Corporate Law

In practice, German corporate law is characterized by a strong interconnection with other fields of law. As a result a specialized partner at your side must an expert in corporate law but also in connected fields of law. This is the only way that potential problems are identified ahead of time. In general a solid basic structure for companies is already layed in the pre-founding phase. The first step is to chose the appropriate form of organization; especially following aspects should be taken into account:

 

Choosing form of organization:

 

  • Objective:
    • Working cooperatively (personalistic orientation)
    • Wealth management
    • Public corporation
    • Project related
    • Silent partnership, trust
    • Equity participation
    • Private partnerships for self employed professions (doctors, dentists, attorneys-at-law etc.)

 

  • Structure and legal consequences:
    • Formal requirements (Do I need to go to a notary public?; Get registered in a public register?)
    • Management and Surveillance / representative participation
    • Taxation
    • Flexibility
    • Decision process (Proportion of votes)
    • Publicity requirements
    • Restricted transferability of shares; preemptive purchasing rights
    • Organization of profit distribution / Organization of rights to withdraw equity
    • Legal representation and management of the company
    • Equity deposits (cash and in kind) / nominal capital / mandatory and liability deposits ), contribution liabilities, additional deposits liability
    • Surveillance mechanisms
    • Exclusion of shareholders / shareholder disputes / indemnity payments / liquidation
    • Change of shareholders, corporate succession
    • Fiduciary duties, clauses for non-competition and competition restrictions
    • Accounting (annual accounts, balance sheets, profit and loss statements etc.)

 

  • Legal organization:
    • Separation of internal relations and relations to third parties
    • Management (joint management, sole manager)
    • Company representation (individual representation, joint representation), contracting with oneself (Sec. 181 German Civil Code, BGB)
    • Company officers with general power of attorney (Prokurist), authorized signatories
    • Shareholders' meeting / Shareholders' decisions (unanimous, simple majority, qualified majority)
    • Administrative and equity rights of the shareholders
    • Information rights
    • Arbitration clauses

 

Therefore, saving money on qualified legal advice in this matter is a short sighted approach.

 

German Private Partnerships (GbR, OHG, KG)

Many companies are organized in a personalistic manner. As long as the partners get along, the cooperation is often expedient and prolific. Yet, in the event of a dispute business and work flow usually find themselves at an impasse. Assets are threatened to be broken up and the dispute continues to aggravate. Therefore, it is paramount to react swiftly and proactively. This starts with the realization, that once there is a serious dispute it is routinely advantageous to separate in a structured and economically sound manner.

 

  • Withdrawal of a partner:
    • Voluntary withdrawal: termination; illegal limitation of termination rights (Sec. 723 para. 3 German Civil Code, BGB); withdrawal agreement; transfer of partnership property
    • Involuntary (forced) withdrawal: exclusion; illegal stipulations in the articles of association (unfair and contra bonos mores indemnity clauses); good cause; last resort; continuation clauses; illegal termination clauses; preliminary injunction
    • Court procedure for exclusion (Sec. 140 German Commercial Code, HGB)
    • Termination by third parties (private creditors of the partner)
    • Order of succession: continuation clauses, succession clauses (by virtue of law, by legal act); entry clauses for heirs
    • Accrual of partnership property; purchasing rights
    • Indemnity claims: evaluation of the claim; balance sheets to determine partnership assets at the time of withdrawal; clauses calculating indemnity claims according to book value, in kind indemnities; positions with equity quality (undistributed profits, reserves etc.); good will; hidden assets
    • Partnership in a liberal profession: management; good will;
    • Discharging of debt; discharging of joint liability; discharging of liability
    • Continued liability; limitation of continued liability (publicity; publicity obligations); existing obligations; continuing obligations; new obligations
    • Tax questions: capital gains taxes; discharging of liabilities / participation in losses as taxable capital gains; appraisal of intangible assets; capitalized earnings method

 

