Corporate Law Changes planned by the New German Government

Corporate Law Changes planned by the New German Government

January 17, 2022, Covington Alert

On 7 December 2021, the three-party coalition of Social Democrats (SPD), Greens (Bündnis 90/Die Grünen) and Liberals (FDP) signed their coalition agreement under the headline “Mehr Fortschritt wagen” (Dare More Progress) which shall govern the cooperation of the “traffic-light” coalition for the current legislative term until 2025. In the meantime, new federal ministers and a record number of undersecretaries have been appointed, ministries have been reorganized and the new government has taken up its work. In the following, we provide an overview on the most relevant corporate law projects.

A. Innovations for Startups

Setting itself the ambitious goal to make Germany the leading European venue for startups[1], the coalition envisages to provide for a "one-stop shop" solution for setting-up a company. The objective is to enable companies to be incorporated within 24 hours, which, if achieved, would provide a significant alleviation. Although the coalition agreement broadly announces nationwide contact points for foundation advice, support and registration, it remains to be seen how this will be implemented in detail.

Additionally, Startups are to benefit from a stronger "digitization" of corporate law. Already in 2021, i.e. still under the preceding government, an amendment of the Limited Liability Companies Act was adopted and will come into force on August 1, 2022, which will allow notarial cash incorporations by way of video communication. In future, incorporations by way of video communication shall also be permissible for in-kind incorporations. Although this extension for “online notarizations” is a step in the right direction, its practical impact will most likely be negligible[2]. Much more relevant, not only for startups, will be the implementation of the plan to offer online notarizations also for post-incorporation measures like capital increases, and amendments of the articles of association[3].

B. Facilitated IPO (Exit), Follow-on Financings and Dual Class Shares

To further support emerging companies and SMEs and to generally strengthen the German capital market, the coalition further agreed to facilitate IPOs and capital increases. For this purpose, it is intended, inter alia, to introduce shares with different voting rights for stock corporations (dual class shares) in addition to the existing concept of preferred shares without voting rights. Using such dual-class structures would allow founders to raise capital by going public without losing control over their company. This would at least mitigate one major disadvantage of German stock corporations compared to foreign legal forms[4]. However, the practical gain will highly depend on the specific details of its implementation. In this regard, current announcements indicate that the coalition may choose a quite conservative approach and impose certain significant restrictions on the new dual class shares model, e.g. by providing for a time limitation.

C. Virtual Shareholders’ Meetings

Forced by the Covid-19-pandemic, the German legislator hastily permitted as temporary measure the option of holding a hybrid shareholders’ meeting with the possibility for shareholders to participate virtually. Taking up on that development, the coalition intends to provide a permanent solution for virtual shareholders’ meeting reflecting a practical demand. Again, several questions necessarily arising in the context of such fundamental shift remain unanswered in the coalition agreement. In particular, it will be interesting to see how the legislator intends to preserve the shareholders’ rights in such virtual assemblies, to which legal entities such option will be available and whether the virtual assembly can entirely be held online or merely continue the current hybrid model by still requiring a physical gathering to a certain extent.

D. Corporate Co-Determination

Additionally, the coalition agreement contains an extension of the statutory obligation of corporations to appoint employee representatives to their supervisory boards (co-determination). The number of required supervisory board members and employee representatives in the supervisory board depends on the number of employees: "One third co-determination" (requiring one third of the supervisory board seats be appointed by employees) kicks in if the headcount exceeds 500, and "equal co-determination" (50:50 employee and shareholder representatives) is mandatory beyond a threshold of 2,000 employees.

Under the current regime it is however possible to preserve the co-determination status quo by way of a legal transformation into a European stock corporation (Societas Europaea or SE).  According to the coalition agreement, this so-called “freezing” privilege of SEs is now up for discussion. However, it is questionable whether a removal of such privilege is possible from a European law perspective without amending the European SE-Regulation which would require a majority vote of the EU member states. Likewise, it is an open question whether existing SEs would benefit from a grandfathering privilege.

Further, the coalition plans to extend the scope of application of the one-third participation law (DrittelbG) in a groups of companies situation. Currently, employees working at a subsidiary are only included in the calculation of the threshold value at parent company level if the parent and its subsidiary have entered into a domination agreement. Prospectively, employees of the subsidiary shall also be attributed to the parent company already if the subsidiary is de facto controlled by the parent, in particular if the parent holds the majority of voting rights. If implemented, this will inevitably have the effect that many corporations with de facto control over other companies will, for the first time, have to include employee representatives in their supervisory board or actually establish a supervisory board.

Contrary to the other reforms, this expansion of co-determination is neither intended nor likely to contribute to Germany's attractiveness as a business location.

E. Outlook

Many projects and initiates the coalition intends to take on are long overdue, and therefore, the new coalition agreement is a step into the right direction. However, the coalition’s plans are still very vague and in many aspects the question remains if the envisaged reforms are sufficient to achieve the defined goals. In that regard, the coalition may dare some more progress.

We will follow further developments and provide respective updates when specific legislative plans take shape.