- •Preface
- •Contents
- •About the Authors
- •Introduction
- •1.1 Conducting Business in Germany
- •1.1.1 Case Study
- •Case Study
- •1.1.2 Economic Background
- •1.1.3 Core Features of the German Legal System
- •1.1.3.1 Hierarchy of Norms and Constitutional Framework
- •1.1.3.2 Predominance of Federal Law
- •1.1.3.3 Distinction Between Public and Private Law
- •1.2 Key Aspects of German Business Law
- •1.2.1 Codified Rules and Judge-made Law
- •1.2.1.1 German Law as a Civil Law System
- •1.2.1.2 Importance of Judge-Made Law
- •1.2.1.3 Interpretation of Statutes
- •1.2.2 Increasing Importance of European Law
- •1.2.2.1 European Legal Instruments
- •1.2.2.2 Supremacy of European Law
- •1.2.2.3 Fundamental Freedoms
- •1.2.3 (Re-)current Issues in Corporate Law
- •1.3 The Legal Framework for Business Organizations in Germany
- •1.3.1 Case Study
- •Case Study
- •1.3.2 Options for Conducting Business in Germany
- •1.3.2.1 Establishing a Branch Office
- •1.3.2.2 Overview of Various Forms of Business Organizations
- •1.4 A Brief Introduction into German Insolvency Law
- •1.4.1 Objectives of German Insolvency Law
- •1.4.2 Reasons for Opening Insolvency Proceedings
- •1.4.2.1 Illiquidity
- •1.4.2.2 Over-indebtedness
- •1.4.2.3 Imminent Illiquidity
- •1.4.3 Insolvency Proceedings—Steps and Options
- •1.4.3.1 Petition to Open Insolvency Proceedings
- •1.4.3.2 Preliminary Proceedings
- •1.4.3.3 Regular Insolvency Proceedings
- •1.4.3.4 Reorganization Proceedings
- •References
- •Stock Corporation (AG)
- •2.1 Introduction
- •2.1.1 Case Study
- •Case Study
- •2.1.2 Characteristics of the AG
- •2.1.3 Advantages of the AG
- •2.1.4 Disadvantages of the AG
- •2.2 Internal Organization
- •2.2.1 Governance Structure and Bodies of the AG
- •2.2.2.1 Composition and Appointment
- •2.2.2.2 Functions and Responsibilities of the Management Board
- •2.2.3.1 Composition and Appointment
- •2.2.3.2 Functions and Responsibilities of the Supervisory Board
- •2.2.5.1 Sphere of Competence of the Stockholders’ Meeting
- •2.2.5.2 Decision-Making Procedure
- •2.2.5.3 Minority Rights of Stockholders
- •2.3 The Capital of the AG
- •2.3.1 Equity and Capital Structure
- •2.3.1.1 Internal Financing
- •2.3.1.2 External Financing
- •2.3.1.3 Determining the Right Capital Structure
- •2.3.2 Share Capital of the Stock Corporation
- •2.3.2.1 Types of Stock
- •2.3.3 Capital Increases
- •2.3.3.1 Ordinary Capital Increase Against Contributions
- •2.3.3.2 Contingent Capital Increase
- •2.3.3.3 Capital Increase from Authorized Capital
- •2.3.3.4 Capital Increase from Retained Earnings
- •2.3.4 Capital Reductions
- •2.3.4.1 Ordinary Capital Reduction
- •2.3.4.2 Simplified Capital Reduction
- •2.3.4.3 Capital Reduction by Way of Redemption of Stocks
- •2.3.5 Capital Preservation
- •2.4 Formation, Dissolution and Liquidation of the AG
- •2.4.1 Formation
- •2.4.2 Dissolution and Liquidation
- •2.4.2.1 Dissolution
- •2.4.2.2 Liquidation
- •2.5 Employee Participation
- •2.5.1 Collective Bargaining and the Role of Labor Unions
- •2.5.2 Shop-Level Co-determination
- •2.5.3 Board-Level Co-determination
- •2.5.3.1 Coal and Steel Co-determination Act of 1951
- •2.5.3.2 One-Third Co-determination Act of 2004
