07.05.2020

Corona: Contractual implications, especially for Corporate/M&A

This article is part of our continually updated corona resource center.

Despite the intervention of the legislator, which has now taken place and is above all only temporary, companies should also review their contracts to see whether the providers or organisations within the supply chain may not be able to provide their usual services or whether delivery difficulties may arise. In addition, precautions should be taken in ongoing M&A transactions or risks arising from a share purchase and transfer agreement (SPA) that is about to be closed should be assessed and, if necessary, concrete measures should be taken. Individual factors should also be taken into account with regard to the beginning of the main and shareholders' meeting season.

General information

It is precisely here that the measures adopted by the legislator to cushion the effects of the pandemic should now be taken into account:

  • For business operations, it is particularly important to identify key person problems and to provide for suitable emergency and substitution arrangements in the event that such persons fall ill with the corona virus or are temporarily quarantined due to suspected infection:
  • If all the managing directors of a GmbH should "fail" due to the corona virus, a lack of management can result in accordance with § 35, Subsection 1, Sentence 2, GmbHG. This situation can be overcome by the appointment of a new managing director or the appointment of an emergency managing director. Restricted to court proceedings, the appointment of a guardian of process is also possible (cf. § 57 ZPO). The appointment of an emergency managing director is already possible in the case of prevention due to illness. The emergency managing director is a managing director according to §§ 35 ff. GmbHG. He differs from the ordinary managing director solely in the manner and circumstances of his appointment, as he is appointed by the local court on application until he is recalled by the court or the duly appointed managing directors resume their office.
  • Something else applies in turn to the stock corporation: A member of the management board is "absent" here in accordance with § 85 para. 1 AktG only if the exercise of the office is permanently impossible due to death or if he or she has left the management board by revocation of the appointment or resignation from office. No "absence" is deemed to exist if, among other things, a member of the Management Board is temporarily unable to exercise his office due to (even prolonged) absence or illness. In the event of such temporary inability of a member of the Management Board to perform his duties, however, the Supervisory Board may, pursuant to Section 105 (2) of the German Stock Corporation Act (AktG), appoint individual members of the Management Board for a maximum of one year as deputies of members of the Management Board who are unable to perform their duties.
  • Do any agreed MAC clauses intervene between signing (conclusion) and closing (execution) of an SPA? Does the SPA grant a right of rescission, in particular, if the economic circumstances of the target company have changed seriously due to the corona virus, because in the relevant period between signing and closing the workforce has been "put out of action" in such a way that the continuation of the business until closing cannot or could not be guaranteed or the supply chain has been interrupted and the "belts stop working"?
  • Is there a case of "force majeure" which temporarily suspends certain contractual obligations within the framework of existing supply relationships? According to the case law of the Federal Court of Justice, force majeure is "an external event which has no operational connection and cannot be averted even by the utmost care which can reasonably be expected". This should be carefully questioned in the relevant contracts and examined for each individual case. Does especially a global health emergency fall under the definition of force majeure? In analogy to travel law, epidemics and pandemics (e.g. SARS, plague, cholera) constitute cases of force majeure. Therefore, if the continuation of business was negatively affected by the corona virus, the respondent could in principle argue with a case of force majeure.
  • In any case, the individually agreed clauses should be carefully examined or defined in an appropriately stringent manner if a treaty is currently being negotiated, e.g. by introducing economic thresholds which should not be fallen short of, taking the pandemic into account.
