News
Transfer of a business opportunity as a violation of Austrian capital maintenance rules?
Supreme Court creates certainty
Facts
Mr. A (the later first defendant) was active in the real estate industry and was the sole shareholder and managing director of a limited liability company (the later second defendant) whose business purpose was investment management and participation in real estate projects including acquisition, development and sale of real estate.
Mr. A and Mr. B agreed to carry out future real estate projects through a newly established limited liability company (the later plaintiff), in which Mr. A and Mr. B held shares. The sole (legal) shareholder and managing director of the newly founded company was initially Mr. A, who, however, held 50% of the shares as trustee for Mr. B. Subsequently, until the transaction which became the subject matter of the action, new real estate projects were carried out by the “joint” limited liability company through the cooperation of Mr. A and Mr. B.
After about two years, Mr. A learned through a broker of a property for sale. Since other persons were also very interested in the property, he visited the property on the same day. A few days later, an employee of the plaintiff received information from another brokerage firm about the possible purchase of the property. Subsequently, employees of the plaintiff carried out a due diligence examination with a view to a possible acquisition. In parallel, Mr. A (i) drafted a purchase offer for the property, stating that either the second defendant (i.e. “his” company) or a project company yet to be established would be the purchaser of the property, and (ii) organized bank financing for the acquisition. At the same time, Mr. A and Mr. B signed a dissolution agreement separating the trusteeship, and Mr. B became (directly) a 50% shareholder of the plaintiff by accepting an offer of assignment from Mr. A. Eventually, the second defendant (Mr. A’s company) acquired the property.
Mr. A did not inform Mr. B about the purchase of the property; Mr. B first became aware of the facts of the case after the dissolution of the trusteeship, and became aware of the second defendant’s entry in the land register only after the acquisition of the share in the plaintiff. One month later, he learned by chance that Mr. A planned to resell the property, which had originally been acquired for EUR 2,500,000, for EUR 3,900,000.
The plaintiff then demanded from the defendants (Mr. A and his limited liability company) the transfer of the property free of encumbrances and transfer of ownership against payment of the purchase price of EUR 2,500,000 paid by the second defendant or, in the alternative, damages in the amount of EUR 500,000, and based its claim on a violation of the non-compete obligation pursuant to Sec 24 Austrian Act on Limited Liability Companies (Gesetz über Gesellschaften mit beschränkter Haftung; “GmbHG”), prohibited repayment of share capital pursuant to Sec 82 GmbHG and a violation of Sec 1 Austrian Act on Unfair Competition (unfair advantage through breach of law). In order to secure its claim for transfer of ownership of the property, the plaintiff applied for an interim injunction prohibiting the defendants from selling and encumbering the property and for the prohibition of sale and encumbrance to be recorded in the land register.
The trial court issued the requested interim injunction and upheld it even after an opposition procedure. The appellate court confirmed this decision. The Austrian Supreme Court upheld the defendant’s appeal and dismissed the application for a protective order, stating that there was neither a violation of the non-competition obligation nor a prohibited repayment of share capital and, accordingly, no unfair breach of law pursuant to Sec 1 Austrian Act on Unfair Competition.
From the reasoning of the OGH
The core statements of the Austrian Supreme Court regarding repayment of share capital can be summarized as follows:
- Sec 82 para 1 GmbH and Sec 52 Austrian Stock Corporation Act do not only provide for the protection of capital contributions, but also for a comprehensive protection of a company’s assets. Any transfer of assets from a company to its shareholder that favors the shareholder to the detriment of the company in any way other than transfers in fulfillment of dividend claims (dividend distributions), other exceptional cases permitted by law and payments on the basis of arm’s length transactions, is inadmissible.
- Although the legal prohibition to return capital contributions generally aims at transfers to (former) shareholders of the company a, payments to third parties may also qualify as violating capital maintenance rules: Payments to third parties are attributable to a shareholder if the payment to the third party also constitutes a payment to the shareholder. This includes payments to third parties which, from an economic point of view, benefit the shareholder. A transfer of assets to the second defendant (who was never a shareholder of the plaintiff) to the detriment of the plaintiff would therefore in principle be covered by the prohibition of return of capital contributions.
- The transfer of “business opportunities” (without consideration) may also violate Austrian capital maintenance rules. For this to be the case, however, the business opportunity must at least have materialized to such an extent that it has a market value, i.e. that a third party would pay a fee for the transfer of such “business opportunity”. If this criterion is not fulfilled, one may in any case not to speak of an asset of the company protected under capital maintenance rules.
- On the other hand, the mere fact that the company has already incurred expenses with regard to the business opportunity, which are now frustrated, is not sufficient for a business opportunity to qualify as “asset” of the company. In such a case, savings of these expenses by the shareholder might constitute a forbidden return of capital contributions.
With regard to the alleged infringement of the non-compete clause, the Austrian Supreme Court pointed out that (i) the sole shareholder of a GmbH who is at the same time the managing director of the company is not subject to a non-compete clause, because in such a case there is in principle no corporate interest which deviates from the interests of the sole shareholder / managing director and which is intended to be protected by Sec 24 para 1 GmbHG, and (ii) according to the principle of separation, corporate participation and trust relationship are to be separated from each other, so that the trustor does not have any legal position within the company similar to that of a shareholder derived from his position. A breach of the duties arising from the trusteeship would have had to be asserted by the trustor against the trustee; however, the trustor did not do so.
Comments
Austrian legal doctrine already argued (under slightly differing conditions) that the transfer of business opportunities from a company to its shareholder may qualify as violation of Austrian capital maintenance rules. Despite tendencies in this direction, there was so far no clear statement by the Austrian Supreme Court.
The recent decision 6 Ob 71/21s clarified (which is very positive) that not every “business opportunity” of a company, irrespective of how abstract it may be, constitutes an asset of the company protected by Austrian capital maintenance rules: It is undisputed that there is no requirement for shareholders to conduct business exclusively through their subsidiary as of its formation. The shareholder of an Austrian entity is therefore not per se prohibited from conducting its own business activities on the basis of its position as a shareholder. Otherwise, project companies would be just as problematic as the intra-group management of tasks.
What constitutes a “protected asset” as defined by the Supreme Court can be determined by referring to general tort law principles: In Austrian general tort law, a distinction is made between positive (actual) damage and lost profit (prevention of an increase in assets through the destruction of an opportunity to make a profit). Roughly speaking, lost profit is only to be compensated if the injured party already has a legally secured position; according to case law, this is equivalent to the case that a chance of success can be assumed with probability bordering on certainty. In other words, the existence of a compensable damage (and, thus, also the existence of a protected asset) is to be affirmed only if a legally (very) secure chance of acquisition is success with. Apart from that, lost profit is not to be compensated.
If the Supreme Court now states that the business opportunity must “have materialized to such an extent that it has a market value” in order to be an asset of the company protected by capital maintenance provisions, this is, in our opinion, in line with the aforementioned principles on compensation for lost profits.