- •2.5.3.3 Co-determination Act of 1976
- •2.6 Capital Markets Law
- •2.6.1 Introduction
- •2.6.1.1 Objectives of Capital Markets Law
- •2.6.1.2 Sources of German Capital Markets Law
- •2.6.2 Prohibition of Insider Trading
- •2.6.3 Publication of Inside Information
- •2.6.4 Share Ownership Notification Rules
- •References
- •Limited Liability Company (GmbH)
- •3.1 Introduction
- •3.1.1 Characteristics of the GmbH
- •3.1.2 The Lasting Success of the GmbH—A Historical Overview
- •3.1.4 Advantages of the GmbH as a Business Vehicle
- •3.2 Formation
- •3.2.1 Regular Formation Procedure
- •3.2.2 Simplified Formation Procedure
- •3.3 Internal Organization
- •3.3.1 Shareholders’ Meeting (Gesellschafterversammlung)
- •3.3.2 Managing Director (Geschäftsführer)
- •3.3.3 Supervisory Board (Aufsichtsrat)
- •3.4 Duties and Liability Risks of the Managing Director
- •3.4.1 Duties and Responsibilities of the Managing Director
- •3.4.1.1 Formation and Raising of the Share Capital
- •3.4.1.2 Preservation of the Share Capital
- •3.4.1.3 Accounting Duties
- •3.4.1.4 Duty to Prepare and Submit the Annual Accounts
- •3.4.1.5 Duty to File Petition for Initiation of Insolvency Proceedings
- •3.4.1.6 Calling of the Shareholders’ Meeting
- •3.4.1.7 Duty of Disclosure towards the Shareholders
- •3.4.1.8 Duties Arising in Connection with Entries in the Commercial Register
- •3.4.1.9 Duties Related to Social Security and Taxes
- •3.4.1.10 Information on the Business Letterhead
- •3.4.1.11 Other Duties
- •3.4.2 Liability Risks of Managing Directors
- •3.4.2.1 Liability to the Company
- •3.4.2.2 Liability to the Shareholders
- •3.4.2.3 Liability to Creditors of the GmbH
- •3.4.2.4 Liability for Violations of Competition Laws by the GmbH
- •3.4.2.5 Personal Liability under Tort Law
- •3.4.2.6 Liability to Tax Authorities and Social Insurance Agencies
- •3.4.3 Joint Responsibility/Joint and Several Liability
- •3.4.4 Statute of Limitations
- •3.4.5 Summary—Managerial Duties and Liability Risks
- •3.5 Shareholders’ Liability
- •3.5.1 Statutory Provisions Stipulating Personal Liability
- •3.5.2 Piercing the Corporate Veil
- •3.6 Protection of Minority Shareholders
- •3.6.1 Articles of Association—General Issues
- •3.6.2 Clauses to Protect Minority Shareholders
- •3.6.2.1 Need for Supplementary Protection
- •3.6.2.2 Overview of the Minority Protection Rules for GmbH Shareholders
- •3.6.2.3 Minority Protection Through Clauses in the Articles of Association
- •3.7 Dissolution and Liquidation
- •References
- •Corporate Acquisitions in Germany
- •4.1 Introduction
- •4.1.1 Case Study
- •Case Study
- •4.2 Types of Transaction
- •4.2.1 Share Deal
- •4.2.2 Asset Deal
- •4.3 Typical Steps in the Acquisition Process
- •4.3.1 Auction Process
- •4.3.1.1 Initial Phase
- •4.3.1.2 Information Memorandum
- •4.3.1.3 Due Diligence
- •4.3.2 Negotiations with One Bidder Only
- •4.3.3 Key Elements of the Share Sale and Transfer Agreement
- •4.3.3.1 Purchase Price
- •4.3.3.2 Warranties and Indemnities
- •4.3.3.3 Covenants
- •4.3.4 Completion of the Transaction (Closing)
- •4.3.5 Post-Closing Integration/Restructuring
- •4.4 Specific Problems
- •4.4.1 Financing
- •4.4.2 Merger Control Issues
