Supermajority Vote

What is a supermajority vote?

Supermajority vote (resolution by qualified majority) describes a decision for which more approval than a simple majority is required. Depending on the threshold, the terms used are a two-thirds majority, a three-quarters majority or, for example, a majority of 90% of the votes. For a GmbH (German limited liability company), the law prescribes a majority of three quarters of the votes cast for amendments to the articles of association (Section 53(2) of the German Limited Liability Companies Act, GmbHG). The articles of association (Satzung, or Gesellschaftsvertrag) are the constitutional document of the GmbH, setting out its name, registered office, share capital and the rights of the shareholders.

Qualified majorities protect this constitutional framework. The idea is familiar from constitutional law: the German Basic Law (Grundgesetz) can only be amended with two thirds of the members of the Bundestag and two thirds of the votes of the Bundesrat. This way, the basic rules do not change with a narrow majority. In company law, qualified majorities apply to decisions that change the legal position of all shareholders: articles of association, capital, reorganisation and dissolution. In a financing round, they determine who can push through structural changes alone and who can prevent them.

Statutory three-quarters majority in a GmbH

The law requires a three-quarters majority above all for the following resolutions:

• amendments to the articles of association of any kind (Section 53(2) GmbHG), for example concerning the company name, registered office or object of the company,
• capital increases and capital reductions that are resolved as amendments to the articles of association,
• the creation of authorised capital, with which the management may increase the share capital by up to half for a maximum of five years (Section 55a GmbHG),
• the dissolution of the company (Section 60(1) no. 2 GmbHG), unless the articles of association provide otherwise,
• mergers, demergers and changes of legal form under the German Transformation Act (Umwandlungsgesetz).

An amendment to the articles of association must be notarised and only takes effect upon entry in the commercial register (Section 54(3) GmbHG). For amendments to the articles, the articles may raise the threshold and impose further requirements, but may not lower it below three quarters. For dissolution, by contrast, the law permits a different rule in the articles. If an amendment to the articles is to increase the shareholders' obligations to perform, for example through an obligation to make additional contributions (the duty to pay in further money later), all affected shareholders must consent (Section 53(3) GmbHG).

On a capital increase, the existing shareholders, according to the prevailing view, hold a subscription right to the new shares (pre-emptive rights). It allows them to take up new shares in proportion to their existing holding so that their percentage does not fall. Excluding it also requires three quarters of the votes and an objective justification, that is, a reason in the interest of the company, such as the entry of a needed investor. In financing rounds, the existing shareholders therefore usually waive their subscription right in the participation agreement, and only the new investor is admitted to subscribe.

Basis: votes cast, not attendance

The three quarters refer to the votes cast, not to the share capital and not to the number of those present. The law does not require an attendance quorum of 75%. Abstentions reduce the reference base.

Formula: approval rate = yes votes / (yes votes + no votes) × 100%; an amendment to the articles of a GmbH is passed if the rate reaches at least 75%

By contrast, in a stock corporation (Aktiengesellschaft), the three-quarters majority for amendments to the articles of association relates to the share capital represented when the resolution is passed (Section 179(2) of the German Stock Corporation Act, AktG).

The blocking minority

Anyone who holds more than a quarter of the votes cast can prevent any decision that requires three quarters. This position is called a blocking minority (Sperrminorität). It confers no power to shape decisions, but for amendments to the articles, capital measures and reorganisations it works like a veto right (veto rights). The common formula "25% plus one vote" is a simplification, since what counts is the share of the votes actually cast.

The blocking minority is therefore not a fixed figure. If shareholders stay away from the meeting or abstain, a smaller share of the capital is enough for another shareholder to block a resolution. By contrast, a shareholder who holds more than 25% of all votes and votes no keeps the blocking minority in every case, because that shareholder's share of the votes cast rises when others stay away.

For founders, the joint blocking minority is often the last threshold they hold across several rounds. Investors do not always aim for a blocking minority of their own. They achieve their protection through contractual consent requirements that are independent of the size of the shareholding.

Qualified majorities in the articles and the shareholders' agreement

In financing rounds, two further levels are added to the statutory threshold. The articles of association may provide higher majorities for individual resolutions or require the consent of a particular class of shares. A class is a group of shares with the same special rights, for example the investors' preferred shares. The shareholders' agreement often contains a catalogue of measures that an investor majority must approve (protective provisions).

The two levels work differently. A higher majority in the articles applies directly to the resolution; if it is not reached, the motion is rejected. A rule contained only in the shareholders' agreement binds only the contracting parties among themselves (as a matter of contract law). Whether a resolution that breaches it can be challenged depends on how it is drafted. Material reservations are therefore often anchored in both documents. For resolutions of an advisory board, too, the articles or the rules of procedure may provide for a qualified majority, for example for approval of the annual budget.

Thresholds that are too high have side effects. If the articles require 90% of the votes for capital increases, every shareholder with more than 10% obtains a de facto veto right. In a bridge financing (interim financing until the next round) or a follow-on round under time pressure, this can leave the company unable to act. The statutory three-quarters majority, combined with a manageable catalogue of investor approvals, is therefore widespread.

