Forms of Corporate/Business Organisations
German law differentiates between capital companies and partnerships. The following chapter will focus on capital companies, as these are the most important and regulated forms of companies in Germany.
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 or GmbH) and the stock corporation (Aktiengesellschaft or AG). Other forms of capital companies are the European stock company (Societas Europaea or SE) and the partnership limited by shares (Kommanditgesellschaft auf Aktien or 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 or 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 or GbR) and the general partnership (Offene Handelsgesellschaft or 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 or GmbHG);
- the German Stock Corporation Act (Aktiengesetz or AktG);
- the European and German acts on SEs (in particular the European SEVO and the German SEAG);
- the German Commercial Code (Handelsgesetzbuch or HGB);
- the Reorganisation of Companies Act (Umwandlungsgesetz or UmwG);
- the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz or WpÜG);
- the Market Abuse Regulation (Marktmissbrauchsverordnung or MAR); and
- the Securities Trade Act (Wertpapierhandelsgesetz or WpHG).
Beyond this, the German Corporate Governance Code (Deutscher Corporate Governance Kodexor DCGK) sets out further corporate governance rules for listed companies, which differentiate between recommendations and suggestions. In 2020, the DCGK introduced the category of principles which precede the recommendations and suggestions regarding a certain subject matter and outline the fundamentals of the applicable law.
Most recently, the DCGK has been amended, substantiating some ESG aspects as well as the guidelines on internal controlling in response to new legislation on financial integrity.
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 Companies With Publicly Traded Shares
Shares of an AG, SE and, less commonly, 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 or BörsG) and the 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 legislature, 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 a declaration of compliance (Entsprechenserklärung), to be resolved upon annually by the responsible corporate governance bodies of the listed company.
The issuance of the declaration of compliance 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.
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Chambers Global Practice Guides_Corporate Governance 2022_Chapter-Germany
This article was first published in: Chambers, Legal Practice Guide Corporate Governance, July 2022