80			3  Limited Liability Company (GmbH)
3.4  Duties and Liability Risks of the Managing Director						94
	3.4.1  Duties and Responsibilities of the Managing Director					94
	3.4.2  Liability Risks of Managing Directors . . . .			. . . . . . . . . . .	. .	98
	3.4.3  Joint Responsibility/ Joint and Several Liability					102
	3.4.4	Statute of Limitations . . . . . . . . . . . . . . . . .		. . . . . . . . . . .	. .	103
	3.4.5  Summary—Managerial Duties and Liability Risks					103
3.5	Shareholders’Liability					103
	3.5.1  Statutory Provisions Stipulating Personal Liability					104
	3.5.2	Piercing the Corporate Veil . . . . . . . . . . . . .		. . . . . . . . . . .	. .	105
3.6  Protection of Minority Shareholders						107
	3.6.1	Articles of Association—General Issues				107
	3.6.2  Clauses to Protect Minority Shareholders					108
3.7	Dissolution and Liquidation					113
References						113

3.1  Introduction

3.1.1  Characteristics of the GmbH

The German limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) is a highly flexible corporate form ideally suited for medium-sized closelyheld enterprises, as well as for use within group structures.

The GmbH may be established by one or more natural or juristic persons. As a corporation (Körperschaft) the GmbH is a legal entity separate from its shareholders. Once the GmbH is registered with the Commercial Register—upon which the company comes into legal existence—and the share capital has been paid in, the shareholders may not be held liable for any obligation of the GmbH.1

The required statutory minimum share capital is EUR 25,000. There is no maximum amount. In an effort to maintain the GmbH’s as an attractive business vehicle against increasing competition from other corporate forms in the European Union (and, in particular the Limited Liability Company from the UK), the German legislator has, however, introduced a new ‘subspecies’of the GmbH, the entrepreneurial company (Unternehmergesellschaft, UG) which may be founded with a share capital of only EUR 1.00.2

In practice, no share certificates are issued and the shares of a GmbH are not publicly traded on the stock exchange. Instead, GmbH shares may be transferred by way of assignment in form of a notarial deed.Alist of the shareholders has to be filed with the Commercial Register and is subject to public inspection.

1  There are very few exceptions to this rule; see infra, Sect. 3.5.

2  Of course, the correct abbreviation would be UG (haftungsbeschränkt) (entrepreneurial company (limited in liability)). Section 5a para 1 GmbHG expressly demands that the addition ‘haftungsbeschränkt’ be used at all times when conducting business, intended to be a warning signal for third parties. However, for the sake of readability we will hereinafter use the less unwieldy ‘UG’.

3.1  Introduction	81

The GmbH must have at least one managing director (Geschäftsführer) who manages the company and represents it in and out of court. In contrast to a German AG, however, the shareholders’ meeting is considered the principal decisionmaking authority: The shareholders’ meeting may give binding instructions to the managing director even as to specific issues of day-to-day management. There is no general requirement for a GmbH to establish a supervisory board (Aufsichtsrat); however, the GmbH must establish a supervisory board if the company is subject to mandatory German co-determination rules which require that representatives of the workforce become members of the supervisory board. Furthermore, the shareholders may voluntarily stipulate a supervisory board in the articles of association (Gesellschaftsvertrag).

3.1.2  The Lasting Success of the GmbH—A Historical Overview

In Germany, the limited liability company is traditionally subject to specific regulation in form of the Act on German Limited Liability Companies (GmbH-Gesetz, GmbHG). This Act was passed in 1892 in order to fill the regulatory gap between the GermanAG (as the classic corporate form for large enterprises) on the one hand, and business associations like civil law partnerships (BGB-Gesellschaften) or commercial law partnerships (OHG, KG), on the other hand. The GmbH is typically designed for medium sized companies with a limited number of shareholders (in contrast to theAG) and with shares not being publicly traded.

As the most frequent company form in Germany, the GmbH has long been a success story, and other countries have adopted the German legislative model, enacting legal frameworks similar to the German GmbHG (e.g. Austria in 1906, England in 1907, France in 1925, Luxembourg in 1933, Belgium in 1935, Italy in 1942, Greece in 1955, and The Netherlands in 19713). In Germany, the legal framework of the GmbH has been subject to numerous amendments by the legislator and has also been supplemented frequently by judge-made law. Thus, although the GmbH faces increasing competition from similar company forms from other European Member States, it still remains by far the most popular corporate form in Germany (Fig. 3.1).

3.1.3  Recent Developments:

Reform of the Statutory Framework in 2008

The continuing success of the GmbH as a business vehicle is greatly due to constant legislative efforts to adapt its legal framework to the ever-changing economic circumstances. In recent times, the most significant reform has been the ‘Act on the Modernization of the Limited Liability Company Law and the Prevention of

3  See Beurskens and Noack 2008, p. 1070.

82							3  Limited Liability Company (GmbH)
Limited liability company (GmbH)											1016443
Limited commercial partnership (KG)							236554
Registered sole proprietor (eK)						176836
General commercial partnership (oHG)					27422
Branches of foreign companies (e.g. Ltd.)				19534
Stock corporation (AG)			17583
Limited partnership by shares (KGaA)			236
Societas europaea (SE)			116
0			400000						800000		1200000

Fig. 3.1 Registered companies in Germany as of 1 January 2010. (Figures according to Kornblum 2010)

Abuses’ (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen, MoMiG), enacted in 2008.