  • Could further guarantees in a SPA be affected by the corona virus and result in possible claims for damages?
  • Businesses should consider whether there is a failure by suppliers or vendors to meet a contractual obligation and what rights they have.
  • Do any breaches of contract, delays in delivery possibly justify termination (ordinary or even extraordinary)? Can "force majeure" also be objected to? What about volume-dependent bonuses that cannot be achieved due to delivery difficulties?
  • In order to safeguard rights, it is advisable to review and comply with reporting and information obligations in general and with regard to force majeure provisions. Within the framework of the general duty to mitigate damage, there should always be an obligation between parties to the contract to make "best efforts" to mitigate the effects of a force majeure event.
  • Are there provisions in the contracts for dispute resolution (e.g. mediation and arbitration procedures)?
  • Observe the general duty to mitigate damage. We recommend that you communicate with your contractual partners at an early stage and secure evidence (written documentation). This can be particularly important to establish that you have done everything that was reasonably possible to mitigate the effects of the events on your benefit.
  • Be sure to check whether guarantees, indemnities or performance bonds could be called upon or your company runs the risk of being called upon if the secured obligations cannot be fulfilled.
  • In addition, meetings, (major) events and trade fairs have now been cancelled worldwide, and the responsible authorities have ordered curfews and contact bans. This could have a particular impact on the upcoming Annual General Meetings of German stock corporations. However, without an Annual General Meeting in person, no dividend payment can be resolved (cf. Section 119 (1) No. 2 AktG) or other resolutions of importance to the Company can be passed.
  • It is therefore necessary to consider under what circumstances a general meeting scheduled in the near future could be postponed until the summer or autumn of 2020 or whether the deadlines required by the German Stock Corporation Act have already passed. The prevailing opinion is that a cancellation of a General Meeting is still possible until its formal opening and that the cancellation must be made by the person who convened the General Meeting.
  • It may only be carried out by the body as a whole. The form in which the meeting is convened need not be adhered to for the cancellation; in any case, we consider the (electronic) Federal Gazette to be the most suitable medium for this purpose. It is possible to postpone the Annual General Meeting to a new date, but this must then be treated in the same way as a new meeting; in particular, the deadlines applicable to the convening of the meeting must be observed.
  • If the general meeting is to be held despite the current circumstances, shareholders should be encouraged to use proxy voting in order to avoid too many shareholders being present, while at the same time ensuring a quorum. However, it must be taken into account here that, especially in the case of critical agenda items, voting behaviour depends primarily on the speech of the Management Board on the annual report and the course of the ensuing general debate, and proxy voting will therefore be out of the question for many shareholders or only after the conclusion of the general debate (which in turn would require shareholders to be present until then). In any case, the Executive Board would have to examine each individual case on its own merits.
  • Pursuant to Section 118 (3) sentence 2 of the German Stock Corporation Act (AktG), the presence at the Annual General Meeting, which was previously considered a duty for the Management Board and Supervisory Board, now only applies to the Management Board. Representation of the members of the Management Board is no longer possible. The obligation to attend is only waived if there are serious reasons for prevention. An illness of a member of the Management Board has always been accepted as a reason for excuse. However, if all members of the Executive Board should fall ill with the corona virus and could not be present at the time of the General Meeting, it would therefore be mandatory to cancel or postpone the General Meeting (taking into account the above explanations). This is because, for example, participation of the ill/infected members of the Management Board in the General Meeting by means of video transmission is not possible, as this is only possible for members of the Supervisory Board in accordance with section 118 (3) sentence 2 AktG.