Squeeze-out, drag-along obligation and company sale

GmbH law does not provide for a statutory exclusion of minority shareholders against compensation (squeeze-out). For stock corporations, the law provides for it in several procedures, depending on the procedure from a shareholding of 90 or 95% of the share capital. In a GmbH, the contractual drag-along obligation (drag-along rights) performs this function in the case of a sale. Its trigger threshold is often structured as a qualified majority.

Structural measures such as a merger are resolved by qualified majority. A single small shareholder cannot prevent them by withholding consent. The position is different for the sale of all shares (share deal): here every shareholder must transfer their own shares, which is why the drag-along obligation is decisive. Whether the agreed threshold has been reached and whether the obligation was validly notarised is something acquirers clarify in due diligence.

Worked example: calculating the three-quarters majority and blocking minority

In a GmbH with EUR 100,000 of share capital there are 100,000 votes, one per euro of nominal value (voting rights). Founder A holds 32,000, founder B 28,000, the lead investor (the investor who led the last round) 24,000, a second investor 10,000 and business angels together 6,000 votes. A capital increase is to be resolved. The lead investor votes against, all other participants vote in favour.

• All shareholders vote: 32,000 + 28,000 + 10,000 + 6,000 = 76,000 yes votes out of 100,000 votes cast, that is 76%. The three-quarters majority is reached; with 24%, the lead investor cannot block.
• The business angels stay away: 32,000 + 28,000 + 10,000 = 70,000 yes votes out of 94,000 votes cast, that is 74.5%. The three-quarters majority is missed.
• The lead investor's share of the votes cast in the second case: 24,000 / 94,000 = 25.5%. The lead investor therefore holds a blocking minority.
• Contractual level: the shareholders' agreement requires, for capital increases, the consent of the majority of the preferred shares. The investors together hold 24,000 + 10,000 = 34,000 preferred shares, of which 24,000 / 34,000 = 70.6% belong to the lead investor.

Irrespective of attendance, the lead investor can therefore block the capital increase contractually through the investor majority. The statutory blocking minority only determines whether the lead investor can also block under company law. For the founders, the consequence is that the round can be implemented in accordance with the contract only with the lead investor, even if the other shareholders reach three quarters of the votes.

Distinctions: qualified majority, simple majority and veto right

• Majority vote: a resolution with more than half of the votes cast. It suffices for the ongoing responsibilities of the shareholders' meeting, but not for interventions in the articles of association and capital.
• Unanimity: requires the consent of all shareholders. The law requires, for example, the consent of all affected shareholders for increasing obligations to perform (Section 53(3) GmbHG); otherwise unanimity usually arises from the articles of association.
• Investor majority: a majority counted only within the group of investors. It can give a single investor a veto right even though that investor is far below the blocking minority.
• Veto rights: individual rights to prevent a measure. The blocking minority, by contrast, is a veto right that arises from voting weight and is lost with it.

Common mistakes

• Three-quarters majority confused with an attendance quorum. The law requires three quarters of the votes cast, not the presence of three quarters of the capital. Anyone who equates the two plans shareholders' meetings wrongly.
• Blocking minority calculated as a fixed share of capital. Whether a shareholder can block depends on the votes actually cast. Absences and abstentions by others shift the threshold.
• Thresholds in the articles set too high. 90% or unanimity for capital increases gives small shareholders a de facto veto right and makes follow-on rounds and bridge financings harder.
• Notarisation and registration not planned for. A resolution amending the articles requires notarisation and only takes effect upon registration. Closing plans for a round that do not take these steps into account slip.
• Approval catalogue regulated only under contract law. If a material reservation appears only in the shareholders' agreement, a deviating resolution is not automatically invalid.

Frequently asked questions

What percentage is a qualified majority?

That is set by the rule in question. Two thirds (around 66.7%) or three quarters (75%) of the votes cast are usual. For amendments to the articles of a GmbH, the law prescribes at least three quarters (Section 53(2) GmbHG). The articles may set higher thresholds such as 80 or 90%, but not lower ones.

From what shareholding does a shareholder have a blocking minority?

With more than a quarter of the votes cast. If all shareholders vote, that is more than 25% of all votes; if others stay away, a smaller share of the share capital suffices.

Does every capital increase need a three-quarters majority?

In principle yes, because a regular capital increase is an amendment to the articles of association. If authorised capital exists, the management may increase the capital within the authorisation without a new shareholder resolution; the authorisation itself, however, again requires three quarters of the votes.

Is there a squeeze-out in a GmbH?

No. GmbH law does not provide for a statutory exclusion of minority shareholders against compensation. Contractual drag-along obligations and rules on compulsory redemption of shares in the articles of association, tied to specific grounds, are possible.

Can an investor with 10% of the votes prevent an amendment to the articles?

Under the law, as a rule not, because such an investor reaches the blocking minority only if large parts of the remaining votes are not cast. The investor can, however, if the articles or the shareholders' agreement require the investor's consent or an investor majority in which the investor is decisive.

The Roemer Capital view

Roemer Capital shows founders, already when a round is being prepared, in which of the planned follow-on rounds they would lose their joint blocking minority. The opposite direction is just as important: thresholds in the articles above three quarters and broad approval catalogues can delay a later bridge financing if a single investor does not go along.

In negotiations on the term sheet, Roemer Capital therefore runs every proposed threshold against the expected shareholder structure of the coming rounds. The result is brought into the discussions with the investors. The wording in the articles and the shareholders' agreement is taken over by the company's law firm.