Voting Rights

What are voting rights?

Voting rights (German: Stimmrechte) denote the right of a shareholder to take part in the resolutions of the shareholders' meeting by casting a vote. The shareholders' meeting is the body in which the shareholders of a GmbH (German limited liability company) jointly decide the company's affairs. The voting weight (share of votes) depends on the nominal amount of the shares, that is, the fixed nominal value of a share, for example EUR 1, regardless of what was paid for it. Under Section 47(2) of the German Limited Liability Companies Act (GmbHG), each euro of nominal amount counts as one vote, unless the articles of association provide otherwise.

In a funding round, the distribution of votes determines which group of shareholders can pass or prevent which resolutions alone. The basic rules are in the GmbHG, deviations in the articles of association (Gesellschaftsvertrag). The shareholders' agreement, an additional contract between the shareholders, can oblige them to vote in a particular way; it binds only the contracting parties among themselves. For voting weight, only the shares that actually exist count, as shown by the cap table (overview of shareholdings). Virtual shares and options not yet exercised, which a fully diluted presentation additionally includes, confer no vote.

Voting rights in the GmbH: voting weight and casting votes

Because the law ties in with the nominal amount, voting weight follows the share of the share capital and not the price paid. The share capital is the total of all nominal amounts entered in the commercial register. In a funding round, investors usually pay a premium (Agio) in addition to the nominal amount, that is, the part of the price above the nominal amount. It flows into the capital reserve, an item of equity, and increases neither the share capital nor the number of votes.

Formula: share of votes = nominal amounts of own voting shares / total nominal amounts of all voting shares × 100%

For an individual resolution, only the votes cast count. Abstentions and shareholders subject to a voting ban drop out of the calculation.

A shareholder can be represented at the vote. The proxy requires text form (Section 47(3) GmbHG), so an email suffices, an oral statement does not. The articles of association can restrict the circle of possible representatives, for example to fellow shareholders.

Who may vote towards the company is determined by the list of shareholders filed in the commercial register (Section 16(1) GmbHG), the officially deposited register of all shareholders and their shares. An acquirer who is not yet entered there does not yet count as a shareholder towards the company. If the acquirer votes nevertheless, the vote becomes effective only if the amended list is filed in the commercial register without undue delay afterwards.

The voting right cannot be separated from the share and transferred in isolation (prohibition of separation). Anyone who wants to influence another shareholder's vote needs a proxy or a contractual voting commitment (voting agreement). Business angels and founders often pool their votes in a pooling agreement, so that their group votes uniformly in the shareholders' meeting.

Voting bans under Section 47(4) GmbHG

The law excludes shareholders from voting in certain conflicts of interest. Anyone who is to be discharged by the resolution or released from a liability has no vote. The same applies to resolutions on entering into a transaction with the shareholder and on commencing or settling legal proceedings against the shareholder. In these cases, the shareholder may not exercise the voting right as another's representative either. By discharge, the shareholders approve a managing director's conduct of office and as a rule waive damages claims known to them.

In growth companies this concerns above all the discharge of shareholder-managing directors, loan, consultancy or licence agreements with a shareholder and claims against that shareholder. According to the prevailing view, the voting ban also covers the removal of a shareholder-managing director for good cause. On the appointment and on a removal without special cause, by contrast, the shareholder-managing director may vote.

Deviating voting rights in the articles of association

The rule "one euro, one vote" is dispositive law, so it applies only to the extent that the articles of association provide nothing else. The articles can detach voting weight from the nominal amount and create classes of shares, that is, groups of shares each with their own rights. Two arrangements occur in practice.

Non-voting shares

Non-voting shares confer a participation in profit and sale proceeds, but no influence on resolutions. They suit participants who are deliberately not meant to have a say, for example family members in a succession arrangement or individual employees holding genuine shares. The right to attend the shareholders' meeting, the right to information and the power to challenge resolutions remain according to the prevailing view. Interference with the core of the membership, for example a reduction of the profit right, still requires the consent of the shareholder concerned.

Multiple voting rights

Conversely, the articles of association can assign a multiple of votes to certain shares, for example ten votes per euro. This allows founders to keep the majority although their share of capital falls below half. In German funding rounds, this is the exception. Investors usually secure their influence not through voting weight but through consent requirements (protective provisions) and veto rights. Consent requirements are lists of measures that may be implemented only with the investors' consent. Multiple voting rights also affect the qualified majority, because the GmbHG measures it by the votes cast and not by capital.

The stock corporation is more tightly bound. There, every share confers the voting right (Section 12(1) of the German Stock Corporation Act, AktG); only preference shares with a profit preference can be non-voting. Multiple-voting shares have been permitted only within narrow limits since the Future Financing Act (Zukunftsfinanzierungsgesetz).

Voting rights in funding rounds, due diligence and sale

Every capital increase, that is, every issue of new shares, shifts the distribution of votes. For founders, what counts is less the absolute size of their holding than the question of which resolution thresholds they can still reach alone after the round. Simple resolutions need more than half of the votes cast (majority vote), amendments to the articles of association three quarters (supermajority vote). Anyone who holds more than a quarter of the votes cast can prevent amendments to the articles of association (blocking minority).

