Austria: Pre-emptive right on shares unenforceable in insolvency proceedings?

However, according to the recent case law of the Regional Court of Linz on limited liability companies, pre-emptive rights to purchase the shares of an insolvent shareholder are invalid and unenforceable.

Know your co-shareholders

There are many ways to prevent shareholders from selling and transferring their shares to third parties without the consent or knowledge of the co-shareholders. Shareholders typically do not want to find themselves in a situation where an unknown person becomes a co-shareholder or even has certain majority rights.

This is a particular risk in case of insolvency proceedings against a shareholder, as the shares of the insolvent shareholder are part of the insolvency estate. In most cases, the insolvency administrator will sell all assets of the insolvency estate, including the shares, to the best bidder and the proceeds will be used to (partly) satisfy the creditors of the insolvent shareholder.

To address this risk, many articles of association provide that in case of insolvency proceedings against a shareholder the remaining shareholders will have a pre-emptive right (Aufgriffsrecht) to purchase the insolvent shareholder's shares. But does this work under Austrian insolvency law?

Pre-emptive right in insolvency proceedings?

Debate rages on whether pre-emptive rights to purchase an insolvent shareholder's shares are valid and can be exercised by the other shareholders. The Austrian Supreme Court has yet to answer this question explicitly. However, it clarified that any agreement that the purchase price for the shares of an insolvent shareholder will be lower than in other comparable cases when exercising the pre-emptive right is immoral (sittenwidrig) and invalid, as this is detrimental to the insolvent shareholder's creditors. Whether pre-emptive rights are enforceable in case of insolvency proceedings at all the Austrian Supreme Court left unanswered.

The Regional Court of Linz recently stated in a legally binding decision (6 R 95/19m) that a pre-emptive right to purchase an insolvent shareholder's shares is in any case immoral (sittenwidrig) and therefore cannot be agreed between shareholders of limited liability companies. The Regional Court of Linz provided the following reasoning:

Upon the opening of insolvency proceedings against a shareholder, the shares are part of the insolvency estate and only the insolvency administrator is entitled to dispose of them. The insolvency administrator may sell and transfer the shares regardless of any pre-emptive right of co-shareholders. A pre-emptive right is to be qualified as a purchase option and according to Austrian insolvency law (Section 26 (3) IO) the insolvency administrator is not bound to (still unaccepted) purchase options granted by the insolvent debtor prior to the opening of insolvency proceedings. Thus, the insolvency administrator is free to sell and transfer the shares to the best bidder irrespective of a pre-emptive right agreed in the articles of association.

Outlook

In line with the recent decision by the Regional Court of Linz, the Regional Courts of Vienna and Graz also tend to qualify pre-emptive rights to purchase an insolvent shareholder's shares to be unenforceable. It remains to be seen whether the Austrian Supreme Court will explicitly confirm this legal view once it has the opportunity to decide about it. If the insolvency administrator is indeed free to sell the shares and is not bound by pre-emptive rights, co-shareholders may only avoid the sale to third parties by making the best purchase offer to the insolvency administrator.

Alternatively, shareholders could agree that shares may not be transferred without the prior consent of all co-shareholders (Vinkulierung). Although not yet explicitly confirmed by the Austrian Supreme Court, there are strong reasons for such a transfer restriction to also be enforceable in insolvency proceedings. As a consequence, upon notification by the insolvency administrator, the company would be entitled to nominate within 14 days a purchaser who is willing to purchase the shares at a price estimated by the court. The company (shareholders) would thus retain control over who takes over the shares of the insolvent shareholder.

Authors: Wolfgang Höller, Philipp Wetter