Disposition of assets as a whole in Germany

Since 1995 it had been considered that section 179a of the German Stock Corporation Act (AktG) was to be applied in the same way (in German so called analog) for disposition of the entire assets of both a commercial partnership and a limited liability company (GmbH).

The ruling established that the requirement for the consent of all shareholders does not stem from a corresponding application of the law but from the exceptional nature of the measure itself. The approval has a different effect than before. This will affect many asset-related transactions involving GmbH companies and partnerships.

This guide outlines what approval is needed for asset disposition in relation to each kind of German company.

Separation and abstraction

A special characteristic of German law is the so-called separation and abstraction principle (Trennungs- und Abtraktionsprinzip). It distinguishes between the obligatory transaction under the law of obligations, the contract, and the transaction 'in rem' - the actual granting of ownership of an object. Both can be effective or ineffective in themselves.

The consequences of ineffectiveness include claims for rescission of the contract, surrender or damages. In the cases described, a disposition of the assets as a whole is always present if either the entire assets are actually disposed of or if individual items are or are to be transferred which represent almost the entire assets and the remaining items or claims do not represent significant assets of the transferring legal entity. In corporate transactions, the approval requirements for both the share deal and the asset deal are of particular importance.

Approval requirements under civil law

Consent of Spouse - Sections 1365, 1423 BGB

Approval requirements under German civil law derive from family law. The preservation of the property as the economic basis of existence of the marriage community or the preservation of the claim to property settlement after the termination of such is the protective purpose of section 1365 para. 1 of the German Civil Code (BGB). A disposition of more than 90 % of the total assets of a spouse shall only be effective if the other spouse also agrees. The consent is directed to the transaction of disposal. If one spouse has agreed to the obligatory transaction - i.e. the contract - this also covers the disposition transaction. If there is no consent, the disposition is ineffective vis-à-vis the third party. Subsequent approval is possible. The regulation can be waived by marriage contract. A comparable regulation for the obligation business with the marriage in form of the property community provides the law in section 1423 sentence 1 BGB. The provision has today only little practical relevance, but follows the same principles as section 1365 BGB.

Consent of the Family Court for Minors - Section 1822 BGB

The assets of a minor should also be protected from unhindered access by a legal guardian. According to section 1822 no. 1 BGB, a legal guardian can only enter into an obligation to dispose of the assets as a whole if the competent family court has agreed to this transaction. As an exception, the courts apply the so-called "total theory" (in German so called "Gesamttheorie"), according to which the obligation to dispose of the assets must actually concern the entire current assets of the minor. In the absence of such consent, subsequent approval can be obtained from the family court. Otherwise the contract is ineffective and the minor is not bound by it.

Relevance under Corporate Law

If a spouse sells shares from his or her assets as part of a share deal, it is generally advisable to obtain the written consent of the other spouse prior to a M&A transaction. This applies regardless of whether only shares in a company or the entire company are to be sold or whether the buyer is later granted a purchase option for further shares. The marital status of a seller must be clarified at an early stage. This also applies if shares in a company are only held in trust and the trustee sells shares for the trustor (as the actual beneficial owner). The facts of a disposal of the assets as a whole can also be fulfilled upon the termination of a company or the admission of new shareholders into the company. The transfer of a commercial business to a company may also require approval.

Approval requirements under corporate and stock corporation law

If the group of shareholders is granted certain reservations of approval for transactions of the company with third parties, this constitutes a restriction of the powers of representation of the legal representatives. Companies are represented by their executive bodies. In the case of stock corporations (AG), GmbH and commercial partnerships - such as general partnerships (OHG) or limited partnerships (KG) - these are the executive board and board members, the managing director and the personally liable partners. Restrictions on the power of representation have no effect on third parties, so that third parties may in principle rely on the unlimited power of representation and thus the effectiveness of the legal relationships of legal representatives. A third party does not have to examine restrictions in the internal relation, which result from rules of procedure or the articles of association. This principle finds two breakthroughs in dispositions of the assets as a whole: In insolvency proceedings pursuant to sections 69, 160 of the German insolvency code (InsO) and in the case of stock corporations pursuant to section 179a AktG.

