Information Rights

What are information rights?

Information Rights (in German Informationsrechte) describe the rights of shareholders and investors to receive from the company information about its affairs, inspection of books and documents, and regular reports. In a GmbH (German limited liability company), they are made up of the statutory right to information and inspection of every shareholder and of contractually agreed reporting obligations. In German one also speaks of Auskunftsrechte or Kontrollrechte of the shareholders.

In funding rounds, the shareholders' agreement, the contract of the shareholders alongside the articles of association, determines which reports the company delivers to whom and within what period. Investors need this information to monitor their investment, to decide on follow-on investments and to report to their own investors. For the management, the obligations are a fixed working rhythm that goes beyond the voluntary investor update.

The statutory right to information under Section 51a GmbHG

Under Section 51a(1) of the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG), the managing directors must give every shareholder on request prompt information about the affairs of the company. They must also permit the shareholder to inspect books and records. The right belongs to every shareholder, regardless of the size of the shareholding. Under Section 51a(3) GmbHG the articles of association cannot restrict it. If information is refused, the shareholder can enforce it in court proceedings under Section 51b GmbHG.

The managing directors may refuse information and inspection only on a narrow condition. It must be feared that the shareholder will use the information for purposes foreign to the company and thereby cause the company or an affiliated company a not insignificant disadvantage. The refusal requires a shareholders' resolution (Section 51a(2) GmbHG). The right can be asserted at any time, not only in a shareholders' meeting. It thus goes considerably further than the right to information of shareholders in a stock corporation, which is limited to the general meeting and to the assessment of the agenda (Section 131 of the German Stock Corporation Act, Aktiengesetz, AktG).

Contractual information rights and reporting obligations

The reporting package

The shareholders' agreement supplements the statutory right with regular reports that are to be delivered without request. A package in several tiers is common:

• Monthly report: often within 20 to 30 days after month-end. It contains an earnings statement based on the BWA (betriebswirtschaftliche Auswertung, the monthly short report from bookkeeping), the cash position and the burn rate (monthly cash consumption). Added are the runway and the agreed metrics.
• Quarterly report: balance sheet, income statement, liquidity overview, budget-versus-actual comparison and commentary by the management.
• Annual financial statements: the annual financial statements under German commercial law (HGB). Under Section 264(1) of the German Commercial Code (Handelsgesetzbuch, HGB) they must be prepared in the first three months of the following financial year, for small corporations at the latest within six months. Investors sometimes require an audit by a statutory auditor even where there is no statutory audit obligation.
• Budget: annual plan for the following financial year, usually before it begins and often linked to a reserved matter requiring consent.
• Event-driven notifications: material events such as legal disputes, the loss of important customers or foreseeable liquidity shortfalls.

Recipients and thresholds

The full package is often received only by major investors, whose shareholding reaches an agreed percentage or investment amount. Smaller shareholders receive quarterly reports or the annual financial statements. Such a tiering applies only to the contractual reports. Every shareholder keeps the statutory right under Section 51a GmbHG, including a business angel with a 1% shareholding.

Venture capital funds must report to their own investors. The agreement therefore usually allows them to pass on information in summarised form to investors, advisers and financing partners, provided that these are bound to confidentiality.

Information rights of competitors and confidentiality

Information rights are combined with a duty of confidentiality, either in the shareholders' agreement or in a separate confidentiality agreement. Special rules apply to shareholders who hold a stake in a competitor or are themselves in competition. One example is an investor from the field of corporate venture capital, that is, the investment arm of a corporation in the same industry. It is usual that such shareholders do not receive competitively relevant information such as customer lists, prices and product planning, or that their contractual information rights lapse entirely.

These limits also have a competition-law background. The exchange of competitively sensitive information between competitors can violate the prohibition of cartels. For the statutory right to information, Section 51a(2) GmbHG provides the basis for refusing a competitor individual items of information.

Information rights in due diligence and company sales

Shareholders' information rights do not entitle them to pass documents on to prospective buyers. Whether and to what extent a prospective buyer gains insight is decided by the management, in practice backed by a shareholders' resolution and a confidentiality agreement with the prospective buyer. The documents are made available in a data room, which as a rule protects them technically, for example by watermarks, blocks on printing and download, or time-limited access. This technology is called information rights management (IRM) and shares only the name with the information rights under company law.

