Decrease in share value: Compensation for indirect damages only to be paid to the company
The German Federal High Court of Justice (BGH) confirmed that shareholders of a limited liability company (GmbH) whose shares lost in value as a result of harm caused to the GmbH will only be able to claim compensation to be paid to the GmbH. This applies even if the company has been liquidated following the initiation of insolvency proceedings.
In line with its previous decisions, the BGH ruled that in case of a decrease in value of a shareholder’s shares as a result of damage having been caused to a company, the shareholder cannot bring forward a personal claim but can only request compensation to be paid to the company. This principle is also applicable if as a result of the damage the company has to be wound up.
In the case at hand the minority shareholder and managing director of a GmbH caused the company to lose employees and in particular customers to a competing entity which had been set up by his son. Due to the loss of employees and customers, the business of the GmbH eventually ceased and a petition for insolvency proceedings was filed. The majority shareholder and the GmbH issued a compensation claim against the minority shareholder and managing director.
The insolvency administrator agreed to settle out of court and withdraw its claim in return for a compensation payment by the minority shareholder and managing director. However, the majority shareholder continued to pursue its claim and asked for compensation to be paid directly to him. This claim was refused by the BGH on the basis of the principle that indirect damages suffered by shareholders following a decrease in share value are not subject to personal claims brought forward by shareholders. The court held that so-called reflex damages can only be compensated by payments being made in favour of the company. This principle also applies in case of a dissolution of the company.
From a practical point of view, so far as reflex damages are concerned, shareholders should ask for compensation to be paid to the company. If such a claim is excluded because a settlement has been reached by the company and the liable party, a shareholder could bring a claim against the management of the company or the insolvency administrator who caused the company to settle the dispute. However, such claims again cannot be pursued in favour of the shareholders, but only in favour of the company.
German Federal High Court of Justice, decision dated 14 May 2013 (II ZR 176/10)