Gesellschaft mit beschränkter Haftung (GmbH)
1. German statutory law and functional commonality across Europe
The Gesellschaft mit beschränkter Haftung (GmbH), as created by German statutory law, is a form of organization specialized for the formation of closed (non-public; unlisted) firms. Its core attributes are: (i) legal personality, including authority to bind the firm to contracts and to bond those contracts with assets which are the property of the firm, as distinct from the firm’s owners; (ii) shared ownership by one or more contributors of capital (shareholders); (iii) shares, which are transferable (in principle) but not marketable in an organized securities exchange; (iv) contractual freedom (to a significant degree) as to the relationships among shareholders, and between shareholders and directors; (v) limited liability (of shareholders and directors). While the GmbH thus exhibits all of the canonical characteristics of the corporate form, its most distinct feature in practice has proven to be intra-firm contractual freedom: restrictions on share transfers and additional shareholders’ duties and rights rank among its most pronounced measures which are used to customize the statutory standard form contract to the needs of the empirically prevalent closely-held firm which has only a handful of shareholders, some or all of whom often belong to the same family.
In Germany, due to the permissiveness and flexibility of its legal infrastructure, the GmbH provides an extensive and attractive range of benefits which enable firm owners to implement tailor-made governance structures. This legal infrastructure is best characterized by its diverse functionality for both profit-earning and non-profit purposes and its adaptable governance rules which permit efficient solutions for small (single-member) firms and medium-sized (family-owned) businesses as well as for groups of companies, holding companies and public undertakings. The GmbH is neither specifically organized for the accumulation of capital through public offerings nor are its shares designed to warrant fungibility and marketability. It follows that investor protection is of less importance to the GmbH than it is to the Aktiengesellschaft (AG), and, therefore, essentially becomes a question of shareholder (minority) protection.
Further to this, and perhaps crucially, the GmbH differs from the AG in that contractual freedom (freedom of contract) for intra-firm relationships is the rule rather than the exception, whereas the AG in this respect is subject to laws which are mandatory. The most conspicuous example highlighting this difference is the implementation of direct shareholder management in a GmbH. Fittingly, a two-tier structure (management/supervisory board) is optional for the GmbH, unless the laws on worker co-determination explicitly require otherwise. The flip side of intra-firm contractual freedom is that the regulatory model of the AG nonetheless applies in principle, insofar as the underlying rationale for mandatory terms is based on ‘contracting failure’, ie informational asymmetries or externalities to the detriment of third-parties. The consequences are two-fold: first, while the law still stipulates a minimum capital requirement, it follows a more flexible approach towards both contribution and maintenance of capital. Secondly, with respect to creditor protection rules, including disclosure provisions and accounting principles, the law shows a stricter adherence to the regulatory model of the AG, allowing for only minor relaxations.
All EU Member States, and virtually all remaining European countries, have enacted at least one organizational statute to provide for the formation of firms with all of the aforementioned attributes (i)–(v); and the same applies to the EU legal order (European Private Company (Societas Europaea Privata)). Despite this basic commonality, major jurisdictions nevertheless differ in two respects: first, the relevant organizational law may be in the form of a corporation (private limited company (England and Wales)), or a partnership (Société à responsabilité limitée (according to the Code de commerce formally a sociéte de personnes, but due to various reforms substantively in a constant state of flux since 1966)), or may assume a hybrid character (German GmbH; Swiss GmbH). Secondly, some jurisdictions have, in addition to these special closed firm forms, either created quasi-corporate statutory forms (limited liability company) or rendered the existing (commercial) partnership law more permissive for the contractual stipulation of corporate-style elements (GmbH & Co KG/limited liability partnership). But notwithstanding these differences the functional commonality of organizational forms which are predominantly utilized for the formation and governance of closely-held firms makes for a striking observation in European comparative law. In this context, besides the autonomous development of the private limited company (private limited company (England and Wales)), German GmbH law has for many European legislatures served as a highly conducive model when conceptualizing the creation of a comparable form of organization, or reform thereof, as the case may be.
