Excessive Retention of Profits and Minority Protection – A German Perspective

Decisions on profit distribution can easily become a tantalizing matter in family firms. In many jurisdictions, the decision to distribute or retain a corporation’s profits stands or falls on the votes of the majority shareholders. Thus, the majority can turn a corporation’s dividend policy into an oppression strategy against minority shareholders, cutting off the minority from any source of income from their corporation and leaving financial profits dangling in sight, but out of the minority’s reach. Especially in family firms, where the corporation is the main source of income for its shareholders, the retention of profits can threaten the financial subsistence of the minority. German scholars have even coined the term starvation dividends (Hungerdividende) for this phenomenon. At the same time, majority shareholders remain largely unaffected as they can secure their liquidity through other ways of profit extraction from the corporate firm, e.g. by granting themselves a generous salary or substantial payments for services provided.Like other jurisdictions, German law is struggling to rein in such behavior and to protect minority shareholders. The author outlines the statutory and contractual framework for the distribution of a corporation’s profits in German Limited Liability Corporations (Gesellschaft mit beschränkter Haftung – GmbH). She then presents the shareholders’ Treuepflicht, i.e. the shareholders’ fiduciary duty towards the corporation and each other, as a powerful tool on which scholars and courts draw in order to police shareholder resolutions on the application of profits. However, even where a shareholder resolution to retain profits has been found to violate the law, providing an adequate remedy may prove difficult. The article concludes with a discussion of these difficulties and potential solutions