Introduction
Forms of Corporate/Business Organisations
German law differentiates between capital companies and partnerships. Capital companies are legal entities, where the liability is limited to the assets of the company – ie, the shareholders’ liability is limited to what they have invested in the company. The most common legal forms of capital companies are the limited liability Company (Gesellschaft mit beschränkter Haftung – GmbH) and the stock corporation (Aktiengesellschaft – AG). Other forms of capital companies are the European stock company (Societas Europaea – SE) and the partnership limited by shares (Kommanditgesellschaft auf Aktien – KGaA). The KGaA is a capital company, but also has some elements of a partnership.
Partnerships are characterised by the personal liability of the partners. The most popular legal form of a partnership is the limited partnership (Kommanditgesellschaft – KG), consisting of limited partners whose liability is limited to a certain amount agreed and disclosed in the commercial register, and general partners with unlimited liability. However, the general partner may have the legal form of a capital company, thereby limiting its liability. German law also acknowledges the partnership under civil law (Gesellschaft bürgerlichen Rechts – GbR) and the General partnership (Offene Handelsgesellschaft – OHG), with unlimited liability of their partners.
Sources of Corporate Governance Requirements
The primary sources for corporate governance requirements for capital companies in Germany (GmbH, AG, KGaA, SE) are the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung – GmbHG), the German Stock Corporation Act (Aktiengesetz – AktG), the European and German acts on SEs (in particular the European SEVO and the German SEAG), the German Commercial Code (Handelsgesetzbuch – HGB), the Reorganisation of Companies Act (Umwandlungsgesetz – UmwG), the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz – WpÜG) and the Securities Trade Act (Wertpapierhandelsgesetz – WpHG).
Beyond this, for listed companies the German Corporate Governance Code (Deutscher Corporate Governance Kodex – DCGK) sets further corporate governance rules, which differentiate between recommendations and suggestions. Moreover, non-governmental regulations such as applicable listing rules enacted by the stock exchanges also establish corporate governance requirements. Certain industry sectors (eg, banks) are subject to further Regulation with respect to, inter alia, their corporate governance.
Corporate Governance Requirements for Publicly Traded Companies
Shares of an AG, SE and, less common, a KGaA may be listed on a stock exchange. The primary source for corporate governance requirements concerning listed AGs and KGaAs as well as, to a lesser degree, SEs is the AktG, as it differentiates between rules for listed and non-listed companies. Its requirements are mandatory. The HGB, WpHG, WpÜG, the European and German Securities Prospectus rules (the European WPVO and the German WpPG), the Stock Exchange Act (Börsengesetz – BörsG) and the Market Abuse Regulation (MAR) provide for further mandatory regulation, inter alia, in relation to listed companies’ corporate governance.
To promote a high corporate governance standard, the DCGK contains corporate governance standards in the form of recommendations and suggestions for listed companies with a two-tier corporate governance system; however, the rules of the DCGK shall also be applied correspondingly by listed companies with a one-tier corporate governance system. The DCGK is not enacted by the legislator, but by the German Corporate Governance Commission and is therefore not a statute or an ordinance, but rather “soft law”, so the standards set in the DCGK are principally voluntary. Recommendations shall be complied with and, if not, deviations have to be explained and disclosed (principle of “comply or explain”) in the corporate governance declaration (Entsprechenserklärung), to be resolved upon annually by the responsible corporate governance bodies of the listed company. The issuance of the corporate governance declaration is obligatory. Deviations from suggestions are allowed without disclosure. In practice, listed companies seek to comply with the standards set out in the DCGK, in particular the recommendations.
Corporate Governance Framework
Key Rules and Requirements
Over and above the corporate governance rules this article will focus on, German law provides for the following particularity changing the (allocation of seats of the) supervising body of certain companies.
Under German law, there are two different kinds of employee representation in supervisory boards of an AG, KGaA and GmbH – the so-called co-determination (“Mitbestimmung”). If an AG or a KGaA exceeds the threshold of generally 500 German employees, one third of the supervisory board members of the company must be employee representatives – ie, the one third participation (Drittelbeteiligungsgesetz – DrittelbG). If an AG, KGaA or GmbH and its controlled companies exceed 2,000 German employees in total, the supervisory board must consist of 50% employee representatives – ie, the parity co-determination (Mitbestimmungsgesetz – MitbestG).
