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Brexit – And a proposal designed to help German companies return to Germany

Brexit has not only hit many banks hard a not insignificant number of small companies that chose the legal form of a UK limited company but have their head offices in Germany are increasingly considering returning to Germany. Once Brexit becomes effective, these companies will no longer be recognised in Germany, as they will lose their freedom of establishment. Now, a proposal by the Federal Ministry of Justice seeks to produce relief.

Current Situation

An estimated 8,000 to 10,000 small and medium-sized companies mostly start-ups with few capital resources – chose, when setting up their companies, the legal form of a "private company limited by shares", in short, limited company (Ltd). Their head offices, however, are in Germany.

Once Brexit becomes effective whether hard or soft these companies will no longer be able to benefit from the freedom of establishment applicable in the EU, and will thereby lose their legal personality in Germany. According to decisions by the German Federal Court, they will instead be treated as one of the corresponding legal forms available in Germany, i.e. either as general partnership (Offene Handelsgesellschaft - OHG), or as partnership under the German Civil Code (Bürgerliches Gesetzbuch – BGB) or non-trading partnership (Gesellschaft bürgerlichen Rechts – GbR), depending on whether they engage in trade or not. If the company only has one shareholder as is often the case in small companies and start-ups the shareholder would even be considered a sole trader (Einzelkaufmann) or simply an individual (Einzelperson) after Brexit. The same will happen to public limited companies, in short PLCs.

Risk of unlimited personal liability

In all of the above cases, the company or the shareholders of the company would be subject to a personal and unlimited liability with their personal assets for all company liabilities, even for existing liabilities. It is, however, exactly this scenario that founders sought to avoid in most cases when establishing a company limited by shares. So what can be done?

Moving generally possible

In order to "move" such a company to Germany, a German legal entity will be needed in any case once Great Britain has left the European Union. As of today, companies that plan to return to Germany practically only have the following two options:

  1. Sale of all assets and contracts of the limited company to a newly founded German company (e.g. a company with limited liability, Gesellschaft mit beschränkter Haftung - GmbH), and subsequent liquidation of the limited company. This approach is, however, somewhat complicated because a transfer of contracts (customers, suppliers, developers, employees etc.) generally require the consent of the contractual partners. A transfer may also reveal hidden reserves, which can result in tax disadvantages.
  2. Cross-border transformation of the limited company into a German GmbH: first, a German GmbH is established by way of the so-called Sachgründung (formation by non-cash capital contribution), using all of the shares in the limited company as the contribution. The limited company is then merged with the GmbH, following the regulations of the German Act Regulating the Transformation of Companies (Umwandlungsgesetz, UmwG). This approach, however, includes many formalities and is labour-intensive and costly, which small companies in particular might not be able to shoulder.

Further models have been discussed in legal literature, presenting approaches to "move" a limited company to Germany. All of these models, however, suffer either from the uncertainty as to whether such a solution is at all practicable, owing to the absence of a statutory basis, or the significant formal and financial efforts involved.

Cost-efficient solution: transformation into partnership?

A proposal by the Federal Ministry of Justice of 3 September/10 October 2018 proposes a less costly solution: it contains plans to add regulations on merging companies limited by shares with partnerships to sections 122a et seq. of the Umwandlungsgesetz. Previously, this option of a cross-border merger was only open to companies limited by shares. To "move" has therefore always required the establishment of a German company limited by shares in the form of a GmbH by way of a Sachgründung. The "Mini-GmbH" an enterprise company (with limited liability) (Unternehmergesellschaft), in short UG was not an option, as a Sachgründung is prohibited for this type of company.

The proposed additions to sections 122 et seq. UmwG, still requires the formation of a German legal entity, just as before. However, companies affected by Brexit will now be allowed to transfer, for instance, into a limited partnership (Kommanditgesellschaft - KG). Depending on capital resources, either a GmbH or a UG could have an interest as a personally liable partner. Either a GmbH & Co. KG or a UG & Co. KG would then be established. In the latter case, the share capital may be below EUR 25,000.00 since the statutorily minimum share capital is EUR 1.00. This would make the capital that the German legal entity would have to summon up for formation very small, while at the same time it would protect shareholders from unlimited personal liability.

The planned new regulation thus creates an additional option for concerned companies to transform, complementing the existing possibilities. It is doubtful that this option really carries less effort and costs though. It remains necessary to form a German company, which will merge with the British limited, thus incurring costs for legal advice and a notary. In the case of a GmbH & Co. KG or a UG & Co. KG, even two shareholders' agreements would have to be prepared and one would require notarisation. Also administrative expenses would grow, since it would be necessary to prepare two sets of financial statements in the future. Finally, the company would have to undergo the entire merging process, which requires the involvement of the relevant British authorities, again resulting in consulting and translation fees.

Still, the initiative should certainly be welcomed, as every new alternative offers affected companies more flexibility to find, the best way to bring their company to Germany, depending on their individual situation, while avoiding excessive personal liability risks and taking the relevant cost-benefit considerations into account.

Dr Gesine von der Groeben
(Lawyer)

This article has been published in a different version for the first time in: DER PLATOW Brief, PLATOW Recht, edition from 17 October 2018.