Temporarily Limited Company Participation for Managing Directors and Employees: Legal Foundations and Practical Relevance
The participation of executives and employees in the limited liability company (GmbH) they work for is a common practice in corporate management to retain employees and align interests. Especially in start-ups and growth-oriented medium-sized companies, employee participation models are increasingly used to create performance-based incentives and allow key personnel to share in the company’s success. This regularly raises the question of to what extent such participations may be limited in time without violating mandatory corporate law or the fundamental rights of the participants. The decision of the Federal Court of Justice (BGH) of September 26, 2005 (II ZR 173/04 and II ZR 342/03) has formulated fundamental guidelines on this.
Company Shares as a Retention Tool: Practice and Motives
The granting of company shares to managers and qualified employees primarily aims to closely link their commitment to the well-being of the company. Especially for managing directors and executives, a high level of identification is intended to be generated through corporate governance participation rights and a direct share in financial success. Usually, this linkage is tied to the existing organ or employment relationship.
Companies aim to synchronize active work and corporate governance influence. Consequently, the acquisition and holding obligation of the shares are often contractually linked to the continuation of the service or organ position, with departure usually resulting in the loss or obligation to transfer back the held shares.
Limitation of the Participation Duration and Corporate Law Admissibility
Contractual Autonomy and Limits of Freedom to Structure
The contracting parties are fundamentally free to individually regulate the conditions for granting and maintaining participation. This especially includes duration provisions as well as repurchase or transfer obligations upon leaving the organ position or employment relationship. The BGH has clarified in its rulings that a temporal limitation of participation does not constitute an impermissible interference with the rights of the shareholder, as long as there is no violation of law, particularly mandatory corporate law provisions or essential public interests.
Admissibility of the Time Limitation from a Corporate Law Perspective
The possibility to impose temporal limitations on participation relationships strengthens the freedom of design of companies. According to the BGH, it does not violate the predefined structural principles of the GmbH if shares are granted under the condition of maintaining a service or organ relationship and, in case this condition ceases to exist, the mandatory repurchase or transfer of shares to the company or third parties is agreed upon. The core status of shareholder rights remains unaffected, as access to shareholder rights during active membership is unhindered.
However, it is required that the modalities for such share repurchases and their valuation are clearly and transparently regulated so that the affected shareholder is not unreasonably disadvantaged. Arbitrary or unjustified deprivation of shareholder rights would be inadmissible.
Demarcation Issues Regarding Dismissal Protection and the Prohibition of Tied Transactions
Such participation models also raise the question to what extent mandatory dismissal protection laws are affected or circumvention cases arise. Jurisprudence clarifies that linking corporate participation to the organ position or continued employment relationship does not, by itself, constitute an abuse, provided there is no unlawful coercion and no shareholder is deprived of a share essential for their livelihood.
Scope for Structuring and Practical Consequences
Different Variants of Return Clauses
In practice, diverse designs of return clauses are widespread. Besides mandatory transfer of company shares to other shareholders or the GmbH against compensation, rights of tender, pre-emption rights, or call options are also agreed upon. For validity, it is decisive that the conditions for terminating the participation relationship are clearly and predictably regulated for the participant.
Valuation Issues in Case of Return and Compensation
A contentious area remains the valuation of shares in the event of their return. Jurisprudence requires an appropriate and factual determination of the repurchase price to prevent departing shareholders from being unreasonably disadvantaged. This demands transparency in valuation methods and consideration of the company’s economic development until the time of transfer back.
Summary and Legal Outlook
The current highest court rulings have confirmed the fundamental admissibility of time-limited equity participations by managers and employees in the GmbH that employs them—provided that the contractual arrangements meet the requirements of corporate and general civil law, do not unfairly disadvantage the participants, and, in particular, ensure transparency of the return and valuation modalities. Corporate law structures and employee participation models are thus subject to a differentiated design regime that seeks to balance both the company’s interests and the rights of managers and employees fairly.
Given the complexity involved in the individual design of these models, especially at the interfaces of corporate, labor, and tax law, it is advisable to obtain competent support in corporate law when reviewing the legal position and drafting the participation agreements. Further information and contact persons can be found under Legal Advice in Corporate Law at MTR Legal.