2. Brief history of the German GmbH
The GmbH, as introduced by Act of Law in 1892, came into existence as an ‘artificial product’ created without historical or comparative legal transplant. As the AG had become densely regulated by the mid-1880s following a multitude of fraudulent formation cases, many entrepreneurs with dealings in German colonies came to regard the AG as increasingly unsuited for their expanding purposes. They then united with other special-interest groups in lobbying for a more flexible legal form offering limited liability. Although a debated issue during political consultation 1888–91, the idea for a limited liability partnership was eventually jettisoned and replaced with a corporate form requiring less regulatory compliance than the AG. The general principle of this new legal form became ‘taking the middle ground’ between the ‘strictly private commercial partnerships’ and the AG ‘as the spearhead of public capitalism’. This conception was passed in the German Reichstag 21 March 1892 and entered into force 10 May 1892 (GmbH Act). In defiance of intermittent calls for reform (1909–14; 1939; 1969/73), the GmbH Act over the course of 100 years has never been subject to a complete revision, but only to a minor amendment in 1980. This amendment legalized single-member firms and further introduced minority shareholder information rights, thereby rooting a second aspect to the Act’s general principle: private ownership among equal contributors of capital and labour.
Still, however strongly the empirical prevalence of the closely-held firm may counsel for default rules providing a corresponding standard form contract, in many respects the GmbH Act has until present retained a corporate character. Perhaps the most important factor in the history of the GmbH has been, and continues to be, the development of the law through judicial interpretation against the backdrop of innovative contract drafting. In fulfilling this task judges have borrowed extensively from the law on the AG and the laws on partnerships, occasionally leading to over-regulation (distribution restrictions; equitable subordination) but mostly finding expedient compromises consistent with the general principles of the GmbH Act. The legislative overhaul of the GmbH Act in 2008 (MoMiG) therefore constitutes something of a paradigm shift in the history of the GmbH.
3. Legal reception of the German GmbH across Europe
Upon its introduction in Germany, the GmbH soon became a respected legal form for business enterprises, proven by a thousand-fold increase in start-ups, whereas many European countries demonstrated an observant but sceptical attitude. An early chapter in the book of the GmbH’s legal reception began during the first two decades of the 20th century when Portugal (1901), Austria (1906) and Poland (1919) created comparable legal forms of their own, by respective acts of law, and when Spain codified a longstanding judicial practice (1919). The height of legal reception of the GmbH then arrived when France legislated for a distinct legal form modelled after the GmbH (1925), generating a wave of similar legislation across most of continental Europe (Luxemburg 1933; Belgium 1935; Switzerland 1937; Italy 1942; Greece 1955). After the 1950s, more European jurisdictions followed suit creating special rules for closed firms: Ireland (1963) and the Netherlands (1971), each upon receiving membership in the EEC, and Denmark (1973), upon reform of its law on firms. The latest period of the German GmbH’s legal reception came about in numerous eastern European countries following the downfall of socialism in 1989/90.
4. Economic and legal practice in Germany and Europe
Since its introduction about 115 years ago, the GmbH in Germany has evolved to qualify as the typical form of organization employed by small and medium-sized businesses, both in the manufacturing and services sector. Estimates, based on tax figures, currently account for up to 975,000 firms, reflecting a slight upward trend since 2005. The economic and legal value of forms comparable to the German GmbH are similarly esteemed in the following countries: Denmark, the United Kingdom, Estonia, Finland, France, Latvia, Austria, Poland, Portugal, Spain; and similarly, yet to a lesser extent, Greece, Italy and the Netherlands. By comparison, an exceptional position is held by Switzerland, where the general corporate form is traditionally conceived to be so permissive and flexible as to attract most small and medium-sized businesses; however, the Swiss GmbH has recently been recognized as a ‘rising star’ in terms of absolute numbers.
