4) sentence 2 of the German Stock Corporation Act (Aktiengesetz – AktG).
The annual general meeting may grant an authorization to the management board of a German stock corporation for a maximum period of up to five years to increase the share capital of the company (authorized capital). The authorization in the articles of association may also provide for the management board to decide on the exclusion of subscription rights. An authorization to exclude subscription rights must be expressly and properly announced with the agenda of a general meeting and the management board must make available a written report on the reasons for the authorization to exclude subscription rights.
The defendant in the relevant case is an unlisted stock corporation. In May 2017, it published an invitation to its annual general meeting in the electronic Federal Gazette. One of the items on the agenda was a resolution authorizing the management board to create new authorized capital by amending the articles of association. The management board was also to be authorized, with the approval of the supervisory board, to exclude shareholders' subscription rights. The management board’s report on this authorization, which was published with the invitation to the annual general meeting, stated an example of when such an exclusion of subscription rights might be considered.
The annual general meeting approved the agenda item and the corresponding amendment to the articles of association. The plaintiff, a shareholder of the defendant, attended the annual general meeting and filed an objection to the resolution. In its action for annulment, the plaintiff sought to have the resolution declared null and void insofar as the management board was authorized to exclude subscription rights.
The FCJ rejected the plaintiff's appeal because the resolution adopted by the annual general meeting authorizing the management board to create authorized capital and to exclude subscription rights does not violate the law or the articles of association.
Pursuant to Section 203 (2) sentence 1 and Section 186 (4) AktG, the annual general meeting may leave the decision on the exclusion of shareholders' subscription rights to the discretion of the management board. The authorization for such an exclusion does not require an exhaustive list of the purposes pursued with an exclusion. Such purposes may also be specified in a report of the management board to be made available to the annual general meeting in accordance with Section 203 (2) sentence 2 and Section 186 (4) sentence 2 AktG by means of a nonexhaustive exemplary list of cases of exclusion.
This is in line with the purpose of the authorized capital, which is to give the stock corporation or its management bodies the freedom required to take advantage of opportunities that arise on the capital and investment market quickly, flexibly, and successfully. To this end, it is also necessary in individual cases to exclude shareholders' subscription rights, which the management board can be authorized to do in accordance with Section 203 (2) sentence 1 AktG.
According to the case law of the FCJ, the annual general meeting is in principle free to determine the boundaries of the authorization it grants (FCJ, Resolution II ZR 152/06, June 11, 2007). The authorization may also provide for the decision on the exclusion of subscription rights to remain entirely in the discretion of the management board subject to the management board determining that the capital increase is in the best interests of the company.
The appeal criticized this case law on the grounds that the management board was not sufficiently bound by an unrestricted discretionary authorization and was given too much leeway to justify the exclusion of subscription rights. Against this, the FCJ argued on the one hand with the wording of Section 203 (2) AktG, which does not require the authorization to be limited to specific purposes provided for by the annual general meeting. On the other hand, the legislative history of the provision speaks in favor of the FCJ's view, as the legislator had in mind that the management board may use the authorized capital with exclusion of subscription rights in a case that is not yet foreseeable at the time the authorization is granted. It would be contrary to this to require conclusive specifications for the exercise of the authorization.
The shareholders are sufficiently protected, as the management board may only decide on an exclusion of subscription rights if there is objective justification for it, and it also requires the approval of the supervisory board (Section 204 (1) sentence 2 AktG). In addition, they can have the management board's decision reviewed by way of an action for injunctive relief or declaratory relief to determine whether the management board, when using the authorized capital or the authorization to exclude subscription rights, exceeded the powers granted to it and made decisions that are not covered by the statutory requirements and/or the authorization resolution of the annual general meeting.
The distribution of the burden of proof in the context of a shareholder action brought against an administrative resolution is conducive to shareholder protection. In light of the fundamental authority of the annual general meeting to exclude subscription rights, ambiguities in the authorization should not be to the detriment of shareholders. In the event of doubt, the management board must refrain from exercising the authorization.
If the annual general meeting resolves such an amendment to the articles of association, according to which the management board is authorized to decide on the exclusion of subscription rights when using authorized capital, the management board report prepared in accordance with Section 186 (4) sentence 2 AktG is to be used for the interpretation of the resolution of the annual general meeting.
The FCJ's decision confirms what is already common practice. It averts formal hurdles for future authorizations that are not enshrined in law and would contradict the purpose of authorized capital. The possibilities for using authorized capital are thus extremely flexible.
On the other hand, if the purposes of the authorization are listed only by way of example, there is a lack of guidance for the internal obligation of the management board and thus legal certainty on its end.
In future authorizations, attention should therefore be paid to whether the management board should only be bound by its dutiful discretion. Depending on the case, the reasons for excluding subscription rights should be listed either exhaustively or by way of example.
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