Commentary on Art. 786 CO

A. Legal transfer restrictions

In contrast to a joint-stock company, which follows the principle of free transferability - with the exception of statutory restrictions - the transfer of voting shares of a limited liability company is subject to statutory transfer restrictions. Art. 786 para. 1 CO requires the consent of the shareholders' meeting for the transfer of ordinary shares. The consent may be refused without giving reasons, without the need for a specification in the articles of association.

The composition of the group of shareholders can be influenced by the transfer restrictions; the personal element of the GmbH is taken into account. Unwanted acquirers of ordinary shares can be kept out in the interest of the company.

B. Notification

In order for the transfer of the ordinary shares to be approved, the company (i.c. the management) must be informed of the transfer. Both the transferor and the transferee may notify the company of the transfer of the ordinary shares without the involvement of the other person, unless there is a special provision in the articles of association as to who is to make the notification.

If the acquiring person notifies the transfer and requests the company's approval of the said transfer, he or she shall enclose the transfer agreement with the request so that the legal validity of the transfer can be verified. If the transferor submits the request to the company, it is not required that the assignment agreement be attached.

C. Jurisdiction

If the request for approval of the assignment has been submitted or delivered to the company, the management must convene a general meeting of shareholders. The directors are neither obliged nor entitled to put the consent on the agenda if no request has been received.

The consent to the assignment of the ordinary shares is given by the general meeting of shareholders and not by the management, i.e. the competence cannot be delegated (Art. 804 CO). Accordingly, an ordinary or extraordinary general meeting of shareholders must be convened by the management (Art. 805 para. 1 and 2 CO) and the consent to the assignment must be included on the agenda - unless it is a universal meeting (Art. 805 para. 3 last sentence CO).

D. Consent resolution

A qualified majority of two-thirds of the votes represented and an absolute majority of the total share capital is required for approval of the assignment of shares or recognition as a shareholder with voting rights (Art. 808b para. 1 item 4 CO). The resolution cannot be transferred to the management (art. 804 para. 2 item 8 CO), as it is considered a non-transferable competence of the shareholders' meeting. With regard to Art. 808b para. 2 CO, it should be noted that the requirements for passing resolutions may be increased, but not reduced; in other words, the quorum cannot be reduced to a simple majority.

The law does not comment on the formal requirements for a resolution of approval or rejection by the shareholders' meeting. The resolution may be passed in writing, provided that no oral discussion has been requested by the shareholder or shareholders (Art. 805 para. 4 CO). As a rule, it is recorded in writing in the ordinary minutes. If the shareholder or shareholders are listed by name in the articles of association - as was necessary before the revision of the law on limited liability companies in 2008 - an amendment to the articles of association must also be made when the ordinary shares are transferred, which requires public certification.

Consent is usually given at a shareholders' meeting; instead of passing a resolution at the shareholders' meeting, consent may also be given by circular resolution - provided this form of resolution has not been excluded by the articles of association (Art. 805 para. 4 CO).

E. Practical advice

The person selling the ordinary shares may attend the shareholders' meeting and vote in favour of the assignment (Art. 806a CO). However, it may not take any precautions to impede or prevent the transfer.

The acquiring person may only participate in the shareholders' meeting or take the place of the selling person (the assigning person) after a positive resolution on the assignment. Siffert/Fischer/Petrin support the possibility for the selling person to be represented by the acquiring person at the shareholders' meeting and to vote in favour of the transfer. However, this requires that the articles of association permit the representation of shareholders by third parties. If all the ordinary shares are held by one person and also sold to a single person, the approval of the general meeting of shareholders is formally required; however, the approval can be decided at the same time as the transfer by universal meeting (art. 805 para. 3 CO).

A. Abolition of the requirement for consent (No. 1)

The shareholders have the option of repealing the legal restriction on transferability in the articles (Art. 786 para. 2 item 1 CO) and thus providing for the free transferability of ordinary shares. In practice, this regulation is chosen for companies with many shareholders or if the composition of the shareholder group is not particularly significant. Accordingly, the capitalistic element is accorded greater importance than the personal element of membership in the GmbH.

It can be stipulated in the articles that consent may only be withheld for important reasons, thus introducing a quasi abolition of the consent requirement.

