Considerations for a minority shareholder

This post is part of a series in which we are sharing our experience of founding a company in Germany. We hope that it will help others working their way through the foundation process. This post is about some of the considerations when creating the foundation documents, you can read more about which documents are required in a previous post. Also, think about reading the first post in the series for more details.

Minority shareholder rights

Because our founders were investing different amounts into the company, we agreed to split the share of ownership in our company unevenly. With two shareholders, this immediately creates an interesting situation, because the shareholder who holds more shares is in a dominant majority position. From a purely legal perspective, the majority shareholder has a lot of power. He can make unilateral decisions on any topic unless the articles of association specify areas where he cannot or otherwise curb his power. There are a few ways this can be done:

  • Give each shareholder 50-50 voting rights, despite the unequal share distribution
  • Give the minority shareholder a veto
  • Require a qualified majority for certain types of decision

The challenge with making everyone equal or giving the minority shareholder a veto is that there is a high risk of a stalemate in the event of a disagreement. So we decided to create a list of decision types for which a qualified majority was required (in our current situation unanimity is required), such as changing the articles of association, buying or selling a business or property, naming or firing directors.

Social insurance

If a director is a minority shareholder, he is considered as an employee and the company must pay social insurance contributions for him or her. This can be avoided if he is given a veto or a wide-reaching ability to block decisions of the shareholders, especially regarding the time, duration, scope and location of his work. The majority shareholder is considered not to be an employee and the company is not required to pay social insurance. In our case, since we are currently not paying ourselves a salary, social insurance is not an issue.

Read the other posts in this series:

Disclaimer: We’re not lawyers or tax advisors, to stay on the safe side consult an expert before doing anything 😉