Stock corporation - Section 179a AktG

If a stock corporation wishes to dispose of its assets in their entirety, the transaction of obligation must be approved by the general meeting. The approval must be granted by at least 75% of the share capital represented and is directed at the entire agreement including the annexes. The executive board has special duties to inform and inform the shareholders in advance. If the contents of the agreement change, a new resolution is required. The provision refers to the formal requirements for the adoption of resolutions when the articles of association are amended, so that the resolution must be notarised. In the absence of such approval, the agreement shall be ineffective and may be subsequently approved. The lack of consent thus has an external effect vis-à-vis third parties. A waiver of the provision in the articles of association of the company is not possible. The provision also applies to project and holding companies as well as to the partnership limited by shares (KGaA) and companies already in liquidation. If the sale of the assets is accompanied by a change in the object of the company, two resolutions of the general meeting must be passed.

GmbH

On the basis of the history and the protective purpose of the regulation as well as the structural and conceptual differences between the AG and the GmbH, the BGH develops its reasons for its decision and thus clearly states in the first guiding principle of its decision: "Section 179a AktG is not applicable to the GmbH by analogy". The German Limited Liability Code (GmbHG) does not know a regulation comparable to section 179a AktG. A not legally regulated restriction of the comprehensive power of representation of the GmbH managing director in the external relationship leads however to substantial uncertainties in the legal traffic to the detriment of third parties. However, a provision is only applied analog if there is an illegal loophole in the law - in this case the GmbHG - and the underlying facts are comparable in both cases, so that it can be assumed that the legislator would have come to the same result in weighing up the interests. However, the BGH states that the status and need for protection of the shareholders of a GmbH is not comparable to the status of shareholders of an AG (or KGaA). The GmbH shareholder can issue instructions to the management, makes structural decisions and has comprehensive control and information rights, unlike the shareholder of an AG. Even without application of section 179a AktG analog, the shareholders' meeting can assert the information rights stipulated therein.

Nevertheless, the BGH considers the approval of the shareholders' meeting to be necessary if the assets as a whole are to be disposed of. It is then a so-called "particularly significant business" for the GmbH. It is therefore irrelevant whether the articles of association of the GmbH provide for such consent. In contrast to the previous situation, however, a lack of consent should only be effective in the internal relationship. A subsequent approval remains possible. If the managing director has not obtained the consent, he may be liable for damages. In the external relationship the contract remains effective. Only if the contractual partner knew or should have known that the managing director abused his power of representation is the contract also ineffective in the external relationship. The BGH remains silent as to whether a majority other than a simple majority is required for the resolution. Meanwhile there are individual voices, which proceed further from a notarisation obligation for the partner resolution and derive these from section 53 para. 2 GmbHG analog. In its decision, however, the BGH did not take up such an obligation, so that the notarisation of the shareholders' resolution should not be necessary.

The approval requirement applies both to the disposal of individual assets and to shares in a company if these represent the assets of the company. In practice, it is advisable to include a corresponding provision in the articles of association of the GmbH and also to make provisions for the necessary majorities. The transfer of assets to a third party or a majority shareholder at the expense of minority shareholders can be made more difficult. According to the judgement, it is now also possible for the shareholders of a GmbH to shake the good faith of a third party in advance in order to preserve the company assets and thus bring about the invalidity of an obligation transaction in the external relationship.

Commercial partnerships

The BGH has still clarified the (non-)application of section 179a AktG only for the GmbH. A lawsuit concerning the applicability of section 179a AktG to commercial partnerships is already pending before the BGH and will be decided shortly. It is to be expected that the court will come to the same conclusion here as well. In the case of commercial partnerships, the so-called "principle of self-organization" (in German so called "Prinzip der Selbstorganschaft") applies. The shareholders themselves carry out the management, so that a corresponding application of section 179a AktG cannot be considered a fortiori.

Until the court has made a decision, it is still recommended to proceed from an application of section 179a AktG analog for the partnership and to bring about a unanimous shareholders' resolution. The resolution for an amendment of the articles of association of the partnership is formless and does not have to be notarised.