Consequences of Civil Code amendment for termination of shareholder agreements

Introduction

According to Austrian doctrine and case law, shareholder (syndicate) agreements are generally qualified as civil law partnerships. A recent amendment to the Civil Code introduced an ordinary termination right relating to such civil law partnerships. This termination right has its origins in the Commercial Code, in which similar rights have long been embodied for unlimited liability partnerships. However, it seems that the legislature did not consider the consequences that transferring the ordinary termination right into the regulations of civil law partnerships would have on corporate law and legal practice.

Termination right

In practice, shareholder agreements are concluded for the period for which parties to the shareholder agreement are shareholders of the target company. Therefore, if the target company is established for an indefinite term, the shareholder agreement will also be concluded for an indefinite term. An ordinary termination right with regard to the shareholder agreement therefore contradicts its purpose and – under the old rules – shareholders normally waived ordinary termination rights.

However, according to the new Section 1209 of the Civil Code, any party to a civil law partnership concluded for an indefinite term can terminate the civil law partnership with six months' notice at the end of each business year. This ordinary termination right cannot be waived; any such agreement will be invalid. Further, any agreement that hinders enforcement of the ordinary termination right will be invalid. In addition, according to Section 1211 of the Civil Code and the prevailing doctrine developed thereto, even linking the period of the shareholder agreement to the existence of the target company (established for an indefinite term) will result in a civil law partnership established for an indefinite term to which Section 1209 of the Civil Code applies.

The new rules enter into force on July 1 2016 for all civil law partnerships established before January 1 2015. However, the interim regulations set out in Paragraph 5, Section 1503 of the Civil Code allow civil law partnerships established before January 1 2015 to extend the old rules until December 31 2021. To extend the old rules, one partner must issue a notice to all other partners stating that he or she wants to continue following the old rules. This can be done up until June 30 2016.

For civil law partnerships established on or after January 1 2015, the new rules apply mandatorily.

At present, only two possibilities for dealing with the new legal situation seem feasible: parties to a shareholder agreement can either conclude a termination waiver for a fixed period or conclude the shareholder agreement for a fixed period.

The applicable period for either possibility must carefully be assessed on a case-by-case basis. An indication may be that in one case the Supreme Court accepted a termination waiver for 40 years. Prevailing opinion considers 30 years admissible, whereas German courts have admitted termination waivers for 15 to 30 years. Generally, the conclusion of a shareholder agreement for a fixed period of 10 years with an automatic renewal of another 10 years will be accepted by Austrian courts. In relation to family-owned businesses, scholars have argued for a fixed period of 30 years with a renewal option of another 30 years.

Comment

For shareholder agreements concluded before January 1 2015, it is strongly recommended that parties opt for an extension of the old rules until December 31 2021. The deadline for doing so is June 30 2016.

All newly concluded shareholder agreements should either contain a termination waiver for a fixed period or be concluded for a fixed period (with renewal options). The exact duration of the termination waiver or fixed period must be assessed for each case.

The common practice of syndication is dramatically hindered by the new legislation. As such, another law change taking into account the special purposes of shareholder agreements and their qualifications as civil law partnerships is desirable.

For further information on this topic please contact Julia Wasserburger at Schoenherr by telephone (+43 1 5343 70) or email ([email protected]). The Schoenherr website can be accessed at www.schoenherr.eu.

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