- •4.4.3 Other Regulatory Matters
- •4.5 Introduction to Public Takeovers
- •4.5.1 Scope of the Public Takeover Act
- •4.5.2 Requirements for the Bidding Process
- •4.5.2.1 Mandatory Offer
- •4.5.2.2 Offer Document
- •4.5.2.3 Financing the Bid
- •4.5.2.4 Time Limits and Procedures for Notifying BaFin
- •4.5.3 Evaluation of the Bid by the Target Company
- •4.5.4.1 Types of Consideration
- •4.5.4.2 Determination of the Offer Price/Consideration
- •4.5.5 Duty of Neutrality and Defence Measures
- •4.5.6 Role of BaFin
- •4.6 Squeeze-out of Minority Stockholders
- •4.6.1 Overview
- •4.6.2 Steps of the Squeeze-out Procedure
- •Cross-Border Corporate Activities
- •5.1 Cross-Border Transfer of Corporate Seat and Applicable Law
- •5.1.1 Case Study
- •Case Study
- •5.1.2 Introduction
- •5.1.3 German Conflict-of-Law Rules for Corporations
- •5.1.4 The Decisions of the European Court of Justice
- •5.1.4.1 The Segers Decision (1986)
- •5.1.4.2 The Daily Mail Decision (1988)
- •5.1.4.3 The Centros Decision (1999)
- •5.1.4.4 The Überseering Decision (2002)
- •5.1.4.5 The Inspire Art Decision (2003)
- •5.1.4.6 The Cartesio Decision (2008)
- •5.1.5 Status-quo of German Conflict-of-Laws Rules for Companies
- •5.1.6 Legislative Proposals
- •5.1.6.1 Connecting Factors
- •5.1.6.2 Scope of Application
- •5.1.6.3 Expected Consequences for Corporate Mobility
- •5.1.7 Competition of Corporate Forms—GmbH vs. Limited
- •5.1.7.1 Competition of Corporate Laws—Some Comments
- •5.1.7.2 Check List—Advantages and Disadvantages of a UK Ltd. Compared to a German GmbH
- •5.2 The European Company (SE)
- •5.2.1 Case Study
- •Case Study
- •5.2.2 General Background
- •5.2.3 Formation of the European Company
- •5.2.4 Corporate Governance in the SE
- •5.2.5 Employee Participation in the SE
- •5.2.6 Possible Use of the SE
- •5.2.6.1 Cross-Border Merger of Companies by Using SE
- •5.2.6.2 Reorganization of the European Organizational Structure
- •5.2.6.3 Change in the Corporate Governance Structure
- •5.2.6.4 Cross-Border Transfer of Corporate Seat
- •5.3 The European Private Company (SPE)
- •5.3.1 The Commission Proposal on the Statute for a SPE
- •5.3.2 Controversial Issues
- •5.4 The EU Cross-Border Mergers Directive and Its Implementation in Germany
- •5.4.1 Case Study
- •Case Study
- •5.4.2 General Background
- •5.4.3 Implementation in Germany
- •5.4.4 Essential Steps in a Cross-Border Merger Proceeding
- •5.4.5 The SEVIC Decision of the ECJ
- •5.5 International Joint Ventures—A Check List for Relevant Issues
- •5.5.1 Commercial Background for Establishing a Joint Venture
- •5.5.2 Outline of Key Issues for Establishing a Joint Venture
- •References
- •Supplementary Materials
- •6.1 Convenience Translations
- •Further Translations
- •6.2 Examples of Corporate Documents
- •6.2.1 Articles of Association of a GmbH
- •6.2.2 Rules of Procedure for the Management Board of a GmbH
- •Selected Literature on German, International and Comparative Issues of Business Law
- •Index
2.2 Internal Organization |
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which may affect the property and pecuniary rights of stockholders.26 Aviolation of these restrictions will render the transaction null and void.
