{"id":3239,"date":"2018-03-28T15:55:08","date_gmt":"2018-03-28T13:55:08","guid":{"rendered":"https:\/\/honert.de\/?p=3239\/"},"modified":"2019-09-03T16:40:03","modified_gmt":"2019-09-03T14:40:03","slug":"furnishing-of-upstream-securities-here-is-what-managing-directors-should-pay-attention-to","status":"publish","type":"post","link":"https:\/\/honert.de\/en\/furnishing-of-upstream-securities-here-is-what-managing-directors-should-pay-attention-to\/","title":{"rendered":"FURNISHING OF UPSTREAM SECURITIES \u2013 HERE IS WHAT MANAGING DIRECTORS SHOULD PAY ATTENTION TO"},"content":{"rendered":"\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-m7cv03-c4fdf20f6ff8857e23b9c15ff7c1cbda\">\n.avia-section.av-m7cv03-c4fdf20f6ff8857e23b9c15ff7c1cbda{\nbackground-repeat:no-repeat;\nbackground-image:url(https:\/\/honert.de\/wp-content\/uploads\/3629.jpg);\nbackground-position:0% 0%;\nbackground-attachment:scroll;\n}\n<\/style>\n<div id='av_section_1'  class='avia-section av-m7cv03-c4fdf20f6ff8857e23b9c15ff7c1cbda main_color avia-section-default avia-no-shadow  avia-builder-el-0  el_before_av_section  avia-builder-el-first  hide_on_print avia-full-stretch avia-bg-style-scroll av-minimum-height av-minimum-height-40 av-height-40  container_wrap sidebar_right'  data-section-bg-repeat='stretch' data-av_minimum_height_pc='40' data-av_min_height_opt='40'><div class='container av-section-cont-open' ><main  role=\"main\" itemprop=\"mainContentOfPage\"  class='template-page content  av-content-small alpha units'><div class='post-entry post-entry-type-page post-entry-3239'><div class='entry-content-wrapper clearfix'>\n<\/div><\/div><\/main><!-- close content main element --><\/div><\/div><div id='av_section_2'  class='avia-section av-ky27ar-133adbcafe4bfae8882ffa4ff0992f9a main_color avia-section-default avia-no-shadow  avia-builder-el-1  el_after_av_section  avia-builder-el-last  avia-bg-style-scroll container_wrap sidebar_right'  ><div class='container av-section-cont-open' ><div class='template-page content  av-content-small alpha units'><div class='post-entry post-entry-type-page post-entry-3239'><div class='entry-content-wrapper clearfix'>\n\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-j49dir-494e8c4c2cd406a0b39b36f05ac59d23\">\n.flex_column.av-j49dir-494e8c4c2cd406a0b39b36f05ac59d23{\nborder-radius:0px 0px 0px 0px;\npadding:0px 0px 0px 0px;\n}\n<\/style>\n<div  class='flex_column av-j49dir-494e8c4c2cd406a0b39b36f05ac59d23 av_two_third  avia-builder-el-2  el_before_av_two_third  avia-builder-el-first  first flex_column_div av-zero-column-padding  '     ><style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-64elf-2212fc7b2c8381c24a8879aa26a02460\">\n#top .av-special-heading.av-64elf-2212fc7b2c8381c24a8879aa26a02460{\npadding-bottom:10px;\n}\nbody .av-special-heading.av-64elf-2212fc7b2c8381c24a8879aa26a02460 .av-special-heading-tag .heading-char{\nfont-size:25px;\n}\n.av-special-heading.av-64elf-2212fc7b2c8381c24a8879aa26a02460 .av-subheading{\nfont-size:15px;\n}\n<\/style>\n<div  class='av-special-heading av-64elf-2212fc7b2c8381c24a8879aa26a02460 av-special-heading-h1 blockquote modern-quote  avia-builder-el-3  avia-builder-el-no-sibling '><div class='av-subheading av-subheading_above'>28. March 2018\n<\/div><h1 class='av-special-heading-tag '  itemprop=\"headline\"  >FURNISHING OF UPSTREAM SECURITIES \u2013 HERE IS WHAT MANAGING DIRECTORS SHOULD PAY ATTENTION TO<\/h1><div class=\"special-heading-border\"><div class=\"special-heading-inner-border\"><\/div><\/div><\/div><\/div>\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-1mhh8z-156240b76d0c4942e73e5d971a7f52a5\">\n.flex_column.av-1mhh8z-156240b76d0c4942e73e5d971a7f52a5{\nborder-radius:0px 0px 0px 0px;\npadding:0px 0px 0px 0px;\n}\n<\/style>\n<div  class='flex_column av-1mhh8z-156240b76d0c4942e73e5d971a7f52a5 av_two_third  avia-builder-el-4  el_after_av_two_third  el_before_av_two_third  first flex_column_div av-zero-column-padding  column-top-margin'     ><section  