Voting Agreement

What is a voting agreement?

Voting agreement (German: Stimmbindungsvereinbarung, also Stimmbindungsvertrag) denotes a contract in which shareholders undertake to exercise their voting rights in the shareholders' meeting in a particular way. They then vote for particular persons, for or against particular measures, or as those bound have previously decided among themselves. The agreement operates under the law of obligations, that is, only between the contracting parties and not towards the company. It changes neither the articles of association nor the voting rights themselves. Similarly, members of an association agree to vote together for a particular list in the election of the executive board: the association's constitution remains as it is, and only those involved are bound.

In the US market, the voting agreement mainly regulates how the shareholders fill the board of directors of a corporation. A German GmbH (German limited liability company) has no such body, but a shareholders' meeting, management and, where applicable, an advisory board, an advisory or supervisory body that the articles of association can establish. Voting agreements here concern the appointment and removal of managing directors, the composition of the advisory board, amendments to the articles of association, capital measures and the exit. In funding rounds, they are part of the shareholders' agreement, which is concluded together with the participation agreement. US model contracts for venture rounds are therefore useful for the GmbH only as a help with structure.

Legal classification of the voting agreement in the GmbH

Admissibility and limits

Voting agreements among shareholders of a GmbH are in principle permissible according to case law. The voting right remains with the shareholder; it cannot be split off from the share and transferred to another person (prohibition of separation, Abspaltungsverbot). A voting proxy, under which another person votes for the shareholder, is possible. It may not, however, exclude the shareholder from casting a vote personally. A commitment is invalid if it circumvents a statutory voting ban under Section 47(4) of the German Limited Liability Companies Act (GmbHG), for example in a vote on the shareholder's own discharge or on a transaction with themselves. The same applies, according to the prevailing view, to a commitment to follow instructions from the management. Voting commitments towards third parties who are not shareholders are held permissible by most, but are disputed.

Form

A voting commitment is in principle free of form. If the same agreement contains obligations to transfer shares, for example from an obligation to sell along (drag-along) or from leaver rules, it requires notarial recording as a whole under Section 15(4) GmbHG. In venture rounds, the shareholders' agreement is therefore regularly notarised.

Effect and enforcement

Because the commitment operates only under the law of obligations, a vote cast in breach of the agreement is in principle effective towards the company, and the resolution comes about with it. The other parties can sue for performance; the final judgment replaces the owed vote (Section 894 of the German Code of Civil Procedure, ZPO). Courts issue an interim injunction before a vote only in exceptional cases. More effective in practice are contractual penalties and voting proxies in favour of a common representative. If all shareholders are bound by the agreement, a resolution in breach of it can also be open to challenge according to case law.

Typical contents of a voting agreement in funding rounds

• Composition of the advisory board: Investors and founders nominate members, and an independent member is determined jointly. All shareholders undertake to elect those nominated and to remove them at the nominator's request. The voting commitment thus secures the board seat of an investor whose shareholding alone is not enough for an election. Observer rights without a vote (observer seat) are regulated alongside.
• Management: The shareholders undertake to appoint particular founders as managing directors and to remove them only under agreed conditions.
• Implementation of the round: Consent to the capital increase, waiver of subscription rights (the right of existing shareholders to take up new shares first), amendments to the articles of association and the establishment of an employee participation programme.
• Consent requirements: The shareholders approve certain measures only if an investor majority has cleared them. This reinforces the veto rights in the articles of association.
• Cooperation on exit: If the agreed majorities resolve on a sale, all shareholders vote for the necessary resolutions. These include approval of share transfers that require consent under the articles of association (transfer restrictions, Vinkulierung) and the waiver of pre-emption rights. This implements drag-along rights in company law.

The term is usually tied to the shareholding and ends with an exit or IPO. If no term is fixed, the question of ordinary termination arises; shareholders' agreements therefore expressly regulate term and rights of termination.

Quorum and de facto veto

The GmbHG requires no minimum attendance for the shareholders' meeting. Articles of association often provide that the meeting has a quorum only if a certain part of the share capital is represented, and sometimes that an investor must be present. If the investor then stays away, the meeting cannot pass valid resolutions. The meeting is not unlawful as a result, but it remains without result. Economically, a veto right arises through absence.

A follow-up rule is therefore widespread: if the first meeting has no quorum, a second one with the same agenda is convened, which can pass resolutions regardless of the capital represented. The same applies to advisory board meetings under the advisory board's rules of procedure.

