“German” Distributor Indemnity – How to avoid it

21 novembre 2016

Allemagne

Agence
Distribution

German Law recognizes protection for certain creations of the mind and grants a set of exclusive rights for these creations. While the Copyright Act grants protection for works of literature, science and art without any further conditions, other intellectual property rights basically require a registration at the German Patent and Trademark Office (DPMA) or in an international register. Furthermore, the imitation of products not protected by intellectual property rights can violate the Act against Unfair Competition, which grants protection against any kind of unfair practice in the course of the business. Unfair competition lawsuits are very similar to lawsuits in the field of intellectual property law and usually follow the same pattern.

In this first post we will analyse the German Copyright Act, Neighbouring Rights and Design Patents. The next post will look into Trademarks, Patents and Utility Patents; while a third post will focus on the Act against Unfair Competition and the procedural aspects.

Copyrights and Neighbouring Rights

The German Copyright Act protects creative and artistic works, in particular linguistic works (for example books, speeches and software), musical works, works of pantomime including choreographic works, works of fine art including those of architecture, applied art and plans for such works, photographic works, films and illustrations of a scientific or technical nature. Ideas are not protected, as only the form of an individual and personal creation is the subject of copyright. The person who creates a work shall be deemed the author; several persons who have created a work jointly shall be deemed joint authors. As mentioned above, there is no registration of works, but in the case of anonymous or pseudonymous works the true name of the author can be submitted for entry in the Register of Authors at the DPMA.

Copyright shall protect the author with respect to his intellectual and personal relationship with his work on the one hand, and with respect to the utilization of his work on the other hand. The right of exploitation of the work can be licensed to third persons, but the copyright itself cannot be transferred to others (except by way of inheritance). Copyright expires 70 years after the author’s death.

The Copyright Acts grants also protection for economic efforts in relation to works. The so-called Neighbouring Rights cover for example the protection of the performer of a work, of the producer of an audio recording of a work, of broadcasting organizations and of the maker of a database

Germany has signed the most important international copyright conventions and therefore grants copyright protection to authors of the most states in the world, while these states also grant copyrights to German authors, based on the respective national law. Several European Union directives on special parts of copyright legislation have been implemented in Germany, but the harmonization within the EU does not yet cover the whole copyright system.

Design Patents

The design patent is the small brother of the copyright, because it also protects achievements in the aesthetic field. However, the German Design Patent Act grants only protection after the registration of the Design Patent at the DPMA. The design has to be new and needs an individual character. A design shall be considered new if no identical design has been made available to the public before the date of filing of the application for registration. It has an individual character if the overall impression it produces on the informed user differs from the overall impression produced on such a user by any design which has been made available to the public before the date of filing of the application. The protection is granted up to 25 years, but has to be renewed every five years by paying renewal fees.

The German design patent grants only protection for Germany. If the creator of an aesthetic form wants to exploit the design internationally, he can also apply for a European Design Patent at the European Office for Harmonization in the Internal Market for the EU or at the International Bureau of the World Intellectual Property Organization (WIPO). Newly, the European system even recognizes the protection of new designs that have not been registered, but only for three years since the design has been made available to the public.

Companies can sell their products worldwide directly – through branches, subsidiaries or e-commerce – or indirectly – through agents, distributors, franchisees or commission agents.

The German Federal Court of Justice now ruled for the first time that commission agents may also claim indemnity at terminination of their contract (decision of 21 July 2016, ref. no. I ZR 229/15).

What are Commission Agents?

Commission agents are self-employed business persons who are constantly entrusted with the task of concluding transactions in their own name for the account of another company, i.e. the supplier. They differ from distributors insofar as distributors buy and sell products on their own behalf and consequently bear distribution risks themselves (for details, see the Legalmondo post on Distribution Agreements in Germany and the Legalmondo post on “German” Distributor Indemnity – How to avoid it).

What is new for Commission Agents?

The Federal Court of Justice has clarified that – as is settled case law for distributors – also Commission Agents can claim indemnity at termination if two analogy requirements are met, namely if the commission agent

(i) is integrated into the supplier’s sales organization like a commercial agent; and
(ii) has to provide the customer data to the supplier so that the supplier continues to derive substantial benefits from the business with such customers after termination of the contract.

With regard to the second requirement (provision of customer data), the Federal Court points out that the prerequisite is – as a general rule – fulfilled because statutory law obliges the commission agent to provide the customer data (sec. 384 para. 2 German Commercial Code). As a result, the customers “belong” to the supplier by law, without any specific contractual obligation.

If distribution concerns “anonymous mass business” (i.e. where customers pay cash and the sales intermediary does not know customer names because of any CRM measures), it may be impossible for the commission agent to provide respective customer data. In such case, it shall according to the Federal Court suffice if the commission agent provides data « on the sale process per se » – so that the supplier can estimate which type of goods is in demand where (quite different from the requirements regarding distribution of high-quality products such as cars, fashion or electronics).

Can the parties contract out?

Yes, the obligation to provide customer data can be contracted out. Nevertheless, indemnity claims can currently not 100% safely excluded by doing so because the Federal Court leaves explicitly open whether commission agents may also claim indemnity if the supplier has the mere factual chance to use the customer data. Hence, to be on the safe side, one has to exclude also the chance to use the data (see “Practical information” below).

What about franchisees?

As regards franchisees as sales intermediaries, the Federal Court confirms that mere factual continuity of the customer base does not suffice to result into an indemnity claim (thus confirming the decision against the franchisee of the traditional bakery chain “Kamps” of 5 February 2015, ref. no. VII ZR 315/13).

Practical tips

The provisions protecting self-employed commercial agents may apply analogously to commission agents.

As regards existing agreements under German law: if the two analogy requirements are met, indemnity claims at termination are quite likely.

As regards future agreements under German law:

In general, the claim for indemnity can likely be avoided by excluding the commission agent’s obligation to provide the customer data. Such exclusion should, however, be clearly formulated. Alternatively – or, to be on the safe side, additionally –, the supplier may oblige himself to block and or delete the customer data at terminaton of the contract with the commission agent.
Alternatively, the right to indemnity can be avoided by choosing another law and jurisdiction (taking into account the risk that the “German” indemnity claim might nevertheless be applied by as overriding mandatory provision in the sense of Article 9 of the Rome I Regulation).
Finally, if the commission agent acts outside the European Economic Area, the indemnity claim can be excluded by a simple waiver (according to analogue application of sec. 92c German Commercial Code).

In distribution contracts, manufacturers and suppliers tend to restrict distributors in selling the goods online (I.). Though this practice is quite common, there is no clearly established rule if and which restrictions are allowed by antitrust law (II.), especially in case of luxury goods within selective distribution networks (III.).

Now, it is up to the Court of Justice of the European Union (CJEU) to give a preliminary ruling on the internet sales restrictions (IV.). In the meantime, the question is: how to deal with resale restrictions now (V.).

Resale Restrictions in E-Commerce

E-Commerce keeps growing – worldwide and also in Germany, where it accounts for about 10% of total retail turnover (according to the 2016 figures from “Handelsverband Deutschland” [Trade Association of Germany]). Also manufacturers of renowned brands try to take advantage of the market opportunities of e-commerce, and at the same time try to preserve their brand’s image. Consequently, manufacturers have imposed several kinds of restrictions on their distributors, in particular:

total ban of internet sales,
prohibition of sales via third parties’ online platforms (especially “marketplaces”),
operation of a brick and mortar shops as a prerequisite for internet sales,
dual pricing, or
quality criteria for internet sales.

