Setting the Scene – Sources and Overview
What are the main corporate entities to be discussed?
Companies may be organised as capital companies or partnerships. Whereas partnerships are characterised by the personal liability of their partners, the liability of capital companies is limited to the assets of the company.
This chapter will focus on the two most popular forms of capital companies in Germany: stock corporations (Aktiengesellschaft – AG); and companies with limited liability (Gesellschaft mit beschränkter Haftung – GmbH). The other legal forms of capital companies – European stock corporations (Societas Europaea – SE) and partnerships limited by shares (Kommanditgesellschaft auf Aktien – KGaA) – are largely comparable to an AG. In particular, this chapter will highlight the requirements for listed companies, which are subject to the most comprehensive corporate governance rules.
What are the main legislative, regulatory and other sources regulating corporate governance practices?
The main sources regulating corporate governance practices are the German Stock Corporation Act (Aktiengesetz – AktG), the European and German acts on SEs (in particular, the European SE-VO and the German SEAG), the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaft mit beschränkter Haftung – GmbHG), the German Commercial Code (Handelsgesetzbuch – HGB) and, for certain aspects, the Reorganisation of Companies Act (Umwandlungsgesetz – UmwG) and co-determination laws (in particular the MitbestG and the DrittelbG).
For listed companies, capital markets law – in particular the European Market Abuse Regulation (MAR), the Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and the Securities Takeover Act (Wertpapiererwerbs- und Übernahmegesetz – WpÜG) – establish further requirements. The German Corporate Governance Code (DCGK) is an additional non-binding source of corporate governance rules for listed companies following the “comply or explain” principle.
The company’s articles of association and the rules of procedure for the management and the supervisory board shape corporate governance within the statutory framework at the level of the individual company.
What are the current topical issues, developments, trends and challenges in corporate governance?
The Conversion Directive Implementation Act was adopted in the beginning of 2023. In summary, it provides a legal framework for cross-border conversions, mergers and divisions.
The topic of sustainability and social and environmental responsibility has become increasingly significant, resulting in more specific and extensive expectations and legislation on this matter, both at national and EU level. Inter alia, the Corporate Sustainability Reporting Directive (CSRD) came into force in January 2023 and must be implemented into national law within 18 months. The CSRD aims to expand the reporting requirements to include additional information on ESG issues. However, the legislative process for implementation into national law is still ongoing.
With effect from 15 December 2023, the Financing for the Future Act introduced a number of changes for stock corporations. The aim is to make it easier for companies, especially start-ups, to access the capital markets. In this context, shares with multiple voting rights have been reintroduced. Thresholds for capital increases have been modified to facilitate capital increases, especially if subscription rights are to be excluded.
As part of the EU Listing Act, changes to capital markets legislation are expected to be implemented in 2024. These include changes to the Market Abuse Regulation (e.g. changes to the so-called ad hoc disclosure of inside information by listed companies) and changes to the EU Prospectus Regulation.
What are the current perspectives in this jurisdiction regarding the risks of short termism and the importance of promoting sustainable value creation over the long term?
The risks of short-termism are primarily addressed through legal requirements and limitations on management remuneration. For listed companies, the remuneration structure for the management board must be designed to enhance long-term and sustainable corporate development. Variable remuneration will be based on a multi-year assessment. The DCGK further recommends, inter alia, clawback provisions, a waiting period of four years for share-based remuneration, and that long-term incentives outweigh short-term incentives.
This article was first published in: The International Comparative Legal Guide to: Corporate Governance 2024, GLG Global Legal Group (published 15 July 2024)