The investors of a Series A, that is, the first larger round with venture capital funds, usually hold a minority. Their consent requirements often demand a majority within the investor group, and this second level has to be calculated in negotiation just as carefully as the distribution of votes by capital.

Whether earlier shareholder resolutions came about validly is examined by investors and acquirers in due diligence. What is checked is voting entitlement according to the list of shareholders, observance of voting bans, the form of proxies and whether the necessary majorities were reached. Defects in resolutions on capital increases or the appointment of managing directors are remedied before closing the transaction, often by confirmatory resolutions with which the shareholders pass the defective resolution again, without defect.

Worked example: calculating voting rights after a funding round

Two founders each hold 12,500 shares with a nominal amount of EUR 1 each in their GmbH, so the share capital is EUR 25,000. In a funding round, an investor takes 6,250 new shares for EUR 2 million: EUR 6,250 falls on the nominal amount, EUR 1,993,750 on the premium.

• Share capital after the capital increase: EUR 25,000 + EUR 6,250 = EUR 31,250, that is, 31,250 votes
• Each founder: 12,500 / 31,250 = 40% of the votes
• Price per new share: EUR 2,000,000 / 6,250 = EUR 320, of which EUR 1 nominal amount and EUR 319 premium
• Investor: 6,250 / 31,250 = 20% of the votes, although it has paid in EUR 2 million
• Calculated valuation after the round (post-money): 31,250 shares × EUR 320 = EUR 10 million
• Both founders together: 25,000 / 31,250 = 80% of the votes. Under the law, that is enough for any amendment to the articles of association without the investor, as long as the articles and the shareholders' agreement do not require its consent
• Voting ban: The shareholders' meeting is to approve a consultancy agreement with founder A. Only the 12,500 votes of founder B and the 6,250 votes of the investor are entitled to vote, 18,750 together
• Weight of founder B on this resolution: 12,500 / 18,750 = 66.7% of the votes entitled to vote

With 20% of the votes, the investor can prevent neither simple resolutions nor amendments to the articles of association and therefore negotiates consent requirements, for example for capital increases, the annual budget and contracts with shareholders. At the same time, the example shows how strongly a voting ban shifts the majority on an individual resolution.

Distinctions: voting rights, veto rights and information rights

• Veto rights: allow a resolution to be prevented irrespective of one's own voting weight. Voting rights, by contrast, determine the weight with which a shareholder takes part in every resolution.
• Information rights: give a claim to information and inspection, but no influence on resolutions. Holders of non-voting shares keep them too.
• Preferred shares: in German funding rounds regulate above all the investors' priority in the distribution of sale proceeds (liquidation preference). In voting weight per euro, they usually do not differ from the founders' shares.

Common mistakes

• Outdated list of shareholders. As long as an acquisition does not appear in the list filed in the commercial register, the acquirer does not count as a shareholder towards the company. If the new list is not filed without undue delay, the acquirer's votes are open to challenge.
• Voting ban overlooked. If a shareholder votes on their own discharge or on a contract with themselves, the resolution is open to challenge where that shareholder's votes were decisive. The other shareholders can then have it declared void by a court.
• Proxy without text form. The meeting can reject a representative authorised only orally, and the validity of that representative's vote is in question.
• Multiple voting rights without regard to later rounds. New investors often make such classes a subject of negotiation. Abolishing them is an amendment to the articles of association and as a rule requires the consent of the shareholders who benefit.
• Voting commitment not reconciled with the articles of association. If a pooling agreement contradicts the rules on representation or transfer in the articles of association, it is unclear how the pooled votes are validly cast.

Frequently asked questions

Does a GmbH vote by heads or by shares?

By shares. Each euro of nominal amount confers one vote (Section 47(2) GmbHG), regardless of what a shareholder paid for the shares. Voting by heads takes place only if the articles of association provide for it for certain resolutions. Investors gain additional influence only through rules in the articles of association, consent requirements or veto rights.

Do employees with virtual shares have a voting right?

No. Virtual shares establish only a contractual payment claim against the company, but no shareholder status. A voting right arises only when employees acquire genuine shares.

May a shareholder-managing director vote on their own removal?

On a removal without special cause, yes. If the shareholder-managing director is to be removed for good cause, that person is excluded from voting according to the prevailing view, because nobody should co-decide on an accusation against themselves.

Are multiple voting rights permissible in a GmbH?

Yes. The articles of association can assign several votes per euro to individual shares. Introducing them is an amendment to the articles of association, which must be notarially recorded and entered in the commercial register. Because it treats the other shareholders unequally, the consent of the shareholders placed at a disadvantage is additionally required according to the prevailing view.

The Roemer Capital view

We calculate the distribution of votes with the founders before every funding round, for the upcoming round as well as for the planned follow-on rounds. The calculation shows from which round the founders lose the simple majority, the three-quarters majority or the blocking minority and which investor consent requirements then become decisive. It shapes the negotiation over board seats and consent catalogues and therefore belongs at the start of the process.

Governance is one of the four pillars by which we measure a company's investor readiness. This includes a history of resolutions that stands up in due diligence. The legal structuring of voting rights lies with the client's law firm; we supply the figures and scenarios on which it builds.