Antitrust limits to online resale restrictions

Antitrust authorities, however, however, have lately put such restrictions under scrutiny and enforce antitrust rules in e-commerce as well. Accordingly, there have been quite a few court judgments and antitrust authorities’ decisions, both in favour of and against such restrictions, e.g. on:

bags (“Scout” re third party platforms),
sportswear (“Asics”re price comparisons, logo clause, “Adidas” re third party platforms),
electronics (“Sennheiser” and “Casio”both re third party platforms),
luxury cosmetics / perfumes (“Coty” re price comparisons, third platforms), or
software (“Google” requiring manufacturers of to pre-install apps, cf. European Commission’s press release of 20 April 2016).

Now, the luxury cosmetics case of Coty Germany has reached the European level.

The current Coty Case

Facts of the case are as follows: The supplier (Coty Germany GmbH) has set up a selective distribution network. Distributors may sell via internet, under the following restrictions. They shall

use their internet store as “electronic store window” of their brick and mortar store(s), thereby maintaining the products’ character as luxury goods, and
abstain insofar from engaging third parties as such cooperation is externally visible.

The parties’ intentions: The supplier wants to enforce especially the last restriction, stopping a distributor (Parfümerie Akzente GmbH) from selling supplier’s products via Amazon’s marketplace. The distributor, obviously, intends to be free from such restrictions.

The court of first instance, the district court of Frankfurt, decided that the ban of sales via third party platforms is an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”), namely a hardcore restriction under article 4 lit. c Regulation (EU) No. 330/2010 (Vertical Block Exemptions Regulation or “VBER”). The court of second instance, the Higher Regional Court of Frankfurt, however, does obviously not see the answer that clear. Therefore, the court has requested the Court of Justice of the European Union (CJEU) to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c VBER (decision of 19.04.2016, ref. no. 11 U 96/14 [Kart]).

Questions referred to the CJEU

The CJEU has filed the case as “Coty Germany” (reference no. C-230/16). These are the four questions on which the CJEU is requested to answer:

Do selective distribution systems that have as their aim the distribution of luxury goods and primarily serve to ensure a ‘luxury image’ for the goods constitute an aspect of competition that is compatible with Article 101(1) TFEU?

If the first question is answered in the affirmative:

Does it constitute an aspect of competition that is compatible with Article 101(1) TFEU if the members of a selective distribution system operating at the retail level of trade are prohibited generally from engaging third-party undertakings discernible to the public to handle internet sales, irrespective of whether the manufacturer’s legitimate quality standards are contravened in the specific case?

Is Article 4(b) of Regulation (EU) No 330/2010 to be interpreted as meaning that a prohibition of engaging thirdparty undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of the retailer’s customer group ‘by object’?

Is Article 4(c) of Regulation (EU) No 330/2010 to be interpreted as meaning that a prohibition of engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of passive sales to end users ‘by object’?

How to deal with Restrictions now

There is quite some case law in Germany about the ban on online sales, some decisions in favour, some against. Online sales restrictions have lately also been under scrutiny of the German Bundeskartellamt (federal antitrust authority), which in general rather takes a critical position against such restrictions, including restrictions on selling via third-party platforms.

A decision of the highest German court is, however, still missing. Still missing is therefore also a clear answer to the question which restrictions suppliers and distributors can validly agree upon, especially in case of luxury goods. The CJEU’s preliminary ruling should provide such clarity.

Until the CJEU’s preliminary ruling, the current legal situation should be as follows – based especially on the Guidelines on Vertical Restraints 2010 (which do not have the quality of a law and do not bind the courts, but set out the principles which guide the European Commission’s assessment of vertical agreements and thus in principle bind the European Commission itself):

A total ban of online sales is hardly valid because online sales are considered as passive sales (cf. Guidelines on Vertical Restraints 2010, para. 52). Hardly an option either is restricting the webstore’s language options because it does not change the passive character of such selling (cf. Guidelines on Vertical Restraints 2010, para. 52). The same goes for restrictions on the turnover made by sales via the internet.

Allowed should, however, especially be

qualitative requirements for the design of e-commerce platform (without resulting in a total ban and without restricting the use of languages),
the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer (article 4 lit. b (i) VBER), e.g. territory-based banners on third party websites, cf. Guidelines on Vertical Restraints 2010, para. 53),
general qualitative restrictions for becoming a member of the supplier’s selective distribution system, e.g. requiring that distributors have one or more brick and mortar shops or showrooms (Guidelines on Vertical Restraints 2010, para. 54, 176).

The CJEU’s decision will bring more clarity – Legalmondo will keep you updated on the Coty Case and possible implications on online distribution.

When entering new markets, there are different distribution strategies to choose from (I.). In retail, car and wholesale trade, distributorship agreements are quite common (II.). In international distributorship agreements, the parties may choose the applicable law (III.). Whether chosen or not, the applicable law may contain unpleasant surprises like goodwill indemnity for distributors under German law (IV.). Such surprises can be avoided – the post shows how, considering the latest 2016 decisions by the German Federal Court of Justice (V.).

I. Entering new Markets

When entering new markets, different structures exist. Which one to choose depends on the strategy desired: from direct sales with own employees or sales agents to indirect distribution via distributors, franchisees, commission agents, the sale of white label products or licensing with the scope of manufacture and sale by third parties. For details on distribution in Germany see the Legalmondo post on “Distribution agreements in Germany”.

II. Distributorship Agreements

In retail (especially electronics, cosmetics, jewelery, and sometimes fashion), car and wholesale trade, distributorship systems are particularly common – regardless of whether the sales intermediary is referred to as a “distributor”, “trader”, “dealer”, “specialist retailer”, “concessionary” or “authorized dealer”. Distributors are self-employed, independent contractors who constantly sell and promote the products in their own name and on their own account. They bear the sales risk, for which – vice versa –manufacturers’ margins are rather low. Distributors are generally less protected than commercial agents (to whom within the European Union, the Directive on self-employed commercial agents of 1986 applies, as implemented in the national law of the respective EU Member State). Contrary to agreements with sales agents, distributorship agreements are restricted by antitrust law. Restrictions of competition are, in principal, prohibited, unless they do not appreciably restrict competition under Article 101 TFEU (Treaty on the Functioning of the European Union). For details on distribution online see the Legalmondo post on “Restrictions on Distributors in E-Commerce”.

III. Distribution international and Choice of law

When a manufacturer distributes its products or services internationally, the manufacturer’s and the distributors’ national laws « collide ». Frequently, the parties will choose the applicable law in order to solve such collision and create legal certainty. Typically, each party will try to take its « own », and perhaps not more favourable, but at least well-known law abroad. Alternatively, the parties may agree on the law of a “neutral”, third country – e.g. Swiss law between an Italian manufacturer and a German distributor, which, by the way, also gives more freedom as regards standard form contracts. Even with a choice of law, there can nevertheless be unpleasant surprises in international trade – approximately as in the saying « different countries, different customs« :

First, because a choice of law may not be effective – as, for example, in some South American countries and in the Middle East.
Second, because there may be internationally mandatory provisions (“overriding mandatory provisions”, « lois des police » or « Eingriffsnormen« ) which are so important for safeguarding a country’s public interests that they practically « override » the choice of law, i.e. apply despite the otherwise effective choice of law.
Third, because the chosen law may contain unpleasant surprises, such as the German goodwill indemnity for distributors.

IV. “German” Distributor Indemnity

Also German law may provide surprises – in particular in form of the distributor’s claim to goodwill indemnity at termination. Though there are no explicit rules on distributors under German law, there is extensive case law and various agency rules apply also to distributors if two conditions are given:

The distributor is

integrated into the supplier’s sales organisation; and
obliged (due to agreement or factually) to forward customer data during or at termination of contract.

If given, the distributor is basically also entitled to claim goodwill indemnity at termination (under the same conditions as an agent). The calculation of such goodwill indemnity is, in general, based on the distributor’s margin made in the last year with new customers brought by the distributor or with existing customers where the distributor has significantly increased the business. Details vary; different ways of calculation are accepted by German courts.