Reporting that is kept up to date speeds up financial due diligence, that is, the review of the financial figures by the investor or buyer. If monthly reports, quarterly reports and annual financial statements agree, revenue, earnings and liquidity can be traced quickly. If the figures reported to investors deviate from the bookkeeping, acquirers treat this as a warning signal and examine correspondingly more deeply.

Practical example: information rights with a corporate investor

A GmbH has 14 shareholders. Three venture capital funds hold 12%, 9% and 6%, the investment arm of a corporation with a competing product line holds 4%, and founders and business angels hold the remaining shares. The shareholders' agreement defines major investors as those with a shareholding of 5% or more and provides for them monthly reports by the 25th of the following month and quarterly reports within 45 days. All other shareholders receive a quarterly update. Shareholders with a competitor connection receive no customer-related data.

• The three funds receive the full package. The monthly report for March is due by 25 April.
• With 4%, the corporate investor is not a major investor and receives the quarterly update without customer-related data.
• A business angel with 1.5% demands inspection of the contracts with the 20 largest customers. Under Section 51a GmbHG, inspection must be granted, for example on the company's premises and with reference to the business angel's duty of confidentiality.
• If the corporate investor makes the same request, the shareholders' meeting can resolve to refuse, because use in competition and a not insignificant disadvantage for the company are to be feared. According to the prevailing view, the corporate investor itself does not vote on this.

The example shows the two levels. The contractual tiering controls the ongoing reporting effort. The statutory right remains for every shareholder and finds its limit only in Section 51a(2) GmbHG.

Distinction: information rights, investor update and observer seat

• Investor update: the regular, often voluntary communication of the management with all shareholders. Information rights, by contrast, establish an enforceable claim.
• Observer seat: an observer seat on an advisory board or supervisory body. The observer receives information by attending the meetings, without a vote.
• Protective provisions: investors' reserved matters requiring consent. They give decision-making power, information rights only knowledge.
• Due diligence: a one-off, event-driven review before a transaction. Information rights operate on an ongoing basis throughout the shareholding.

Common mistakes

• Deadlines that accounting cannot meet. A monthly report five days after month-end presupposes a monthly closing that many growth companies cannot deliver that fast.
• Restriction of the statutory right assumed. A tiering by major investors changes nothing about the fact that every shareholder can demand information and inspection under Section 51a GmbHG.
• No competitor rule. Without an exception, shareholders with a competitor connection also receive competitively relevant information.
• Inconsistent metrics. If metrics are defined differently in budget and report, a budget-versus-actual comparison is not reliable.
• Passing on by funds unregulated. Without a rule, it is unclear which information a fund may pass on to its investors.

Frequently asked questions

Which information rights does a GmbH shareholder have without a special agreement?

The right to information and inspection under Section 51a GmbHG. It covers all affairs of the company and inspection of books and records and belongs to every shareholder regardless of the size of the shareholding.

Can the articles of association exclude the right to information?

No, not the statutory right. Section 51a(3) GmbHG prohibits deviating provisions in the articles of association. The contractual reporting obligations, by contrast, can be freely designed: scope, deadlines and circle of recipients are set by the shareholders' agreement.

Can the company refuse information to a shareholder with a competitor connection?

Yes, within limits. The statutory right can be refused by shareholders' resolution if use for purposes foreign to the company and a not insignificant disadvantage are to be feared. The contractual reporting rights can be restricted for such shareholders from the outset.

How quickly must the monthly report be available?

That is determined solely by the agreement. Often 20 to 30 days after month-end. Shorter deadlines presuppose a well-rehearsed monthly closing with bookkeeping and tax advisers.

Does a removed founder-managing director keep access to information?

As a shareholder yes, as a managing director no. With removal, direct access to the documents ends. What remains is the right under Section 51a GmbHG and whatever the shareholders' agreement grants the founder as a shareholder.

Do holders of virtual shares have information rights?

None under company law. Employees with virtual shares are not shareholders. Which information they receive, for example to calculate their entitlement on an exit, is regulated by the participation plan.

The Roemer Capital view

As a fractional CFO, we set up reporting so that a single data source serves all contractual information obligations: monthly closing, uniformly defined metrics, budget-versus-actual comparison and investor update. We agree reporting deadlines with bookkeeping and tax advisers before signature so that the company can meet them reliably.

In the sale process this pays off. If the figures reported to investors agree with monthly and annual financial statements, the data room can be made available within 24 hours, and financial due diligence begins without reconciliation loops.