Shareholder’s right to terminate a letter of comfort issued to a company
Pursuant to a recent judgment of the Federal Court of Justice, a parent company having issued a letter of comfort (Patronatserklärung) to its subsidiary which is in a financial crisis may terminate this letter of comfort if the parties – explicitly or implicitly - agreed upon a right of termination.
In the case at hand, pursuant to the letter of comfort, the parent company undertook to fulfil due liabilitities of its subsidiary with the effect of solving any existing over-indebtedness or illiquidity. However, if the undertaking of the shareholder to meet the company’s financial obligations is non-permanent but limited in time to the purpose of examining the company’s ability of financial recovery, then the parent company is indeed entitled to terminate the letter of comfort if the possibility of financial recovery is deemed to be excluded.
Federal Court of Justice, decision dated 20 September 2010 (II ZR 296/08)