Germany – Material Changes to German Company Law
On May 23, 2007 the German government introduced a bill which, when adopted, will fundamentally modify Germany’s Limited Liability Companies Act (“GmbHGâ€). The new legislation is expected to come into effect during the first half of 2008 and constitutes the most far-reaching amendment to the GmbHG since its inception in 1892.
There are approximately one million Limited Liability Companies (“GmbHâ€) in Germany. The GmbH is the most popular corporate form in Germany used for small and medium sized businesses as well as in corporate structures of large groups of companies. Over the past few years, the modernization of the GmbHG has been increasingly discussed.
The main aims of the proposed legislation are (i) to ease and quicken the formation process of a GmbH, (ii) to make the GmbH more internationally competitive, mainly by simplifying some regulations regarding the preservation of the share capital and the transfer of shares and (iii) to make abuses of the GmbH, in particular in connection with insolvency proceedings, more difficult. The main points of the proposed legislation are outlined below.
- The minimum share capital of a GmbH will be decreased from € 25.000 to € 10.000. In addition, some of the formation procedures will be simplified in order to accelerate the formation of a GmbH.
- Under the current regime, the shareholders have to provide sufficient legal documentation in order to prove that assets contributed in kind do in fact reach the respective value of the share capital for which the shares are issued. With the proposed changes, such documentation will only have to be provided if there is a substantial discrepancy between the value of the contribution in kind and the required amount of share capital issued for such contribution in kind, thus making contributions in kind easier to handle in practice.
- Furthermore, the legal concept of so-called “hidden contributions in kindâ€ will be subject to completely different rules. Currently, the legal consequence of a hidden contribution in kind is that the share capital is deemed as not having been paid in and therefore has to be paid in again, and the sale and transfer of the contribution in kind to the company can be regarded as void. Under the new law, the shareholder of a GmbH will generally only be liable for the payment of the difference between the value of the required contribution and the contribution in kind, if any.
- The proposed legislation includes “sample bylawsâ€ for the GmbH. If these are used, the GmbH can be established without notarization. Furthermore, a GmbH can be registered by the commercial register even if governmental approvals required in regard to the purpose of the business are still outstanding.
- Under the current GmbHG, loans provided by the GmbH to shareholders (upstream loans) can be regarded as a prohibited repayment of capital. This may even apply if the loan is in fact valuable. In the future, such loans shall be permitted if they are valuable, enforceable and if the loan is not subject to depreciation.
- Shareholder loans will be subject to completely different and much simpler rules. Whereas the current law on equitable subordination of shareholder loans is quite complex and murky, these will in future be subject to a very simple rule: Any repayment of shareholder loans may be avoided by the trustee in bankruptcy if such (re)payment occurred during a one-year period prior to the application for the opening of insolvency proceedings.
- The new law will simplify the acquisition of shares. Currently it is often not possible to ascertain whether a person is in fact the shareholder of a GmbH. Furthermore, German law currently does not permit the acquisition of shares of a GmbH in good faith. Thus, there is a risk that the seller of the shares is not the legal shareholder. Henceforth, the acquisition of shares in good faith will be possible if the list of shareholders which is deposited at the commercial register has remained undisputed for at least three years. Therefore, there will be a limited protection of a good faith buyer. Thus, due diligence procedures will be simplified.
- The administrative seat of a GmbH can henceforth be established outside of Germany, which brings German law in line with the law of most other EU countries.
- In order to make it more difficult to abuse the GmbH, additional duties will be established for managing directors and shareholders, mainly in connection with their business address and with the opening of insolvency proceedings.
- Moreover, a so-called “Unternehmergesellschaftâ€ (i.e., a “Mini-GmbHâ€) will be established for which no minimum capital is required at all. Details about the “Mini-GmbHâ€ are provided in the article below.