In the event of the insolvency of one partner, the partnership agreements of many limited liability companies grant the other partners a pre-emptive right to purchase the insolvent partner's share in the business. This is intended to ensure the existing ownership structure remains unchanged as much as possible. However, the role of pre-emptive rights in insolvency is controversial, both in the literature and case-law. In a recent decision, the Higher Regional Court of Linz (in case 6 R 95/19m) once again ruled that such an "insolvency clause" is invalid and unenforceable.
Facts of the case
The general meeting of a limited liability company (GmbH) adopted a resolution to amend its partnership agreement to the effect that a pre-emptive right was established in favour of a shareholder in the event of the insolvency of one of the partners. The "Vienna procedure" was to be used to determine the purchase price, with a discount of 50% of the value thus determined. The procedure was also to be applied in other cases, but provision was not always made for the same 50% discount. In the insolvency of the partner, the Commercial Court of Registration considered the clause establishing the pre-emptive right to be contra bonos mores and refused to register the company. The appellate court – the Higher Regional Court of Linz – also agreed with the opinion of the Commercial Court of Registration; the appeal was unsuccessful. However, it allowed an appeal on points of law owing to the fact that the Higher Regional Court had not yet conclusively answered the question of the relationship to Section 26 para. 3 of the Insolvency Act.
Specific legal question
It was questionable whether Section 26 para. 3 of the Insolvency Act was applicable with regard to the pre-emptive right. Accordingly, the insolvency administrator is "not bound […] by applications of the debtor which have not yet been accepted before the opening of the insolvency proceedings [...]". In concrete terms, this raises the question of whether a pre-emptive right in the partnership agreement is to be qualified as an application within the meaning of Section 26 para. 3 of the Insolvency Act. It should be noted that the term "application" refers to offers and tenders as defined by Section 862 of the Civil Code.
The practical relevance of the underlying legal issue is derived from the prevention of legal problems. It is common practice for partners to have a pre-emptive right, as the law on limited liability companies does not provide for a regulation for the insolvency of the partner. This means that the insolvency administrator has the right of disposal over the share and can also sell it freely, for example. However, in most cases, this runs contrary to the wishes of the partners, and the pre-emptive right is intended to prevent new shareholders from joining the company.
Although the Higher Regional Court ruled against allowing the inclusion of the pre-emptive right in the partnership agreement, no pronouncement has yet been made about its general admissibility. The ruling in question was found to be contra bonos mores, primarily on the grounds that the valuation of the purchase price is not based on any commercially recognised procedure.
In contrast, the majority of the doctrine advocates admissibility and puts forward as its argument the statutory arrangements laid down in Section 21 et seq. of the Insolvency Act and Section 76 para. 4 of the Act on Limited Liability Companies. In particular, Section 76 para. 4 of the latter shows that restrictions on sale also remain valid relating to execution. In that respect, it seems only logical to apply a reconciliation of interests, as is made between operating creditors and those whose rights to transferability are restricted, also in the case of the pre-emptive rights of partners in the event of insolvency. Furthermore, it is not clear why pre-emptive rights should be possible in the case of shares with restricted transferability, but not in cases of shares without restricted transferability, as both legal instruments pursue the same purpose in most cases.
Finally, it is argued that the share in the limited liability company is a coherent bundle of rights and obligations, which is why it should not be possible to extract and modify individual rights and obligations attached to the share in isolation. The share should be considered as a whole and it should not be possible to separate it into individual parts and it is therefore not to be treated differently depending on the situation, i.e. depending on whether the shareholder is insolvent or not.
If the Supreme Court itself has not yet taken a final position on this legal issue, it has already had to deal with such clauses, but has always declared them inadmissible on the grounds that the settlement price is contra bonos mores or the valuation procedure is unsuitable. However, the Supreme Court has so far avoided examining the applicability of Section 26 para. 3 of the Insolvency Act and has not dealt with it in detail.
However, the case-law is not consistent even in the case of the violation of boni mores due to creditor damage. The Supreme Court indicates obiter dictum in several decisions that a settlement price below the estimated value is possible in principle if the price does not differ from the price in comparable cases. In contrast, the decision of the Higher Regional Court could be much stricter, as creditors must in any case receive the estimated value at the time of purchase (market value).
At least the performance of the estimated value (market value) or a recognised valuation procedure will be necessary for an effective pre-emptive right to purchase a share in a limited liability company in order to grant a legally secure acquisition right on the merits. It would of course be desirable if the Supreme Court were to take an explicit position on the applicability of Section 26 para. 3 of the Insolvency Act with regard to pre-emptive rights, especially since the case-law of the courts of second instance also diverges within the various areas of the jurisdiction of the Higher Regional Court. In terms of contract drafting to prevent legal problems, an explicit reference to the fact that the pre-emptive right in the event of the partner's insolvency is not to be understood as an application pursuant to Section 26 para. 3 of the Insolvency Act would be offered in the partnership agreement itself – at least one argument more that can be put forward in a dispute with the liquidator who holds the share of the partner, for a comparative settlement of the dispute.
Thomas Trettnak / Marcus Lusar