What is apooling of voting rights?
The termpooling of voting rights describes a situation in which certain investors(usually minority shareholders with a stake of less than 2-5%) pool theirvoting rights and authorize a lead investor or another person (Proxy) to exercise their voting- orother rights. The Proxy is thereby authorized to represent the minorityshareholders in shareholder resolutions. The authorization has no effect on theownership position of the minority shareholders – they remain legal owners ofthe shares and generally only authorize the Proxy to exercise the associatedvoting rights.
However,the authorization may go beyond the mere exercise of voting rights. Forexample, contractual provisions can provide that the proxy may not onlyexercise the voting right but also amend and renegotiate the shareholders'agreement in the name of and on behalf of the minority shareholders, sign anyother agreements in connection with the investment and generally act as arepresentative of the minority shareholders in connection with the investmentin the company.
Thespecific extent of pooling therefore depends on the individual case.
What isthe legal basis of the pooling of voting rights?
The legalbasis for the pooling of voting rights can be found in art. 689 para. 2 CO, pursuantto which each shareholder may be represented by a third party unless there iscontradicting provision in the articles of association. According to art. 689apara. 1 CO, the corresponding authorization must be in writing. An electronicauthorization is also permissible according to prevailing doctrine. The newstock corporation law (in force from January 01, 2023) will contain the legalbasis in art. 689b para 1 nCO.
Furthermore,the general provisions on agency in arts. 32 et seqq. CO are applicable aswell.
Inpractice, the authorization is usually based on a contractual clause in theshareholders’ agreement and on a separate written power of attorney.
The scopeof the power of attorney thereby depends on the provisions in the shareholders’agreement.
What isthe specific procedure to be followed by the Proxy?
Inprinciple, the Proxy is bound by the instructions of the minority shareholderswhen exercising their voting rights. How the Proxy receives the instructionsdepends on the specific provisions in the shareholders’ agreement.
Either eachminority shareholder issues individual instructions in advance or the minorityshareholders undertake to instruct the Proxy in accordance with a majorityresolution that is made in each case.
Can thepower of attorney be revoked?
The powerof attorney may be revoked at any time pursuant to art. 34 paras. 1 and 2 CO. Accordingto prevailing doctrine, the possibility of revocation at any time may not be directlyor indirectly restricted, for example by agreeing on a contractual penalty inthe event of revocation.
Pooling viaproxies is thus, on closer examination, a "weak" pooling, as it canbe revoked by the minority shareholders at any time. This revocability at anytime is a significant difference to German law, according to which a proxy maybe made irrevocable under certain conditions.
How cana pooling agreement be contractually implemented?
The wordingof a pooling agreement is highly dependent on the individual case. A genericexample without consideration of the individual case could be structured in ashareholders' agreement as follows:
1. Representation of Minority Shareholders
Each shareholder holding less than [5%] of theshare capital of the Company (Minority Shareholder) appoints andauthorizes Mr. […] (Proxy) as his direct representative and authorizeshim to exercise the rights of a Minority Shareholder of the Company and allrights and obligations under this Shareholders’ Agreement in his name and forhis account. For this purpose, the Minority Shareholder undertakes to sign awritten power of attorney in favor of the proxy in accordance with Annex […].
The Minority Shareholders agree that the Proxymay be replaced at any time by majority resolution of the Minority Shareholders.Should the Proxy resign or cease to exist for other reasons without areplacement, a substitute may be appointed by the Board of Directors until anew proxy is elected.
The authorization of the Proxy remains validuntil it is expressly revoked.
2. Powers of the Proxy
The powers of the Proxy include - subject to thefollowing limitations - in particular (i) the exercise of voting rights, (ii)the negotiation, amendment, termination and signing of the shareholders'agreement and other agreements relevant in connection with the investment inthe Company, and (iii) the receipt of notifications in connection with theCompany. The Proxy shall be the sole contact of the Company and the othershareholders and shall act in this context on behalf of and in representationof the Minority Shareholders.
The Proxy must adhere to the followingprinciples when exercising his power of attorney:
The Proxy shall obtain instructions from theMinority Shareholders before exercising the power of attorney. For thispurpose, the Proxy shall contact the Minority Shareholders and request to beinstructed by them within 7 calendar days.
The Minority Shareholders may then instruct theProxy within 7 calendar days by electronic or written means. If the Proxy doesnot receive any instructions by a Minority Shareholder within that period, thefollowing rules apply:
· If the Proxy exercises voting rights in a general assembly, the Proxyshall vote in accordance with the proposals of the Board of Directors.
· If the Proxy acts on behalf of the respective Minority Shareholder inother cases than in a general assembly, he shall exercise the rights inaccordance with the instructions of the majority of the Minority Shareholders.
If the shareholders’ agreement contains anyrules on how to exercise certain rights, the Proxy has to adhere to theseprovisions.
Further, the Proxy shall act in accordance withthe majority opinion of the Minority Shareholders when negotiating, amending,terminating and signing the Shareholders’ Agreement and other agreementsrelevant in connection with the investment in the Company, provided that theexercise of the power of attorney does not impose obligations on the MinorityShareholders that go beyond the existing obligations.
If additional duties are imposed on theMinority Shareholders, the Proxy may only act in accordance with theinstructions received. Without instructions, the Proxy is not entitled to acton behalf and for the account of a minority shareholder.
3. Release and Indemnification
Each of the Minority Shareholder undertakes toindemnify and hold harmless the Proxy in his capacity as a directrepresentative against and from all expenses and liabilities which may be owedto, imposed on, incurred by the Representative in connection with the exerciseof the power of attorney in accordance with the shareholders’ agreement or theinstruction.
Disclaimer: The information contained in this articleis for general information purposes and does not constitute legal or taxadvice. In specific individual cases, the present content cannot replaceindividual advice by expert persons.
