I. The decision of BGH

What happens if the defendant suddenly loses his legal existence in the course of legal proceedings? The BGH dealt with this issue in January 2017. A private company limited by shares sued in Germany was removed from the Companies Register of the British Companies House in England after lis pendens. The company was thus considered dissolved under British law until it has been accordingly re-registered. This re-registration was carried out during the appeal proceedings. However, according to the BGH, the temporary removal lead to the defendant losing its existence and thus its legal and procedural capacity according to § 50 para. 1 German Code of Civil Procedure [Ziviprozessordnung – ZPO]. Pursuant to §§ 239, 241 ZPO, this lead to an interruption of the litigation ex officio as long as a re-registration has been carried out or could be carried out.
It is true that § 239 ZPO is only directly applicable to natural persons and, according to previous German case-law, only to such legal persons whose removal does not result in liquidation but in universal succession. In this case, however, according to the BGH, an analogous application of the provision was necessary because the private company limited by shares regained its legal existence by re-registration into the companies register and thus this situation is comparable to a suspension of legal proceedings as a result of universal succession. Such a suspension of legal proceedings serves the economy of procedure. § 249 ZPO which is also applicable to this situation effectuates that any actions of the court with external effect which have been carried out during the interruption of proceedings shall basically be deemed void. The consequence was that a default judgment which was caused by the absence of a party from the hearing and which has been notified to the parties during the suspension of legal proceedings could not initiate an effective objection period.

II. Private companies limited by shares [“limited company”] registered in the UK with administrative headquarters in Germany – exit after Brexit?

In the referendum of 23 June 2016 51.9 % of UK electorates voted in favor of leaving the European Union. The official exit was declared on 29 March 2017 – according to article 50 para. 2 TEU [Treaty on European Union], at this day the two-year period for the withdrawal taking effect has started to run. As of 30 March 2019, EU Treaties will no longer have an effect on the UK. Does Brexit, however, entail an exit for the legal form of private limited companies by shares in Germany as well?

1. Consequences under company law

Due to the consequences of Brexit, around 8,200 English limited companies and around 3,000 Ltd. & Co. KGs [limited commercial partnership (KG) consisting of a general partner (Ltd.) and a limited partner (members of the Ltd.)] with registered offices in the UK and their administrative headquarters in Germany are affected. Leading rulings of the European Court of Justice such as in the cases of Centros, Überseering and Inspire Art had led to a veritable boom in the legal form of private companies limited by shares in Germany – at least before the Law for the Modernization of the German Limited Liability Company Law and the Prevention of Misuse [Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen – MoMiG] came into force and as a result the “Unternehmergesellschaft (haftbeschränkt)” (UG) [entrepreneurial company] was introduced as a special form of the GmbH [German limited liability company]: Due to the application of the foundation theory to companies under foreign law in Germany resulting from the principle of freedom of establishment, it was possible to establish a corporation under English law and thus not have to comply with either a legally prescribed minimum capital in Germany nor any regulations regarding co-determination.
Upon entry into force of the withdrawal of the United Kingdom from the EU, however, European primary and secondary laws will no longer apply within the relations between the UK and EU member states, subject to any other negotiation results or an accession of the UK to the EEA. This replaces the foundation theory by the principles of seat theory which prevails in German private international law and is applicable to non-EU and EEA member states in accordance with Supreme Court rulings. As a result, only the law of that country in which the registered office is located is applicable with regard to the legal form of the company. Does this mean “Goodbye Germany” for private companies limited by shares whose administrative headquarters are located in Germany?
However, one thing is certain: If the principles of seat theory are applied, private limited companies by shares are subject to German company law and have to be classified in accordance with German company law according to its numerus clausus, i.e. other legal forms of companies than those provided by German law are not permissible. This may inevitably lead to the Limited being classified as a general partnership [Offene Handelsgesellschaft – OHG] or as a partnership under civil law [Gesellschaft bürgerlichen Rechts – GbR] in future – which may result in disastrous consequences: In fact, the intended exclusion of the personal liability of the partners is being revived. Furthermore, the classification as a partnership means that the principle of self-organization applies, i.e. generally only the partners are authorized to manage the company. In the case of a general partnership, this means that each shareholder is entitled to represent the company individually. The power of representation of a director of the company who is also a shareholder of the Limited may be legally established by way of a shareholder resolution upon the appointment as director.
However, if the director is not a shareholder, the principle of self-organization would be violated. In this case, at most a reinterpretation into a legal power of representation may then be taken into consideration.
In order to avoid any personal liability, a corresponding shareholder resolution should therefore be adopted for any actions of directors. It should also be noted that the “transformation” would take place by law, i.e. any advantages of the German Transformation Act [Umwandlungsgesetz – UmwG] would not apply. It is therefore not possible to ensure the legal identity of assets and members.

