The district court of Kiel has held that in the event of a capital decrease to zero in combination with a subsequent capital increase pledges over shares in a German limited liability company (GmbH), which are nullified due to the capital decrease, do not continue to exist over the newly issued shares.

In the case at issue, the shareholder of a GmbH had taken out a loan and pledged its shares as a security for the bank's repayment claims. Later on, the shareholders' meeting of the company adopted a capital decrease to zero in combination with a subsequent capital increase without the votes of the concerned shareholder. The court has rejected the bank's view that the pledge continued to encumber the newly issued shares which had been offered to the shareholder, but to which the shareholder had not subscribed.

Pursuant to the court's reasoning the new shares did not replace the shares that were nullified as a result of the capital decrease, as there is no automatic acquisition of the new shares by the shareholder. Such acquisition only occurs as a result of the shareholder expressly exercising the subscription right, to which it is entitled in proportion to its previous participation quota, by subscribing to the shares and by making the required contributions. Another view may in the court's opinion only be justified in the particular case of a capital increase from company funds, because in this scenario the funds used to increase the company's share capital are economically already attributable to the shareholders in proportion to their shareholding.

Furthermore, the subscription right as such does in the court's view not substitute the nullified shares, because it ensues independently from the nullification of the former shares only from the capital increase.

The court has also rejected liability claims asserted by the bank against the meanwhile sole shareholder of the company, with the votes of which the capital measures had been resolved. There was no obligation of this shareholder to increase the previously existing shares, in order to ensure the survival of the pledges, instead of issuing new shares. When choosing between increasing of existing or issuing new shares, the shareholders which are not concerned by the pledge, only need to take into due consideration the best interests of the company and the shareholders, but not those of holders of pledge rights.

For the full text of the decision in the German language, please click here. If you are interested in further information on this topic, please do not hesitate to contact Christine Oppenhoff.