Majority Vote

What is a majority vote?

Majority vote (in German, Beschluss mit einfacher Mehrheit) describes a decision-making procedure in which a motion is carried if the votes in favour exceed the votes against. The terms majority resolution (Mehrheitsbeschluss) and simple majority of votes (einfache Stimmenmehrheit) mean the same thing. For the shareholders' meeting of the GmbH (German limited liability company), the body in which the shareholders decide jointly, this is the statutory basic rule. Resolutions are passed by a majority of the votes cast (Section 47(1) of the German Limited Liability Companies Act, GmbHG), unless the law or the articles of association require a larger majority. As in a political election, what counts is the votes actually cast, not the number of persons entitled to vote.

In German practice the term appears in three contexts: in resolutions of the shareholders' meeting, in resolutions of an advisory board and in contractual consent requirements such as the majority of the investors. The company law majority rules are found in the GmbHG and in the articles of association (Gesellschaftsvertrag), which are notarially recorded. The shareholders' agreement is a separate contract that binds only the contracting parties among themselves. It can oblige shareholders to vote in a certain way, but does not itself change the majority with which a resolution becomes effective.

The simple majority under Section 47(1) GmbHG

The yardstick: the votes cast

The reference base is the votes cast, not the entire share capital and not the votes of all those present. A motion is carried if there are more valid votes in favour than votes against. In the event of a tie, it is rejected. A shareholder with exactly 50% of the votes can therefore not bring about a resolution alone, but can defeat any motion he or she votes against.

Formula: Yes ratio = votes in favour / (votes in favour + votes against) × 100%; the motion is carried if the yes ratio is above 50%

Abstentions and invalid votes

According to the prevailing view, abstentions do not count as votes cast. They act neither as yes nor as no, but reduce the reference base. Invalid votes are likewise disregarded, as are votes that may not be cast because of a voting prohibition, for example in the vote on one's own discharge (voting rights). The articles of association can provide otherwise, for example that abstentions count as votes against or that the majority is based on all existing votes.

What the simple majority suffices for

Section 46 GmbHG assigns a catalogue of responsibilities to the shareholders' meeting. The shareholders decide on these under Section 47(1) GmbHG by simple majority, unless the articles of association provide otherwise. They include:

• the adoption of the annual financial statements and the appropriation of the result,
• the appointment, removal and discharge of managing directors, that is, the approval of their conduct of office,
• the calling in of contributions as well as the division, consolidation and redemption of shares,
• measures for the review and supervision of the management and the appointment of holders of commercial power of attorney (Prokuristen, employees with far-reaching authority to represent the company),
• the enforcement of claims for damages arising from the formation of the company or from management.

The shareholders also issue instructions to the management by simple majority (Section 37(1) GmbHG). The same applies to consent to transactions that the articles of association make subject to the reservation of the shareholders' meeting. For amendments to the articles of association, capital measures and reorganisations, the simple majority is not sufficient. They require a qualified majority (supermajority vote).

Quorum, convening and recording of the result

The GmbHG knows no minimum attendance. A properly convened shareholders' meeting can pass resolutions even if only one shareholder appears. Articles of association therefore often provide for a quorum, that is, a minimum attendance, for example the presence or representation of at least half of the share capital. They usually also provide that, if the quorum is missed, a second meeting with the same agenda is to be convened. That meeting can then pass resolutions regardless of the number of those present.

The meeting is convened by the management (Section 49(1) GmbHG). Under Section 51 GmbHG this is done by registered letter with a notice period of at least one week; the items to be resolved are to be announced at the latest three days before the meeting. Shareholders who together hold at least 10% of the share capital can demand that a meeting be convened (Section 50(1) GmbHG). Defects in convening make resolutions open to challenge, unless all shareholders are present and agree to the resolution being passed (universal meeting).

If the chair of the meeting formally records the voting result, the resolution applies with the recorded content until a court declares it void following an action to set it aside. Without this recording, it remains open in the event of a dispute whether a resolution was passed at all.

Resolutions outside a meeting: text form and circular procedure

An in-person meeting is not mandatory. Under Section 48(2) GmbHG, resolutions can be passed without a meeting if all shareholders agree to the content of the resolution in text form or declare their consent to voting outside the meeting. In the second case, all need only agree to the procedure; for the resolution itself, the simple majority again suffices. The law permits meetings by telephone or video if all shareholders agree to this in text form.

The articles of association can provide for further procedures, for example circular resolutions in which votes are cast in writing or by email without every shareholder having to agree to the procedure. In companies with many business angels, this considerably eases decision-making.

Majorities in the articles of association, shareholders' agreement and advisory board

The articles of association can provide for a higher majority for individual items of business or shift responsibilities to an advisory board. In funding rounds, contractual majorities are added. A commonly agreed arrangement is the investor majority: certain measures require, in addition to the shareholders' resolution, the consent of investors who together hold more than half of the preferred shares. Preferred shares are the shares that investors receive with special rights. Lists of such measures requiring consent (protective provisions) make the simple majority operate at two levels, across all votes and within the investor group.