V. How to avoid “German” Goodwill Indemnity for Distributors

For a long time, it was disputed whether the distributor’s goodwill indemnity under German law, granted in analogue application of agency law (sec. 89b German Commercial Code) could be excluded in advance (i.e. before termination of contract) when the distributor operates outside Germany, but in the European Economic Area (“EEA”).

The question was now put to the test before the German Federal Court (decision of 25/02/2016, ref. no. VII ZR 102/15). The defendant, established in Germany, manufactured equipment for the electrical industry. The plaintiff was operating as a distributor in Sweden and other EEA States. The distributorship agreement provided for German law; any postcontractual compensation or remuneration was excluded. After termination by the defendant, the plaintiff claimed goodwill indemnity as distributor. The plaintiff did not succeed in the lower courts, but the German Federal Court now decided in the plaintiff’s favour (as, by the way, in a similar matter did the Higher Regional Court of Frankfurt on 06/02/2016, ref. no. 11 U 136/14 [Kart]).

The decision focuses on the territorial scope of the provision on goodwill indemnity (sec. 89b of the German Commercial Code). Pursuant to that provision, the agent’s goodwill indemnity cannot be excluded in advance. In settled case law, this provision may apply analogously to distributors (see above). However, it was disputed whether the distributor’s goodwill indemnity is also mandatory if the distributor operates outside Germany, but within the EU / EEA. The German Federal Court has now confirmed that – arguing especially with (i) the historic development of agency law and (ii) its objective to protect the agent respectively the distributor: also distributors operating in other EEA countries than Germany were to be protected as those operating in Germany; the relevant provision was intended to protect against unfavorable agreements resulting from economic dependence on manufacturers / suppliers. Finally, the Federal Court of Justice deemed it not necessary to refer this question to the Court of Justice of the EU because it did not fall within the scope of the Directive on self-employed commercial agents of 1986.

The new decision is consistent with existing case-law: it was quite likely that the German Federal Court would continue on its way of largely applying agency law to distributors by analogy.

Five practical tips for contractual practice and future contract drafting:

Goodwill indemnity is a cost which arises only in the wake of a distributorship agreement, but should be considered beforehand – and also, if such cost can be avoided or stipulated differently beforehand (e.g. stipulate entry payments).

If the distributor operates outside the EEA, the claim for goodwill indemnity can be excluded at any time, i.e. already in the distributorship agreement itself (sec. 92c German Commercial Code; cf. Higher Regional Court of Munich, decision of 11/01/2002, ref. no. 23 U 4416/01).

If the distributor operates in the EEA, German law applies and the two above conditions are met, the distributor’s claim to goodwill indemnity cannot be excluded before termination.

Distributor’s German goodwill indemnity can be excluded beforehand especially if the parties

(i) exclude the transfer of the customer data; or

(ii) oblige the manufacturer to block, stop using and, if necessary, delete such customer data at termination (German Federal Court, decision of 05/02/2015, ref. no. VII ZR 315/13); or

(iii) chose another law (and, consequently, another jurisdiction or arbitration).

Alternatively, the parties may cushion the claim for goodwill imdemnity by agreeing on “entry payments” (“Einstandszahlungen”) – which could even be deferred until termination and then offset against the claim for goodwill indemnity. However, such entry payment should not be unreasonably high (Federal Court of Justice, decision of 24/02/1983, ref. no. I ZR 14/81), respectively it should correspond to a value in return, e.g. a particularly high distributor discount or a very long contract term (Higher Regional Court of Munich, decision of 04/12/1996, ref. no. 7 U 3915/96, Higher Regional Court of Saarbrücken, decision of 30/08/2013, ref. no. 1 U 161/12). In short: the manufacturer must prove that the parties would not have agreed a higher commission, even without the entry payment (as just decided by the German Federal Court on 14 July 2016, ref. no. VII ZR 297/15).

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.

Agency (regulations, duration, termination, indemnities – if any)

Instead of direct distribution (by setting up a branch, a subsidiary or via e-commerce), one can also distribute ones’ products and / or services indirectly. Indirect distribution especially includes agents, distributors, franchisees or commission agents.

Self-employed commercial agents solicit customers and can (but do not have to) have the authority to conclude a contract on supplier’s behalf. The supplier sells directly to end customers and bears the distribution risk, but may also control the margins. Contrary to employees, the agent’s remuneration (“commission”) can be exclusively profit-oriented, i.e. remunerated only in case of successfully soliciting customers, and in relation to the turnover. Commercial agents have to provide detailed market reports. If the commercial agent acts in the EU, protective agency law applies, including the indemnity claim.

An agent would be treated as a supplier’s employee if the agent does not act independently. An agent acts independently if the agent – according to the overall picture of contractual rules and factual activity – freely organizes his activities and working time (sec. 84 (1) 2 HGB). This goes mutatis mutandis for other types of distribution partners. The treatment as employee especially has the following consequences:

employee protection, e.g. limited right of termination under Dismissal Protection Act;
continued payment of salary during public holidays, illness and holidays;
minimum wage under Minimum Wage Act of 11 August 2014;
obligation to pay contributions to social security;
income tax on salary;
adherence to worker participation and collective bargaining agreements if applicable.
exclusive competence of labour courts if the employee has, during the last 6 months of activity, earned an average amount which does not exceed EUR 1,000 per month.

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Agency contracts are governed by sec. 84–92c German Commercial Code (HGB). The commercial agent is, next to the employee, strongly protected, e.g. by mandatory rules on remuneration, minimum notice periods, and goodwill indemnity. As regards remuneration, the agent is entitled to

- - “del credere commission” if the agent assumes liability for fulfilment of businesses (sec. 86b HGB);
  - an advance on commission once the principal has performed its obligation (sec. 87a para. 1 HGB);
  - accounting within maximum periods of three months (sec. 87c (1) HGB);
  - commission irrespective of delivery and payment, unless the principal is not responsible for non-delivery (sec. 87a ( 3) HGB);
  - request information, statements of account, an excerpt from the books, and inspection by an auditor (sec. 87c HGB).

These rules are mandatory and cannot be contracted out. Further details on the payment of commission (if not agreed otherwise) are set in sec. 86b et seq. HGB.

Besides, both parties have to safeguard each other’s interests (sec. 86, 86a, 90 HGB and sec. 242 BGB). Theagent is especially obliged to

- check the customers’ creditworthiness,
- inform the supplier immediately about any business procured,
- keep confidential any information obtained during his activity, and
- abstain from acting for the supplier’s competitors.

Agency agreements can be terminated without cause if contractually agreed. However, mandatory notice periods have to be observed, staggered pursuant to the contractual term: from one month in the first year to six months after five years (sec. 89 ( 1) HGB). The notice periods cannot be shortened, and, in case of extension, the supplier’s notice period must not be shorter than the agent’s one (sec. 89 (2) HGB). A cause is only required if the agreement is terminated without notice period (sec. 89a HGB). It is given if the terminating party cannot reasonably be expected to continue the relationship until ordinary termination (considering all circumstances of the single case and weighing the interests of both parties).

The agent is entitled to indemnity if the agent has brought new customers or has significantly increased the business volume with existing customers, which results in benefits for the principal, and if such payment of indemnity is equitable under the given circumstances (sec. 89b HGB). Indemnity is calculated on basis of the commission earned during the last 12 months of activity, earned with new customers, and existing customers towards whom the agent has substantially increased the sales. Indemnity is capped to a maximum of the past five year’s average annual commission (sec. 89b HGB). The claim cannot be waived before termination, but is excluded if the agent has not notified the principal within one year following termination. Indemnity is not payable if

the agent terminated the contract (unless justified by circumstances attributable to the principal or because of the agent’s age or illness),
the principle has terminated the contract because of default attributable to the agent (which would justify immediate termination for cause), or
the agent, with the principal’s agreement, assigns and transfers its rights and duties under the agency contract to another person.

