On november 1, 2008, the Act for the Modernization of GmbH Law and the Fight against Abuses (MoMiG) came into force. This marked the completion of the most comprehensive reform of GmbH law since the inception of the GmbH Act in 1892. Going forward, business founders will also have access to an entry-level variant of the GmbH, the limited liability entrepreneurial company (UG).
The key aspects of the new regulation are as follows:
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 Capital Contribution and Transfer of Shares
- The new GmbH law introduces two variants of the GmbH. Alongside the established GmbH with a minimum share capital of 25,000 Euros, there is now the limited liability entrepreneurial company (UG) (§ 5a GmbHG). It offers an entry-level variant of the GmbH and is intended to be attractive for business founders who have and require little share capital at the start of their operations – for instance, in the service sector. The limited liability entrepreneurial company is not a new legal form, but rather a GmbH that can be established without a specific minimum share capital. However, this GmbH is not permitted to fully distribute its profits. 25% of the profits must be allocated to reserves. In this way, the minimum share capital of a standard GmbH is intended to be gradually accumulated. Once the UG reaches the share capital of a “standard” GmbH, it can be converted into a standard GmbH.
- Shareholders can now individually determine the amount of their respective capital contributions, aligning them more effectively with their needs and financial capabilities. Each share must now be denominated at a minimum of one Euro. For new formations or capital increases, a flexible denomination can be chosen from the outset, and existing shares can be more easily divided.
- This increased flexibility extends to the shares themselves. Shares can be more easily divided, merged, and transferred individually or collectively to a third party.
- Legal uncertainties concerning capital contributions are eliminated by clearly regulating the legal concept of "hidden contributions in kind" within the law. A hidden contribution in kind occurs when, formally, a cash contribution is agreed upon and made, but from an economic perspective, the company is intended to receive an asset in kind (e.g., a vehicle). The jurisprudential requirements for hidden contributions in kind, which were difficult to adhere to in practice, along with the severe legal consequences often requiring shareholders to make their contribution twice, were almost universally criticized. Therefore, the law stipulates that the value of the contributed asset in kind shall be credited against the shareholder's cash contribution obligation. This credit is applied only after the company's registration in the commercial register. If the managing director is aware of a planned hidden contribution in kind, meaning an intentional hidden contribution in kind exists, they may not certify in the commercial register application that the cash contribution has been fulfilled. There is no right to misrepresent in this context.
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 aims to further reduce registration times in the commercial register:
- Previously, a company could only be registered in the commercial register if a state approval certificate was already available at the time of application for registration (§ 8 para. 1 no. 6 GmbHG old version). This applied, for example, to craft businesses, restaurants, or property developers requiring a commercial license. Thus, the slowest procedure dictated the pace. This legal situation significantly complicated and delayed company formations. Now, GmbHs, like sole traders and commercial partnerships, no longer need to submit approval certificates to the registration court, which facilitates their establishment.
- The formation of single-person GmbHs is also simplified. Special security deposits are no longer required.
- It is explicitly clarified that during the formation review, the court can only demand the submission of payment receipts or other evidence if it has significant doubts as to whether the capital has been properly raised. For contributions in kind, the valuation control by the registration court is limited to determining whether a “not insignificant” overvaluation exists. This aligns with the legal situation for stock corporations. Consequently, an external appraisal can only be initiated during the formation review in the future if there are corresponding indications.
- The use of the model protocol will also lead to acceleration, as there will be fewer inquiries from the registration courts.
