The Reformed GmbH

April 7, 2009

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.

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.

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