Practical example: voting agreement after a Series A round

After a Series A round, two founders each hold 30% of a GmbH, several business angels together 10% and the lead investor 30%. The articles of association provide for an advisory board of five members, which the shareholders' meeting elects by simple majority.

• Without a voting commitment, the founders, if they vote together, could elect all five advisory board members alone with 60% of all votes.
• For amendments to the articles of association, they lack the majority of three quarters of the votes cast, even together with the business angels (70%). The investor, with 30% at full attendance, holds a blocking minority and can therefore prevent any amendment to the articles of association.
• The voting agreement distributes the seats: two members on the founders' nomination, two on the investor's nomination, one independent member on a joint nomination. All shareholders, including the business angels, undertake to vote accordingly.
• For the exit, the parties agree: if shareholders holding 60%, including the investor, approve a sale, all take part in the necessary resolutions.
• The articles of association require representation of 75% of the share capital for the first meeting; a follow-up meeting within two weeks has a quorum without this threshold.

As a result, the composition of the advisory board reflects the negotiating position, not the pure majority of votes, and neither side can block decisions permanently by staying away.

Distinctions: voting agreement, pooling agreement and right to delegate a member

• Pooling agreement: combines a voting commitment with a restriction on disposal and mostly serves inheritance tax relief in family companies. The voting agreement of a venture round contains no such restriction on disposal.
• Right to delegate a member in the articles of association: a special right that operates directly towards the company and also binds future shareholders. The voting commitment operates only between the contracting parties.
• Voting proxy: the instrument with which a voting commitment is put into practice. It does not itself create any obligation to vote in a particular way.

Common mistakes

• Advisory board without a basis in the articles of association. The rights and duties of an advisory board must be anchored in the articles of association; a voting commitment alone does not give it powers towards the company.
• New shareholders not bound. Without an obligation to accede on every share transfer, the agreement loses effect with each change in the shareholder group.
• No enforcement mechanism. Without a contractual penalty or proxy, a breach leaves only a lawsuit whose judgment often comes too late.
• Conflict with the articles of association. If the articles and the agreement provide for different majorities, the resolution is effective under the articles even if it breaches the agreement.
• Quorum without a follow-up rule. An attendance threshold without a second meeting gives every shareholder above the threshold a veto right through absence.

Frequently asked questions

Is a resolution invalid if a shareholder votes against the voting agreement?

As a rule not. The vote is effective towards the company, and the breach gives rise to claims by the other contracting parties. If all shareholders are bound by the agreement, the resolution can be open to challenge according to case law.

Does a voting agreement have to be notarised?

Only if it contains obligations to transfer shares. Because voting commitments in venture rounds usually appear together with sell-along and leaver rules in a shareholders' agreement, the agreement as a whole is notarised in practice.

Can an investor determine managing directors through a voting agreement?

Indirectly yes. The shareholders' meeting appoints managing directors. If the other shareholders undertake to vote for the person nominated by the investor, the investor in effect co-determines the appointment. A directly effective nomination right must be regulated in the articles of association as a special right.

Does a voting agreement also bind later acquirers of shares?

Only if they accede to the agreement. Shareholders' agreements therefore make accession a condition of every transfer, and the articles of association secure this through a consent requirement.

How long does a voting agreement apply?

For as long as agreed, in venture rounds usually until an exit or IPO. For individual shareholders, the commitment often ends when they sell their shares in full.

What role does a voting agreement play in a company sale?

It secures the implementation of the sale. In the shareholders' agreement, it obliges all shareholders to cooperate in a sale that the agreed majority has resolved. In the purchase agreement, sellers often promise the acquirer to consent between signing and closing only to resolutions that have been agreed, within the limits of the merger control ban on closing (Vollzugsverbot). In stock corporations, bidders have material shareholders promise in advance to accept the offer or to vote for the transaction (irrevocable undertaking).

The Roemer Capital view

Before a Series A or Series B round, we work through with the client how the votes will be distributed after the round and which decision needs which majority. Only on this basis can it be assessed which advisory board seats, nomination rights and voting commitments an investor can receive without the founders losing control of the operating business.

The contract text is drafted by the law firm. In negotiation, we make sure that quorum rules do not create an unintended veto. In addition, the voting commitments for the exit must fit the sell-along rules, so that a later sale does not fail at implementation.