GERMAN M&A AND PRIVATE EQUITY NEWS - 4TH QUARTER 2010
So-called shelf companies are frequently used in connection with various corporate transactions. These shelf companies are typically incorporated by commercial service providers but are not initially involved in any entrepreneurial activities. Participants in a transaction, instead of newly establishing a company, may purchase all of the shares in a dormant shelf company from the service provider. Further, the sale and use of a company that had formerly been operative but has ceased to do business (a so-called shell company) in lieu of liquidation are of practical relevance. Acquiring a shelf or shell company is often faster than incorporating a company but also involves certain risks. In case a shell company is used, there is a particular risk that the purchaser of the shares will be responsible for any outstanding capital contributions that should have been paid in by its predecessor in title. In addition, there is also a risk to the purchaser that the seller is not in fact authorized to sell the shares in the company.
On November 1, 2008, the German Act to Modernize the Law Governing Private Limited Companies and to Combat Abuses (commonly referred to as the "MoMiG") came into effect. The changes relating to the laws governing limited liability companies ("GmbHs") introduced by the MoMiG also affect the purchase of shelf or shell companies in several respects.
Notification of the Company With Respect to the Acquirer
Previously, only those persons notified to the company as such were recognized by the company as shareholders In connection with the purchase of a shelf company, the purchaser had to be registered as a shareholder with the company prior to being able to appoint its managing directors and make changes to its articles of association.
The new law no longer provides for such a notification requirement. The required registration of the new shareholder in the list of shareholders partly takes the place of the notification. Accordingly, vis-à-vis the company, only those persons who are included in the list of shareholders accepted by the commercial register are deemed to be shareholders. Such acceptance is deemed to have occurred when the list becomes available from such register online. If after the sale but prior to inclusion in the list of shareholders, the purchaser concludes any resolutions concerning the managing directors of the company or its articles of association, these resolutions are effective only if the purchaser is "promptly" included in the shareholder list after the date of the resolution. Accordingly, the purchaser bears the risk that its inclusion in the list of shareholders is not deemed to have been prompt or that delays due to other participants in the transaction (seller, notary, commercial register) are attributed to the purchaser. In connection with the purchase of a shelf company, it is therefore advisable that immediately prior to the sale of the shares, the measures that the purchaser wishes to implement be carried out by resolutions enacted by the seller.
Share Splits
Previously, shares could be split only in the context of a sale or an inheritance. A mere preparatory split or a split for financing purposes was not permissible. In order to be valid, a split had to receive the approval of the company. Under the new law, a preparatory split or a split for financing purposes is now permitted and no longer requires the consent of the company, although a resolution of the shareholders is required. The new rules simplify the deal structuring in connection with the purchase of a shelf company when various parties are involved on the purchaser's side. Size and number of shares can now easily be tailored to the desired acquisition structure.
Good-Faith Purchase of the Shelf or Shell Company
Under previous law, a share could be validly transferred only by its legal owner, and there was no protection available to a good-faith purchaser against transfer of ownership from a person who was not the rightful owner of the shares. In the case of shelf companies sold by professional providers, this was routinely not an issue. The risk in case of the purchase of a shell company was higher, however, since the shares were potentially subject to a number of previous share transfers, and therefore the purchaser could not be certain that the seller was actually able to transfer ownership of the company to the purchaser. The MoMiG now provides for a share transfer by a person who is not a shareholder to a good-faith purchaser if: (i) the seller is identified as a shareholder in the list of shareholders, and (ii) such list has been incorrect for not less than three years from the date of the purchase or the incorrectness is attributable to the true shareholder. As discussed in a previous edition of this newsletter, this new provision has also raised a number of issues. For instance, the purchaser bears the risk that the shares are encumbered by third-party rights, particularly pledges, since a good-faith purchase free from encumbrances is not possible according to the new law. In addition, the purchaser may not simply rely on the contents of the shareholder list; the list does not have official bona fide status as would an extract from the land registry. The determining fact is the period during which the list has been incorrect, which often cannot be definitively ascertained. Therefore, even a 10-year-old shareholder list could have become incorrect in the last three years. In light of the fact that the good-faith protection provided by the MoMiG is incomplete, a shell purchase remains risky and should be considered only under special circumstances, e.g., in the case of purchases of companies within a company group where the shareholding history can be sufficiently determined.
Determination of the New Corporate Purpose
An important step in the sale of a shell or shelf company is the change of the corporate purpose of such company. Under previous law, the new corporate purpose, if it required governmental authorization (e.g., a banking or real-estate agent's license), could be registered in the commercial register only if such official authorization had already been obtained. Under the new law, this requirement has been abolished. If the purchaser wants to conduct business that requires a license, the purchaser can obtain registration of the new corporate purpose prior to receiving official approval. In many cases, however, applicable regulatory laws regard the registration as commencing business operations. Therefore, in order to avoid the risk of illegally commencing business operations prior to obtaining a license, purchasers should generally continue to register the new corporate purpose only after receiving the relevant license.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