Unless otherwise provided for in the articles, the members of the management board (Vorstandsmitglieder) represent the corporation jointly in actively committing the company although each member has authority to receive commitments from third parties individually. In practice, however, it is common for the articles to contain a provision allowing any two members of the management board to jointly enter into commitments on behalf of the corporation in order to simplify operative procedures.
The power of representation of the management board also includes the authority to grant limited or unlimited power of attorney to employees of the company.
Reporting Obligations of the Management Board
The management board is obliged to deliver regular, conscientious and accurate reports to the supervisory board on the intended business strategy and on other fundamental matters regarding the present and future strategic alignment of the corporation, in particular on such matters as the planning of financial investments and human resources, expected turnover and profitability of the corporation, as well as on important corporate transactions.27
Furthermore, event driven ad-hoc reports shall be made to the chairman of the supervisory board (Aufsichtsratsvorsitzender), where significant developments occur, including developments concerning the business of an affiliated company, which may have a material impact on the stock corporation.28
Although the management board has to fulfill these reporting obligations proactively, the supervisory board also has the right to request, at any time, special reports by the management board on matters of relevance to the corporation, its relations to affiliated companies, as well as such business developments in affiliated companies, which may have any material impact on theAG.29
In addition, further information and reporting requirements of the management board may be provided for in the rules of procedure for the management board (Geschäftsordnung für den Vorstand ).
2.2.3 Supervisory Board (Aufsichtsrat)
2.2.3.1 Composition and Appointment
The supervisory board shall consist of at least three members. The maximum number of members depends on the amount of stock capital, the articles of association
26 See Sec. 293AktG: Validity of enterprise agreements with affiliated companies is contingent to prior approval of the general meeting.
27 See Sec. 90 para. 1 sentence 1AktG. 28 See Sec. 90 para. 1 sentence 3AktG. 29 See Sec. 90 para. 3AktG.
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and the applicable co-determination regime regarding the AG’s employees. Only natural persons can be members of the supervisory board.
As a special feature of German corporate law, depending on the number of employees, the supervisory board of an AG is subject to mandatory co-determination (unternehmerische Mitbestimmung) by employees’ representatives. In these cases, the supervisory board must consist of both stockholders’representatives, as well as employees’ representatives. The stockholders’ representatives on the supervisory board are appointed and removed by resolution of the stockholders’ meeting. The employees’ representatives, on the other hand, are elected in a special procedure provided for in the applicable German co-determination laws.30
The stockholders’ representatives are elected for a term, not exceeding five years, by the stockholders’ meeting31. The resolution requires a majority of more than 50%. However, the articles of association may provide special appointment rights to a particular stockholder (Entsendungsrecht). In this case, the respective stockholder will have the right to appoint a number of stockholders’representatives specified in the articles, not exceeding one third of all such representatives, independently outside the stockholders’meeting.
In the event of a member of the board’s resigning during her/his term, the stockholders’meeting may either appoint a substitute until the regular completion of the term or elect a new, regular member for a full term. For the interim period between resignation and appointment, the management board can apply for the court to appoint a temporary stand-in.
Appointments of stockholders’ representatives can be terminated without cause by the stockholders’ assembly. The resolution requires a qualified majority; however, in the articles of association, this threshold may be reduced. Moreover, the supervisory board itself has the right to apply to the court, in order to remove one of its members from office.
