Germany: Incorporations in Nevada - Legal advantages over incorporations in Germany

1. GENERAL REMARKS

Comparing the corporate law between the Federal Republic of Germany and the state of Nevada is only possible if we are aware of the legal framework around it;

Commercial law in Germany falls within the scope of federal lawmakers, whereas in the United States, it is a matter of the individual U.S. states. Consequently the "Aktiengesetz" is a federal law and the limits are set by the federal German constitution (Grundgesetz). In Nevada, we have to review the background both on the level of the U.S. Constitution and on the level of the Constitution of the state of Nevada. Of course we all know that a law concerning corporations can be subject to change by the lawmakers.

Nevertheless, for long-term planning, it is important for a businessman to know what limits are set by the constitutions that cannot be transgressed by the lawmakers. The most important question in this context is to what extent property is protected by the constitution.

The history of German constitutions is a history of one endurance test after the other;

In 1849, the first constitution was promulgated, known as the Frankfurt Constitution. The Frankfurt Constitutional Assembly did excellent legal work; however, they failed for practical political reasons.

In 1866, the North German Federation was founded, leaving out the states in the southern part of Germany, and in Austria.

In 1871, the first constitution was proclaimed and included the south German states.

After World War I, the so-called Weimar Constitution came into effect in 1919. This constitution recognized basic rights and protected property. It can be characterized as a liberal constitution, comparable to many elements of the U.S. Constitution.

Nevertheless, due to lack of both economic and political stability, the Weimar Constitution could only survive for a period of 14 years, until 1933. It is less than a coincidence that corporate law underwent a major change four years later in 1937.

After World War II, a new constitution was proclaimed on May 8. 1949, as the basic law of the Federal Republic of Germany. This constitution declares itself to be provisional--a unique statement for a constitutional assembly. This reservation was not made out of the intention to change the constitutional rights. It took into consideration the situation of two German states emerging as a consequence of events after World War II. With the constant changes of the territories of Germany in the past, it was fully justified to assume in 1949 that the duration of this new constitution would be limited.

The protection of property is regulated in the constitution in Article 14 as follows:

"The rights of ownership and of inheritance are guaranteed. Their content and limits shall be determined by law."Article 14 Section 2:

Shareholders have tested the constitution to find out how much protection the shareholder has. The Supreme Constitutional Court ruled in 1979 that the shareholders have to accept certain restrictions imposed by the Go-determination Act (BVerfG 50/290 = NJW 1979, 699). The Supreme Court came to the conclusion that the constitution does not give a particular guarantee for certain economic order. Within the framework of the basic rights of each individual, the German federal lawmaker is not prevented from issuing laws restricting economic freedom. It has to be said, however, that not every question of dispute arising out of the Go-determination Act has been tried in court. A substantial number of questions on the constitutionality of the Act still remains open today.

Even before the U.S. Supreme Court ruled in 1886 that states laws may not restrict corporations, the state of Nevada had already, in its constitution of 1864. devoted a whole article with ten sections to covering the protection of corporations. The legislature can pass only general laws for the formation of corporations. The constitution prohibits, in Article 8, Section 1, Nevada Constitution, explicitly passing special acts to limit corporate powers. The exception is that corporations created for municipal purposes may be subject to state legislation. This exception in the constitution, however, leaves no room for interpretations to broaden the scope of this constitutional rule. Should the state legislature originate new laws curbing the rights of corporations, it is justified to assume that such laws would be ruled unconstitutional by the Supreme Court of Nevada. The Supreme Court proved that to be the case as early a. in 1935, in a matter concerning the liability of shareholders, which will be discussed later.

Article 8 only laid down specific rights of a corporation. The general protection of property is guaranteed by Article 1. Section 1 ("acquiring. possessing and protecting property").

Just one year after the state constitution of Nevada was approved, the Nevada courts, stated clearly that the term "company" includes corporations (Gillig, Mott and Co. vs. Independent Gold and Silver Mining Co., 1 Nev 247, 1865).

The term "corporation" was defined more clearly in 1893. The corporation was considered to be an artificial person created by statute and is vested with the power and capacity to make contracts within the scope of the powers conferred upon it by the act of incorporation and by-laws which govern the corporation (Edwards vs. Carson Water Company, 21 Nev. 459, 31 Pac 381, 1893).

Again in 1918 the courts ruled that the legislature could not pass any special act in any manner to restrict corporate powers (City of Reno v. Reno Tracteon Company, 41 Nev. 405, 171 Pac 375).

The constitution of the state of Nevada not only provides for the utmost protection of the corporation, but also for very strong protection of property rights. This is equally important for a shareholder, for then and only then can he enjoy the rights of his shares in an unrestricted way. Property rights were considered so important that Article 1. Section 16 declares that foreigners who are residents of the state enjoy the same rights of property as native-born citizens. This clause ha. only been tested once in the courts, when a Chinese citizen tried to buy land. It was ruled that his citizenship did not disqualify him from purchasing land (Foot Ling vs. Preble. 18 Nev. 251, 2 Pac 754, 1884). Today, this decision of 1884 no longer has any practical importance, as it is uncontested that foreigners may buy property; consequently it is of no practical importance that Article 1. Section 16 was repealed in 1924 by a referendum. Nevertheless, the existence of this clause indicates the determination of the Nevada Constitutional Assembly to respect property rights by all means.

There are two more indications of a strong protection of private property:

1. Shares of stock are defined expressly in the Nevada Corporation Code as personal property (78.240 NRS). This leads directly to the protection under the constitution of Nevada.