5. Harmonization and regulatory competition across Europe
Apart from the functional commonality outlined above, general tendencies in the law on closed firms across Europe are not readily identifiable. Different countries in the past have taken, and at present continue to take, different approaches in order to conform their respective law to shifts in the general economic condition or changes in legal policy. In former socialist countries the dominant force has mainly been economic liberalization. Belgium and, initially, Italy have passed legislation under the banner of regulation while, by contrast, Germany, France, Portugal, Spain, the United Kingdom, and, now, Italy have recently enacted new laws under the banner of de-regulation. Nevertheless, the following two factors are invariably of general relevance to the law on closed firms across Europe:
a) Harmonization within the EU
Harmonization of the law on firms by means of a directive has mostly concentrated on public listed corporations. This is why Directive 89/667 is the only legislative act to prioritize the law on closed firms. In addition, the following directives apply in whole or in part, as the case may be, to national legislation on closed firms: 68/151 and 89/666 (company law); 78/669, 83/349, 84/253 (repealed), including 90/604, 90/605 and 2006/73 (auditing). The impact of the European Private Company (Societas Europaea Privata) (draft regulation; EU council, June 2008) at present remains to be seen. Alongside legislative harmonization, the European Court of Justice (ECJ) has propelled an indirect harmonization of the law on (closed) firms through a series of judgments concerning the effect of freedom of establishment on conflicts of law, effectively substituting the ‘place of incorporation’ rule with the ‘real seat’ doctrine (siège reel; Sitztheorie) and introducing EU-wide ‘corporate mobility’: ECJ Case C-81/87 – Daily Mail [1988] ECR 5483 (home state restriction); ECJ Case C-212/97 – Centros [1999] ECR I-1459 (host state restriction); ECJ Case C-208/00 – Überseering [2002] ECR I-9919 (host state restriction); and ECJ Case C-167/01 – Inspire Art [2003] ECR I-10159 (host state restriction). This jurisprudence was continued in ECJ Case C-9/02 – Lasteyrie du Saillant [2004] ECR I-2409 (tax restrictions upon exit); and ECJ Case C-411/03 – Sevic [2005] ECR I-10805 (cross-border merger restrictions), but the ECJ has now stated an important qualification in ECJ Case C-210/06 – Cartesio [2009] ECR I-9641 (permissibility of home state restrictions upon exit).
b) Regulatory competition
Subsequent to this ECJ jurisprudence, influential commentators have predicted regulatory competition amongst European legislators will become the key innovative force in the development of the law on firms. As a starting point, it is a correct empirical observation that an increasing number of (small) firms have chosen a principal place of business which is located in a country different from that of their place of incorporation. To improve theoretical analysis, however, it is advisable to differentiate between two inter-related phenomena: first, free choice of jurisdiction is a prerequisite to market competition and may lead to legal arbitrage. Secondly, legislative competition may take the form of a market model shaped by supply (legislation on firms) and demand (firm founders and owners), but not necessarily so. A note of caution is therefore appropriate: while it is clear that there is at least a sort of yardstick competition between European legislators, promoting comparative studies and legislative de-regulation, sufficient evidence in favour of market model competition has yet to be furnished. The latest reforms on the law on closed firms in Germany and the Netherlands may be referenced as supporting this more tentative view.
6. Recent de-regulation and reform across Europe
Recent reforms of the law on closed firms across Europe have been united in a bid for de-regulation. For a more concrete analysis it is helpful to note that these reforms exhibit two antagonistic character traits, namely convergence and divergence: first, there is growing convergence as to what aspects of the law need de-regulation. Secondly, although some ‘pioneer’ legal orders do in fact converge as to the means of de-regulation, there remains a considerable degree of divergence across European jurisdictions as to what specific rules are to be introduced as appropriate problem-solving tools. The following comparative overview is therefore witness to the fact that the law on closed firms is a dynamic system of general purpose tools which serves the solution of recurring problem situations.
a) Aspects of the law targeted by de-regulation
(i) Formation: to reduce transaction costs, centralize, cheapen and accelerate public law proceedings and simplify substantive law.
(ii) Shares: to reduce transaction costs, de-formalize requirements for lawful transfers and establish a legal medium to convey transfer authority.
(iii) Capital contribution/minimum capital: to decrease system costs, cut back pre-emptive valuation control (direct sunk costs) and marginalize, or more efficiently, renounce minimum capital (indirect costs in the shape of market failure vis-à-vis otherwise profitable formations, and in the shape of return inefficiencies).
(iv) Creditor protection/capital maintenance: to reduce debt agency costs, substitute a system composed by pre-emptive valuation control, minimum capital and narrow distribution restrictions (ex-ante capital protection) with a system of special directors’/shareholders’ duties and distribution rules focusing on firms in distress (ex-post capital protection).