2.2.3.2 Functions and Responsibilities of the Supervisory Board
The supervisory board is entrusted with the appointment, supervision and control of the management board. It appoints the members of the management board, as well as the chairman of the management board (Vorstandsvorsitzender) and may also dismiss them for good cause.32 It receives reports from the management board on a regular basis, but also may at any time request a specific report on the on the company’s affairs, its legal and business relationships with affiliated companies and on important transactions.33
The supervisory board may not issue binding instructions to the management board with regard to the operative management of the AG. However, the supervisory board may pass special rules of procedures for the management board
30 For further detail see infra, Sect. 2.5.3.
31 Appointment is limited to one third of the members of the supervisory board, AktG, Sec. 101 para. 2.
32 See Sec. 84AktG.
33 See Secs. 90, 111AktG.
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(Geschäftsordnung für den Vorstand ). Such rules of procedure typically provide for a catalogue of managerial decisions which require the prior approval of the supervisory board.34
In order to avoid potential conflicts of interest, German law provides that the supervisory board must represent theAG in transactions with members of the management board, and in particular, regarding employment contracts.35 The supervisory board also represents the corporation in retaining an auditor for the annual financial statement, which it must review.36
In practice, certain tasks of supervision are often prepared by a special committee (Aufsichtsratsausschuss, e.g. an auditing committee or a HR-committee). However, the supervisory board as a whole remains responsible for any breach of duty of care by such a committee so that every member of the supervisory board has to constantly supervise the committee’s work.
2.2.4 Advisory Board (Beirat)
As in the case of the GmbH, additional bodies such as advisory boards or administrative boards may be created, provided that the general allocation of responsibilities between the management board and supervisory board remains untouched. ManyAGs will use a Beirat in order to gain access to specific regional or industrial expertise.
2.2.5 Stockholders’ Meeting (Hauptversammlung)
2.2.5.1 Sphere of Competence of the Stockholders’ Meeting
The stockholders’ meeting (Hauptversammlung) is the forum in which the stockholders exercise their rights with respect to the AG and as such it is the principal corporate body of the German stock corporation. Its task is to pass resolutions on matters concerning the AG falling within its sphere of competence. In contrast to the GmbH, however, this sphere of competence is limited in scope. The stockholders’ meeting has the right to pass a resolution only if and insofar as statutory law (as interpreted by the courts) specifically provides for such a right with regard to the subject matter in question. Thus, in particular the influence of the stockholders’ meeting on management decisions is limited compared to the influence of the shareholders on the managing directors of a German GmbH37.
34 See Sec. 111 para. 4AktG. 35 See Sec. 112AktG.
36 See Sec. 111 para. 2AktG.
37 According to Sec. 119 para. 2 AktG the stockholders’ meeting may, as a rule, pass a resolution concerning matters of the operative management of the corporation only if the management board explicitly requests it to do so.
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Following the principle of separation of ownership and control, German statutory law limits the sphere of competence of the stockholders’ meeting to certain fundamental issues of essential importance, including, among others:
•Amendments to the articles of association;38
•Capital reductions39 and capital increases;40
•Dissolution and liquidation of the corporation;41
•Election42 and removal43 of members of the supervisory board;
•Discharge of the members of the management board and the supervisory board44
•Appropriation of distributable profits;45
•Appointment of the auditor for the annual financial statement;46
•Corporate restructuring measures as provided for by the German Transformation Act (Umwandlungsgesetz, UmwG), in particular mergers47, changes of corporate form48, hive-down49, spin-off 50, corporate division;51
•Squeeze-out of minority stockholders.52
In addition to subject matters specifically allotted to the stockholders’ meeting by statutory law, the Bundesgerichtshof has defined further, so-called inherent powers of the stockholders’ meeting. This unwritten sphere of competence covers a delisting of the corporation,53 as well as restructuring measures, which touch upon the core of the business and concern about 80% of the corporation’s assets.54
An annual general meeting of the stockholders must take place within the first eight months of every fiscal year.
