Act on the Modernisation of the Law on Private Limited Companies in Force

On 1 November 2008, the Act to Modernise the Law on Private Limited Companies and Combat Abuses (MoMiG) came into force. This marks the completion of the most comprehensive reform of GmbH law since the GmbH Act of 1892 came into existence. In future, start-ups will have an additional entry-level variant of the GmbH available to them in the form of the haftungsbeschränkte Unternehmergesellschaft (UG).

The main contents of the new regulation are in detail:

1. acceleration of company start-ups
A core concern of the GmbH amendment was to facilitate and accelerate the formation of companies. The GmbH was often seen as being at a competitive disadvantage compared with foreign legal forms such as the English Limited (Ltd.), because many member states of the European Union impose lower requirements in terms of formation formalities and the raising of minimum share capital.

a) Facilitation of the raising of capital and transfer of business shares

  • The new GmbH law recognises two variants of the GmbH. In addition to the tried and tested GmbH with a minimum share capital of 25,000 euros, there is the haftungsbeschränkte Unternehmergesellschaft (UG) (§ 5a GmbHG). It offers an entry-level variant of the GmbH and is intended to be of interest to start-ups that have and need little share capital at the beginning of their business - such as in the service sector. The haftungsbeschränkte Unternehmergesellschaft is not a new legal form, but a GmbH that can be founded without a certain minimum share capital. However, this GmbH may not distribute its profits in full. 25 % of the profits must be placed in the reserve. In this way, the minimum share capital of the normal GmbH is gradually accumulated. If the UG reaches the share capital of a "normal" GmbH, it can be converted into a normal GmbH.
  • The shareholders can now individually determine the respective amount of their capital contributions and thus better align them to their needs and financial possibilities. Each share must now only be denominated in an amount of at least one euro. In the case of new foundations or capital increases, a flexible denomination can be chosen from the outset, and existing shares can be divided more easily.
  • The flexibilisation continues with the business shares. Shares can be more easily divided, merged and transferred to a third party individually or in groups.
  • Legal uncertainties in the area of raising capital are eliminated by clearly regulating the legal institution of the "hidden contribution in kind" in the law. A hidden contribution in kind exists if a cash contribution is formally agreed and made, but the company is to receive a material value from an economic point of view (e.g. a vehicle). The requirements of case law on hidden contributions in kind, which are difficult to comply with in practice, as well as the drastic legal consequences, which mean that the shareholder often has to make his contribution twice, were almost unanimously criticised. The law therefore provides that the value of the contribution in kind is credited against the shareholder's cash contribution obligation. The crediting only takes place after the company has been entered in the commercial register. If the managing director knows about the planned hidden contribution in kind, i.e. if there is an intentional hidden contribution in kind, he may not assert in the commercial register application that the cash contribution has been fulfilled. There is no right to lie here.

b) Introduction of model protocols
For uncomplicated standard formations (including formation in cash, a maximum of three shareholders), two model protocols requiring notarization are made available as an annex to the GmbH Act. This is intended to simplify the formation of a GmbH. The simplification is to be achieved primarily by combining three documents (articles of association, appointment of managing directors and list of shareholders) into one. In the case of the limited liability entrepreneurial company with low share capital, formation using a model protocol is also intended to lead to real cost savings due to a privileged treatment in terms of costs.

c) Acceleration of the registration process
The entry of a company in the commercial register has already been considerably accelerated by the Act on Electronic Commercial Registers and Registers of Cooperatives as well as the Business Register (EHUG), which came into force at the beginning of 2007. According to this law, the documents required for the formation of a GmbH are generally submitted electronically to the registry court. It can then decide on the application without delay and transfer the transmitted data directly to the electronically maintained register.