class='av_textblock_section av-dfiu0j-46ec11df26c98ab4433a8262ad53eee9 '   itemscope=\"itemscope\" itemtype=\"https:\/\/schema.org\/BlogPosting\" itemprop=\"blogPost\" ><div class='avia_textblock'  itemprop=\"text\" ><p><strong>The Federal Court of Justice [<em>Bundesgerichtshof \u2013 BGH<\/em>] commented on the admissibility of the furnishing of securities granted by companies in favor of their shareholders and on the so-called capital maintenance rules in AGs [<em>Aktiengesellschaft \u2013 stock corporation<\/em>] and GmbHs [<em>Gesellschaft mit beschr\u00e4nkter Haftung \u2013 limited liability companies<\/em>]. Capital maintenance rules have an \u201cindirect\u201d effect on financing group-related matters, because a violation of such may lead to a (personal) liability of dependent managing directors. So far, in practice, the agreement of a so-called Limitation Language has helped to furnish such upstream securities.<\/strong><!--more--><\/p>\n<\/div><\/section><\/div>\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-c8jrkj-c96bff73099e7dc6835997b3b94d8925\">\n.flex_column.av-c8jrkj-c96bff73099e7dc6835997b3b94d8925{\nborder-radius:0px 0px 0px 0px;\npadding:0px 0px 0px 0px;\n}\n<\/style>\n<div  class='flex_column av-c8jrkj-c96bff73099e7dc6835997b3b94d8925 av_two_third  avia-builder-el-6  el_after_av_two_third  el_before_av_one_third  first flex_column_div av-zero-column-padding  column-top-margin'     ><section  class='av_textblock_section av-aw7d8z-4d3f5c00272d6a376d070e5d3f23ab2a '   itemscope=\"itemscope\" itemtype=\"https:\/\/schema.org\/BlogPosting\" itemprop=\"blogPost\" ><div class='avia_textblock'  itemprop=\"text\" ><h2>I. Background of the problem and previous practice<\/h2>\n<p>When it comes to group-financing activities, but also in cases of financing activities in the private equity sector, lenders often demand that subsidiaries of the actual borrowers provide securities (so-called \u201cupstream securities\u201d).<br \/>\nSubsidiary GmbHs or AGs have to comply with creditor-protecting provisions in order to preserve their equity (\u00a7 30 GmbHG [<em>GmbH-Gesetz \u2013 German law on limited liability companies<\/em>], \u00a7 57 AktG [<em>Aktiengesetz \u2013 German Stock Corporation Act<\/em>]. The security shall not result in an outflow of assets, which leads to a reduction in the protected share capital of a GmbH or in the equity of an AG (in case of an AG, the protection goes beyond the capital stock).<br \/>\nIn practice, the focus has been based so far on the time of liquidating the securities for precautionary reasons concerning this issue. In addition, it had established on the market as standard to adopt particular reservations to limit a liquidation by contract in order to protect the management of a company against personal liability if such a liquidation would entail a violation of \u00a7 30 GmbHG, \u00a7 57 AktG (so-called Limitation Language). This Limitation Language resulted in an unsatisfactory result for borrowers, as securities were economically devaluated which, as a rule, simultaneously increased the amount of a loan in the form of higher interest rates. If the lender exploits the furnished security, it is replaced by a recourse claim against the parent company. These kinds of recourse claims, however, were often not accepted as fully adequate (anymore), because in these cases the exploitation of the security resulted from the parent company\u2019s (limited) inability to pay its debt.<br \/>\nIt was partly argued that furnishing of securities was unproblematic, as long as the parent company is able to repay the loan granted to it, because the furnishing of a security was offset against a valuable recourse claim against the parent company. However, if the parent company becomes insolvent, furnishing of a security may constitute a redemption of share capital and thus a violation of the capital maintenance provisions. According to \u00a7 42 para. 2, para. 3 page 1 GmbHG, a managing director is fictitiously liable for the amount paid out (because already warranted by furnishing of the security).