B. Deviations (No. 2)

Pursuant to Art. 786, para. 2, subpara. 2 CO, the articles themselves may specify the reasons justifying the refusal of consent to the transfer of ordinary shares. Important reasons may be listed, but trivial reasons may also be stipulated in the articles if they are related to the composition of the circle of shareholders, such as the family clause.

The restrictions on the transfer of shares pursuant to para. 2 apply not only to a transfer to a new shareholder, but also to existing shareholders, because the balance of power may change.

C. Takeover at real value (section 3)

The shareholders' meeting may refuse to approve the transfer if it is stated in the articles that the company offers the transferor the transfer at the real value (Art. 786, para. 2, item 3 CO). The real value is not defined by law and must be determined as the total value at going concern values taking into account the net asset value and the capitalised earnings value. Furthermore, it is expedient to determine the valuation by taking into account cash flows (especially the discounted cash flow method), the determination of value added contributions or residual profit figures (e.g. the economic value added method). In any case, it makes sense to use a combination of different valuation methods. It also makes sense to determine the value based on the opinion of an independent expert.

With this provision (escape clause), the shareholder willing to sell is guaranteed a right of withdrawal and corresponds to the provision for unlisted registered shares in the case of a public limited company (Art. 685b para. 1 CO). The ordinary shares may be acquired either for the account of the company (acquisition of own ordinary shares, art. 783 and 806a para. 2 CO), the individual shareholders or third parties.

D. Prohibition of transfer (No. 4)

The articles of association may provide for a prohibition of transfer. This provision is very similar to the transferability of membership rights in partnerships. The prohibition of transfer is generally used in corporate joint ventures, because the purpose of the company can only be achieved through the personal characteristics of the partners.

The prohibition of transfer implies a right of withdrawal for good cause for the shareholder (Art. 786 para. 3 in connection with Art. 822 CO). The prohibition of transfer also excludes the creation of a usufruct or a lien on the shares (Art. 789a para. 2 and Art. 789b para. 2 CO).

E. Doubts about the assignee's liquidity (para. 5)

As a last resort, the shareholders' meeting can adjust the approval requirements in the articles of association according to section 5 if the fulfilment of statutory obligations to make additional contributions (Art. 795 CO) or ancillary services (Art. 796 CO) is doubtful and a security demanded by the company is not provided. The so-called credit rating restriction is only valid if both conditions are met cumulatively. It corresponds to the transfer restriction for registered shares that are not fully paid up (Art. 685 CO).

The company may only demand security if the solvency of the acquiring person cannot be made credible. However, the requested security may be provided by the selling person, the acquiring person or by third parties and its form (real and personal securities) may not be prescribed by the company. The amount of the security is determined by the uncovered portion of the additional or ancillary payment obligations.

This provision is in conflict with the principle that the general meeting of shareholders may refuse consent without stating reasons. Indeed, para. 5 only makes sense if the dispositive legal restriction on transferability of Art. 786 para. 1 CO has been excluded in advance.

III. Legal Consequences of Refusal of Consent

If the required majority is not reached at the shareholders' meeting when voting on consent, consent is deemed to be refused. If the general meeting of shareholders refuses to give its consent to the transfer, the transfer transaction remains ineffective and a reversal of the transaction must take place. The person selling the shares remains a shareholder - unless the company takes over the ordinary shares at their real value (art. 786 para. 2 item 3 CO).

By restricting the transferability of shares, the company can protect itself from undesirable acquirers; however, it can also impair the interests of the shareholders who wish to withdraw. In order to counteract the drastic consequences of making a change of membership more difficult, Art. 786, para. 3 CO provides that in the case of a statutory prohibition of transfer and in the case of a refusal to consent to the transfer of an ordinary share, the right to resign for good cause (Art. 822 CO) is reserved.

A statutory prohibition of transfer constitutes good cause for withdrawal, but it remains to be examined whether the continuation of the corporate relationship is unreasonable in the individual case. If the company refuses its consent without good cause and thus acts abusively, resignation for good cause or even dissolution for good cause (Art. 821 para. 3 CO) may be justified.

Whether the right to resign can also be exercised in the case of a non-abusive refusal of consent is not entirely clear, but it does not seem to have been the legislator's intention to protect shareholders willing to sell so comprehensively.