01/27/2010 05:12:00 PM EST
The Lure of the Limited and Corporate Law Reforms in Germany
In 2003, the European Court of Justice tore down the walls sealing off the types of corporations available throughout the Member States of the European Union. Rapidly afterwards, Germans seized the opportunity and started to set up English private companies limited by shares (Ltd). More than 50,000 Ltds with a German branch as the effective seat have been established to date. At times, 25 per cent of all new corporations were Ltds. With the recently enacted Law to Modernize the Limited Liability Corporation Act and to Counter Abuses (Gesetz zur Modernisierung des GmbH-Rechtes und zur Bekampfung von Missbrauchen - MoMiG) Germany seeks to reverse the run towards the Ltd and to increase the competitive standing of the German Limited Liability Corporation (Gesellschaft mit beschrankter Haftung - GmbH). Hans-Josef Vogel examines the road to the reform, its goals and the effects of the legislation.
Dr. Vogel writes: A long, long time ago, laws of conflicts in international corporate law, at least for a German practitioner, were easy and straightforward: a company had to be erected in keeping with the laws in force at the seat of its administration (the “real seat theory”). This effectively led to corporations being stationary and sealed off Germany from types of corporations used in other countries. For the types of corporations, a numerus clausus (“closed number”) doctrine was a common view. Thus, a United Kingdom (UK) Ltd, if “moved” to Germany, was not recognized by German law. The shareholders had to newly incorporate, following the applicable German law. This, inter alia, called for a minimum share capital of EUR 25,000. In the absence of the new incorporation, the company was treated as a (commercial) partnership, with full personal liability of all shareholders.
Then the European Court of Justice (ECJ), in the Inspire Art decision (Case C-167/01, Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art, [2003] ECR I-10155, available [here]), turned matters up side down. One of the most important decisions of the ECJ in corporate law in this century, and possibly, the last two decades, said farewell to the “real seat theory”, which had been followed in Germany. The ECJ held that as a legal entity an Ltd set up in England had a right of establishment anywhere in the European Union (EU), and could not be prevented from exercising that right by any restrictions. The Inspire Art judgment has established the “incorporation principle” according to which as long as a corporation is established validly in its country of origin, it may move its real seat anywhere within the EU, and has to be treated according to the domestic classification, i.e., at the time of incorporation.
The ECJ decision dealt with a UK Ltd, whose seat was in the Netherlands where it traded exclusively. Dutch law allowed this, but required the company to disclose its nature as a “pseudo-foreign” company. This was in breach of the Eleventh Council Directive (Directive 89/666/EEC of 21 December 1989 concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State, OJ 1989 L 395/36, available [here]) as the disclosure elements contained in the Directive were enumerative. The Court held that a requirement corresponding to the Dutch provision could be found neither in the Directive’s obligatory list nor in the facultative disclosure requirements and was, therefore, inadmissible and not justifiable. The Court also held that it was not abusive (except for fraud cases) to establish a company in a Member State only to trade in other Member States. Further on, the Court held that in setting up a corporation, the most liberal legal regime may be used.
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