<br \/>\nThe decisive date for assessing the recoverability of the recourse claim has controversially been discussed up until now. In practice, this led to the conclusion of contracts on furnishing securities subject to the solvency of the shareholder. If the parent company was unable to pay the debt at maturity, the liquidation of the security was accordingly excluded.<\/p>\n<h2>II. BGH ruling dated 21 March 2017<\/h2>\n<p>In its judgment of 21 March 2017 (file reference: II ZR 93\/16), the BGH ruled on a case where the managing director of a GmbH &amp; Co. KG [<em>limited partnership with a limited liability company as general partner<\/em>] created a mortgage for private debts of a shareholder. In its judgment of 10 January 2017 (file reference: II ZR 94\/15), the BGH had already ruled similarly for the AG involved.<br \/>\nThe main concern is to determine which time is decisive for the question of whether a payment within the meaning of \u00a7 30 para. 1 GmbHG (\u00a7 57 AktG) prevails. The Second Senate ruled that the decisive time for applying \u00a7 30 GmbH is the time of the furnishing of a security and not the time of the liquidation of such security. Accordingly, the examination on the adequacy of the counterclaim has to be carried out at the same time. However, the BGH did not specify what this examination should look like.<br \/>\nIn its ruling the BGH refers to furnishing a security in rem. It is indeed argued in the literature that the principles could be transferred to the obligation of furnishing a security at a later date and to any obligation arising under the law of obligations, e.g. a declaration of surety.<\/p>\n<h2>III. Changes to be expected for managing directors of subsidiaries<\/h2>\n<p>As good as the BGH ruling may sound, it probably involves only few positive changes for managing directors. Lenders will make use of the judgments in order to justify the dispensability of the Limitation Language and thus to improve their position. As a result however, managing directors may be exposed to the risk of personal liability in the future if the intrinsic value of a recourse claim towards the parent company is not given.<\/p>\n<h5>1. Examination of financial solvency of a shareholder when furnishing a security<\/h5>\n<p>The key message of the BGH is that the managing director has to determine at the time of furnishing a security that a loss of the claim against the shareholder is unlikely. It remains unclear, how much effort a managing director has to put into providing enough evidence to show that he justifiably assumed the intrinsic value of the claim when furnishing the security.<br \/>\nEach indication which could constitute an imminent insolvency should consequently entail that a security is not furnished.<br \/>\nIn return, indications which suggest a positive development of the parent company should make it possible for a managing director to furnish securities. A managing director should not be content with, amongst others, generalized statements on the future development of the parent company. In fact, a positive development has to be highly probable based on the current figures and a comprehensible forecast.<br \/>\nShould any unforeseeable circumstances arise later on which may lead to the insolvency of the parent company the initially targeted furnishing of securities remains legitimate, according to the BGH. However, it is in particular hardly conceivable when it comes to group-related matters that the managing director of a (small) subsidiary GmbH can actually gain a comprehensive and reliable picture of the creditworthiness of the parent company. Without this picture, however, he is continuously exposed to a substantial liability risk. Furthermore, the BGH does not provide an answer to the question as to the (legal) basis on which the managing director of the subsidiary should be able to obtain such information.