Last month the German Parliament passed an Act to modernise the law governing private limited companies – meaning comprehensive changes to the country's limited liability company law. Klaus von Gierke and Anna Urbaniak report

Germany's company law reform is one of the most comprehensive changes to the country's limited liability company law (GmbHG) since it first came into being in 1892. The German Parliament passed an Act to modernise the law governing private limited companies and to combat abuses (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekaempfung von Missbraeuchen, or MoMiG) on 26 June with the changes expected to come into force in October or November this year.

The legal form of the German limited liability company (GmbH) has been facing competition since the European Court of Justice cleared the way for companies constituted under the law of a European Union (EU) member state to conduct their business exclusively in Germany, without the need to have at least the administrative seat in their home country. The aim of the reform has primarily been to deregulate certain provisions of the GmbHG and, thus, to maintain the GmbH as an attractive business vehicle against increasing competition from other corporate forms within the EU, such as the English Limited (private company limited by shares). The future will show whether this aim has in fact been achieved.

The changes simplify the establishment of new GmbHs. Contrary to initial plans to decrease the minimum registered capital to E10,000 (£7,895), the minimum capital will remain at E25,000 (£19,739). The legislator has also decided against a material simplification of the registration procedure, e.g. by waiving the requirement of a full recording of the necessary documentation by a notary. The only change in this respect which may be considered a facilitation is the introduction of a model record (Musterprotokoll) containing the articles of association, the appointment of the managing director and a list of shareholders for so-called uncomplicated standard set ups (establishment by way of cash subscription, with no more than three shareholders and only one managing director). Such model record may be taken from an Annex to the MoMiG but still requires full recording by a notary.

The MoMiG will speed up registration by further reducing the time needed for entering a registration in the commercial register. The registration had already been substantially accelerated at the beginning of 2007 by the Act on Electronic Commercial Registers. Pursuant to this statute, the documents required to establish a GmbH are submitted electronically to the court. The court is thus able to make direct entry of the transmitted data in the electronic commercial register. To further reduce the time needed for entering a registration, a company whose business purpose requires permits or licences pursuant to administrative law (for instance craft businesses or restaurants) will no longer be required to submit such licence documentation to the commercial register prior to registration.

To meet the needs of individuals setting themselves up in business, start-ups will get the possibility to incorporate a so-called "entrepreneur's GmbH" (Unternehmergesellschaft (haftungsbeschraenkt)) which requires only a nominal capital of E1 but must save 25% of its annual profits until it has increased its share capital to the minimum amount (E25,000). Additionally the entrepreneur's GmbH is obliged to bear the addendum 'Unternehmergesellschaft (haftungsbeschraenkt)' or 'UG (haftungsbeschraenkt)' in its company name. It remains to be seen which role, if any, the entrepreneur's GmbH will play in practice.

Like the German stock corporation subject to the German stock corporation law (Aktiengesetz), a GmbH can now also have authorised capital. Under the new law, the articles of association can authorise the managing director to increase the capital up to a certain nominal amount (Nennbetrag) for a period of up to five years, by issuing new shares for cash or in certain circumstances for non-cash consideration, provided the amount of the authorised capital does not exceed half of the equity available at the time of the authorisation.

Up to now, German companies have not had the opportunity to have their administrative headquarters based in other countries. As a result of certain European Court of Justice rulings, German companies are now given the opportunity to have an administrative headquarter which is not necessarily identical to their registered seat. This implies that administrative headquarters can be established abroad, giving German companies more room to manoeuvre in developing their business activities abroad.

The legal reforms will ensure that the identity of a GmbH's shareholder is disclosed to the public. To reach this aim, only those persons registered in the list of shareholders maintained by the commercial register are going to be deemed to be persons holding shares in the company and be entitled to voting rights and dividends. Therefore, it is essential to ensure that the shareholder list is kept updated. An incoming shareholder has a claim to be registered in the list as a shareholder.

In return, MoMiG will now enable a bonafide acquisition of GmbH shares from a person who is on the list of shareholders even if he or she has not acquired the shares. Under current law, a flaw in a chain of acquisition bestowing title on an existing 'shareholder' may make a share purchase from that person invalid. The MoMiG allows the buyer to acquire the shares even if the seller does not hold title, provided the seller has been on the shareholder list submitted to the commercial register for at least three years, no objection to the list was filed and the buyer is not aware (or not culpably unaware) of the defect in the title of the seller. Nevertheless, this may not necessarily simplify a due diligence, since a bona fide acquisition still requires the existence of the share. It remains therefore necessary to check whether the share has been redeemed, abandoned or forfeited or otherwise cancelled.

Hidden contributions in kind (verdeckte Sacheinlagen), as before, do not discharge the shareholder from the obligation to contribute the nominal amount to which he has subscribed. However, the true value of the contribution in kind will be credited to the nominal amount to be contributed; thus, the shareholder will need to pay only the difference in value between the contribution in kind and the cash contribution which had been stipulated.

Payment of funds by a GmbH to its parent company is currently subject to capital maintenance rules aimed at preventing the distribution of share capital to the parent company. It is in particular uncertain to what extent cash pooling is permitted for a GmbH. According to a judgment of the German Federal Supreme Court of November 2003, the transfer of funds to the parent company as a loan (upstream loans) may only be effected to the extent the amount is covered by the GmbH's total net equity over its registered capital i.e. any loans which exceed the amount of the so-called free equity are prohibited regardless of the solvency of the respective parent company receiving the loan. MoMiG will now limit the scope of the applicability of the capital maintenance rules and will no longer restrict payments to a parent company provided that its claim to repayment of the loan is valued at par.

Similarly, the capital maintenance rules will also not apply for payments between parties to domination or profit and loss transfer agreements.

In order to combat abuse encountered in practice in connection with the GmbH's legal structure, MoMiG will tighten the obligations of the managing director. The appointment barrier will comprise more criminal offences than before (such as fraud and other provisions of economic criminal law). Additionally, the shareholders will be required, in a case where the company has no managing director, to file themselves for insolvency in the event of the company's illiquidity or over–indebtedness so that the lack of a managing director no longer enables the evasion of the duty to file for insolvency.

Legal action against companies will be accelerated by the company's requirement to register a valid business address so that creditors will be able to know to whom and where they can address their claims. Service to companies without a managing director will be possible.

Klaus von Gierke is a corporate partner and Anna Urbaniak an associate at DLA Piper in Hamburg.

GermanyJuly2008