Germany: Bona Fide Transfers Of GmbH Shares Under The MoMiG

Last Updated: 13 October 2008
Article by Marc O. Peisert

In the context of the transfer of interests in a German limited liability company, a bona fide purchase of the shares from a seller owning such interests was not possible. In contrast to the purchase of real property or movable goods, the purchaser's good-faith belief in the ownership of the would-be seller was not protected. The purchaser therefore could not obtain ownership rights over the shares. Although the purchaser in an M&A transaction typically receives broad warranties that at least cover financial damages, these seldom compensate for the full commercial damages of a failed transaction.

The MoMiG now provides for a bona fide purchase of shares in a GmbH; this means that the effective acquisition of shares from a nonowner will be possible in the future. The good faith required to make such a bona fide purchase will now be based on the shareholder information contained in the shareholder list that has to be submitted to the commercial register. This shareholder list had previously served as an information source for the shareholdings in the GmbH, but due to the lax provisions on submitting such a document, it was inadequate as a basis for a finding of good faith. In order to increase the reliability of the shareholder list, the MoMiG has now tightened the provisions requiring its submission. Notaries that are involved in transactions made by notarial deed in which the shareholders change (such as the transfer of shares via notarial deed) now have the obligation to submit the shareholder list to the commercial register. In addition, the liability of the managing directors, who must submit the shareholder list in all other cases, is exposed in the case of nonsubmittal

Despite these safeguarding measures, the reliability of the shareholder list is limited. The accuracy of the shareholdings according to the shareholder list is not examined by the commercial register. Also, if the transfer is subject to a condition precedent (such as approval by the competition authorities), the notary recording the conditional transfer is not obligated to keep informed about whether the condition has been satisfied, nor to submit the shareholder list at that time; this continues to be the obligation of the managing director of the company. Further, the legislature decided against requiring notarial certification of the signature of the managing director submitting the application; therefore, it is possible that falsified shareholder lists will be submitted. Due to these loopholes, the legislature decided that the list should not have a full and immediate impact on the finding of good faith and instead introduced a step-by-step system.

Time Limitations

The intensity of the protections provided by the MoMiG is determined by how long the shareholder list was inaccurate at the time of the transfer. The shareholder list can be inaccurate for two reasons: it can be inaccurate at the outset, such as when the submitted list is inconsistent with the actual shareholdings of the company, or it can become inaccurate later, if the shareholdings change without submission of a new list.

If the list was inaccurate for a period of more than three years at the time of transfer, the purchaser is required only to demonstrate good faith. "Good faith" means that the purchaser may not have had knowledge of the inaccuracy of the shareholder list or was not grossly negligent in lacking such knowledge. If the shareholder list was inaccurate for a period of less than three years, in addition to the good faith of the purchaser, the inaccuracy of the list must be able to be imputed to the true owner of the shares. This is the case, for instance, when the true owner affirms the inaccuracy of the shareholder list or, despite knowledge to the contrary, does not object to the inaccuracy of the shareholder list.

Independent of the length of time that the shareholder list is inaccurate, the purchaser cannot obtain the shares from the person not authorized to sell them if an objection as to the inaccuracy of the list is entered with the commercial register. Such entry is possible either with the consent of the person authorized to sell the shares according to the shareholder list or on the basis of an interim judicial order. If an objection is incorrectly entered, it remains possible to purchase the shares from the actual owner set forth in the shareholder list. However, in such a case, due to the fact that no bona fide transfer will be possible, the purported ownership should be verified with the utmost diligence.

Limits on Bona Fide Transfers

The scope of the good-faith protection is limited. First, good faith applies only in the case of shares that actually exist; there is no good-faith creation of a nonexistent share. Further, good-faith protection does not extend to existing encumbrances such as pledges or easements; a bona fide purchase extinguishing prior liens as under the law of real property based on the land register is therefore not possible. Good faith is also not sufficient to override provisions restricting transferability that may be found in the company's articles of association—in this context, the consent of the shareholder remains necessary.

A further disadvantage for the purchaser in the future is in the case of transfers subject to a condition precedent. Here, subsequent disposals of the shares vis-à-vis the first purchaser had been invalid (Section 161, paragraph 1, of the German Civil Code). According to Section 161, paragraph 3, of the German Civil Code, the provisions relating to good faith will now apply so that in the case of a subsequent transfer during the time that the condition precedent has not yet been satisfied, the second good-faith purchaser can obtain ownership of the shares. A corresponding protective mechanism, as under real property law, in the form of priority notice in the commercial register to safeguard the first purchaser's claim has not been created by the legislature. Alone, the registration of an objection by mutual consent could be of assistance here; however, the shareholder list is not inaccurate until the condition is satisfied so that the objection would, in fact, be unfounded in substance. It remains to be seen how this gap is closed in practice; it is possible that the legislature will propose further amendments.

Effects on Due Diligence and Contractual Documentation

For the M&A practitioner, the question arises as to the practical effects of the new rules in carrying out M&A transactions. In the context of M&A due diligence, one is faced with a dilemma: on the one hand, the length of time that the list is inaccurate determines the level of protection afforded to the purchaser, so that in theory, a positive determination of the point in time at which the shareholder list became inaccurate is necessary. At the same time, however, the positive determination of the inaccuracy would destroy good faith. Too much knowledge can therefore be harmful. This means, in practice, that if a shareholder list is more than three years old, transfers of shares prior to that time can be disregarded, although it will still be necessary to ascertain whether there have been any subsequent transfers of shares.

A related practical question is whether failing to conduct any due diligence whatsoever is to be considered grossly negligent per se, with the consequence that no bona fide transfer is possible. The question has to be answered in the negative, since the purpose of the good-faith transfer would otherwise be defeated—an innocent purchaser is exactly the one who should be protected here. However, due to the loopholes discussed previously, there is a danger that the transfer would fail on the grounds identified above, in which the protections of good faith do not apply (nonexisting shares, restrictions on transferability). To this extent, the liability of the management of the purchaser is still possible, due to the lack or insufficiency of due diligence.

While the new rules apply to companies that are incorporated after the effective date of the new law, the law provides for a transitional period for existing companies so that the full protections of good faith apply, at the earliest, three years after the reform takes effect. In order to avoid complications, companies with interests in GmbHs should utilize this transitional period to ensure that they are registered as shareholders in the respective shareholder list; in addition, in the subsequent period, regular checks of the shareholder list should be made for compliance reasons.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions