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Take care when adopting financial statements!

Jochen König

Jochen König, RA/WP/StB
MOORE STEPHENS Rhein-Emscher GmbH

Financial statements are a central but routine topic in business. But if the shareholders disagree, they can be a source of disputes, such as if a managing shareholder takes a profit share which deviates from the company agreement or if earnings are distributed in a manner contrary to the company agreement.

Such practices, in violation of the company agreement, would of course be reflected in the company’s financial statements and, therefore in the resolutions adopting the financial statements and the distribution of earnings. If a dispute later breaks out among the shareholders, the aggrieved party will typically try to reverse these circumstances retroactively as well, and assert claims for damages, subsequent payment or repayment, even though it may have previously given its approval to this practice when the relevant financial statements were adopted by mutual consent. The extent to which this can be done has been assessed in various ways by the courts and within the legal literature. There are essentially three views in this regard:

The first view holds that adoption of financial statements by the shareholders represents an “abstract acknowledgement of debt” on the part of each shareholder. According to this view, shareholders are now bound by the financial statements unless narrow exceptions apply: once the financial statements are adopted, they cannot be challenged, at least as far as past events are concerned, regardless of whether the shareholder was aware of errors in calculation or not.

According to a different view, the adoption resolution represents an independent contract in the sense of a declaratory acknowledgement of debt. This second view maintains that any objections to the financial statements, whether these objections have been recognized or are merely recognizable, can no longer be asserted. However, shareholders who vote to adopt the financial statements may set aside their declarations under certain circumstances.

A third opinion, the minority view, ascribes no binding effect whatsoever to resolutions concerning adoption of the financial statements and distribution of earnings other than mere approval of the financial statements, arguing that adoption of the financial statements should not be construed as a determination that the disclosed assets and liabilities are valid.

The Federal Supreme Court has expressly left open the question as to whether resolutions of this kind should be classified as an abstract or declaratory acknowledgement of debt, stating that this classification typically depends on the circumstances of the individual case. In other words, the Federal Supreme Court definitely holds that the adoption of financial statements has legal force with regard to the disclosed accounts receivable and payable between the company and the shareholders, which amounts to an indirect rejection of the third opinion.

In view of the different legal assessments which can be found in the case law and the literature, shareholders and managing directors interested in keeping past events from being undone should arrange to have informative documents circulated on the points in question in a timely manner before the financial statements are adopted. Those who are interested in keeping open their options of asserting claims need to consider the extent to which they want to and can afford to pick a fight by voting against adoption of the financial statements and then filing an action to set aside adoption. On the other hand, those who vote against adoption or abstain from voting and then allow the deadline for an action to set aside adoption of the financial statements to expire risk arousing the displeasure of their fellow shareholders, but would at least keep open the option of raising the points in question at a later date, albeit with legal risks.

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