2. The decisive test, however, is the question regarding the conditions under which a person can be deprived of his property. The Fifth Amendment of the U.S. Constitution requires that private property may not be taken for public use without just compensation. Basically. the Nevada constitution has this same regulation, with the following addendum;

The Constitutional Assembly got into a heavy legal battle over the question of whether the state constitution of Nevada was entitled to go beyond the wording of the U.S. Constitution. and if so, to what extent. Assembly Delegate Johnson took the view that Nevada had no right to go further and that merely giving a different wording of the U.S. Constitution was unnecessary (Official report of the debates and proceedings of the state of Nevada by Andrew J. Marsch, p. 60). Delegate DeLong was in favor of the proposed wording, although he admitted if there were a conflict between the two constitutions, then the U.S. Constitution would take precedence. Nevertheless, DeLong argued that the state constitution looks to legislation to give the proper scope of the laws. Then it should be ultimately a matter of the ruling of the Nevada Supreme Court as to whether a law were within the scope of the state constitution or not.

The constitutional protection of a corporation and its shareholders has never been a primary concern of German constitutions. No specific ruling can be found on the protection of corporations, not to mention the rights of shareholders. Property rights are accepted in principle; their scope, however. is not clear-cut.

Historically, the shareholders' position was weakened in 1937 because the position of the directors was strengthened. After World War II, the constitution was quick to stress the constant tension between possession of property and social responsibilities resulting from property possession. This tension, however, is not a new insight. It had been described in 1905 by John P. Davis throughout hundreds of pages in his book, Corporations, A Study of the Origin and Development of Great Business Combinations and of their Relation to the Authority of the State. This analysis of 1905 still has validity today. The task of a constitution is not to point out that there is a problem, but rather to show how the problem can be solved. The West German constitution undoubtedly gave guidelines by accepting the protection of private property. Due to historical and political experiences in the past, it prefers to leave the delimitations to the lawmakers and to the Federal Constitutional Court. There is nothing wrong with this principle, but it has the consequential impact on the question of private property that it leaves more room for interpretation than the Nevada constitution.

It is only logical that the position of shareholders underwent a rather dramatic change after the Go-determination Act was passed. The Federal Constitutional Court had ruled that this new law is within the scope of the constitution, which has been correct.

However, the top court only confirmed that the constitution has a flexible wording. So the German shareholder has to live with the following situation;

• Directors have had a relatively strong position since 1937.

• Shareholders have no right to vote in the election of directors. This is done by a supervisory board.

• In principal, the supervisory board is elected on equal terms by shareholders and employees of a company.

The legality of all those laws is not contested;

Within the framework of the German constitution, they are constitutional, and the complex procedure guarantees a number of safeguards.

Whether it is for good or bad, it has to be noted that the legal position of corporations and shareholders is more restricted than under U.S. law, and in particular to Nevada law. The possibility cannot be excluded that these rights will be subject to further restrictions.

The corporation in the state of Nevada can look back on an undisturbed existence, backed by an unchanged constitution, over a period of not less than 12O years. The Nevada constitution intentionally left out the "buts" and "ifs" in its treatment of the protection of private property. The only real problem for the State Assembly of Nevada was whether they could increase the protection of property in comparison with the U.S. constitution. When studying the wording of the Nevada constitution, it cannot be doubted that the protection of private property goes even beyond the protection of the U.S. constitution. This intent can be easily substantiated when reading about the motivations of the Assembly delegates and checking the final vote on this question. This still leaves open the question of whether Nevada was entitled to go beyond the protection of the U.S. Constitution.

One could argue that the definition of property could not differ on the federal level from that of the state level, if regulations on property were exclusively federal.

Such an assumption would be inconsistent at least when considering corporations: corporate law is a matter of state law. Before the Nevada constitution was passed, the U.S. had already ruled in 1833 that the Fifth Amendment of the U.S. Constitution restricted only the federal government, not the states (Baron v. Baltimore, 32 us 243 (1833)).

From that one has to conclude that the states have the constitutional right to limit or broaden basic rights at least in the case when they have the right of exclusive legislation.

A final interpretation may have still been in doubt when the Nevada Constitution was passed in 1864. However, since the 14th Amendment, Section 1, of the U.S. Constitution was passed and ratified by the state of Nevada, such doubts have ceased to exist. The 14th Amendment provided that no state shall deprive any person of property without due process of law. This amendment was passed by the U.S. Congress on June 13, 1866. The state of Nevada ratified this amendment on January 22, 1867. This amendment clearly defined the relationship between the federal level and the state level; in cases regarding property. the states were obliged to give utmost care to procedure if somebody were deprived of property. The amendment gives no indication of the scope of property; consequently this falls within the scope of the states. The state of Nevada had the choice to maintain the scope of the definition of property at the level of the Constitution, or below it. As the state of Nevada has made the decision to protect property more carefully than the Federal Constitution, the utmost legal protection of private property has become established law.

it goes without saying that the 14th Amendment applies to the states once adopted by them; consequently, the U.S. Supreme Court confirmed this legal view in 1897 (Chicago, Burlington & Quincy Railroad Co. v. Chicago, 166 US 776, 258 (1897)).

The courts are entitled as a general rule to review the question of whether the purpose of expropriation lies in the public domain or not. The courts are only prevented from reviewing the question of whether a purpose is a valid public one (Sidney H. Ash, Civil Rights and Responsibilities under the Constitution, p. 125).

1. Property rights of shareholders and corporations are better protected under the U.S. Constitution than under the Constitution of the Federal Republic of Germany.

2. Property rights are more safeguarded under the Nevada Constitution than under the U.S. Constitution.

3. Nevada lawmakers are more restricted than German lawmakers in regard to the possibility of subjecting corporation law to substantial changes in the future.