38			2  Stock Corporation (AG)
	2.3.4	Capital Reductions	. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . .	60
	2.3.5	Capital Preservation	. . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . .	61
2.4  Formation, Dissolution and Liquidation of theAG					62
	2.4.1	Formation	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . .	62
	2.4.2	Dissolution and Liquidation . . . . . . . . . . . . . . . . . . . . . .		. . . . . . . . . . .	64
2.5	Employee Participation				65
	2.5.1  Collective Bargaining and the Role of Labor Unions				65
	2.5.2	Shop - Level Co - determination . . . . . . . . . . . . . . . . . . . .		. . . . . . . . . . .	67
	2.5.3	Board - Level Co - determination . . . . . . . . . . . . . . . . . . . .		. . . . . . . . . . .	68
2.6	Capital Markets Law				70
	2.6.1	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		. . . . . . . . . . .	71
	2.6.2  Prohibition of Insider Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . .			. . . . . . . . . . .	75
	2.6.3	Publication of Inside Information . . . . . . . . . . . . . . . . . .		. . . . . . . . . . .	76
	2.6.4  Share Ownership Notification Rules . . . . . . . . . . . . . . .			. . . . . . . . . . .	77
References					78

2.1  Introduction

2.1.1  Case Study

Case Study

Having read C’s memorandum, B is convinced that a future expansion of A’s business into the German market will require the establishment of at least one corporation under German law.As B is aware that the setting-up of a competitive business unit in Germany will require access to additional financial resources, he considers establishing a stock corporation, possibly as a holding company in a corporate group structure. He therefore asks C to prepare a presentation on the statutory framework of the German stock corporation (Aktiengesellschaft, AG ) with a special focus on issues of financing. Furthermore, being unfamiliar with the German two-tier board system and the scope of stockholders’ rights under German stock corporation law, B is particularly interested in the role and competencies of the statutory bodies in the AG. In this regard B has also heard that under German law employees have extensive participation rights and asks C also to briefly touch upon this issue in his presentation.

2.1.2  Characteristics of the AG

Like the German limited liability company (Gesellschaft mit beschränkter Haftung, GmbH )1 the AG is a juristic person. As such, it is a legal entity being distinct from its founders and stockholders.2 The AG has the capacity to hold rights, e.g. the title of ownership, by itself and may sue or be sued under its corporate name. In principle

1  The GmbH will be dealt with in detail in the next chapter, see infra, Sect. 3.

2  See Sec. 1 para. 1 AktG. In German stock corporation law, the shareholders of an AG are called ‘Aktionäre’; to reflect this we will use the English term ‘stockholders’.

2.1  Introduction	39

(and subject to some exceptions to be discussed later)3 neither the stockholders of theAG (Aktionäre) nor the members of its management board are personally liable for obligations of the AG. The AG is considered to be a merchant according to the definition under the German Commercial Code (Handelsgesetzbuch, HGB), i.e. the special rules of the HGB also apply to any AG irrespective of its specific business purpose.

Under German corporate law, an AG has three mandatory bodies (Organe): the stockholders’meeting (Hauptversammlung)4, the supervisory board (Aufsichtsrat)5, and the management board (Vorstand )6, each with its own, non-alterable sphere of competence.

The most important characteristic of the stock corporation is that its registered stock capital is typically divided into a high number of stocks (Aktien) which can be easily transferred and listed on a stock exchange.

2.1.3  Advantages of the AG

Choosing anAG as the legal vehicle for one’s business has many advantages. Compared to a GmbH, the AG provides stockholders with greatly improved options to raise equity capital. The company’s stock can be split into a high number of stocks with a low nominal value. In contrast to shares in a GmbH, it is quite simple for investors to transfer the stocks of an AG, since stocks in an AG can be listed on an organized market (stock exchange) and offered to the public. By this access to a public market, anAG may raise substantial amounts of capital from a large number of investors, addressing larger institutionalized investors, as well as smaller private investors. In addition, for further fundraising, German law provides for additional financial instruments such as debentures and bonds.

From the point of view of an investor, an investment in stocks of an AG can be interesting, as even a relatively small investment enables the investor to participate in the productive property of the company. If theAG is listed on an organized stock exchange, the investor can thus directly benefit from the company’s growth, while her/his risk is limited to the initial contribution. Furthermore, with an investment in an AG the identity of the stockholders can be kept secret, since, even if a stock register is kept, the corporation will not disclose the identity of its stockholders to the public.

In summary, a stock corporation typically grants access to larger financial resources, either ‘directly’ in terms of equity capital and additional financial instruments, as well as ‘indirectly’ in terms of greater borrowing power due to a better debt-equity ratio. This enables the company to invest, for example, in large-scale production facilities or expensive research and development projects, which may in

3  See infra, Sect. 3.5.

4  See Secs. 118 et seq. AktG. 5  See Secs. 95 et seq.AktG. 6  See Secs. 76 et seq. AktG.

40	2  Stock Corporation (AG)

turn lead to competition advantages, cost reduction and improved business performance. Therefore, the company form of anAG is ideally suited for larger undertakings.

2.1.4  Disadvantages of the AG

On the other hand, an entrepreneur considering an AG as the suitable form for her/ his business activities should also be aware of some disadvantages.

For example, the rules for incorporating and managing an AG and for controlling its management board are stricter and more complex compared to those applicable to the GmbH. In general, the formation process, as well as the decisionmaking process will take much longer in the case of anAG and are more expensive. Furthermore, with an amount of EUR 50,000.00 the minimum capital required to establish an AG is twice as high as compared to the required minimum capital for the GmbH.

Moreover, raising additional funds by selling stocks of the AG bears the risk of diluting (or even loosing) ownership and control over the AG’s activities. Profits have to be shared among a greater number of stockholders, and a considerable amount of the profits have to be used for the administration of the stockholders’ meeting and the on-going information of the stockholders and the public—since public disclosure of financial affairs is mandatory.

Last but not least, if choosing an AG as the legal vehicle for conducting business, an entrepreneur will have to conform to many more statutory regulations, from classic corporate laws (e.g. capital maintenance rules) to more exotic but equally important legal requirements (e.g. under the corporate governance code, or specific risk management requirements). In German law the vast majority of rules set out in the Stock Corporation Act (Aktiengesetz, AktG) is mandatory and (in contrast to the more flexible legal framework for the German GmbH) cannot be modified by the stockholders (so-called Prinzip der Satzungsstrenge).7 Adeviation from the statutory framework for the AG is only possible if the matter is not exclusively regulated or if the statutory framework explicitly allows a modification by the parties.8

7  In comparison, e.g. Swiss law does not know this principle. As a consequence, although the statutory provisions of Swiss law are very similar to those in Germany, the SwissAG is considered to be a more flexible tool for economic activity. It is not limited to larger enterprises but is also appropriate for small and medium sized enterprises and has become the customary legal form for economic activity in Switzerland. In contrast, the GmbH traditionally has played only a very minor role in Switzerland; this has begun to change lately due to abandoning size limitations in the 2008 Swiss GmbHAct.

8  See Sec. 23 para. 5 AktG. This is rarely the case. e.g. according to Sec. 179 para. 2 sentence 1 AktG an amendment of the articles generally requires the approval of three-quarters of the stockholders’meeting. Sentence 2 of the provision, however, allows for this quota to be modified.