German Limited Liability Company: Structure of a GmbH

The GmbH is a capital company under German law. The liability of the shareholders in this kind of corporation is limited to the company’s share capital i.e. the company’s assets alone shall serve to fulfil the company’s obligations vis-à-vis its creditors. Being the GmbH – a limited liability company – a legal person, it holds autonomous rights and obligations; as such it may e.g. acquire ownership and other rights in real property and autonomously sue and be sued in court in connection with its rights and duties.

The corporate bodies of the GmbH required by compulsory provisions of the Limited Liability Company Act (GmbHG) are the entirety of the shareholders, who regularly adopt resolutions at the shareholder meeting (Gesellschafterversammlung), and the managing director(s) (Geschäftsführer). The establishment of a supervisory board (Aufsichtsrat) is, with some specific exceptions, optional.

Shareholders’ rights and duties

The rights and duties of shareholders may be quite different in origin and nature. Shareholder rights and duties may exist by force of law or may be created by, or based upon, the articles of association (Satzung). Said rights and duties may attach to all shares as such or belong to, or be imposed upon, a shareholder personally (personal shareholder rights and duties). Shareholder rights and duties may be available to, or be imposed upon, all shareholders equally or upon one or several shareholders particularly. In principle such rights and duties pass to any transferee of the share, whether such a transfer is by assignment, inheritance, or otherwise, and cannot be assigned or otherwise transferred separately from the share itself.

Both rights and duties attaching to shares, that are not created by law, and personal shareholder rights and duties can only be granted or imposed by the articles of association or by shareholder resolutions passed on the basis of the articles of association. These rights and duties must be distinguished from the ones provided within agreements between the shareholders, which are made “outside the articles of association”. Such latter agreements can only create contractual rights and duties among the parties thereto. If a share is transferred, the transferee can only exercise the contractual rights of the transferor, provided those rights were specifically assigned to him by contract; said transferee is accordingly bound by his transferor’s contractual duties only if he has agreed to take them over.

Shareholder rights can be divided into administrative and property rights. Administrative rights include the right (i) to request the calling of the shareholders’ meeting (ii) to participate in the shareholder meeting (iii) to vote and (iv) to be provided with information about the corporate activities. The right to information basically entails that the managing directors must provide every shareholder with information about the affairs of the company upon their simple request and allow them to inspect the books and records of the company. Property rights include the entitlement to a quota of the annual profits, the right to dispose of the share and the entitlement to a share of the liquidation proceeds.

The most important shareholder duties are the duty to render contributions, the fiduciary duty and the duty to ensure that the share capital, once provided, is preserved. Shareholder rights and duties can be expanded, restricted or excluded in the articles of association, as long as this is not in conflict with mandatory law provisions.

Finally, once the company gets into economic trouble, a shareholder is obliged to either (i) inject new equity to the company, (ii) liquidate the company or (iii) cause the management to commence insolvency proceedings.

Liability

The GmbH is a legal entity separate from its shareholders. Therefore, the shareholders are in principle not liable for debts of the GmbH. There are only a few scenarios of shareholder liability in literature and court practice:

• Shareholders may be liable for debts or losses of the company – on a contractual basis – if they undertake a contractual obligation towards the company’s creditors or the company (e.g. by means of a guarantee or a comfort letter).
• A shareholder may be personally liable to the company for payments received from the company to the extent such payments cause the equity of the company to fall short compared to the registered share capital.
• Shareholders may be held liable by the company if, disregarding the purpose of the company’s assets to serve as collateral for its creditors, they intentionally abuse their control to remove assets or business opportunities from the company, rendering it unable to satisfy its debts.
• Additionally, a shareholder may become personally liable towards the company’s creditors if the assets are not clearly allocated to the shareholders or the company in the books of the company (intermingling of assets) and such allocation is not inferable from other circumstances, e.g. the physical separation.

 Shareholders’ meeting

The shareholders’ meeting is the company’s ultimate decision-making authority. Shareholders usually exercise their rights in the shareholders’ meeting. Shareholder resolutions may also be taken without a physical meeting. In particular, a meeting is not necessary if all the shareholders confirm in text form that they agree with the resolution to be passed or to cast their votes in writing.

Usually, the articles of association determine the powers of the shareholders’ meeting and the rules of procedure to be applied in its context. To the extent that the articles of association do not contain specific provisions regarding the procedures to be applied within the shareholders’ meeting, §§ 46-51 GmbHG apply as the relevant model framework.

The shareholders’ meeting is exclusively entitled to:

• amend the articles of association,
• call in additional contributions of the shareholders,
• liquidate the company and  appoint and dismiss the liquidators,
• resolve upon measures pursuant to the Transformation Act (Umwandlungsgesetz – UmwG) such as mergers, spin-offs and changes of the company’s legal form.

Except as otherwise provided in the articles of association, the shareholders resolve upon:

• the formal approval of individual and consolidated annual financial statements and the distribution of profits,
• the repayment of additional contributions,
• the division, consolidation and redemption of shares,
• the appointment and dismissal of managing directors, as well as their discharge,
• the execution and termination of service agreements with managing directors,
• the assertion of damage claims to which the company is entitled against managing directors or shareholders, as well as the representation of the company in litigation proceedings against managing directors or shareholders,
• the rules of procedure for the management,
• the appointment of a Prokurist (person vested with the general power of representation) and of persons vested with the commercial power of attorney for the entire business establishment (Handlungsvollmacht).

