Russian Roulette Clause” in the Articles of Association Held Permissible

In practice, fifty-fifty shareholdings often give rise to the problem that shareholder decisions are mutually blocked by a deadlock situation.

A so-called “Russian roulette clause” in the articles of association resolves such shareholder deadlocks by giving either shareholder the right to offer all of their shares to the other shareholder for purchase at a specified price. If the recipient of the offer does not accept the offer, or does not do so in due time, the recipient is in turn obliged to sell and transfer all of their own shares to the offeror without delay at the same purchase price.

In its recent decision of 20 December 2013 – 12 U 49/13, the Higher Regional Court of Nuremberg held such a provision, referred to in legal literature as a “Russian roulette clause”, to be valid. The case concerned a stock corporation whose shares were held in equal parts by two shareholders. Since the interests of shareholders in a GmbH are comparable, this case law should also be directly transferable to the legal relationship between two shareholders of a GmbH.

The generally existing risk of abuse does not in itself justify a finding that the clause is contrary to public policy. If a contracting party does not wish to expose itself to that risk, it should not agree to the Russian roulette mechanism. In any event, the use of such a clause is objectively justified in order to resolve a self-blockade of the company caused by two shareholders holding equal participations.

The court further noted that judicial intervention might at most be justified where one of the two shareholders was unable from the outset to finance a purchase offer and therefore had to avoid the disadvantageous completion mechanism at all costs — in other words, where that shareholder was exposed to a particular situation of coercion.
This appellate decision provides practitioners with an important drafting tool for resolving deadlock situations that frequently arise among shareholders. At the same time, it helps prevent the often protracted and damaging consequences of intense disputes, which in practice — particularly in family-owned businesses — frequently result in lengthy shareholder conflicts.

We would be pleased to advise you on the sustainable drafting of articles of association and on shareholder disputes.