<\/p>\n<h5>2. Continuous monitoring of the solvency of the shareholder<\/h5>\n<p>This must clearly be separated from the continuously existing obligation of the managing director to constantly monitor the solvency of the parent company and to take an occurring indication for any kind of deterioration of its financial situation as opportunity to abolish the furnishment of securities or to otherwise prevent the security from being exploited.<br \/>\nA managing director may therefore not easily exculpate himself from a liability after completing the examination at the time of furnishing the security, whereby the capital maintenance provisions do not apply, but the liability for infringement of the general duty of care does apply. In the event that an insolvency of a parent company is looming and the managing directors would have been able to determine this by a proper control (and thus reduce the damage), the managing director\u2019s liability shall remain as provided in accordance with \u00a7 43 para. 2 GmbHG.<br \/>\nTherefore, a type of \u201cnotification system\u201d has to be introduced which enables the parent company to pass on current information on the financial situation of the company to the subsidiary to an appropriate extent.<\/p>\n<h5>3. Limitation Language<\/h5>\n<p>Even though it was expected that the Limitation Language would no longer be necessary after issuing the judgment, it seems to be still required in the future. Especially because the question already arose as to whether the managing director had examined (or was able to examine) the creditworthiness of the parent company in a sufficiently reliable manner at the time of furnishing the security. In addition, the \u201ccontinuous monitoring of the parent company\u2019s financial status\u201d which is subsequently necessary, requires regulations as well, as the manager does generally not have sufficient access to information without appropriate intra-group measures.<\/p>\n<h2>IV. Outlook<\/h2>\n<p>The rulings of the BGH passed in the previous year indicate at least a tendency with the intention to partially release managing directors from their strict liability. However, this has so far not taken place with the necessary clarity.<br \/>\nWhen it comes to intra-group assumptions of liability (upstream), it is necessary to provide access to information on the group\u2019s situation at the time of furnishing a security to the managing directors. In addition, the parent company should provide ongoing information in order to grant managing directors of a subsidiary the possibility to comply with their monitoring obligations. A Limitation Language will also continue to be necessary \u2013 but with a wording differing from the current formulation \u2013 in order to protect managing directors.<\/p>\n<\/div><\/section><\/div>\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-91ithv-56d0c4a0845e146fb832b73758fbfe4e\">\n.flex_column.av-91ithv-56d0c4a0845e146fb832b73758fbfe4e{\nborder-radius:0px 0px 0px 0px;\npadding:7px 0px 0px 0px;\n}\n<\/style>\n<div  class='flex_column av-91ithv-56d0c4a0845e146fb832b73758fbfe4e av_one_third  avia-builder-el-8  el_after_av_two_third  avia-builder-el-last  sy-only-desktop hide_on_print flex_column_div  column-top-margin'     ><p><div  class='avia-builder-widget-area clearfix  avia-builder-el-9  el_before_av_textblock  avia-builder-el-first '><section id=\"categories-3\" class=\"widget clearfix widget_categories\"><h3 class=\"widgettitle\">Newsletter issues<\/h3>\n\t\t\t<ul>\n\t\t\t\t\t<li class=\"cat-item cat-item-272\"><a 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href=\"https:\/\/honert.de\/en\/category\/2017-q4-en\/\">2017 Q4<\/a>\n<\/li>\n\t<li class=\"cat-item cat-item-116\"><a href=\"https:\/\/honert.de\/en\/category\/2017-q3-en\/\">2017 Q3<\/a>\n<\/li>\n\t<li class=\"cat-item cat-item-114\"><a href=\"https:\/\/honert.de\/en\/category\/2017-q2-en\/\">2017 Q2<\/a>\n<\/li>\n\t<li class=\"cat-item