Indemnity cannot be contracted out, unless the agent acts outside EEA (sec. 92c HGB).

Antitrust law does generally not apply to the agent-relationship, provided that the principal bears the commercial and financial risks related to selling and purchasing the products or services (Guidelines on Vertical Restraints of 10/05/2010, para. 12 et seq., 18, 49). Therefore, suppliers can control the price for which they sell the products / services via agents. Special limits apply only to post-contractual non-compete-obligations if concluded before termination. They must be limited to a two-year-maximum, to the agent’s territory or customers, and to the contractual products or services. Further, they must be done in writing and delivered to the agent. The principal has to pay an indemnity for the non-compete obligation’s term (sec. 90a HGB).

Generally, the parties are free to choose the applicable law (art. 3 Rome-I-Regulation). If, however, all elements relevant for the choice of law are located in another country than that of the chosen law, the choice of law shall not prejudice the provisions which cannot be derogated from by agreement (art. 3 (3) and (4) Rome-I-Regulation).

Overriding mandatory provisions of the forum’s law cannot be avoided by choosing another law. The courts may also give effect to overriding mandatory provisions of the country where the contractual obligations have to be performed (cf. art. 9 Rome-I-Regulation). Overriding mandatory rules are especially most of the protective agency law provisions. If, therefore, the agent acts within the EU, the agent’s claim for goodwill indemnity (based on the EU Directive on self-employed commercial agents of 1986) can hardly be contracted out – even if the parties choose a foreign law (cf. European Court of Justice, decision of 09/11/2000 [“Ingmar”], concerning, however, the former Rome Convention on Law Applicable to Contractual Obligations of 1980). Arguments against applying the same principles under the Rome-I-Regulation exist, but there is yet no case law which favors such interpretation.

Generally, the parties are free to choose a court, especially if

the other party resides in another EU Member State, and the parties have chosen the court(s) of a EU Member State (art. 25 Brussels-Ia-Regulation);
the other party resides in Iceland, Switzerland or Norway, and the parties have chosen the courts of one of these States or Germany (art. 23 Lugano-II-Convention); or
both parties are merchants, legal persons under public law, or special assets under public law, or the other party resides outside Germany (sec. 38 Code of Civil Procedure [“ZPO”]).

Besides, the parties may also choose arbitration (sec. 1029 et seq. ZPO, and art. 1 (2)d Brussels-Ia-Regulationand art. 1 (2)d Lugano-II-Convention).

However, a choice of court or arbitration can hardly avoid overriding mandatory provisions, as ruled by the Higher Regional Court in Munich (decision of 17/05/2006), and confirmed by the BGH (decision of 05/09/2012).

Suppliers and distribution partners are free to use any means of dispute resolution, especially out-of-court-negotiation, mediation, arbitration, litigation. Restrictions exist only insofar as overriding mandatory provisions can hardly be avoided by means of dispute resolution (see above). Suppliers and distribution partners can expect fair treatment in German courts since the judges are well-trained, have been determined beforehand, and the parties are entitled to due process of law (art. 101, 103 German Constitution). Advantages of resolving disputes in Germany are (inter alia) that court rulings are quite foreseeable and that court proceedings are quite quick (8.2 months for proceedings in the district courts according to the latest statistics).

Distribution or Concession of sale

Distributors buy and sell products on their own behalf. Consequently, they bear distribution risks, and, in return, gain profit from the difference between purchase and resale price, while suppliers’ margins are rather low. The distributor is obliged to market and distribute the supplier’s products, and to safeguard the supplier’s interests. Distributors are less protected than commercial agents (exceptions: see below). The supplier is obliged to assist and take care of his distribution partner, subject, however, to the supplier’s economic freedom.

Distributorship contracts are – as in most EU member states – not explicitly regulated by statutory law. However, there is extensive case law, e.g. whether the supplier has to take back products unsold at termination of contract. Agency law applies by analogy if the distributor is:

integrated into the supplier’s sales organization; and
obliged (due to agreement or factually) to forward customer data during or at termination of contract.

Further, distributorship contracts have to conform to antitrust law. Generally, the antitrust law of any affected market applies (art. 6 (3a) Rome-II-Regulation). Agreements which aim at or result in restraints of competition are prohibited by antitrust law, namely by the German Act Against Restraints of Competition (“GWB”) andart. 101, 102 Treaty on the Functioning of the EU (“TFEU”). Unless agreements contain hardcore restrictions, asafe harbor is provided by the De Minimis Notice of 30/08/2014 and the Vertical Block Exemption Regulation no. 330/2010 [“VBER”]). Hardcore restrictions are generally prohibited, regardless of the parties’ market shares, especially price fixing, restricting the geographic areas or categories of customers, or cross-supplies between distributors within a selective distribution system. If one party’s market share exceeds 30%, any restriction of competition can only benefit from the individual exemption under the strict criteria of art. 101 (3) TFEU(“efficiency defense”). Here are the most relevant types of clauses.

As regards non-compete-obligations, they are enforceable if they conform to antitrust law:

Such agreements between non-competitors are safe if each party’s market share does not exceed 15% on any relevant market affected. If one party’s market share exceeds 15%, but none exceeds 30%, a non-compete-obligation during the contractual term is valid if limited up to 5 years at most. Where products are sold on premises owned or leased by supplier from third parties, the five-year maximum does not apply. However, the non-compete obligation cannot exceed the term the buyer is occupying the premises.
After the contractual term, a non-compete obligation where one party’s market share exceeds 15%, but none exceeds 30%, is valid if it is necessary to protect know-how transferred to the distributor, and if limited to competing products, the concrete distributor’s premises, and a 1-year-term.

A supplier can generally not fix a resale price or price level at which its distributors or franchisees resell (except for suppliers that manufacture newspapers, magazines and books, sec. 30 GWB). An agreement or behaviour that aims at establishing such resale price maintenance is treated as hardcore restriction and thereforegenerally void (cf. Guidelines on Vertical Restraints of 10/05/2010, para. 48, 223). By way of – rare – exception, the supplier can plead the efficiency defense (e.g. when introducing a new product or a coordinated short term low price campaign).

However, resale prices can be influenced by recommending resale prices or setting maximum resale prices:Recommending resale prices or setting maximum resale prices is exempt from antitrust law if the parties’ market shares do not exceed 30% (beyond, there is only room for the efficiency defense), and only if it does not result in a minimum or fixed sale price because of pressure or incentives from one party (art. 101 (1) TFEU andart. 4 (a) VBER).

Establishing a minimum advertised price policy is exempt if it works as mere recommendation. If, however, it results in minimum resale prices or a fixed or minimum price level, it can only be exempt under the efficiency defense.

By contrast, a supplier shall not announce not to deal with distributors or franchisees that do not follow its pricing policy because it will be treated as fixing the selling prices (see above).

Most-favored nation or most-favored customer clauses are those which specify that the supplier’s price to the distributor will be no higher than its lowest price to other customer. Such clauses are enforceable if agreed between non-competitors and if none of the parties’ market shares exceeds 30% (beyond, there is only room for the efficiency defense).

The distributor on its side can generally charge different prices to different customers because of freedom of contract. However, a seller

may have to charge the same prices if it holds a dominant or similarly strong market position(sec. 19, 20 GWB and art. 102 TFEU);
may generally not charge different prices on grounds of race or ethnic origin. The same goes ongrounds of sex, religion, disability, age or sexual orientation if the respective sales contract is typically concluded without or with low importance of the buyer’s person, especially in “bulk business”. An exception exists if different treatment is based on objective grounds, especially where it serves to avoid threats, prevent damage etc. (sec. 19, 20 Anti-Discrimination Act, “AGG”).