  • Dissolution / winding up of the partnership:
    • Dissolution agreement; court procedure for dissolution (Sec. 133 German Commercial Code, HGB); end of term; insolvency (partnership insolvency / insolvency of a partner); death of a partner; withdrawal of a partner
    • Complete dissolution; winding up partnership; structured liquidation; registration of winding up
    • Winding up of partnership assets; claims of the partnership, settlement of outstanding liabilities; if applicable additional deposits liability of the partners; liquidation of partnership assets; restitution of deposited equity; distribution of remaining funds; opening balance sheet for liquidation; closing balance sheet for liquidation
    • Sale of business to third parties
    • Tax considerations: appraisal of gains from sale or cessation of business; liquidation of reserves; sales proceeds; transfer of partnership assets (appraised at common value); transfer of partnership liabilities to purchaser; transfer of management

 

  • Distribution of profits / profit sharing:
    • Court action for distribution of profits
    • Court action by stages: information, accountability and distribution of profits
    • Taking into account of asset or equity extraction
    • Ratio of distribution of profits: per partner; stipulations in articles of association
    • Fiduciary duties

 

  • Changing form of organization / transformation
    • Corporation to partnership: transformation resolution; transformation report and cash indemnity offer; registration; balance sheet for original legal entity and for new legal entity; appraisal and taxation of capital gains
    • Partnership to corporation: transformation resolution (resolution and deposit of share capital); transformation report and cash indemnity offer; registration; balancing practices; appraisal and taxation of capital gains

 

  • Partnerships in crisis (financial recovery / insolvency)
    • Default; excess indebtedness (balance sheet and insolvency excess indebtedness)
    • Recovery measures: increase of capital; partner loans, subordination agreements (agreement of creditor to rank own debt behind debt provided by senior lenders); debt waivers (if applicable against debt warrant)
    • In principle no obligation to file for insolvency proceedings (exception: partnerships organized in a capitalistic structure, e.g. GmbH & Co. KG)
    • Accessory liability of the partners (Sec. 128 German Commercial Code; HGB); limited liability of the limited partner (Kommanditist); deposition of liability capital; capital maintenance; liability of partners for taxes (Sec. 191 German Revenue Code; AO)
    • Liability of the managing partner(s): for outstanding taxes (Sec. 34, 35 German Revenue Code, AO); tort liability, e.g. mandatory employee social security contributions (Sec. 823 para. 2 German Civil Code, BGB, in connection with Sec. 266a German Criminal Code, StgB)
    • Particularities for partnerships organized in a capitalistic structure (e.g. GmbH & Co.KG): liability of manager(s) for causing and/or delaying insolvency proceedings; Obligation to reimburse prohibited payments, Sec. 177a, 130a German Commercial Code; HGB); Capital maintenance (Sec. 30, 31 German Limited Liability Companies Code; GmbHG); Right to substitute personal partnership capital (newly drafted insolvency contestation pursuant to Sec. 135 German Insolvency Code, InsO concerning partner loans, Sec. 39 para. 1 Nr. 4 German Insolvency Code; InsO)

 

  • Determination of profits and taxation
    • Tax subject partnership: commercial tax, sales tax, mandatory tax declaration
    • Tax subject partner: income tax, share of profits of the partnership, partnership subject for determining profits; distribution among partners, profit sharing, ratio of distribution of profits; accounting for withdrawal of capital; deduction of deposited capital; possibilities for loss compensation; limited loss compensation in case of limited liability of a partner (Kommanditist), negative capital accounts
    • Taxation of non-withdrawn profits: tax benefits for non-withdrawn profits
    • Determination of revenue by means of cash method of accounting; principle of cash inflow and outflow
    • Operating costs, typical private expenses (privately incurred debt interests, cost for food, groceries and other provisions, private use of vehicles, legal expenses related to liability claims etc.)