As its name suggests, the MoMiG aimed at abolishing certain abusive forms of the GmbH (e.g. fraudulently damaging creditors) as well as introducing various new features. This was done in order to keep the GmbH an attractive business vehicle for entrepreneurs given the increasing competition of company forms within the EU.4 The reform of the statutory framework included, inter alia, the following important amendments:

•Simplifying and Accelerating the Formation and Registration process: In order to achieve this goal, the formation procedure has been deregulated considerably. Among other steps, the requirement to obtain a governmental approval prior to registration with the Commercial Register (Handelsregister) in specific formation scenarios (e.g. forming a GmbH with a business purpose requiring a public license) has been waived. Furthermore, the legislature provided for an option to establish a GmbH by using a standard template form. Thus, the establishment can be achieved more quickly and less expensively because in standard scenarios some notarial costs can be saved.

•Alternative Business Form: In the competition of European corporate forms (following the decision of the European Court of Justice (ECJ) in the famous Centros case) the German legislature felt the need to improve the options for entrepreneurs regarding the comparatively high statutory minimum capital required to establish a German GmbH. But instead of simply reducing the statutory minimum capital from EUR 25,000 to EUR 10,000 (as was discussed during the legislative debates) or even to EUR 1.00, which would approximate the le gal requirements for a private Limited Liability Company formed in England or Wales—the German legislature introduced a third, alternative option: The introduction of a new ‘entry-level’ GmbH subtype: the so-called entrepreneurial company (Unternehmergesellschaft, UG). Such an UG can be formed without complying with the minimum capital provisions applicable to a ‘standard’ GmbH, but is subject to certain other restrictions. Furthermore, by increasing

4  For a discussion of this development see infra, Sect. 5.1.

3.1  Introduction	83

the capital to at least EUR 25,000 an UG may, in the course of its existence, be changed to the ‘standard’GmbH.

•Facilitating Share Purchases: To facilitate share purchases, the legislature has introduced a mechanism for bona fide acquisitions of shares from someone who is not the true owner of the shares. The company must file a list of shareholders with the Commercial Register, which is subject to public inspection. In regards to the GmbH, only a shareholder actually registered in this list will be considered a shareholder. The acquisition of shares from a person listed in this list will be considered valid even if such person has not been the correct shareholder for more than three years, or the incorrectness of the list is attributable to the real owner of the shares. Thus, for practical purposes, a potential buyer can rely on the list of shareholders for acquisition purposes if no objection has been raised to an incorrect entry on the list for the last three years.

•SimplificationofCapitalPreservationRules:UntiltheMoMiGenteredintoforce in 2008, the Federal Court of Justice (Bundesgerichtshof, BGH) took a rather extensive line of interpretation of the capital preservation rules for the GmbH. According to this view, any payment of the company to a shareholder reducing its statutory capital was prohibited, regardless of whether or not the payment was compensated by the company (e.g. by acquiring a fully recoverable claim of (re-)payment, vollwertiger Gegenanspruch). Due to this rather formalistic interpretation of the capital preservation rules by the BGH and the lower courts, the ability of a GmbH to extend loans to shareholders was restricted considerably. In practice, this was considered a major obstacle for corporate group financing, e.g. for so-called ‘upstream loans’ and also for cash pooling agreements. Under the MoMiG the legislature has now returned to the so-called balance sheet approach: payments made by the company to a shareholder are admissible if they are—from a balance-sheet point of view—fully covered by a claim for repayment. Thus, the GmbH may extend loans to a shareholder if the shareholder can objectively be expected to repay the loan. Accordingly, the MoMiG permits intra-group payments made by the GmbH pursuant to a domination agreement or a profit and loss absorption agreement, as well as upstream security provided in favor of a shareholder.

•Facilitating Shareholder Loans: Prior to the MoMiG reform, loans and other contributions by shareholders were treated as quasi-equity. Thus, they were pro hibited from being repaid if they were given or retained in a crisis of the GmbH, i.e. in a situation in which the company would have been unable to obtain a loan from other creditors at regular market conditions. However, these strict rules had an adverse effect on corporate group financing. Through the MoMiG, the legis lature has now considerably relaxed the former case-law regime by clarifying the scope of the statutory provisions: The company may grant shareholder loans at any time; the former distinction between equity-replacing and regular loans has been abolished.5 However, in the interest of outside creditors, shareholder

5  Loans of a minority shareholder who holds up to 10% of the shares and is not a director are not affected. Furthermore, there is no subordination of loans if the lender acquires shares of the company while it is already in financial distress as a means of restructuring the entity.