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In March of this year, the German Parliament and Federal Council ratified two major pieces of legislation which have since been promulgated and taken effect. The Law on Corporate Control and Transparency (Gesetz zur Kontrolle und Transparenz im Unternehmensbereich - KonTraG) makes extensive changes primarily in the provisions of the Stock Corporation Act (Aktiengesetz) to improve corporate accountability. This bill also liberalises the provisions relating to the issuance of stock options to senior executives and other employees. Certain of the new provisions may be applicable by analogy to limited liability companies. Most provisions either take immediate effect or apply to fiscal years beginning in or after 1999.
The Law to Facilitate the Raising of Capital (Kapitalaufnahmeerleichterungsgesetz - KapAEG) permits German corporations to prepare their year-end consolidated financial statements according to U.S. GAAP or International Accounting Standards (IAS) and makes other changes in accounting law intended to address the needs of modern multinational enterprises.
Neither bill modifies the tax laws, but both will be of considerable interest to foreign-based corporate groups operating in Germany. Selected highlights of the new legislation are noted below.
1. Law on Corporate Control and Transparency
1.1 Management must implement a risk monitoring and management system designed to give timely warning of developments which could threaten the existence of the corporation or, in the case of parent companies, the corporate group (sec. 91 (2) AktG). Application by analogy to large limited liability companies appears likely. The year-end financial statements must contain management's assessment of future risks facing the corporation (sec. 289 (1) and 315 (1) HGB). The auditor is required to evaluate this assessment and the quality of the risk management system (sec. 317 (2), 321 (4) and 322 (3) HGB).
1.2 The notes to the financial statements must disclose information on stock option plans, including the number of options outstanding. Stock options issued to members of the board of management and the supervisory board must be disclosed, as must, for publicly traded companies, the positions held by such persons on the supervisory or oversight boards of other corporations (sec. 160 (1) no. 5, 285 nos. 9a and 10, 125 (1) sent 3 HGB).
1.3 The issuance to corporate and group employees of so-called "naked options" for purchase of corporate stock is permitted for the first time (sec. 192 (2) AktG). Previously, a German corporation could only issue options on its own stock to its management and employees as an accessory feature of corporate debt (convertible bonds or option bonds). The issuance of options attached to bonds required shareholder approval (contingent increase in capital). Now, the shareholders may also authorise management to issue pure stock options without the complications caused by embedding such options in a debt instrument. The authorising resolution may exclude shareholder pre-emptive rights. A 10 % limit applies (par value of the options compared to par value of stock outstanding at the time of the shareholder resolution). There are various disclosure obligations. The shareholder resolution must specify planned allocation of options among members of management and employees, the objectives of the stock option plan, the periods of time during which options can be acquired and exercised, and the waiting period after acquisition for exercise of an option. The minimal waiting period is two years .
1.4 The supervisory board of parent companies within the meaning of sec. 290 Commercial Code is charged with examining the consolidated group financial statements and group situation report (sec. 171 (2) sent. 2 AktG). Previously, its responsibility was limited to the financial statements and situation report of the parent corporation itself.
1.5 The supervisory board will in the future commission the outside auditor (sec. 111 (2) AktG). For parent companies, this includes the outside auditor for the consolidated group. This is expected to give the supervisory board authority over auditor fees as well.
1.6 Section 100 AktG restricts service by certain persons as members of the supervisory boards of German stock corporations. In particular, the same person is not permitted to serve on more than 10 different supervisory boards (10 position limit). However, service by a legal representative of the parent company of a consolidated group on the supervisory boards of up to 5 group companies is not counted for purposes of this person's personal limit (consolidated group exception). The law (sec. 100 (2) AktG) is amended to provide that service as the chairman of a supervisory board will count double towards the 10 position limit. Since the consolidated group exception has not been changed, double counting will not apply to positions falling under this exception.
1.7 Various changes are made in provisions affecting shareholder voting rights (maximum voting rights, multiple voting rights, limitations on voting rights).
1.8 Minority shareholders holding 1/20th of a corporation's stock or stock with par value of DM 1 million or more can under certain conditions secure court appointment of special representatives to probe management misconduct or special auditors to investigate alleged misuse of influence by a controlling enterprise (sec. 147 (3) sent 3 and sec. 315 sent. 2 AktG).
1.9 Restrictions are relaxed on acquisition by a corporation of up to 10 % of its own shares by par value (sec. 71 (1) no. 8 and (3) and sec. 71d AktG).
1.10 Starting with fiscal years beginning in 2002 or thereafter, an outside auditing company is not qualified to audit a corporation if the fees derived from the audit client exceed 30 % of its total income (previous limit 50 % - sec. 319 (2) no. 8 HGB). Furthermore, the same individual auditor may not sign the audit report of an officially listed corporation if he or she has done so six times in the last ten years (sec. 319 (2) no. 9 and (3) no. 6 HGB). Official listing (amtliche Notierung) is one of three types of German stock exchange listing. In addition, stock corporations have the options of listing their stock for trading on the regulated market (geregelter Markt) or on the so-called new market (neuer Markt). The listing and disclosure requirements differ for each segment.
1.11 The outside auditor is in the future required to attend plenary or committee meetings of the supervisory board which deal with the year-end financial statements and to report on his or her findings (sec. 171 (1) sent. 2 AktG). It is at present not clear whether the supervisory board can release the auditor from this obligation. Since the new statute contains no express provision on point, it would for the time being appear prudent to assume that such dispensation is not permissible.
1.12 The statutory liability limits for auditors and persons involved in the audit are increased from DM 500,000 to DM 2 million. This limit is further increased to DM 8 million for audits of publicly traded stock corporations with officially listed stock (sec. 323 (2) sent. 2 HGB).
2. Law to Facilitate the Raising of Capital
2.1 German publicly traded corporations which are the parent corporation of a consolidated group may elect to prepare their consolidated financial statements according to internationally accepted accounting principles (essentially, U.S. GAAP or IAS) instead of German GAAP starting, in many cases, with the first financial statements prepared after the law takes effect. The election is subject to certain conditions and at present limited to fiscal years ending on or before 31 December 2004 (sec. 292a (2) HGB).
2.2 Furthermore, German subsidiaries belonging to consolidated groups can be exempted from the requirement of preparing their own financial statements with the consent of all shareholders provided the parent corporation has agreed to assume any losses generated by the subsidiary. Accounting and disclosure for the subsidiary must occur under group consolidated financial statements. The tax accounting of the subsidiary will, however, continue to follow German GAAP, as modified by specific German tax accounting rules (sec. 264 (3) HGB).
2.3 The new law provides that the provisions of the law on limited liability companies on equity substitute loans (sec. 32 (3) GmbHG - see in general article no. 17) shall not apply with respect to GmbH shareholders holding 10 % or less of the company's stated capital provided they are not members of its management. Furthermore, a related amendment in the Law on Corporate Control and Transparency provides that existing or newly granted loans are also exempted from treatment as substitute equity if the lender acquires shares in the GmbH for the purpose of aiding it in overcoming a financial crisis.
Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.