The MoMiG is intended to further shorten registration times in the commercial register:

  • Previously, a company could only be entered in the commercial register if a state authorisation document was already available at the time of application for registration (section 8 (1) no. 6 GmbHG old version). This applied, for example, to craft and restaurant businesses or property developers who needed a trade licence. The slowest procedure thus set the pace. This legal situation made setting up a business considerably more difficult and delayed it. Now, limited liability companies such as sole traders and commercial partnerships no longer have to submit licence documents to the registration court. This makes the start easier.
  • The formation of one-person limited liability companies is also simplified. Special security deposits are no longer required.
  • It is expressly clarified that the court may only demand the submission of deposit receipts or other evidence during the formation audit if it has substantial doubts as to whether the capital was properly raised. In the case of contributions in kind, the value check by the registration court is limited to the question of whether there is a "not insignificant" overvaluation. This corresponds to the legal situation with public limited companies. Only in the case of corresponding indications can an external appraisal be initiated in the future within the scope of the formation audit.
  • The use of the model protocol will also lead to acceleration, as there will be fewer queries from the registry courts.

2. increasing the attractiveness of the legal form of a GmbH as a goal

Through a bundle of measures, the attractiveness of the GmbH was to be increased not only in its formation, but also as an "advertising" company, i.e. active in the market. At the same time, disadvantages of the German GmbH in the competition of legal forms were to be compensated.

a) Transfer of the Administrative Headquarters Abroad
It was previously regarded as a competitive disadvantage that, according to the case law of the ECJ in the Überseering and Inspire Art judgments, EU foreign companies can choose to have their administrative headquarters in another state - i.e. also in Germany. These foreign companies are to be recognized as such in Germany. Conversely, German companies did not previously have this option. The deletion of Sec. 4a (2) GmbHG now enables German companies to choose an administrative seat that is not necessarily the same as the registered office. This administrative headquarters can also be located abroad. This increases the scope for German companies to develop their business activities outside German territory. This can, for example, be an attractive option for German groups to manage their foreign subsidiaries in the legal form of the familiar GmbH.

b) More transparency for company shares
Following the example of the share register, in future only those persons entered in the list of shareholders will be deemed to be shareholders. In this way, business partners of the GmbH will be able to easily and completely trace who is behind the company. Sellers and purchasers of shares in the company will have an incentive to keep the list of shareholders up to date. Because the structure of the shareholders becomes more transparent, abuses - such as money laundering - can be better prevented.

c) Acquisition of Shares in Good Faith
The list of shareholders serves as a connecting factor for the acquisition of shares in good faith. Anyone acquiring a share can rely on the fact that the person entered in the list of shareholders is actually a shareholder. If an incorrect entry in the list of shareholders has remained unchallenged for at least three years, the content of the list is deemed to be correct vis-à-vis the acquirer. The same applies if the entry is incorrect for less than three years, but the incorrectness is attributable to the true beneficiary. The proposed regulation creates greater legal certainty and reduces transaction costs. Up to now, the acquirer of a business share has run the risk that the share belongs to someone other than the seller. The new regulation leads to a considerable simplification in practice for the sale of shares in older GmbHs.

d) Securing cash pooling
Cash pooling, which is commonly used internationally for Group financing, will be secured and placed on a reliable legal basis both for raising and maintaining capital. Cash pooling is an instrument for balancing liquidity between the Group's business units. For this purpose, funds are channelled from the subsidiaries to the parent company for joint cash management. In return, the subsidiaries receive repayment claims against the parent company.

Although cash pooling as a method of group financing is considered to make economic sense, legal uncertainty had arisen in practice about its permissibility due to the recent case law of the BGH on § 30 GmbHG. The MoMiG takes up the concerns of practice and makes a general provision. It goes beyond cash pooling and returns to the balance sheet consideration of the company's assets: according to this, a payment by the company to a shareholder cannot be considered a prohibited disbursement of company assets if there is a pure asset swap, i.e. the company's claim for consideration or reimbursement against the shareholder covers the disbursement and is also of full value. A corresponding regulation also applies in the area of capital contribution. However, this has stricter requirements: In the area of capital raising, it is necessary that the restitution claim is not only fully valid, but also liquid. In other words, it must be due at any time or be able to be called in by the company without notice. This is because, for example, in the case of a loan that can only be terminated after a longer period of time, it is very uncertain whether the repayment claim is actually fully valid. In addition, the back-and-forth payment must be disclosed in the company's application so that the registry judge can check whether the requirements for a fulfilment effect are nevertheless met.

e) Deregulation of Equity Substitution Law
The matter of equity substitution law (Sec. 30 et seq. GmbHG), which has become very complex, is considerably simplified and fundamentally deregulated. Equity substitution law is concerned with the question of whether loans granted by shareholders to their GmbH are treated as loans or as equity. Equity takes second place to all other creditors in the event of insolvency. The basic idea behind the new regulation is that the executive bodies and shareholders of the healthy GmbH should have a simple and clear legal framework. To this end, the case law and statutory rules on shareholder loans replacing capital (Sections 32a, 32b GmbHG old version) have been reorganized in insolvency law; the so-called "case law rules" under Section 30 GmbHG have been abolished. There is no longer a distinction between "capital-replacing" and "normal" shareholder loans.

