The German Higher Regional Court (OLG) of Nuremburg recently decided that a so-called “Russian-Roulette” clause provided in articles of association of a two-tier legal entity which is owned equally by two shareholders can be deemed valid if the application of such a clause is objectively justified.

In the case at hand, the two 50% shareholders had agreed to a clause according to which each shareholder was entitled to offer to the other shareholder his shares at a purchase price referred to in the offer and the other shareholder, if refusing such offer, was in turn obliged to sell and transfer his own shares at the same purchase price to the offering shareholder. Further, the clause provided that the shareholder selling his shares had to resign from any executive office and that any service agreement he was party to would expire.

The OLG confirmed the validity of this “Russian-Roulette” clause due for the following reasons:

• there had in this particular case been no dispute as to whether one of the shareholders had right from the beginning been unable to finance the purchase of shares offered under the “Russian-Roulette” clause;
• the application of this clause was objectively justified in order to have an alternative to settle a deadlock in a company which was being owned equally by two shareholders.

The OLG also decided that the obligation to resign from office and the expiration of any service agreement did not violate the supervisory board’s scope of competence to appoint members of the management board (section 84 German Stock Corporation Act).

From a practical point of view, “Russian-Roulette” clauses or the more draconic “Texan Shoot-Out” clauses can generally be validly agreed in articles of association. In order to avoid a permanent deadlock, such a clause provides an alternative for a quick withdrawal of one shareholder whereby payment of an appropriate purchase price seems to be secured.

However, it should be taken into account that such a clause can be deemed void in case of shareholders with different economic powers and the abuse of the possibility to force a shareholder to leave the company. “Russian-Roulette” clauses should be drafted carefully and the shareholders should also agree upon further conditions of the sale and transfer as one would normally find in a share purchase agreement, e.g. dealing with details on when payment should become due, what should happen to profit distribution claims, representations & warranties, non-competition obligations etc.

Higher Regional Court Nuremberg, judgment dated 20 December 2013 – 12 U 49/13

Dr Marco Zessel