German Corporate Law
Sources of German Corporate Law
German corporate law (Gesellschaftsrecht) derives principally from the Stock Corporation Act (Aktiengesetz, AktG) of 1965, governing the Aktiengesellschaft (AG), and the Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG) of 1892, governing the Gesellschaft mit beschränkter Haftung (GmbH). The Commercial Code (Handelsgesetzbuch, HGB) regulates partnership forms, including the offene Handelsgesellschaft (OHG) and the Kommanditgesellschaft (KG), as well as the GmbH & Co KG, a hybrid combining limited liability with partnership taxation. The Act on Codetermination (Mitbestimmungsgesetz) of 1976 mandates employee representation on the supervisory boards of large companies. The German Corporate Governance Code, updated annually, sets out recommendations and suggestions for best practice, operating under a comply-or-explain principle under § 161 AktG. The Securities Trading Act (Wertpapierhandelsgesetz, WpHG) and the Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WpÜG) regulate capital market activities.
The Two-Tier Board System
The defining feature of German corporate governance for the AG is the mandatory two-tier board system. The management board (Vorstand) is responsible for managing the company under its own responsibility pursuant to § 76 AktG. Members of the management board are appointed and may be removed by the supervisory board. The supervisory board (Aufsichtsrat) appoints, supervises, and advises the management board and is directly involved in decisions of fundamental significance to the enterprise. The two boards are strictly separated, and interlocking directorates are prohibited: no person may serve simultaneously on both boards of the same company. The supervisory board of an AG with more than 500 employees includes one-third employee representatives; companies with more than 2,000 employees are subject to parity codetermination under the Mitbestimmungsgesetz 1976, with equal representation of shareholders and employees. The chair of the supervisory board, always a shareholder representative, holds a casting vote.
Formation of the Stock Corporation (AG)
The formation of an Aktiengesellschaft requires at least one shareholder. The articles of association (Satzung) must be certified by a notary and must state the company’s name, registered office, business purpose, amount of share capital, and the number and par values of shares. The minimum share capital is €50,000 under § 7 AktG. The shares must be fully paid up before registration, and at least one-quarter of the par value plus any premium must be paid on each share. The company must be registered in the Commercial Register (Handelsregister) maintained by the local court (Amtsgericht). The founders bear liability for the correctness of their statements in the formation process.
Formation of the Limited Liability Company (GmbH)
The GmbH is the most common corporate form for small and medium-sized enterprises. It requires at least one shareholder. The memorandum of association (Gesellschaftsvertrag) must be notarially certified and must state the company’s name, registered office, business purpose, amount of share capital, and the amount of the contribution (Stammeinlage) of each shareholder. The minimum share capital is €25,000 under § 5 GmbHG. At least one-quarter of each contribution must be paid before registration, and the total paid-in capital must equal at least €12,500. Shareholders are liable for the company’s debts to the extent of unpaid contributions. The Unternehmergesellschaft (UG), introduced in 2008 as a variant of the GmbH, may be formed with a minimum share capital of €1, subject to mandatory retention of profits until the capital reaches €25,000.
Duties of the Management Board
Members of the management board owe a duty of loyalty to the company. § 93 AktG imposes the standard of care of a prudent and conscientious manager (ordentlicher und gewissenhafter Geschäftsleiter). The business judgment rule, codified in § 93(1) AktG, provides that a director does not breach duty if, at the time of taking a business decision, the director was entitled to reasonably believe that the decision was made on an adequate basis of information and in the best interests of the company. Directors are personally liable for breaches of duty, including violations of law, and bear the burden of proving compliance. Directors must file for insolvency without delay upon the company’s insolvency or over-indebtedness under § 15a of the Insolvency Code (Insolvenzordnung, InsO). Liability for delayed filing is strict and may extend to damages for losses suffered by creditors.
Shareholder Rights
The general meeting (Hauptversammlung) is the forum in which shareholders exercise their rights. Shareholders have voting rights proportional to their shareholding, pre-emptive rights (Bezugsrecht) to subscribe to new issues under § 186 AktG, and the right to receive dividends. The general meeting resolves on the appropriation of profits, the discharge of the management and supervisory boards, the election of the supervisory board, and fundamental structural changes. § 148 AktG, introduced by the Act on the Integrity of Companies (UMAG) 2005, provides for a shareholder derivative action permitting shareholders to bring claims on behalf of the company if certain procedural requirements are met, including a preliminary proceeding to establish that the claim is well-founded.
Capital Market Law
The Securities Trading Act (WpHG) implements EU market abuse regulation and imposes disclosure obligations on issuers of securities. The Securities Acquisition and Takeover Act (WpÜG) regulates public tender offers, requiring a mandatory offer to all shareholders upon acquisition of control (defined as holding 30% or more of voting rights) under § 29 WpÜG. The offer must be at an adequate consideration, and the target company’s board must take a neutral position as to the success of the bid. The Federal Financial Supervisory Authority (BaFin) is the competent regulatory authority for securities market supervision.