The MoMiG continues the course of facilitating the continuation and restructuring of companies in the event of insolvency, which was already taken by the Act on the Simplification of Insolvency Proceedings of 13 April 2007. If a shareholder has left assets to the GmbH for use, he will in future not be able to assert his claim to segregation for the duration of the insolvency proceedings, but at most for a period of one year from their commencement. The shareholder is granted financial compensation for this. This provision eliminates the danger that the company will no longer have items at its disposal that are necessary for the continuation of the business when insolvency proceedings are opened. If there are chances of reorganisation, the insolvency administrator will regularly be able to reach an agreement within the one-year period that will enable the debtor company to continue. This regulation replaces the previous "equity-replacing transfer of use".

3. combating abuses
The cases of abuse reported from practice in connection with the legal form of the GmbH are to be combated by various measures:

  • Legal proceedings against companies should be accelerated. Today, this often fails because the companies evade the service of reminders and lawsuits. Therefore, in future a domestic business address must be entered in the commercial register. This also applies to joint-stock companies, sole traders, commercial partnerships and branches (also of foreign companies). If service is factually impossible at this registered address (also by laying it down), immediate public service in Germany will be opened for legal persons (i.e. in particular the GmbH). This simplifies legal proceedings considerably for creditors.
  • If the company no longer has a managing director, the shareholders are now obliged to file for insolvency in the event of insolvency and overindebtedness. The obligation to file for insolvency can no longer be circumvented by the managing directors "going underground".
  • Managing directors who aid and abet the plundering of the company by the shareholders and thereby cause the insolvency of the company will be held more accountable. To this end, the so-called prohibition of payment in § 64 GmbHG will be expanded.
  • The previous grounds for disqualification of managing directors (section 6 (2) sentence 3 GmbHG, section 76 (3) sentence 3 AktG) will be extended to include convictions for delaying insolvency, false statements and misrepresentation, as well as convictions for general criminal offences with a corporate element (sections 263 to 264a and sections 265b to 266a StGB). Thus, anyone who has violated central provisions of economic criminal law can no longer be appointed managing director. This also applies to convictions for comparable offences abroad. In addition, shareholders who intentionally or through gross negligence entrust the management of the business to a person who cannot be a managing director will in future be liable to the company for damages that this person causes to the company.

Further information can also be found on the website of the Federal Ministry of Justice (BMJ) at

Source: Press release of the Federal Ministry of Justice of 30.10.2008

It remains to be seen whether the success intended by the legislator through the changes to the law on limited liability companies will actually materialise. The success of the new company form "Unternehmergesellschaft haftungsbeschränkt", or UG for short, is already strongly doubted. Some business associations have already spoken out against the UG. It is also feared that the UG will get just as "bad an image" as the foreign Limited (Ldt).

It is also doubtful that the use of a model protocol actually did the company founders a "favour". Legal experience has shown that standard forms without supplementary amendments are generally inappropriate and unsuitable for an individual case. This is also likely to be the case with the model articles of association for the UG. If the use of the model articles of association is intended, it must therefore first be checked in the run-up to the formation of the company whether the model articles of association are at all suitable for the formation of the planned company and can be used. Although the use of the model articles of association can save notary fees for the formation of the company, a comprehensive review and consultation with a lawyer must take place prior to the formation of the company, so that the savings in notarisation costs will at best be neutralised.

If you intend to establish a company, in particular a UG, we will be happy to advise you on how to do so.

Goldberg Attorneys at Law, Wuppertal-Solingen 2008
Attorney at Law Michael Ullrich, LL.M.(Information Law)