2.2.5.2 Decision-Making Procedure
Decisions by the stockholders can only be validly made in a meeting prepared and conducted strictly according to the mandatory rules of the German Stock Corporation Act (AktG ). Any failure to adhere to these requirements will make any resolution passed in the meeting challengeable in court, which will bar the resolution from
38 See Secs. 119 para. 1 no. 5, 179 para. 1AktG.
39 See Secs. 119 para. 1 no. 6, 222 para. 1, 237 para. 1AktG. 40 See Secs. 119 para. 1 no. 6, 182 para. 1, 192 para. 1AktG. 41 See Secs. 119 para. 1 no. 8, 262 para. 1 no. 2AktG.
42 See Secs. 119 para. 1 no. 1, 101 para. 1AktG. 43 See Sec. 103 para. 1AktG.
44 See Secs. 119 para. 1 no. 3, 120 para. 1AktG. 45 See Secs. 119 para. 1 no. 2, 174 para. 1AktG. 46 See Sec. 119 para. 1 no. 4AktG.
47 See Secs. 13, 65, 76 UmwG. 48 See Sec. 193 para. 1 UmwG.
49 See Secs. 125, 65 para. 1 UmwG. 50 See Secs. 125, 65 para. 1 UmwG. 51 See Secs. 125, 65 para. 1 UmwG. 52 See Sec. 327a para. 1AktG.
53 See BGH, 25 November 2002, II ZR 133/01, ZIP 2003, 387—Macrotron. 54 So-called ‘Holzmüller doctrine’, see see supra, Sect. 2.2.2.2.1.
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coming into effect. The management board of the AG is responsible for preparing and heading the stockholders’meeting.
Preparation of the Stockholders’ Meeting
All stockholders entitled to participate in the stockholders’ meeting have to be invited in an orderly fashion. The invitation has to be published online in the Federal Gazette (elektronischer Bundesanzeiger) at least one month prior to the meeting.55 If the company has issued registered stocks only, it may instead mail the invitation to its stockholders. Simultaneously with the invitation, the management board has to publish the agenda of the stockholders’ meeting.56 The agenda has to be comprehensive in the sense that it has to cover all issues on which a stockholder resolution is intended; a resolution adopted on an issue not stated on the agenda is invalid.57 For every stockholder resolution on the agenda the management board has to provide a specific proposal. The proposal must be worded in a way that allows the stockholders to either approve or reject the proposal. The management board must also include countermotions and nominations made by stockholders if they are received in a timely manner.58 Once published, the agenda can be validly amended only within ten days after its publication.The management board is obliged to make an amendment if a minority of stockholders representing at least 5% or an absolute amount of over EUR 500,000 communicates a corresponding request.59
Voting Procedure
In general, a stockholder can exercise her/his voting rights only in the stockholders’ meeting, which means that she/he will, as a rule, have to attend the stockholders’ meeting in person or be validly represented by proxy. In the latter case, the powers of attorney of the representative have to be in writing if the articles of association do not provide otherwise; however, the AG has to provide for an electronic authorization procedure.60
Until recently, attendance at the stockholders’ meeting—either in person or by proxy—was the only possibility for stockholders to validly cast their votes. This often presented an obstacle for many minority stockholders, who were not resident in the place where the AG had its registered office. Therefore, the European legislature in 2007 passed a directive intended to facilitate the exercise of voting rights in a cross-border context.61 Since the German legislature implemented the
55 See Secs. 123 para. 1, 25AktG; additionally, the articles of association may determine a national newspaper in which the invitation may be published.
56 See Sec. 121 para. 3AktG. 57 See Sec. 124 para. 4AktG. 58 See Secs. 126, 127AktG.
59 See Secs. 124, 122 para. 2AktG.
60 See Sec. 134 para. 3AktG; in case of institutional representatives (e.g. banks), the requirements are slightly reduced, see Sec. 135AktG.
61 Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of stockholders in listed companies, OJ L 184/17 as of 14 July 2007.