Clarifying the assessment of appropriate compensation for minority shareholders in the context of a control agreement
The determination of appropriate compensation for minority shareholders in connection with a control and profit transfer agreement between a controlling and a dependent company is one of the key issues in corporate law. A recent decision by the Higher Regional Court (OLG) of Frankfurt am Main (Order dated April 6, 2021, Ref.: 21 W 139/19) sheds light on the possibility of determining the relevant compensation not on the basis of the stock market price of the dependent company, but rather using the market value of the controlling company.
Fundamental considerations regarding the appropriateness of compensation
According to the provisions of the German Stock Corporation Act (§ 304 AktG), compensation must be paid to minority shareholders when concluding a control and profit transfer agreement, in order to protect the economic interests of the outside shareholders. The amount of this compensation is determined by the hypothetical return that the minority shareholders’ interests would yield if the company continued to exist without the control agreement.
Stock market price as a benchmark: Key valuation approaches
Traditionally, the appropriate compensation is determined by means of a business valuation, which often relies on the income value method or the stock market price of the dependent company. However, in its decision, the OLG Frankfurt am Main clarifies that the market value of the controlling company can also be used as a reference, provided that it offers a realistic basis and that the value of the dependent company is sufficiently reflected in the stock market price of the controlling company.
Requirements for applying the stock market price of the controlling company
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- Connected economic development: It is necessary for the value development and earning power of the dependent company to be substantially reflected in the stock market price of the controlling company.
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- Comprehensible valuation methodology: It must be ensured that there are no one-sided valuation shifts to the detriment of minority shareholders. The chosen benchmark must fulfill the aim of the compensation payment under § 304 AktG, i.e., safeguarding the participation rights of minority shareholders.
Significance of the decision for minority shareholders and companies
The order of the OLG Frankfurt am Main expands the valuation framework for determining compensation in control agreements. This provides minority shareholders with an additional legal avenue to review the determination of compensation payments—especially if the stock market price of the dependent company is potentially distorted or does not adequately reflect the company’s potential.
Furthermore, the parties to a control agreement face an increased need for examination and documentation, since application of the stock market price of the controlling company is only permissible if the circumstances of the individual case are appropriately and comprehensively presented. It will regularly be necessary to prove that the equity value of the dependent company is reflected in the stock market price of the controlling company and that the interests of outside shareholders are upheld.
Legal context and perspectives
The OLG Frankfurt am Main emphasizes that the choice of valuation standard always depends on the specific circumstances of each individual case. Thus, courts and contracting parties remain obliged to carefully consider all relevant facts and to decide with due regard for the interests of minority shareholders.
It also remains to be seen to what extent further decisions from higher courts or the Federal Supreme Court will confirm or develop this approach. For ongoing proceedings, it should be noted that the legal evaluation must always be oriented towards the current state of case law.
Final remarks
The refined option to use the stock market price of the controlling company as a benchmark for determining compensation for minority shareholders expands valuation options and is of considerable practical relevance for the structuring and implementation of control and profit transfer agreements.
If you have any further questions regarding the legal requirements and possible options in the context of the appropriateness of compensation payments in corporate agreements, the Rechtsanwalt at MTR Legal will be pleased to provide further examination of your individual situation.