A supplier may not restrict the territory into which, or the customers to whom its distribution partner sells (art. 101 (1) b TFEU). Exempt are, however, restrictions of:

active sales into the exclusive territory or an exclusive customer group reserved to the supplier or another distribution partner;
sales to end users if the distribution partner operates at wholesale level;
sales from members of a selective distribution system to unauthorised distributors in the system’s territory; and
selling components, supplied for incorporation, to customers who would use them to manufacture the same kind of products (art. 4 (b) VBER).

Active sales mean actively approaching individual customers (e.g. by direct, unsolicited mail, e-mail, visits) or a customer group in a specific territory trough promotions specifically targeted at that group. Passive sales mean responding to unsolicited requests from individual customers, including general advertising which reaches customers in other exclusive territories or customer groups if done reasonably. This also applies to the internet: sales via webshops cannot be excluded. A supplier may only, however, require its distribution partner to fulfil certain quality standards, especially in selective distribution (Guidelines on Vertical Restraints of 10/05/2010, para. 51, 54).

At the end of the distribution chain, consumer protection laws apply, namely between the seller and the buying consumer. Statutory law grants a 2-year-warranty that products are free from defects at the passing of risk. In case of defect, the buyer is entitled to claim subsequent performance (remedy of defect or delivery of a defect-free product), alternatively price reduction or withdrawal (all regardless of fault), and, damages, provided that the seller has acted with fault (sec. 437, 280 et seq. BGB). Though fault is generally assumed by law, the seller can exculpate itself, especially if the seller has not manufactured the good (but its sub-supplier). Towards consumers, these rights cannot be contracted out (sec. 474, 475 BGB). Each seller within the distribution chain is entitled to have recourse against its own supplier if the product has already been defective at the respective delivery (sec. 478, 479 BGB). In order to maintain these rights, however, the buyer (unless consumer) already has to check at delivery if products are defective, and inform the seller accordingly (sec. 377, 378 HGB).

Besides, special information duties towards consumers exist in:

over the phone sales (sec. 312a (1) BGB);
over-the-counter sales, except everyday sales (sec. 312a (2) 2 BGB, art. 246 (2) EGBGB);
e-commerce (sec. 312j BGB); and
direct distribution off-premises and distance contracts (sec. 312d BGB).

Statutory law also limits the fees which the consumer shall pay beyond for means of payment or consumer hotlines etc. (sec. 312a (3–5) BGB). Finally, the consumer has a right of withdrawal regarding distance and off-premises contracts (sec. 312g, 355 BGB).

These consumer rights are similar throughout the EU because they are influenced by the EU Directives 1999/44/EC on the sale of consumer goods and 2011/83/EU on consumer rights.

A supplier may limit the warranty rights granted by statutory law towards its distribution partners. In general, there are few limits to individual agreements: they must not contradict statutory prohibitions (sec. 134 BGB) and public policy (sec. 138 BGB), and must not limit or exclude liability for willful intent, fraudulently concealing defects, where a guarantee has been given, or according to product liability law (sec. 202, 276, 444, 639 BGB). If the product has been found defective at the consumer, and the defect has already been existing between the distribution partners, a limitation of warranty can only be enforced if the supplier provides another compensation of equal value (sec. 478 (4) BGB).

In standard business terms, however, one may hardly deviate from statutory law – even in B2B-contracts (sec. 310 (1) and 307 BGB). One may only

- modify the rules of subsequent performance (time, place, number of attempts);
- exclude liability for slightly negligent breaches of non-cardinal duties; and
- limit liability for slightly negligent breaches of cardinal duties to the typical damages foreseeable at conclusion of contract.

The same goes for warranties provided to each downstream customer, unless the customer is a consumer because a consumer’s statutory rights cannot be contracted out.As regards product recalls, statutory law does not set any requirements. According to case law, a manufacturer must keep its products under surveillance and, when detecting risks for legally protected goods (as health), adopt the necessary preventive measures.Extent and time of such measures depends on the single case, especially the good at risk and the extent of possible damage (BGH, decision of 16/12/2008). Distribution agreements can delineate which party isresponsible for a recall and its costs. Individual agreements are not subject to specific limits. Standard business terms, however, are subject to a strict review in court: they can be unenforceable if they are incompatible with essential statutory principles, if they limit essential contractual rights and duties, if they are surprising or ambiguous (sec. 310 (1), 307, 305c BGB). Therefore, such terms should consider who would typically be responsible for recall and costs, depending on the product (ready-made, or not, etc.).

Distributor agreements with indefinite term can be terminated (sec. 314, 573, 620 (2), 723 BGB); the notice period depends, however, on the single case, considering also the distributor’s investments. E.g., one-year periods have been accepted in automotive distribution (BGH, decision of 21/02/1995 [Citroën]). In rare cases, antitrust law may demand a renewal of the relationship.

The distributor can claim indemnity only by analogue application of agency law (see above). The distributor’s indemnity can amount to the distributor’s average annual net margin.As regards applicable law / choice of lawand details on dispute resolution (choice of court, choice of arbitration / mediation), please see above in the section on agents.

Franchising

Franchisees buy and sell products on their own behalf. The franchisee acquires licences of intellectual property rights (trademarks and know-how) from the supplier (franchisor) for using and distributing the products or services. The franchisee is entitled and obliged to design its shop according to the franchisor’s concept and corporate design, and use the management-/system-specific know-how. In return, the franchisee pays royalties. The franchisor is precontractually obliged to disclose the key risks and issues for running the franchise, and subsequently often provides assistance on know-how and business.

Franchise contracts are not explicitly governed by statutory law (unlike e.g. in Italy). They combine elements of licensing, sales, and management of another’s affairs. Generally, agency law applies by analogy (cf. German Federal Court of Justice [“BGH”], decision of 17/07/2002).

Within franchisee relationships, the same antitrust rules apply as within distributor relationships: generally, agreements which aim at or result in restraints of competition are prohibited by antitrust law, namely by the German Act Against Restraints of Competition (“GWB”) and art. 101, 102 Treaty on the Functioning of the EU (“TFEU”). For details, please see above in the section on distributors.

Franchise agreements can be terminated according to agency law (mutatis mutandis). However, longer periods can apply in the specific case, e.g. if the franchisee made considerable investments due to the supplier’s product.

The franchisee can likely claim indemnity based on analogue application of agency law, but this has not yet been ruled out (BGH, decision of 23 July 1997, Benetton). No indemnity, however, can be claimed where the franchise concerns anonymous bulk business and customers continue to be regular customers only de facto (BGH, decision of 5 February 2015).

Trademark license

If a company owns a brand or design, such trademark owner can also distribute the product or service bygranting a trademark license to another party (“licensee”). By way of such license agreement, the trademark owner (“licensor”) allows the licensee to make use of its trademark.

The license agreement should especially cover:

the trademark;
the goods and/or services which the licensee is entitled to offer under the trademark and details on the use of the trademark (with or on the goods and/or services, promotion material);
the territory where the licensee is entitled to use the trademark;
any exclusivity of the license (if applicable);
royalty (in return for the license);
quality control (e.g. approval of samples prior to mass production and audit rights as regards the licensee’s facilities, the raw materials used and the final products);
the license’s term; and

the usual boilerplate clauses (written form, no waiver, severability, choice of law, choice of court etc.).

Selling via e-commerce (required licences, if any)

Selling via e-commerce does not require special licenses in Germany. However, certain requirements have to be observed as regards the webshop, especially providing clearly

the basic information about the entity behind the webshop (“Contact“, “Imprint” or “Legal Notes”);
the terms and conditions of sale; and
the privacy policy (it should mention which kind of personal identifiable data [“data”] is stored, how data, cookies and web-tracking are used, and explain the customer’s right to inform about, correct and delete data, cf. sec. 13 German Telemedia Act).

