Germany: The Draft Bill On International Corporate Law

Last Updated: 15 October 2008
Article by Benjamin Wille

The internationalization of German corporate law is moving forward. In addition to the traditional business entities of German corporate law, further corporate forms are available for companies to use today. These include forms available under the law of the European Union, such as the European Association and the Societas Europaea, and those available under the laws of the other EU Member States, such as the limited company under English law. Since April 2007, German companies have had the choice of merging with companies that are incorporated pursuant to the laws of other Member States. Recently, the Federal Ministry of Justice presented its first draft bill on the Law Applicable to Companies, Associations, and Legal Persons (hereinafter, the "Draft Bill"), which represents a further step in this direction. Thus, in the future it will be possible to operate foreign subsidiaries using the legal form of the German limited liability company.

Background

Under traditional principles of German law, a company can be domiciled only in the legal system pursuant to which it was formed. Should a German limited liability company be transferred to a foreign country, the resolution of the shareholders to this effect would be construed as a resolution to liquidate the company. Conversely, German corporate law would apply to foreign companies that transfer their headquarters to Germany. If an English limited company were moved to Germany, German courts would then alternatively apply the law of partnerships due to the apparent noncompliance with German limited liability law—with serious consequences for the liability of the company's shareholders and managers.

In various decisions handed down between 2003 and 2005, the European Court of Justice clarified that in the case of relocation of foreign companies, such companies enjoy the protections of the European freedom of establishment and consequently continue to be subject to the corporate law under which they were incorporated. Since then, a number of companies became domiciled in Germany while being organized in the form of an English limited company.

However, in the case of the relocation of a German company to a foreign country, the traditional legal principles remained applicable. A German limited liability company, therefore, still has to be domiciled within Germany.

Applicable Corporate Law

The Draft Bill now provides that companies, associations, and legal persons under civil law are subject to the law of the state in which they are registered in a public register. With respect to companies from other European countries, the principles set forth by the European Court of Justice will therefore be incorporated into German law. However, the proposed rule goes beyond this: on the one hand, the rule is not limited to companies from other countries in Europe such that in the future, companies that are domiciled in countries outside the European Economic Area can transfer their seats to Germany. This is the case, as commentators accurately point out, "for refreshment stands in Bochum Wattenscheid just as well as for GAZPROM Germania domiciled in Berlin as the subsidiary of a foreign company. Both may in future be operated as companies under Russian law."

On the other hand, the rule will also permit German companies to move out of Germany without resulting in their liquidation. Henceforth it will be possible for a German company to uniformly organize its foreign subsidiaries in the form of a German limited liability company. Parallel changes to the German limited liability company law are planned in the course of the reform of this area of law, which is currently underway.

However, the ongoing applicability of the law of the state in which the company was incorporated is limited to corporate matters. In particular, in the case of insolvency, the law of the company's administrative seat will continue to apply (under certain circumstances). The same is the case for tortious conduct of the company or its corporate bodies.

Change-of-Corporate-Form Cases

The Draft Bill further provides that the requirements, process, and effects of a restructuring via merger, split-off, asset transfer, or change in corporate form for each of the entities involved in such measures are subject to the laws of the states in which they are registered in a public register. For example, in accordance with this rule, in the case of the merger of a Dutch B.V. into a German limited liability company, the B.V. would be subject to the Dutch merger law, while the German limited liability company would be subject to the relevant provisions of the German Reorganization of Companies Act.

This rule will fundamentally make legal practice easier, since the theoretical argument regarding which law applies to corporate reorganizations will become moot. Initially, however, the direct effect of the new rule will be limited, since the new rule only represents a standard to apply when determining which substantive law is applicable in the event of the conflict of two opposing rules. Procedural rules, including rules regarding the dovetailing of the two legal systems that are to be applied, are not included in the Draft Bill. If one of the applicable laws does not address the prerequisites to and the process for cross-border reorganizations, the legal uncertainty will remain. An example of this is in Sections 122a et seq. of the German Reorganization of Companies Act, which addresses the process of cross-border mergers of corporations. Types of reorganizations other than the merger of corporations are still not addressed, however; in particular, there are no rules for partnerships. This will not be changed by implementation of the Draft Bill.

Cross-Border Change in Corporate Form

A further fundamental reform in the Draft Bill is the ability of a company to be subject to the law of another country while preserving its own identity. This can be deemed a crossborder change in corporate form. For example, according to a press release of the Federal Ministry of Justice, it will become possible for a German limited liability company to transfer its corporate seat to France by registering with the relevant commercial register in France as a S.à.r.l. and deleting its registration in the German commercial register. The Ministry, however, has overlooked the fact that according to the text of the Draft Bill, "the previous as well as the new law to be applied allows a change in corporate form without liquidation and new incorporation." According to prevailing opinion in German jurisprudence, this is not an option for a German company. For this reason, the Draft Bill needs to provide for additional changes to the law currently in effect in order to fulfill the purpose expressed in the Ministry's press release. The foundation for a cross-border change in corporate form was laid in the current text of the Draft Bill, but such a change in corporate form has not been achieved.

Conclusion

The Draft Bill represents a further step in the internationalization of German corporate law following the implementation of the merger directive. The link to the site of the registration in a public register increases legal certainty in international commercial transactions. Beyond this, however, the Draft Bill will not result in any changes in practice, since for the most part, only questions of the law to be applied have been settled and the Draft Bill does not contain any procedural solutions addressing cross-border issues. It therefore remains to be seen whether and how unaddressed legal issues will be handled in further legislative steps. Since German international conflict-of-law rules apply only in Germany, it is certainly desirable to have uniformity within Europe of the rules included in the Draft Bill.

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.

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