2. Consequences under insolvency law

After the withdrawal of the UK from the EU takes effect, the European Union Council Regulation on Insolvency Proceedings will no longer be applicable to insolvency proceedings in the UK. As a result, insolvency proceedings in the UK will no longer be automatically recognized in Germany without further examination in accordance with Article 16 of the European Council Regulation on Insolvency Proceedings in case that a decision to open proceedings in the UK becomes effective. Instead, the requirements of § 343 German Insolvency Act [Insolvenzordnung – InsO] must be met, i.e. it must be examined whether the present insolvency proceedings could be defined as insolvency proceedings in accordance to the InsO and whether the courts of the third country, in this case the UK, have any international jurisdiction at all.

3. Consequences under tax law

As of 30 March 2019, unless other agreements are being made, the application of the so-called parent-subsidiary directive, for example, will cease to apply, which may have an effect on the exemption from withholding of capital gains tax as well as may tighten the conditions regarding the exemption from corporation tax on intercompany dividends of distributions of British subsidiaries to a German parent company and the conditions regarding trade tax on intercompany tax privileges, depending on the respective scenario. With regard to CFC rules, §§ 7, 8 German Foreign Transaction Tax Act [Außensteuergesetz – AStG], the so-called substance test is no longer applicable, i.e. the possibility of a counter-exception in order to avoid the additional taxation of intermediate companies situated in other EU member countries. Brexit also has an impact on loss compensation which will then in the future only be possible to a limited extent for losses from the UK pursuant to § 2a para. 1 German Income Tax Act [Einkommensteuergesetz – EStG]. Furthermore, an exit taxation (§ 6 AStG) may be possible, in particular if a natural person changes his residence from Germany to the UK. In addition, comprehensive restrictions on tax-neutral transformations with inclusion of British companies could also be expected. Further (substantial) effects will arise in the field of VAT law, e. g. a former intra-EU acquisition will then be regarded as an import.

III. Possible measures

It is doubtful whether already existing private limited companies by shares in Germany will be allowed to claim some kind of “existence protection” for themselves. For this reason, companies established under British law with current administrative headquarters in Germany should consider a change of legal form before the UK’s withdrawal from the EU takes effect. As possible measures could be considered a cross-border transformation of a Limited into a German GmbH or a cross-border merger of a Limited into a GmbH. A transformation of legal form of the Limited into a UG is not possible due to the prohibition of non-cash contributions pursuant to § 5a German Limited Liability Companies Act [GmbH-Gesetz – GmbHG]. In addition, the English private company limited by shares could be transformed into an almost identical Irish private company limited by shares in legal terms by means of a cross-border transformation of its legal form. However, this would not result in the adjustment of the legal form of the “fictitious foreign company” and the disadvantages of a foreign company operating exclusively in Germany (higher administrative expenses, additional costs) would still remain.
In addition, a so-called asset deal may be possible in which all assets and liabilities of the British company are transferred to a new German company founded by the shareholders of the British company with the same participation ratios and in which the British company is subsequently liquidated. However, this solution has numerous disadvantages: In the case of an asset deal, there is no transfer of contractual relationships by way of universal succession, so that individual transfer agreements have to be made with the respective contracting parties. Furthermore, hidden reserves usually have to be released for tax purposes.
In the event of a merger of a private company limited by shares into a German GmbH, the provisions of §§ 122a ff. UmwG and the Cross-Border Merger Regulations 2007/2974 apply. However, there is no explicit legal provision for the cross-border transformation of the legal form. Nevertheless, the legal possibility of such a transformation was again confirmed by the European Court of Justice rulings in the cases Cartesio, VALE and Polbud on the basis of the principles of the freedom of establishment and can be carried out according to new German case-law in accordance with the rules of the German UmwG (§§ 190 et seq., 238 et seq.). Due to the associated preservation of identity, the possibility of changing the legal form appears to be attractive. Overall, this procedure should also have a neutral effect on taxation. For this reason, it is even more important that such a transformation should be carried out before the exit of the EU takes effect.

IV. Conclusion and outlook

Brexit has extensive effects on private companies limited by shares which have their administrative headquarters in Germany. Appropriate measures should therefore be taken in advance in order to prevent a possible transformation into a general partnership or a partnership by civil law and to limit liability risks. An exit of the British legal form of the private company limited by shares is therefore expected.