 

  • Arbitration agreements/Arbitration clauses/Arbitral jurisdiction
    • Arbitration claims
    • Defense on the grounds of arbitration clauses or agreements during regular court procedures
    • Court action in front of general jurisdiction courts for advance payment for arbitration procedure
    • Court procedure to designate arbitrators in front of German Higher Regional Courts (Oberlandesgericht)

 

Limited Liability Companies (GmbH) and small and medium sized Public Companies Limited by Shares (AG):

German corporate law is a broad and highly complex field. This is best illustrated by the example of the German limited liability company (GmbH). According to the applicable laws strict formal requirements must be met; for instance regarding the holding of a shareholders' meeting (e.g. due notice of the shareholders' meeting), the (obligation) to legally contest illicit shareholders' resolutions, or regarding the effective transfer of shares. Also, the liability of the manager is a central aspect of legal provisions regarding the GmbH. In contrast to partnerships, where partners are subject to extensive liability according to the law, the main subject of liability in the GmbH is the manager. The law provides for extensive liability of the manager towards the company yet also in some cases towards creditors of the company (e.g. tax agencies). In the event of insolvency proceedings (excessive indebtedness and/or payment default) liability risks for managers are especially high. The inability to act swiftly and appropriately will quickly result in severe civil liability claims and criminal charges. At this point -at the very latest- professional legal advice is indispensable (also see our areas of expertise Insolvency and restructuring, tax law and corporate criminal law).

 

Our areas of action are virtually always located in following categories:

 

  • Shareholders Meeting:
    • Due notification/ Convocation: no untimeliness; generally held at registered office of the company; observing provisions in bylaws; observing period of notice; formalities of notice
    • Supervision / administration / taking protocol
    • Right to be present, proxy (generally by persons with professional obligations of discretion), attendance of third parties
    • Passing resolutions: rendering votes, weighting of votes, declaration of resolution
    • Minutes
    • Observing majority requirements; quorum
    • admissible / inadmissible binding of votes

 

  • Deficient shareholders' resolutions:
    • Especially formal errors: regarding notice of shareholder meeting, administration of the shareholders meeting, passing resolutions, infringement of right to participate, erroneous weighting of votes, non-observance of voting interdiction etc.
    • Other errors: non-existence of requirements for redemption; no grounds for exclusion; non-observance of qualified majorities, inadequate remuneration of managers; deficient yearly statements; deficient appropriation of profits etc.; Authorization of special representatives
    • Court action to assert invalidity of shareholder resolution
    • Court action against illegal shareholder resolution
    • Interlocutory injunctions: injunction against passing resolution (problem of infringement of opinion finding process); interdiction of implementing resolution; injunction against slanderous statements
    • Action for confirmation of resolutions in the event of refusal to pass resolution and/or illegal resolutions (problem of infringement of opinion finding process)

 

  • Disputes between shareholders
    • Minority shareholders; protection by means of unanimity clause; protection by means of qualified majority clause; enforcement by action to assert invalidity or action for annulment
    • Dispute regarding appropriation of profits; Drying up of minority shareholder by retention of profits (accumulated profit, retained profits, building reserves); proper consideration of interests
    • Enforcement of profit claims (right to claim profits, declaration of annual results, declaration of yearly statements, annual surplus, resolution of profit appropriation)
    • Embezzlement of company profits; liability and returning embezzled company property; cease of existence and cold liquidation of the company(what to do?)
    • Due confiscation of shares for just cause; exclusion of shareholders; what to do?: interlocutory injunction against faits accomplis, action to assert invalidity or action for annulment
    • Dismissal of managing shareholder from his function as manager for just cause: violation of obligation to respect due business diligence (Sorgfalt eines ordentlichen Kaufmanns)
    • Action to positively declare and validate resolution in cases of refusal;
    • Appropriation of profits in bylaws; Deviation from legal general principles (return to the prohibition of integral distribution of profits); sustained obstruction of distribution of profits;
    • Claims for damages for illegal forfeiture of shares; illegal transfer of shares; illegal de facto transfer of the companies' business to competitors; illegally causing impossibility to distribute profits
    • Illegal enticement of personnel and clients; Continued employment in competing spin-off company
    • Access and information rights; enforcement by court order against company;
    • Authorization of special representation for legal actions of the company; enforcement of company claims (actio pro socio)

  