Relevant anti-trust regulations

According to the effects doctrine, the antitrust law of any affected market applies (art. 6 (3a) Rome-II-Regulation). Within the European Economic Area (“EEA”), Agreements which aim at or result in restraints of competition are prohibited by antitrust law, namely by art. 101, 102 Treaty on the Functioning of the EU (“TFEU”) and in Germany also by the German Act Against Restraints of Competition (“GWB”). Unlessagreements contain hardcore restrictions, a safe harbor is provided by the De Minimis Notice of 30/08/2014 and the Vertical Block Exemption Regulation no. 330/2010 [“VBER”]). Hardcore restrictions are generally prohibited, regardless of the parties’ market shares, especially price fixing, restricting the geographic areas or categories of customers, or cross-supplies between distributors within a selective distribution system.

Details are explained above with each kind of distribution channel.

Types of companies

There are several types of companies available under German law. However, types of business entities suited best for doing business in Germany are:

limited liability company (“GmbH” and “UG”);
joint stock company (“AG”);
limited partnership (“KG”).

Criteria for choice are liability, taxation, financing, personal involvement and control, and flexibility. For larger companies, GmbH or AG are typically suited best. Their shareholders’ liability is limited to the respective share capital.The minimum share capital varies between 50,000 (AG), EUR 25,000 (GmbH) and EUR 1 (for the GmbH-subtype “UG”). The transfer of shares in a GmbH or UG typically has to be approved by the other shareholders and notarized, while shares in an AG are freely transferable. However, the GmbH is a more flexible and procedurally less demanding form of entity than the AG. GmbH, UG, and AG are formed by one or more founding shareholder(s), adopting the articles of association and appointing its managing director(s) plus, in case of AG, a supervisory board (of at least three members) in a notarial deed. They exist upon registration at the commercial register. Alternatively, a supplier may purchase an existing, inactive shelf company – and, as advantage, start operating immediately. Partnerships are often preferred for tax reasons, especially the KG, which – for reasons of limiting liability – is often combined with a corporation as general partner (“GmbH & Co. KG” or “AG & Co. KG”). They require at least two partners.

Governing laws:

Limited Liability Companies Act (“GmbHG”) for GmbH and UG, and
Joint Stock Company Act („AktG“) for AG.
German Civil Code (“BGB”) and the German Commercial Code (“HGB”) for partnerships.

Foreign businesses generally operate under the same rules as domestic businesses. By way of exception, the Federal Ministry for Economy and Technology can restrict or prohibit acquisitions of or participations in domestic business entities by individuals or business entities seated outside the EU, Iceland, Liechtenstein, Norway or Switzerland (“EEA”). Preconditions:

the foreign investor acquires 25% or more of voting rights in a German company;
the acquisition endangers national public order or security (sec. 55–59 Foreign Trade and Payments Ordinance [“AWV”]). This may especially be the case if the domestic business entity acquired pertains to infrastructure sectors (telecommunications, power supply, trains, airports, or hospitals).Incorporation of a Limited Liability CompanyA Limited Liability Company (GmbH or UG, see above) require a minimum share capital between EUR 25,000 (GmbH) and EUR 1 (for the GmbH-subtype “UG”). GmbH and UG are formed by one or more founding shareholder(s), adopting the articles of association and appointing its managing director(s) in a notarial deed. They exist upon registration at the commercial register. Alternatively, a supplier may purchase an existing, inactive shelf company – and, as advantage, start operating immediately.

Incorporation of a Joint Stock Company

The minimum share capital required for a Joint Stock Company (AG) is EUR 50,000.

An AG is formed by one or more founding shareholder(s), adopting the articles of association and appointing its managing director(s) plus a supervisory board (of at least three members) in a notarial deed. It exists upon registration at the commercial register. Alternatively, a supplier may purchase an existing, inactive shelf company – and, as advantage, start operating immediately.

Set up of a Representative Office

A “Representative Office’s task is limited to observing the market without doing business. The Representative Office does not exist as own category under German commercial law. Instead, an office in Germany is either a branch office of the foreign company (see below), or an office of an independent contractor / service provider (but not of the foreign company). Representative Offices need not to be registered with the commercial register. Instead, a formal registration with the local trade authority suffices (“Gewerbeanzeige”).

Set up of a branch

Another way for direct distribution is to establish

an autonomous branch office („selbständige Zweigniederlassung“) or
a dependent branch office („unselbständige Zweigniederlassung“).

Branch offices are not separate entities, but belong to the head office of the main company and are subject to the same organizational law which governs the head office. The branch offices‘ liability therefore lies with the head office.

An autonomous branch office exercises the same business activities as the head office (not merely auxiliary activities). Besides, it has a certain personal and factual autonomy, especially through an own management with own executive powers, bank accounts, balance sheet and business assets. Such branch office has to be registered with the

local trade authority (as above);
German commercial register. This requires detailed information on the branch, including a notarised copy of the commercial registry in its “home country“ and the power of representation of its managing director(s), plus the memorandum and articles of association. All documents should be translated into German and the notarised copy should be authenticated (usually with an apostil).

A dependent branch office (“Unselbständige Niederlassung” or “Betriebsstätte”) does not act autonomously, but strongly depends on the head office (e.g. it issues invoices in the head office’s name).

Tax procedures

To foreign businesses and individuals that operate in Germany, two levels of taxation apply:

the trade tax applies to all businesses and individuals in Germany and is paid on the taxable earnings. As local tax, its rate differs from municipality to municipality;
the income tax depends on the business entity:

Corporations are subject to corporate income tax (15% flat rate). Their shareholders are subject to a tax on capital gain and dividends. The average overall tax burden for corporations in Germany is 30% (corporate income tax and trade tax).
A partnership itself is not subject to income tax, but its partners are subject to either corporate (if business entities) or personal (if individuals) income tax.
Individuals pay personal income tax. The tax rate increases with the income (to a maximum of 45% at an income of EUR 250,000), but trade tax payments can be set off against it. Special tax rates apply for dividends and capital gains.

To dividends, capital gains, interest payments and license fees, withholding tax (“Kapitalertragssteuer”) may apply. It amounts to 25% of the capital gain distributed to the owning business (plus a further “solidarity surcharge” of 5.5%, added to the tax amount). These taxes may be refunded in case of double taxation if a respective treaty with the country of origin of the owning business exists.

The Company Register

Establishing a company in Germany requires registration with the Company Register / Commercial Register (“Handelsregister”). The Register is administered by the local courts. It informs about merchants and commercial companies acting in Germany. Its objective is to create transparency and legal safety when dealing with these companies (e.g. informing about the managing directors of a company, its registered seat, its founding capital, etc.). It can also be accessed digitally on www.handelsregister.de.

Benedikt Rohrssen

Practice areas

Agence
Distribution
e-commerce
Franchise
Investissements

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Companies can sell their products worldwide directly – through branches, subsidiaries or e-commerce – or indirectly – through agents, distributors, franchisees or commission agents.

What are Commission Agents?

What is new for Commission Agents?

(i) is integrated into the supplier’s sales organization like a commercial agent; and
(ii) has to provide the customer data to the supplier so that the supplier continues to derive substantial benefits from the business with such customers after termination of the contract.

Can the parties contract out?

What about franchisees?

Practical tips

The provisions protecting self-employed commercial agents may apply analogously to commission agents.

As regards existing agreements under German law: if the two analogy requirements are met, indemnity claims at termination are quite likely.

As regards future agreements under German law:

In general, the claim for indemnity can likely be avoided by excluding the commission agent’s obligation to provide the customer data. Such exclusion should, however, be clearly formulated. Alternatively – or, to be on the safe side, additionally –, the supplier may oblige himself to block and or delete the customer data at terminaton of the contract with the commission agent.
Alternatively, the right to indemnity can be avoided by choosing another law and jurisdiction (taking into account the risk that the “German” indemnity claim might nevertheless be applied by as overriding mandatory provision in the sense of Article 9 of the Rome I Regulation).
Finally, if the commission agent acts outside the European Economic Area, the indemnity claim can be excluded by a simple waiver (according to analogue application of sec. 92c German Commercial Code).

