Reform of the German GmbH
The most commonly chosen corporate form in Germany is the Gesellschaft mit beschränkter Haftung (Company with Limited Liability, GmbH). Compared to its main alternative, the Aktiengesellschaft (stock corporation), the shareholders of a GmbH have direct control over the management, can structure the entity in a flexible manner and have to contribute considerably less share capital. These features generally attract small to medium-sized businesses and corporate groups.
The Act on Limited Liability Companies (GmbHG) which provides the framework for the GmbH dates back to 1892 and had its most recent substantial revision in the 1980s. The German parliament is currently debating a proposal by the German government to modernize the GmbHG. It is widely accepted that the GmbHG needs such modernization, as the case law that has developed over the years makes the GmbH an increasingly cumbersome vehicle. It can be expected that the German legislature will ratify the proposal without significant changes so that the reformed GmbHG will take effect sometime in 2008.
The following summary describes those items of the proposal that are most relevant to US investors:
I. Simplifying the Incorporation Process
The rules on capital contributions will be facilitated: shareholders of a GmbH currently face the risk that their cash contributions are considered contributions in kind when transactions take place between the GmbH and the contributing shareholder shortly after the cash contribution is made. This re-characterization takes place to prevent that the more rigid rules on contributions in kind are circumvented. The critical consequence is that the contributing shareholder has to repeat the contribution, without – in many cases – being able to retrieve his initial contribution. The reform proposal aims at facilitating compliance with the capital contribution requirements by permitting a shareholder to settle cash contribution obligations with contributions in kind. The shareholder, however, will have to document the value of the contribution to be able to demonstrate that the contributed value does not fall short of the contribution requirement. Even if such proof cannot be provided, the shareholder only needs to settle the difference in cash.
II. Bona Fide Acquisition of Shares
The current regime does not allow for bona fide share acquisitions. Depending on the complexity of the corporate history of the GmbH, purchasers have to review the target’s corporate history in detail to ascertain that the seller actually owns the shares (without ever being entirely certain). The proposal wants to introduce a shareholder register that purchasers may rely upon: if a registration has been undisputed for a period of three years or more, it will be deemed accurate for the benefit of a good-faith purchaser.
III. Corporate Financing
Cash Pooling. Based on a lack of legislatory guidance and increasingly complex case law, German courts apply the rules on capital maintenance to significantly restraint the use of cash pools, which in many cases prohibits cash pools and exposes managing directors of participating GmbHs to personal liability. The proposal acknowledges that the current situation is unsatisfactory as cash pooling is commonly used for corporate financing. The proposal therefore stipulates a legal framework that allows for cash pooling as long as the borrowers are sufficiently solvent to repay to loans.
Capital Substitution. The provisions on capital substitution have also become too complex over the years. The concept of capital substitution deals with the question if and when loans extended by a shareholder to the GmbH are to be treated as capital contributions. As capital contribution, the shareholder’s claim would be subordinate to third party debt in insolvency procedures. The proposal treats such shareholder loans similar to third party debt if the GmbH was not insolvent when it received the loan.
The upcoming reform will address the main deficits of the GmbHG. This will significantly facilitate the utilization of this established corporate form. The GmbH will remain the most adequate vehicle for foreign investments.
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