cat-item-142\"><a href=\"https:\/\/honert.de\/en\/category\/deals-en\/\">Deal Announcements<\/a>\n<\/li>\n\t<li class=\"cat-item cat-item-58\"><a href=\"https:\/\/honert.de\/en\/category\/uncategorized\/\">Uncategorized<\/a>\n<\/li>\n\t\t\t<\/ul>\n\n\t\t\t<span class=\"seperator extralight-border\"><\/span><\/section><\/div><br \/>\n<section  class='av_textblock_section av-5yjemb-d12fafa03b1370f423b98cdedf9be24f '   itemscope=\"itemscope\" itemtype=\"https:\/\/schema.org\/BlogPosting\" itemprop=\"blogPost\" ><div class='avia_textblock'  itemprop=\"text\" ><h2>More information on this topic<\/h2>\n<ul class=\"sy-list-margin\">\n<li><a href=\"https:\/\/honert.de\/en\/taetigkeitsgebiete\/corporate-law\/\">Corporate Law<\/a><\/li>\n<li><a href=\"https:\/\/honert.de\/en\/taetigkeitsgebiete\/financing\/\">Financing<\/a><\/li>\n<li><a href=\"https:\/\/honert.de\/en\/taetigkeitsgebiete\/mergers-acquisitions\/\">Mergers &amp; Acquisitions (M&amp;A)<\/a><\/li>\n<\/ul>\n<\/div><\/section><br \/>\n\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-4v3v83-acc1afde3b08f4306de34c2660f0e2ce\">\n#top .hr.hr-invisible.av-4v3v83-acc1afde3b08f4306de34c2660f0e2ce{\nheight:8px;\n}\n<\/style>\n<div  class='hr av-4v3v83-acc1afde3b08f4306de34c2660f0e2ce hr-invisible  avia-builder-el-11  el_after_av_textblock  el_before_av_textblock '><span class='hr-inner '><span class=\"hr-inner-style\"><\/span><\/span><\/div><br \/>\n<section  class='av_textblock_section av-1xwscj-5a78b7eb5ab94f9939ead51ba6e6d7e5 '   itemscope=\"itemscope\" itemtype=\"https:\/\/schema.org\/BlogPosting\" itemprop=\"blogPost\" ><div class='avia_textblock hide_on_print'  itemprop=\"text\" ><h2>Downloads<\/h2>\n<p><a href=\"#\" onclick=\"window.print();return false\">Print<\/a><br \/>\n\n\n\n\t<div class=\"dkpdf-button-container\" style=\" text-align:left \">\n\n\t\t<a class=\"dkpdf-button\" href=\"\/en\/wp-json\/wp\/v2\/posts\/3239?pdf=3239\" target=\"_blank\"><span class=\"dkpdf-button-icon\"><i class=\"fa fa-file-pdf-o\"><\/i><\/span> Download (PDF)<\/a>\n\n\t<\/div>\n\n\n\n\n\n<\/p>\n<\/div><\/section><\/p><\/div>\n<\/div><\/div><\/div><!-- close content main div --><\/div><\/div><div id='after_section_2'  class='main_color av_default_container_wrap container_wrap sidebar_right'  ><div class='container av-section-cont-open' ><div class='template-page content  av-content-small alpha units'><div class='post-entry post-entry-type-page post-entry-3239'><div class='entry-content-wrapper clearfix'>\n","protected":false},"excerpt":{"rendered":"<p>The Federal Court of Justice [Bundesgerichtshof \u2013 BGH] commented on the admissibility of the furnishing of securities granted by companies in favor of their shareholders and on the so-called capital maintenance rules in AGs [Aktiengesellschaft \u2013 stock corporation] and GmbHs [Gesellschaft mit beschr\u00e4nkter Haftung \u2013 limited liability companies]. Capital maintenance rules have an \u201cindirect\u201d effect [&hellip;]<\/p>\n","protected":false},"author":26,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"mc4wp_mailchimp_campaign":[],"footnotes":""},"categories":[128],"tags":[],"class_list":["post-3239","post","type-post","status-publish","format-standard","hentry","category-2018-q1-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/posts\/3239","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/users\/26"}],"replies":[{"embeddable":true,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/comments?post=3239"}],"version-history":[{"count":20,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/posts\/3239\/revisions"}],"predecessor-version":[{"id":3543,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/posts\/3239\/revisions\/3543"}],"wp:attachment":[{"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/media?parent=3239"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/categories?post=3239"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/tags?post=3239"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}