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The impact of the new German Limited Liability Companies Act on managing directors

February 2009 - Corporate & Commercial. Legal Developments by Avocado Rechtsanwälte .

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Mission accomplished: After lengthy discussions, the new German Limited Liability Companies Act (LLCA) finally came into force on November 1, 2008. Indeed, the legislators have done a good Job even though only time will show whether the LLCA in fact can bring more legal certainty and flexibility into the landscape of German corporate law.

The goal of the new LLCA was to increase the competitiveness of Germany’s private limited liability company (GmbH). This was triggered by increased competition from companies formed under other jurisdictions like, e.g., the English private company limited by shares (Limited), and the full recognition of limited liability companies from other EU jurisdictions after a series of landmark decisions by the European Court of Justice, such as, e.g. “Centros“, „Überseering“, and - in particular - „Inspire Art“.

Germany’s reform of the aged LLCA – a reform that has turned out to be the biggest undertaken since the introduction of the GmbH in 1892 – will not only bring simplifications and clarifications to the law of the GmbH, but also new liability risks for managing directors of a GmbH, regardless of whether these are residing in Germany or abroad.

Liability for “insolvency causation”

If the GmbH is insolvent, i.e. if it is unable to meet its payment obligations (i.e., illiquidity) or if it is over-indebted, the managing director must apply for insolvency. The managing director is liable for any payments made after insolvency, thus aggravating the state of insolvency.

The new LLCA broadens the managing director’s liability. Pursuant to the new LLCA, the managing director is not only liable for the aggravation of the GmbH’s insolvency, but also for payments made to shareholders of the GmbH if such payments necessarily lead to the GmbH’s illiquidity or over-indebtedness, i.e., for payments made immediately prior to insolvency. Thus, the liability for the aggravation of insolvency has been expanded to liability for the causation of insolvency.

The wording of the LLCA is rather vague in regard to the question of when a payment is considered to be a cause of the insolvency. Even though there is no doubt that not every payment to the shareholder is suitable to cause the insolvency, it is nevertheless not clear under what conditions a payment to the shareholders will lead to personal liability of the managing director.

Due to the fact that there are no court decisions on this issue yet, there is indeed a considerable liability risk for managing directors, in particular in situations where payments are made at a time where the GmbH is in a critical phase. The managing director is therefore forced to make an assessment of the financial situation of the GmbH bfore making any payments to the shareholders, in particular when the company is in a critical situation.

The Shareholder List

The LLCA enhanced the status of the shareholder list in order to increase legal certainty and to reduce efforts and expenses in case of share transfers.

In the past, the shareholder list could not be relied upon to determine who the shareholders of the GmbH were, since the shareholder list legally did not protect the good faith of a buyer of shares who had relied on the accuracy of the list. Therefore, in case of share deals, the buyer had to review every single share transfer starting with the formation deed.

The new LLCA introduces a new bona fide acquisition of shares which allows a buyer to acquire shares of the GmbH even if the seller is not the legal owner of the shares. According to the new rule, only those shareholders whose names are on the shareholders’ list which was filed with the commercial register are deemed to be the legitimate shareholders. If the true shareholder does not ensure that an accurate shareholder list is provided to the commercial register, a share purchase bona fide is possible if the shareholders’ list has been inaccurate for a minimum of three years.

According to the new LLCA, the managing directors are responsible for the accuracy of the list. However, in case of a share transfer, such responsibility is transferred to the notary who notarizes the share transfer. In all other cases, i.e. in situations in which there was no notary involved (e.g., inheritance of shares), the managing director remains liable. Therefore, there is a general liability risk for the managing director if, e.g., the share transfer was notarized abroad because the obligation to provide a new shareholder list does not apply to notaries outside Germany. Furthermore, a liability risk exists for the managing director where the share was transferred by succession.

Thus, the enhancement of the status of the shareholder list simultaneously increases the managing director’s liability risk in case of a bona fide share acquisition.

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