  • Liability of mangers:
    • Offense: cease of existence and cold liquidation of the company; embezzlement of company property, unauthorized withdrawal of funds by managing shareholder (remuneration, loans etc.); Violation of obligations from manager contract; violation of violations as company organ; violation of obligation to respect due business diligence (Sec. 43 German Limited Liability Company Code, GmbHG); if applicable piercing of corporate veil due to an intervention destroying company against manager (Sec. 826 German Civil Code, BGB; general procedure: action against company and then seizure and transfer of claims against manager)
    • Defense: against liability because of delay to declare insolvency (especially Sec. 64 German Limited Liability Company Code, GmbHG);  violation of mandatory laws regarding maintenance of capital; excessive indebtedness (not covered by capital) according to financial and insolvency regulations (taking into account reserves, qualified subordination agreements; debt waivers); inability to pay; obligation to file for insolvency; 
    • Criminal liability: tax fraud (Sec. 370 German Revenue Code, AO); withholding and embezzlement of employee benefits (Sec. 266a German Criminal Code, StGB); collision of obligations; criminally liable bankruptcy, preferential treatment of debtors or creditors (Sec. 283 et seq German Criminal Code, StGB)
    • proper preparation and publication of yearly statements; accounting fraud; accounting principles; fining and criminal laws Sec. 331 et seq German Commercial Code, HGB
    • Liability towards tax agency during insolvency: procedure against notification of liability; damage quota regarding turnover tax; problem regarding payment of tax on wages (obligation to reduce employee wages); collision of obligations 

 

  • Maintenance of and depositing capital
    • Enforcing claims for primary capital deposits, violation of or disbursement of capital against mandatory capital maintenance regulations (Sec. 30 and 31 German Limited Liability Companies Code, GmbHG)
    • Enforcing claims claims against shareholders; legal action against shareholders in the name of the company; legal enforcement, seizure and liquidation of shares

 

vice versa:

 

  • Enforcement of payable claims of shareholders against company, court action and legal enforcement; filing for insolvency by third parties due to payment default and unsuccessful seizure
  • (forced) forfeiture of shares:
  • Perishing of shares; taking into account of key capital figures
  • Confiscation for just cause; provisions in bylaws
  • ultima ratio
  • Action to assert invalidity or action for annulment   
  • Time limit for court action
  • Loss of shareholder rights (participation rights, voting rights etc.)
  • Settlement payments: provisions in bylaws; Settlement payments do not constitute prerequisite for confiscation of shares according to new decision of the German Federal Court (BGH)

 

  • Purchase/ Sale/ Transfer of shares:
    • Mandatory formalities (notarial documentation; possibility of healing lack of mandatory formalities);
    • Restricting transferability of shares (required approval of company, shareholders)
    • Preemptive rights for shareholders to purchase shares (preventing third parties to influence or enter company)
    • Dividend rights or respectively re-assignment of profit entitlements from past financial years; claims for damages from obstructing distribution of profits from previous financial years
    • Valuation of shares (net asset value, goodwill, earning capacity value, or other)
    • Escrow agreements concerning shares: respecting the required formalities, conditions precedent for transfer of shares, approval requirements

 

  • Defending company against tax agencies
    • Business transactions with connection to foreign countries (Problem payment of sales taxes in foreign countries)
    • Problem of recognition of cash transactions in foreign countries (Spain, Greece, Italy)
    • Dispute with customs and tax agencies and tax investigators
    • Accusation of hidden profit distribution
    • Special taxation due to type of business (e.g. liquor tax, entertainment tax)
    • Recognition of operating costs
    • Support during audits; counteracting estimates
    • Communication with tax agencies
    • Procedure of objection
    • Action at fiscal courts; interlocutory injunctions: suspension of enforcement
    • Defense against liability; action against liability claims
    • Arbitration clause/ Arbitration agreements
    • Possibility of action to assert invalidity or action for annulment to be subject to arbitration
    • Interlocutory injunctions by public courts despite arbitration clause (effective legal protection; prevention of loss of rights by faits accomplish)

 

 

 

 

 

 

 Leander J. Gast Attorneys at law

Berlin: Schumannstr. 18 | 10117 Berlin-Mitte | Phone: 030 240 47 66 | Fax: 030 240 476 71

Hamburg - since June 2013: Neuer Wall 10 | Ecke Jungfernstieg | 20354 Hamburg

Fon: 040 822 15 - 31 03 | Fax: 040 822 15 - 34 91

 

Mail: office@leanderjgast.de