2. Increasing the Attractiveness of the GmbH Legal Form as an Objective
Through a package of measures, the attractiveness of the GmbH should be enhanced not only during its formation but also as an “active” company operating in the market. Simultaneously, disadvantages faced by German GmbHs in the competition among legal forms should 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 is considered economically sound as a method of group financing, recent jurisprudence from the Federal Court of Justice (BGH) concerning § 30 GmbHG had created legal uncertainty in practice regarding its permissibility. The MoMiG addresses these practical concerns and introduces a general regulation. This regulation extends beyond cash pooling and reverts to an accounting treatment of company assets: accordingly, a payment from the company to a shareholder cannot be deemed a prohibited distribution of company assets if it constitutes a pure asset exchange, meaning the company's counter-performance or refund claim against the shareholder covers the payment and is also of full value. A corresponding regulation also applies to capital contributions. However, this imposes stricter requirements: in the context of capital contributions, it is necessary that the claim for restitution is not only of full value but also liquid. It must therefore be due at any time or capable of being made due by the company through extraordinary termination. For instance, with a loan terminable only after a long period, the prognosis regarding whether the repayment claim is actually of full value is highly uncertain. Furthermore, reciprocal payments must be disclosed in the company's registration application so that the register judge can verify whether the conditions for an effect of fulfillment 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 set by the Act on the Simplification of Insolvency Proceedings of April 13, 2007, to facilitate the continuation and restructuring of companies in insolvency. If a shareholder has provided assets for use to the GmbH, they can no longer assert their right of segregation during the insolvency proceedings, or at most for a period of one year from its opening. The shareholder is granted financial compensation for this. This regulation eliminates the risk that, upon the opening of insolvency proceedings, assets necessary for the continuation of operations will no longer be available to the company. If restructuring opportunities exist, the insolvency administrator will regularly be able to reach an agreement within the one-year period that allows for the continuation of the debtor company. This regulation replaces the previous "equity-replacing provision 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 enforcement against companies is to be accelerated. Currently, this often fails because companies evade the service of reminders and lawsuits. Therefore, a domestic business address must be registered in the commercial register in the future. This also applies to stock corporations, sole traders, commercial partnerships, and branch offices (including those of foreign companies). If service (including by deposit) is practically impossible at this registered address, immediate public service within Germany will be initiated for legal entities (especially GmbHs). This significantly simplifies legal enforcement for creditors.
- If the company no longer has a managing director, the shareholders are now obliged to file for insolvency in cases of insolvency and overindebtedness. The obligation to file for insolvency can no longer be circumvented by managing directors disappearing.
- Managing directors who abet the plundering of the company by shareholders and thereby cause the company's insolvency will be held more accountable. To this end, the so-called prohibition of payments in § 64 GmbHG will be extended.
- The existing grounds for disqualification of managing directors (§ 6 para. 2 sentence 3 GmbHG, § 76 para. 3 sentence 3 AktG) are expanded to include convictions for delayed insolvency filing, false statements and misrepresentation, as well as convictions based on general criminal offenses related to business (§§ 263 to 264a and §§ 265b to § 266a StGB). Consequently, anyone who has violated central provisions of commercial criminal law can no longer be appointed as a managing director. This also applies to convictions for comparable offenses abroad. Furthermore, shareholders who intentionally or grossly negligently entrust the management of affairs to a person who is ineligible to be a managing director will henceforth be liable to the company for damages caused by that person.
Further information can also be found on the website of the Federal Ministry of Justice (BMJ) at www.bmj.de/momig.
Source: Press release of the Federal Ministry of Justice dated October 30, 2008
It remains to be seen whether the legislative amendments to GmbH law will actually achieve the intended success. The efficacy of the new corporate form, the 'Unternehmergesellschaft haftungsbeschränkt' (entrepreneurial company with limited liability), or UG for short, is already being heavily questioned. Several business associations have voiced opposition to the UG. Furthermore, there are concerns that the UG will acquire as 'poor an image' as foreign Limited (Ltd) companies.
It is also questionable whether the use of a standard protocol (Musterprotokoll) truly benefits company founders. Legal experience has demonstrated that standard forms, without supplementary amendments, are generally unsuitable and inadequate for individual cases. This is likely also true for the standard articles of association (Mustersatzung) for the UG. Therefore, if the use of the standard articles of association is intended, it must first be verified prior to company formation whether these articles are suitable and can be used for establishing the planned company. While the use of the standard protocol may save notary fees during company formation, a comprehensive legal review and consultation must precede the establishment of the company, effectively neutralizing any savings on notarization costs at best.
Should you intend to establish a company, particularly a UG, we would be pleased to advise you on this company formation.
Goldberg Attorneys at Law, Wuppertal-Solingen 2008
Attorney at Law Michael Ullrich, LL.M.(Information Law)
m.ullrich@goldberg.de