General meetings and shareholders' meetings

However, the legislator does not stand idly by and watch the Covid 19 pandemic and is counteracting any difficulties in the area of company law with the legislative package adopted on 25 March 2020. In order to mitigate the consequences of the COVID 19 pandemic in civil, insolvency and criminal procedure law, especially in the area of general meetings and shareholders' meetings - in contrast to the above-mentioned principles which are still valid - the following is now planned:

Temporarily, i.e. only for shareholders' meetings to be held in 2020, sub-stantaneous facilitations for the holding of shareholders' meetings of the stock corporation (AG), the partnership limited by shares (KGaA), the insurance association a. G. (VVaG) and the European Company (SE), as well as for shareholders' meetings of the limited liability company (GmbH), general meetings and representative meetings of the cooperative, and members' meetings of associations.

Essential for the AG, KGaA and the SE is the possibility for the Executive Board of the company to enable online participation (of the shareholders and the members of the Supervisory Board) in the Annual General Meeting even without an authorization in the Articles of Association, the possibility of an Annual General Meeting without an audience and with limited possibilities of rescission, the possibility of reducing the period for convening the meeting to 21 days (with simultaneous adjustment of the period for submitting requests for additions to the agenda) and the authorization for the Executive Board to make advance payments on the net retained profits even without a provision in the Articles of Association; The latter also applies to compensation payments in accordance with Section 304 AktG for outside shareholders of an inter-company agreement.

In concrete terms, the package of measures in this context states:

The Management Board may decide that the meeting is held as a virtual general meeting without the physical presence of the shareholders or their proxies, provided that

  • the video and audio transmission of the entire meeting takes place,
  • shareholders' voting rights can be exercised via electronic communication (postal voting or electronic participation) and proxy voting,
  • the shareholders are given the opportunity to ask questions by way of electronic communication,
  • the shareholders who have exercised their voting rights in accordance with No. 2, in deviation from Section 245 No. 1 of the German Stock Corporation Act (Aktiengesetz) and waiving the requirement to appear at the Annual General Meeting, are given the opportunity to object to a resolution of the Annual General Meeting.

The Board of Directors shall use its best judgment to decide which questions to answer and how to answer them; it may also require that questions be submitted by electronic communication no later than two days before the meeting; it may also require that questions be submitted by electronic communication no later than two days before the meeting.
The Management Board shall also have the possibility of filing an objection electronically with a notary public. As always, objections must be lodged by the end of the meeting and here by means of electronic communication. The notary public himself should be present at the location of the chairman of the meeting for the execution of the minutes. The notaries required for this purpose are, of course, still available nationwide (see below).

In addition, the possibility of holding an Annual General Meeting within the fiscal year has been introduced, i.e. the previous eight-month period will be extended as an exception.

For the GmbH, the facilitated possibility of passing resolutions in text form or by written vote is created temporarily, i.e. only for shareholders' meetings that take place in 2020. Notwithstanding § 48 (2) of the German Act on Limited Liability Companies (Gesetz betreffend Gesellschaften mit beschränkter Haftung - GmbHG), resolutions of the shareholders may be adopted in text form or by written vote even without the consent of all shareholders.

Insolvency law

Insolvency law: For the temporary measures in insolvency law, in particular the suspension of the obligation to file for insolvency, the right to file for insolvency, subordination under insolvency law and contesting insolvency, see point 1 above.

Conversion right

In principle, within the scope of transformations pursuant to § 17 of the German Transformation Act (UmwG), a merger must be filed for entry in the Commercial Register and, in accordance with § 17 sub-section 2 UmwG, a balance sheet must be attached for each of the transferring legal entities (so-called closing balance sheet). The provisions on the annual balance sheet and its audit shall apply accordingly to this balance sheet. In principle, the registration court may only register the merger if the balance sheet has been drawn up on a reference date which is not more than eight months prior to the registration. This is changed by the Covid 19 emergency package, which now extends the deadline according to § 17 sub-section 2 sentence 4 UmwG to twelve months, in order to avoid that conversion measures fail due to a lack of assembly possibilities during the pandemic.

Notary's offices

Irrespective of the package of measures, the notaries required for the general meetings, but also for all other legal transactions requiring form, remain at your disposal despite the guidelines for restricting social contacts adopted by the Federal Government and the Federal States on 22 March 2020. In addition, notarisation dates can be arranged in individual cases in such a way that personal contacts between the parties involved are avoided altogether or at least considerably reduced. Thus, in certain constellations, notarisations can only be carried out with individual participants or with representatives.

Other changes

The new law also contains changes in the law on cooperatives, associations, foundations and WEG, which correspond in meaning and purpose to the changes described above, but which we do not present in detail here - we will be happy to answer your questions personally.