(v) Directors: to reduce both equity/debt agency costs, align directors’ interests with those of shareholders/creditors by means of disqualification rules.
b) Problem solving tools employed by de‑regulation
(i) Formation: Most significantly, traditional two-act formation proceedings have widely been condensed into a one-act registration process. In the United Kingdom, Companies House provides online software which allows a licensed company formation agent to file documents electronically. In Spain, formation of a Sociedad Limitada Nueva may also be effected electronically. France has set up Centres des Formalités des Entreprises as gateways for electronic formations. In these countries formation of start-ups will thus take no longer than 24 hours, and the same is true of the Portuguese Empresa Na Hora. In the United Kingdom, France and Germany the respective organizational statute provides an appendix containing a standard form contract/protocol. In Hungary and Italy, there exist three different formation models offering three different formation speed-levels. Finland and Sweden have both arranged for special ‘all-in-one’ formation proceedings. As for substantive law: first, formation documents signed in a private capacity (France; Romania) or in the presence of witnesses (United Kingdom) are a reasonable simplification to replace anachronistic notarization; secondly, unlinking the registration process from (otherwise required) official authorizations may also be viewed as an example of trend-setting de-regulation (Germany).
(ii) Shares: In the absence of an organized market, a sufficient measure of fungibility and transaction certainty becomes a matter of utmost concern to the practice of share transfers, with implications for shareholder meetings (voice) and minority shareholder protection (exit). Almost all European countries, except Portugal and Switzerland, have enacted statutory rules which stipulate free transferability of shares, subject only to restrictions provided for in a firm’s charter; but statutory restrictions, such as a quorum, are not uncommon for transfers to non-shareholders (Belgium; France; Luxemburg; Spain). In a major contribution to de-regulation, Belgium, France, Switzerland and the United Kingdom have abolished the anachronistic notarization of transfers. In terms of transaction certainty, different solutions exist: all legal orders provide for some sort of a documentary register, and some use this as a medium to convey transfer authority, ie good faith in the register entry awards transfer of title (Denmark; Germany; Italy); the United Kingdom has developed a sophisticated model guaranteeing high transaction certainty (share/certificate).
(iii) Capital contribution/minimum capital: The system value of a minimum capital requirement is conventionally seen as a threshold for access to business with limited liability and as a buffer cushioning loss of capital. As regards closed firms, European jurisdictions have lately adopted a sceptical attitude towards this conventional wisdom. Formation without any minimum capital is permitted for the private limited company (United Kingdom), the Société à responsabilité limitée (France), the Unternehmergesellschaft (Germany), and most recently the beslooten vennootshap met beperkte aansprakelijkheid (Netherlands). The remaining jurisdictions may be divided into three groups: (1) €10,000 or less (main group, eg Baltic countries: < €3,000; Spain: €3,006 and €3,012; Portugal: €5,000; Italy: €10,000); (2) €20,000 or less (eg Luxemburg: €12,394.68); and (3) more than €20,000 (Germany: €25,000; Austria: €35,000). Capital contributions may be effected in cash or in kind in all European jurisdictions; the latter are universally subject to a strict valuation control (by experts/courts), but some countries have lowered control standards lately (Germany) and, as an alternative strategy, established directors’ certification duties, the non-observance of which may result in civil liability and criminal conviction. In the United Kingdom, France and Italy personal services are also regarded as lawful contributions. Potential for further de-regulation awaits its fostering: neutrality towards any form of capital contribution; abolishment of pre-emptive valuation controls and implementation of retro-active balance-sheet and solvency-control mechanisms, supported by shareholders’ liability for differences; accountant’s and auditor’s liability. Role models include the private limited company, the Sociedad de Responsabilidad Limitada, and the German GmbH.