The above mentioned tasks can be however transferred by the shareholders’ meeting to the supervisory board, if any, by adopting a relevant resolution.

In addition, the shareholders’ meeting has the right to issue instructions to the managing directors and to appoint or dismiss members of an optional supervisory board.

A shareholders’ resolution is deemed to be passed, when more than a half of the given votes are favourable. In exceptional cases a majority of ¾ will be necessary, e.g. with regard to amendments of the articles of association, the dissolution of the company, resolutions on mergers, spin-offs and other measures under the Transformation Act (UmwG), execution of domination agreements and of profit and loss transfer agreements.

Managing director

The company must have one or more managing directors (Geschäftsführer). The GmbH is not legally required to have more than one managing director except in particular cases (e.g. in case indicated by the Co-Determination Act. Both shareholders and non-shareholders (however only natural persons, no legal persons) may be appointed managing directors. In the articles of association the shareholders can set requirements regarding the qualification for the position of managing director.

If the GmbH has only one managing director, he represents the company severally. If several managing directors have been appointed, they must represent the company jointly. However, if the company has more than one managing director, the shareholders can also grant the power of representation to the individual managing director derogating the statutory rule of joint representation, by a corresponding clause of the articles of association. In other words any modification of the statutory powers of representation must be based upon a provision in the articles of association. That provision must either itself define directly the extended power of representation in favour of an individual managing director, or permit the shareholders to extend the power of representation of the managing directors by passing a relevant shareholder resolution.

In detail, the shareholders may grant each managing director, or one or several managing directors, the right

• to represent the company acting alone,
• to represent the company acting jointly with one or several other managing directors, or
• to represent the company acting jointly with one or several managing directors or Prokurist.

The managing directors have authority to represent and act on behalf of the company in all legal transactions in and out of court.

A limitation of the authority of managing directors to represent the GmbH – even within the articles of association or resolved by shareholder resolution – will have no effect with respect to third parties. Should the articles of association e.g. set forth that the managing directors are not entitled to execute agreements with a value exceeding 5,000 € and the managing directors enter into an agreement with a 10,000 € value, such latter agreement shall be nonetheless valid vis à vis the contractual counterparty.

The limitation of the power to represent the company, however, operates in individual cases where the third party interacting with the managing director is not entitled to rely on the unlimited power of the managing director. This occurs in particular where a managing director abuses his powers to represent the company and the third party knows or deliberately ignores the abuse.

The power to represent the company is further limited by the prohibition of self-dealing and multiple representations. A managing director is in general not allowed to enter into legal transactions on behalf of the company with himself as counterparty (so called self-dealing) or as the representative of the company and of a third party (multiple representations). However, he can be exempted from such prohibitions. Such exemption may be granted in the articles of association or, if the articles of association allow it, by the shareholder meeting.

In the context of the internal relations between the company and the managing directors, the managing directors must observe the restrictions contained in the articles of association, the instructions set within shareholders’ resolutions or in the management contracts of the managing directors. The shareholders can issue instructions ad hoc or in a general way by establishing rules of procedure for the management (e.g. make certain kind of transactions subject to the consent of the shareholders’ meeting). In case the managing directors do not comply with such instructions, they are obliged to compensate the company for any damages incurred as a consequence thereof.

The shareholders may entrust specific fields of responsibility – i.e. administration, accounting, finance, employment and social matters, production, distribution, sales or marketing – to one or more managing directors. The shareholders may also introduce a hierarchic structure under which one managing director is granted an overall responsibility for any fields, while other managing directors are required to report to him with respect to matters regarding the specific field for which they are responsible. However, no managing director can be completely released from the joint overall responsibility for the well-being of the company. Thus, any managing director in charge of a special area of responsibility must report to the other managing directors whatever matters arise in his particular area if said issues may have an effect on the whole company; moreover any managing director may decide upon matters falling under the area of responsibility of another managing director if he believes that the overall well-being of the company may be affected by decisions taken with respect to those matters. In any case, such internal allocation of specific fields of responsibility does not lead to a limitation of the power of the managing directors to represent the GmbH and has no effect with respect to third parties.

Supervisory board

The creation of a supervisory board (Aufsichtsrat) is either optional or mandatory. It is mandatory if it is required by the One-Third Participation Act (Drittelbeteiligungsgesetz, in case of more than 500 employees), the Coal, Iron and Steel Co-Determination Act (Montanmitbestimmungsgesetz, in case of more than 1,000 employees), the Co-Determination Act (Mitbestimmungsgesetz, in case of more than 2,000 employees) or the Capital Investment Act (Kapitalanlagegesetzbuch, in case the company’s purpose is the management of investment funds).

In companies with up to 500 employees, no supervisory board needs to be established. However, the articles of association can provide for the formation of a supervisory board. In this event, the articles of association can even set forth rules for the supervisory board, including the board’s composition, competencies and mode of procedure. The scope of the competencies can be limited to monitoring and advisory responsibilities or even comprise decision-making and representation of the company vis-à-vis the managing directors.