The shareholders of a limited liability company frequently ask themselves what will become of the share held by a fellow shareholder should he suddenly find he is insolvent: can an unknown third party be prevented from acquiring the shareholding and suddenly becoming a new co-shareholder? This is also a perfectly legitimate question as a shareholder in insolvency proceedings generally forfeits his right to dispose of his assets (including the right to dispose of the shareholding itself) and has to rely on the cooperation or approval of an insolvency administrator before he may sell the share.
In most cases, the shareholders of a limited liability company do not wish third parties to join their ranks; to prevent this happening, rights of first refusal are often agreed to ensure that in the event of the insolvency of one shareholder, the other shareholders (or co-shareholders) are entitled to acquire the shareholding at a certain or determinable price. For a long time, the Supreme Court had not ruled on the issue of whether such rights of first refusal actually exist in the event of insolvency and whether the shareholders can actually acquire the insolvent shareholder's shareholding.
New Supreme Court decision in case 6 Ob 64/20k
In an eagerly awaited decision, the Supreme Court has now clarified that under certain circumstances, rights of first refusal in the event of insolvency can also be effectively agreed in the articles of association of a limited liability company.
In this context, the Supreme Court explained that an appointed insolvency administrator cannot rely on the privilege under Section 26 para. 3 of the Insolvency Act, according to which the insolvency administrator is not bound by "applications" made by the debtor in order to invalidate the right of first refusal. The Supreme Court justified this by stating, in essence, that rights of first refusal should not be considered in isolation but rather in relation to the entire share as a bundle of rights and obligations and that the right of first refusal is therefore an inseparable part of the share.
In this respect, the Supreme Court has now recognised the standard contractual practice and ruled that rights of first refusal that apply in the event of the insolvency of a co-shareholder can, under certain conditions, also be agreed in the articles of association of a limited liability company.
Safeguarding creditor protection
The Supreme Court made it clear that such rights of first refusal may not result in damage to the creditors of the insolvent shareholder. From the point of view of creditor protection, the voluntary departure or death of a shareholder on the one hand and the execution or insolvency on the other must therefore be carried out under the same conditions.
A reduction in the price of the share to be acquired below the market value of the share in cases of execution and insolvency is only permissible if such a reduction is agreed for each possible voluntary and involuntary departure of the shareholder.
The acquisition price may not be too low
However, in the underlying decision, the Supreme Court declared invalid the agreed right of first refusal in the event of insolvency and denied registration because the acquisition price in the event of insolvency was lower than that which would have been paid in the event of other circumstances where first refusal could be exercised, such as death or voluntary departure. In the view of the Supreme Court, this constituted discrimination against creditors, which is contra bones mores, resulting in registration being refused.
In the end, however, the Supreme Court decision with its criteria is certainly to be welcomed and will lead to more legal certainty in the future with regard to safeguarding rights of first refusal between shareholders of a limited liability company in the event of the insolvency of a shareholder (or co-shareholder).
If you have any questions, please contact your local CERHA HEMPEL representative. We look forward to advising you.