(iv) Creditor protection/capital maintenance: A key element to reform creditor protection and capital maintenance is to introduce directors’ and shareholders’ duties focusing on situations of a firm’s financial distress. First, directors may be held personally liable for net increases in losses to creditors when the firm is or is nearly insolvent: a less onerous standard is triggered by fraud or knowledge of likely harm—in other words, absent good faith—while a more severe standard imposes liability for negligently worsening the financial position of the insolvent firm. Prominent examples of such liability rules include the action for wrongful trading, the action en responsabilité pour insuffisance d’actif, and the Haftung für Insolvenzverursachung pursuant to the German GmbH Act. Secondly, shareholders may be held personally liable for the debts of the insolvent firm in those narrow cases where they are controlling owners who are found to have abused limited liability. The three principal tools for imposing such liability are: (1) the doctrine of de facto/shadow directors (United Kingdom), or dirigeants de faits (France), or faktische Organe/Organe durch Kundgabe (Switzerland); (2) equitable subordination (Germany); and (3) ‘piercing the corporate veil’, notoriously known as Existenzvernichtungshaftung in Germany. Further legislative fine-tuning calls for closer inspection of: the substantive content of directors’ duties balancing the interplay of directors’ incentives with the degree of financial distress in which the firm must be before the duty is triggered; firms’ ownership structures biasing directors’ risk attitudes in general and in situations of a firm’s financial distress; the interplay of directors’ and shareholders’ liability; and the creation of more efficient enforcement rights for creditors.
(v) Directors/Officers: As a supplemental tool to directors’ liability, several European jurisdictions have widened the scope of existing director disqualification rules, in particular with respect to previous participation in insolvent firms’ management. The Company Directors Disqualification Act 1986 is the most developed European prototype; France and Germany have enacted similar rules. Potential for future legislation includes improving informational accessibility (for business actors), re-defining corporate shaming and coordinating with social norms.
7. Towards European principles of the law on closed firms
Recent scholarship has often emphasized dissimilarities of the law on closed firms across European jurisdictions. While this thesis may certainly not be dismissed lightly, it is nevertheless critically important for the comparative investigation on the law on firms to look at the wider picture. Closed firms have a fundamentally similar set of legal characteristics and face a fundamentally similar set of legal problems in all European jurisdictions. For this reason it is absolutely worthwhile to start work towards European principles of the law on closed firms from an academic point of view and for the benefit of both practitioners and legislators. The following thoughts may warrant consideration:
(i) Functional commonality of organizational forms utilised for closely-held firms, as outlined above (legal policy vs empirical evidence).
(ii) Role and interaction of special and partial (corporate/partnership) forms utilised for closely -held firms (ownership structure vs legal form).
(iii) Recurring problem situations: identity of ownership and control (control rights, managerial rights); principal-agent conflicts between majority and minority shareholders; deadlocks (two-member firms); principal-agent conflicts between owners and third parties; private and family relations among shareholders.
(iv) General purpose tools and their limits: contractual freedom vs behavioural biases (founding charter; midstream changes); limited liability vs economic justification; creditor protection (debt) vs firm owners’ capital investment (equity) (adjusting/non-adjusting creditors); minority protection (firm-specific investment) vs hold-outs (private benefits); (corporate) governance standardization vs contractual freedom.
Literature
Guido Ferrarini, Paolo Giudici and Mario Stella Richter, ‘Company Law Reform in Italy: Real Progress?’ (2005) 69 RabelsZ 658; Michel Menjucq, ‘The Company Law Reform in France’ (2005) 69 RabelsZ 698; Horst Eidenmüller, ‘Die GmbH im Wettbewerb der Rechtsformen’ [2007] ZGR 168; Paul Davies and Jonathan Rickford, ‘An Introduction to the New UK Companies Act’ [2008] ECFR 48 ff and 239 ff; Jesper Lau Hansen, ‘The Nordic Corporate Governance Model—A European Model’ [2009] Perspectives in Company Law and Financial Regulation 145; André Prüm, ‘Luxembourg Company Law—A Total Overhaul’ [2009] Perspectives in Company Law and Financial Regulation 302; Joseph A McCahery and Erik P Vermeulen, ‘Role of Corporate Governance Reform and Enforcement in the Netherlands, Regulation [2009] Perspectives in Company Law and Financial Regulation 322; Reinier Kraakman and others, Anatomy of Corporate Law (2nd edn, 2009); Holger Fleischer, ‘Einleitung’ in Wulf Goette and Holger Fleischer (eds), Münchener Kommentar zum GmbH-Gesetz, vol 1 (2010); John Armour and Wolf-Georg Ringe, ‘European Company Law 1999-2010: Renaissance and Crisis’ [2011] CMLR 48:125-174.