In the advisory board, a voluntary advisory and supervisory body, what the articles of association and the rules of procedure provide applies. The simple majority of the votes cast by the members is usual. A casting vote is often added: in the event of a tie, the chair's vote is decisive. How advisory board resolutions are prepared and minuted is described in the entry board meeting.

Deadlock between camps of equal strength

If two founders or two groups of shareholders each hold half of the votes, no resolution is passed in the event of disagreement. This also affects the appointment and removal of managing directors. Shareholders' agreements provide tiered solutions for such situations: first negotiations between the shareholders, then mediation or the decision of an advisory board, and as a last resort an exit procedure such as the shotgun clause. Under it, one shareholder names a price per share, and the other must either sell at that price or buy the offering party's shares at the same price.

Worked example: calculating a simple majority with abstentions

The share capital of a GmbH is EUR 100,000, so the shareholders together have 100,000 votes. Founder A holds 35,000 votes, founder B 25,000, an investor 30,000 and several business angels together 10,000. The articles of association require for a quorum the presence or representation of at least half of the share capital. The vote concerns the appointment of an additional managing director.

• A, B and the investor are present: 35,000 + 25,000 + 30,000 = 90,000 votes, or 90% of the share capital. The quorum of 50% is reached.
• A votes yes (35,000), B votes no (25,000), the investor abstains (30,000).
• Votes cast: 35,000 + 25,000 = 60,000; the abstention does not count.
• Result: 35,000 / 60,000 = 58.3% yes votes. The motion is carried.
• Counter-calculation if the articles of association treat abstentions as votes against: 35,000 / 90,000 = 38.9% yes votes. The motion would be rejected.
• If the investor votes no: 35,000 votes in favour against 25,000 + 30,000 = 55,000 votes against. The motion is rejected.

An abstention is therefore not neutral behaviour. Under the statutory rule, it favours the side that is ahead among the votes cast. Anyone who wants to prevent a motion must vote no.

Distinctions: simple majority, three-quarters majority and unanimity

• Supermajority vote: requires a higher threshold than the simple majority, for amendments to the articles of association of a GmbH three quarters of the votes cast. The minority that can prevent this threshold holds a blocking minority.
• Unanimity: If the articles of association require the consent of all shareholders, everyone must agree, including anyone who stays away from the meeting. This gives each individual a right of veto, which makes decision-making considerably harder in companies with many participants.
• Voting rights: determine the weight with which each vote counts. The majority is calculated on this basis.

Common mistakes

• Wrong reference base. Anyone who measures the majority against the entire share capital or against those present treats abstentions and absent shareholders in effect as votes against. Under the law, only the votes cast count.
• Errors in convening. A notice period that is too short, missing items of business or an invitation without the prescribed form make resolutions open to challenge, unless all shareholders are present and agree to the resolution being passed.
• Circular resolution without the consent of all. Without a basis in the articles of association, passing a resolution outside a meeting requires all shareholders to agree to the procedure in text form. If a single declaration is missing, the resolution is open to challenge.
• Contradictory documents. If the shareholders' agreement requires more for a measure than the articles of association, questions of interpretation and challenge arise. The majority rules of both documents must therefore be aligned.
• Deadlock without a resolution mechanism. Without an agreed procedure, the company remains unable to act whenever two camps of equal strength disagree, including on the composition of the management.

Frequently asked questions

Is 50% of the votes enough for a resolution?

No. More than half of the votes cast is required. In the event of a tie, a motion is deemed rejected.

What is the difference between a simple and an absolute majority?

The reference base. The simple majority requires more votes in favour than against among the votes cast. An absolute majority usually means the majority of all persons entitled to vote, so that absentees and abstentions act like votes against. Because the terms are not used consistently, the articles of association should state the reference base expressly.

Do abstentions count as votes against?

Not under the statutory rule. Abstentions are disregarded in calculating the majority, unless the articles of association provide otherwise.

Can shareholder resolutions be passed by email?

Yes, if all shareholders agree to this in text form or the articles of association provide for such a procedure. For resolutions that must be notarially recorded, such as amendments to the articles of association, a vote by email is not sufficient.

Can the articles of association require a higher majority for simple resolutions?

Yes. The majority rule of Section 47(1) GmbHG is non-mandatory. The articles of association can require a qualified majority or unanimity for individual or all items of business.

The Roemer Capital view

Even before a funding round begins, we place the future distribution of votes alongside the items of business of the shareholders' meeting and the advisory board. This makes visible which decisions the founders will still take by simple majority after closing, where the investor majority has a say and where a deadlock can arise. The shareholders and the law firm clarify open points before the term sheet is signed.

In a company sale, we compile the resolution record for the data room: shareholder list, resolutions on the appointment of the management, adoption of the annual financial statements. Our benchmark is a data room that is ready within 24 hours, and that includes a complete history of resolutions. Missing resolutions that only come to light in due diligence delay closing.