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Corporate law in Germany
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Articles of association of a German limited company (GmbH)
If foreign companies are involved in a German GmbH, their status under company law is determined according to German law. The German GmbH Act regulates the formation of the company, the legal relations of the company and the shareholders, the representation and the management of the company and the capitalisation and appropriation of profits in the German GmbH.
As the German GmbH Act generally allows deviations from the statutory provisions the memorandum and articles of association of the German GmbH play a key role in this context. The drafting of the GmbH agreement is of decisive importance for the relationship of a foreign shareholder of a German GmbH to another shareholder, . Also, the relationship to the management of the German GmbH can be shaped via the GmbH agreement. A close look at the individual regulation options for foreign shareholders of a German GmbH is particularly important. In the following we will show which areas of regulation are especially relevant.
Appropriation of earnings
Section 29 of the GmbH Act provides:
The shareholders have a claim to the annual surplus of the company. Unless the articles of association provide otherwise, the shareholders may allot the amounts to retained earnings or carry them forward as profit on the basis of a resolution to appropriate earnings. The profit shall be distributed in proportion to the shares. The articles of association may stipulate another criterion for distribution.
In practice, deviations from these regulations are often necessary. In order to avoid disputes about the appropriation of profits, deviations from the statutory provisions are made at various points, depending on the situation of the company. If a minority shareholder is to be protected, for example, a minimum distribution is provided for in the GmbH articles. Conversely, in order to strengthen the position of individual shareholders, it can be provided that the resolution on the appropriation of profits can only be passed with a qualified majority. Finally, an obligation to form reserves can be provided for in order to strengthen the company’s capital.
For the correct drafting of the GmbH articles, the interests of the individual shareholders and the company must be carefully assessed. A good balance of interests can prevent a shareholder dispute or a dispute between shareholder and managing director, which in the worst case could threaten the existence of the company.
The company’s share capital must amount to no less than EUR 25,000.00. The company assets alone shall serve to discharge the company’s obligations vis-à-vis its creditors. The organs of the GmbH are the shareholders‘ meeting and the management. In addition, a supervisory board or an advisory board may be established.
Sale and acquisition of shares in a German limited company (GmbH)
According to the GmbH Act, shares in a German GmbH are in principle freely disposable. In practice, the shareholders usually restrict the possibility of freely disposing of shares in the articles of association. Without a restriction, the shareholders would have no possibility to oppose an exchange of shareholders. Unpopular shareholders or even competing companies could buy into the company.
In practice, there are numerous possibilities for structuring a change of shareholders. The focus is on balancing the interests of the shareholder wishing to leave and the interests of the shareholder remaining in the company. For example, pre-emptive rights of the remaining shareholder can be agreed. The sale of the shares to a third party is then only possible if the remaining shareholder has not exercised his pre-emptive right. The regulation of the purchase price at which the pre-emptive right is exercised is very important in this context. The purchase price agreed with the third party can be used as a basis, but a different valuation of the shares, for example by an expert, can also be agreed.
Termination of the shareholder of a German limited company (GmbH)
According to the German GmbH Act, ordinary termination of the company is not possible. However, it may be in the interests of the shareholders to grant individual or all shareholders the possibility of termination. In the end, this gives the terminating shareholder an instrument to force his co-partners to take over his shares in the company. This makes sense where the shares are difficult to sell. To protect the remaining shareholders, termination clauses must always contain a provision on the valuation of the shares of the terminating shareholder. Also, it should be provided that remaining shareholders may join in a termination if they have no interest in the continuation of the company without the terminating shareholder.
Redemption of shares in a German limited company (GmbH)
The possibility to collect shares in a German GmbH is often relevant if a shareholder is to be excluded from the company against his will. The German GmbH Act provides that collection of shares is only possible if it is permitted in the articles of association. In principle, the possibility of collection of shares should be provided for in the articles of association in order to protect the company. At least in the event that the shareholder concerned behaves in a manner highly detrimental to the company, the other shareholders should have the possibility to exclude him from the company. The more concretely the reasons for the collection of shares are formulated, the more regulated the company’s dissolution can be. In this respect, the regulations must be formulated with such precision that they ideally help to pacify a dispute between the partners. Similarly, the collection of shares should be possible if enforcement by third parties of the shareholder’s shares is imminent. In this case, the executing third parties must be kept out of the company.
The provision regulation the collection of shares must be coupled with a provision for compensation to be paid to the shareholder who loses his shares. If the redemption is due to a gross misconduct, the compensation is significantly lower than in other cases in which the redemption is linked to objective criteria such as for example the age of the shareholder.
You like to learn more about the structuring options in articles of association of German limited liability companies? Get in touch with us! Our specialist lawyers for commercial and corporate law will advise you on all questions concerning the German limited liability company (GmbH) and its management.
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