Resale Restrictions in E-Commerce

total ban of internet sales,
prohibition of sales via third parties’ online platforms (especially “marketplaces”),
operation of a brick and mortar shops as a prerequisite for internet sales,
dual pricing, or
quality criteria for internet sales.

Antitrust limits to online resale restrictions

bags (“Scout” re third party platforms),
sportswear (“Asics”re price comparisons, logo clause, “Adidas” re third party platforms),
electronics (“Sennheiser” and “Casio”both re third party platforms),
luxury cosmetics / perfumes (“Coty” re price comparisons, third platforms), or
software (“Google” requiring manufacturers of to pre-install apps, cf. European Commission’s press release of 20 April 2016).

Now, the luxury cosmetics case of Coty Germany has reached the European level.

The current Coty Case

use their internet store as “electronic store window” of their brick and mortar store(s), thereby maintaining the products’ character as luxury goods, and
abstain insofar from engaging third parties as such cooperation is externally visible.

Questions referred to the CJEU

The CJEU has filed the case as “Coty Germany” (reference no. C-230/16). These are the four questions on which the CJEU is requested to answer:

Do selective distribution systems that have as their aim the distribution of luxury goods and primarily serve to ensure a ‘luxury image’ for the goods constitute an aspect of competition that is compatible with Article 101(1) TFEU?

If the first question is answered in the affirmative:

Does it constitute an aspect of competition that is compatible with Article 101(1) TFEU if the members of a selective distribution system operating at the retail level of trade are prohibited generally from engaging third-party undertakings discernible to the public to handle internet sales, irrespective of whether the manufacturer’s legitimate quality standards are contravened in the specific case?

Is Article 4(b) of Regulation (EU) No 330/2010 to be interpreted as meaning that a prohibition of engaging thirdparty undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of the retailer’s customer group ‘by object’?

Is Article 4(c) of Regulation (EU) No 330/2010 to be interpreted as meaning that a prohibition of engaging third-party undertakings discernible to the public to handle internet sales that is imposed on the members of a selective distribution system operating at the retail level of trade constitutes a restriction of passive sales to end users ‘by object’?

How to deal with Restrictions now

A total ban of online sales is hardly valid because online sales are considered as passive sales (cf. Guidelines on Vertical Restraints 2010, para. 52). Hardly an option either is restricting the webstore’s language options because it does not change the passive character of such selling (cf. Guidelines on Vertical Restraints 2010, para. 52). The same goes for restrictions on the turnover made by sales via the internet.

Allowed should, however, especially be

qualitative requirements for the design of e-commerce platform (without resulting in a total ban and without restricting the use of languages),
the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer (article 4 lit. b (i) VBER), e.g. territory-based banners on third party websites, cf. Guidelines on Vertical Restraints 2010, para. 53),
general qualitative restrictions for becoming a member of the supplier’s selective distribution system, e.g. requiring that distributors have one or more brick and mortar shops or showrooms (Guidelines on Vertical Restraints 2010, para. 54, 176).

The CJEU’s decision will bring more clarity – Legalmondo will keep you updated on the Coty Case and possible implications on online distribution.

I. Entering new Markets

II. Distributorship Agreements

III. Distribution international and Choice of law

First, because a choice of law may not be effective – as, for example, in some South American countries and in the Middle East.
Second, because there may be internationally mandatory provisions (“overriding mandatory provisions”, « lois des police » or « Eingriffsnormen« ) which are so important for safeguarding a country’s public interests that they practically « override » the choice of law, i.e. apply despite the otherwise effective choice of law.
Third, because the chosen law may contain unpleasant surprises, such as the German goodwill indemnity for distributors.

IV. “German” Distributor Indemnity

The distributor is

integrated into the supplier’s sales organisation; and
obliged (due to agreement or factually) to forward customer data during or at termination of contract.

V. How to avoid “German” Goodwill Indemnity for Distributors

The new decision is consistent with existing case-law: it was quite likely that the German Federal Court would continue on its way of largely applying agency law to distributors by analogy.

Five practical tips for contractual practice and future contract drafting:

Goodwill indemnity is a cost which arises only in the wake of a distributorship agreement, but should be considered beforehand – and also, if such cost can be avoided or stipulated differently beforehand (e.g. stipulate entry payments).

If the distributor operates outside the EEA, the claim for goodwill indemnity can be excluded at any time, i.e. already in the distributorship agreement itself (sec. 92c German Commercial Code; cf. Higher Regional Court of Munich, decision of 11/01/2002, ref. no. 23 U 4416/01).

If the distributor operates in the EEA, German law applies and the two above conditions are met, the distributor’s claim to goodwill indemnity cannot be excluded before termination.

Distributor’s German goodwill indemnity can be excluded beforehand especially if the parties

(i) exclude the transfer of the customer data; or

(ii) oblige the manufacturer to block, stop using and, if necessary, delete such customer data at termination (German Federal Court, decision of 05/02/2015, ref. no. VII ZR 315/13); or

(iii) chose another law (and, consequently, another jurisdiction or arbitration).

Alternatively, the parties may cushion the claim for goodwill imdemnity by agreeing on “entry payments” (“Einstandszahlungen”) – which could even be deferred until termination and then offset against the claim for goodwill indemnity. However, such entry payment should not be unreasonably high (Federal Court of Justice, decision of 24/02/1983, ref. no. I ZR 14/81), respectively it should correspond to a value in return, e.g. a particularly high distributor discount or a very long contract term (Higher Regional Court of Munich, decision of 04/12/1996, ref. no. 7 U 3915/96, Higher Regional Court of Saarbrücken, decision of 30/08/2013, ref. no. 1 U 161/12). In short: the manufacturer must prove that the parties would not have agreed a higher commission, even without the entry payment (as just decided by the German Federal Court on 14 July 2016, ref. no. VII ZR 297/15).

Shareholders’ rights and duties

Liability

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 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.

Managing director

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.

Supervisory board

Agency (regulations, duration, termination, indemnities – if any)

employee protection, e.g. limited right of termination under Dismissal Protection Act;
continued payment of salary during public holidays, illness and holidays;
minimum wage under Minimum Wage Act of 11 August 2014;
obligation to pay contributions to social security;
income tax on salary;
adherence to worker participation and collective bargaining agreements if applicable.
exclusive competence of labour courts if the employee has, during the last 6 months of activity, earned an average amount which does not exceed EUR 1,000 per month.

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- - “del credere commission” if the agent assumes liability for fulfilment of businesses (sec. 86b HGB);
  - an advance on commission once the principal has performed its obligation (sec. 87a para. 1 HGB);
  - accounting within maximum periods of three months (sec. 87c (1) HGB);
  - commission irrespective of delivery and payment, unless the principal is not responsible for non-delivery (sec. 87a ( 3) HGB);
  - request information, statements of account, an excerpt from the books, and inspection by an auditor (sec. 87c HGB).

These rules are mandatory and cannot be contracted out. Further details on the payment of commission (if not agreed otherwise) are set in sec. 86b et seq. HGB.

Besides, both parties have to safeguard each other’s interests (sec. 86, 86a, 90 HGB and sec. 242 BGB). Theagent is especially obliged to

- check the customers’ creditworthiness,
- inform the supplier immediately about any business procured,
- keep confidential any information obtained during his activity, and
- abstain from acting for the supplier’s competitors.

the agent terminated the contract (unless justified by circumstances attributable to the principal or because of the agent’s age or illness),
the principle has terminated the contract because of default attributable to the agent (which would justify immediate termination for cause), or
the agent, with the principal’s agreement, assigns and transfers its rights and duties under the agency contract to another person.