With respect to a GmbH, the establishment of a supervisory board is only required if co-determination rules become applicable. Thus, a GmbH with more than 500 German employees must establish a supervisory board with one third of the supervisory board members being employee representatives. Also, a GmbH with more than 2,000 German employees within it and its controlled group must establish a parity co-determined supervisory board with a minimum of six shareholder and six employee representatives.
Shareholder representatives on the supervisory board are generally appointed by the general meeting, while employee representatives in cases of co-determination are generally appointed by employee elections.
German co-determination rules do not apply to the SE. When incorporating an SE by way of the ‘numerus clausus’ of incorporation, an agreement on the participation of employees in the SE (the so-called employee participation agreement) has to be negotiated with the special negotiating body, which is established particularly for such negotiation, representing employees from the German company, its subsidiaries and branches that are in EU and EEA member states other than Germany. The rules on co-determination are part of the agreement, with the General principle that the level of co-determination of the German company used to incorporate the SE shall be maintained (freeze of co-determination/prior to and after principle) – eg, if no co-determination exists and needed to exist Prior to the incorporation of the SE, then no co-determination would need to be agreed upon in the employee participation agreement for the SE, etc.
Current Issues and Developments
A key forthcoming development in the area of corporate governance will be the upcoming national implementation of the amended EU-Shareholders’ Rights Directive, as well as the amended DCGK, which is not yet in force.
The amended EU-Shareholders’ Rights Directive addresses several ongoing “hot topics” of corporate governance. With regard to the remuneration of members of the management of an AG, of the general partner of a KGaA, if any, and of an SE, the general meeting of a listed AG, SE and KGaA currently has an advisory vote on the remuneration of the members of the management board (“say on pay”). This does not affect the remuneration of senior management.
The management board and the supervisory board resolve upon the resolution proposal to be proposed to the general meeting; they are currently free to decide whether and how often the general meeting shall vote. This will change due to the implementation of the amended EU-Shareholders’ Rights Directive, which is currently in the legislative procedure and was supposed to become effective on 10th June, 2019 at the latest; however, the implementation act has not yet been passed by parliament. According to the current draft implementation act, the annual general meeting must vote on any material change to the remuneration policy, but at least every four years.
The draft implementation act also sets out minimum requirements for the remuneration policy. If the general meeting dismisses the resolution proposal upon the remuneration, the next annual general meeting has to resolve upon an amended remuneration policy again. The resolution has to be published on the website of the company for the period of the application of the remuneration system, for at least ten years. The annual general meeting also has to resolve upon the approval of the remuneration report for the previous financial year, with the exception of small and mid-sized corporations, if the remuneration report is presented as a separate item on the agenda of the annual general meeting. Neither the vote/resolution on the remuneration policy nor the vote/resolution on the remuneration report can be objected to by means of a contesting action or an action for annulment by a shareholder. The remuneration report also has to be published on the website of the company for at least ten years.
The draft act implementing the amended EU-Shareholders’ Rights Directive also provides for approval requirements and further disclosure requirements for related party transactions, including transactions of the company with ist various members of corporate bodies and introduces new rules with respect to intermediaries, institutional investors, asset managers and proxy advisers.
Furthermore, the commission overseeing the draft and amendment of the DCGK adopted an amended version of the DCGK. The amended DCGK will not be handed in for publication at the Federal Ministry of Justice and Consumer Protection until the act implementing the amended EU-Shareholders’ Rights Directive enters into force. The amended DCGK will enter into force upon its publication. While a lot of provisions of the DCGK shall be deleted following the amended DCGK because they repeat applicable law rather than set additional standards, the draft introduces the concept of principles preceding the individual recommendations and outlining the essence of the most important legal rules and concepts. The commission introduced new recommendations regarding the remuneration of the management board, seeking, among other goals, greater transparency, social acceptance of the compensation of the management board and to incentivise certain behaviours of the management board. The third aspect which has been heavily modified is the rules concerning the supervisory board, especially the indicators on when a member of the supervisory board is to be considered “independent”. Some other recommendations have also been added – for example, a maximum of five supervisory board mandates per individual is recommended, and, where an individual is a member of the management board of another listed company, a maximum of two supervisory board mandates is recommended. Also, in the latter case, none of those mandates shall be as the chair of the supervisory board. The amended DCGK eliminates the need for a separate corporate governance report and instead calls for information on the corporate governance to be included in the declaration on corporate governance in the management report.
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Chambers Global Practice Guide_Corporate Governance 2019_Chapter Germany
This article was first published in: Chambers Global Practice Guide, Corporate Governance 2019, June 2019
