The Reformed GmbH
Germany recently updated its limited liability company, or GmbH, law, mainly to adjust to international trends and pull back some of the case law on capital maintenance which had become increasingly peculiar to the GmbH. These updates are relevant for US investors as most foreign-owned operations in Germany are structured as a GmbH.
I. The Rules On Capital Contributions and Maintenance Underwent Numerous Changes.
The capital maintenance rules still require a significant degree of attention to avoid that the managing directors or even the shareholders become directly liable. The reform did, however, cut back on some of the requirements that were particularly burdensome.
- Less Liability Exposure From Capital Contributions.
The contribution of non-cash assets by shareholders in exchange for shares requires that the contributed assets are appraised. This is to ensure that their value at least equals the subscription price. To avoid the hassle and cost of an appraisal, shareholders are sometimes tempted to contribute cash first and then have the company use the cash to acquire the assets that the shareholder would have otherwise contributed in exchange for the shares.
To penalize this behavior, courts nullified transactions between the company and a shareholder that were entered into to circumvent the capital contribution rules. The intent to circumvent the capital contribution rules was presumed when the company paid the shareholder for assets shortly after the shareholder had subscribed to shares for cash. By nullifying the transaction, the shareholder was required to repay the funds.
The consequences of violating the capital contribution requirements have changed significantly: Transactions between the company and a shareholder are no longer nullified. Instead, the law treats the initial cash contribution to be outstanding, i.e., as if the shareholder had not made the contribution, and allows the shareholder to set-off this liability with the value of the subsequent transaction. Assuming that the shareholder can show that the subsequent transaction was at arm’s length, i.e., at a market rate, the shareholder can avoid liability.
- Cash Pool Requirements Are Codified.
The former GmbH law did not address cash pooling, i.e., the concentration of the funds of corporate group entities for efficient cash-management. But the case law that German courts developed during recent years made cash pools for group financing more and more difficult. The reform addresses this explicitly. Basically, GmbHs may now participate in a cash pool if they are subject to a control and profit transfer agreement or the repayment claims are of adequate value. The latter still poses a risk for managing directors as they have the burden of determining the adequacy of the repayment claim. If they fail to act prudently, they can become personally accountable for the damages suffered by the company or even its creditors.
- Shareholder Loans Are (Almost) Treated Like Third-Party Debt.
Shareholder loans are now treated like any other loan, except that they are subordinate to other company debt if the company becomes insolvent. Also, shareholders who receive payments on a loan shortly before insolvency may now be required to return these payments.
II. The Liability Exposure of Managing Directors Increases.
Managing directors may not only be liable to the company or its creditors for losses caused by cash pooling, but also for dividends paid to shareholders if these payments cause the company to become insolvent. Managing directors can avoid liability by showing that they acted prudently. Acting on behalf of a shareholder resolution, however, does not exculpate them if their actions impair creditor claims.
III. The Online Register Becomes An Interesting Source Of Information.
The commercial register information is now accessible under www.unternehmensregister.de. This gives everyone, including your competitors, easy access to your corporate and, more importantly, financial information. You should carefully review your financial disclosure as accountants sometimes file more financial information than required.
IV. The Capital Structure Becomes More Flexible.
Prior to the reform, shares had a minimum value of €100 and could only be issued in multiples of €50. Shareholders could not subscribe to more than a single share at a time. And raising additional equity always required the (costly) involvement of a German notary. These restrictions have been largely removed: Shares in any number can be issued to a shareholder, with a nominal value as low as one euro. The company’s articles can also provide for authorized capital, allowing the company to regulate its capital requirements more autonomously and without incurring the cost of notarization.
V. The Shareholder List Protects Bona Fide Third Parties.
The shareholder list, which is part of the information submitted to and published online by the commercial register, becomes more significant. Bona fide third parties can now rely on its accuracy. This will make it easier for a purchaser of shares to determine if the seller, i.e., the (alleged) shareholder, can validly transfer title. This protection does not apply, however, if (i) the shares do not exist at all, (ii) the buyer does not act in good faith, or (iii) the seller has been listed as a shareholder for less than three years.
VI. The GmbH Operates Throughout Europe.
A GmbH’s principal place of business is no longer required to be located in the place where the company is registered. Headquarters can therefore be outside of Germany. This will encourage companies to use the GmbH for their operations throughout Europe. The change is in line with the EU’s mandate to its member states to recognize branches of companies formed under the laws of other member states. Using the same entity form for operations throughout Europe should make it easier to comply with corporate requirements. Experience shows, however, that commercial registers throughout the EU sometimes adapt to these cross-border reforms only slowly, at first causing delays with the registration of foreign entities.
Please feel free to contact our German Desk to discuss how the GmbH reform affects your European operations or investments.