Indemnity cannot be contracted out, unless the agent acts outside EEA (sec. 92c HGB).

Generally, the parties are free to choose a court, especially if

the other party resides in another EU Member State, and the parties have chosen the court(s) of a EU Member State (art. 25 Brussels-Ia-Regulation);
the other party resides in Iceland, Switzerland or Norway, and the parties have chosen the courts of one of these States or Germany (art. 23 Lugano-II-Convention); or
both parties are merchants, legal persons under public law, or special assets under public law, or the other party resides outside Germany (sec. 38 Code of Civil Procedure [“ZPO”]).

Besides, the parties may also choose arbitration (sec. 1029 et seq. ZPO, and art. 1 (2)d Brussels-Ia-Regulationand art. 1 (2)d Lugano-II-Convention).

Distribution or Concession of sale

integrated into the supplier’s sales organization; and
obliged (due to agreement or factually) to forward customer data during or at termination of contract.

As regards non-compete-obligations, they are enforceable if they conform to antitrust law:

Such agreements between non-competitors are safe if each party’s market share does not exceed 15% on any relevant market affected. If one party’s market share exceeds 15%, but none exceeds 30%, a non-compete-obligation during the contractual term is valid if limited up to 5 years at most. Where products are sold on premises owned or leased by supplier from third parties, the five-year maximum does not apply. However, the non-compete obligation cannot exceed the term the buyer is occupying the premises.
After the contractual term, a non-compete obligation where one party’s market share exceeds 15%, but none exceeds 30%, is valid if it is necessary to protect know-how transferred to the distributor, and if limited to competing products, the concrete distributor’s premises, and a 1-year-term.

The distributor on its side can generally charge different prices to different customers because of freedom of contract. However, a seller

may have to charge the same prices if it holds a dominant or similarly strong market position(sec. 19, 20 GWB and art. 102 TFEU);
may generally not charge different prices on grounds of race or ethnic origin. The same goes ongrounds of sex, religion, disability, age or sexual orientation if the respective sales contract is typically concluded without or with low importance of the buyer’s person, especially in “bulk business”. An exception exists if different treatment is based on objective grounds, especially where it serves to avoid threats, prevent damage etc. (sec. 19, 20 Anti-Discrimination Act, “AGG”).

A supplier may not restrict the territory into which, or the customers to whom its distribution partner sells (art. 101 (1) b TFEU). Exempt are, however, restrictions of:

active sales into the exclusive territory or an exclusive customer group reserved to the supplier or another distribution partner;
sales to end users if the distribution partner operates at wholesale level;
sales from members of a selective distribution system to unauthorised distributors in the system’s territory; and
selling components, supplied for incorporation, to customers who would use them to manufacture the same kind of products (art. 4 (b) VBER).

Besides, special information duties towards consumers exist in:

over the phone sales (sec. 312a (1) BGB);
over-the-counter sales, except everyday sales (sec. 312a (2) 2 BGB, art. 246 (2) EGBGB);
e-commerce (sec. 312j BGB); and
direct distribution off-premises and distance contracts (sec. 312d BGB).

These consumer rights are similar throughout the EU because they are influenced by the EU Directives 1999/44/EC on the sale of consumer goods and 2011/83/EU on consumer rights.

In standard business terms, however, one may hardly deviate from statutory law – even in B2B-contracts (sec. 310 (1) and 307 BGB). One may only

- modify the rules of subsequent performance (time, place, number of attempts);
- exclude liability for slightly negligent breaches of non-cardinal duties; and
- limit liability for slightly negligent breaches of cardinal duties to the typical damages foreseeable at conclusion of contract.

Franchising

Trademark license

The license agreement should especially cover:

the trademark;
the goods and/or services which the licensee is entitled to offer under the trademark and details on the use of the trademark (with or on the goods and/or services, promotion material);
the territory where the licensee is entitled to use the trademark;
any exclusivity of the license (if applicable);
royalty (in return for the license);
quality control (e.g. approval of samples prior to mass production and audit rights as regards the licensee’s facilities, the raw materials used and the final products);
the license’s term; and

the usual boilerplate clauses (written form, no waiver, severability, choice of law, choice of court etc.).

Selling via e-commerce (required licences, if any)

Selling via e-commerce does not require special licenses in Germany. However, certain requirements have to be observed as regards the webshop, especially providing clearly

the basic information about the entity behind the webshop (“Contact“, “Imprint” or “Legal Notes”);
the terms and conditions of sale; and
the privacy policy (it should mention which kind of personal identifiable data [“data”] is stored, how data, cookies and web-tracking are used, and explain the customer’s right to inform about, correct and delete data, cf. sec. 13 German Telemedia Act).

Relevant anti-trust regulations

Details are explained above with each kind of distribution channel.

Types of companies

There are several types of companies available under German law. However, types of business entities suited best for doing business in Germany are:

limited liability company (“GmbH” and “UG”);
joint stock company (“AG”);
limited partnership (“KG”).

Governing laws:

Limited Liability Companies Act (“GmbHG”) for GmbH and UG, and
Joint Stock Company Act („AktG“) for AG.
German Civil Code (“BGB”) and the German Commercial Code (“HGB”) for partnerships.

the foreign investor acquires 25% or more of voting rights in a German company;
the acquisition endangers national public order or security (sec. 55–59 Foreign Trade and Payments Ordinance [“AWV”]). This may especially be the case if the domestic business entity acquired pertains to infrastructure sectors (telecommunications, power supply, trains, airports, or hospitals).Incorporation of a Limited Liability CompanyA Limited Liability Company (GmbH or UG, see above) require a minimum share capital between EUR 25,000 (GmbH) and EUR 1 (for the GmbH-subtype “UG”). GmbH and UG are formed by one or more founding shareholder(s), adopting the articles of association and appointing its managing director(s) in a notarial deed. They exist upon registration at the commercial register. Alternatively, a supplier may purchase an existing, inactive shelf company – and, as advantage, start operating immediately.

Incorporation of a Joint Stock Company

The minimum share capital required for a Joint Stock Company (AG) is EUR 50,000.

Set up of a Representative Office

Set up of a branch

Another way for direct distribution is to establish

an autonomous branch office („selbständige Zweigniederlassung“) or
a dependent branch office („unselbständige Zweigniederlassung“).

local trade authority (as above);
German commercial register. This requires detailed information on the branch, including a notarised copy of the commercial registry in its “home country“ and the power of representation of its managing director(s), plus the memorandum and articles of association. All documents should be translated into German and the notarised copy should be authenticated (usually with an apostil).

Tax procedures

To foreign businesses and individuals that operate in Germany, two levels of taxation apply:

the trade tax applies to all businesses and individuals in Germany and is paid on the taxable earnings. As local tax, its rate differs from municipality to municipality;
the income tax depends on the business entity:

Corporations are subject to corporate income tax (15% flat rate). Their shareholders are subject to a tax on capital gain and dividends. The average overall tax burden for corporations in Germany is 30% (corporate income tax and trade tax).
A partnership itself is not subject to income tax, but its partners are subject to either corporate (if business entities) or personal (if individuals) income tax.
Individuals pay personal income tax. The tax rate increases with the income (to a maximum of 45% at an income of EUR 250,000), but trade tax payments can be set off against it. Special tax rates apply for dividends and capital gains.

The Company Register

Mattia Dalla Costa

Practice areas

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How to deal with Restrictions now

I. Entering new Markets

II. Distributorship Agreements

III. Distribution international and Choice of law

IV. “German” Distributor Indemnity

V. How to avoid “German” Goodwill Indemnity for Distributors

Shareholders’ rights and duties

Liability

Shareholders’ meeting

Managing director

Supervisory board

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