Client Alert | 11 October 2018

Brexit and the Germany-based "Limited’s" – German government proposes amending the Transformation Act

The forthcoming withdrawal of the United Kingdom from the European Union (Brexit) may adversely affect companies in the legal form of a company incorporated under United Kingdom law having their administrative seat in the Federal Republic of Germany. This affects companies in particular in the legal form of a private company limited by shares (Ltd.).

 

With the coming into effect of Brexit, these companies lose their freedom of establishment and are no longer recognized as such in Germany. According to the settled case-law of the German Federal Court of Justice, it can be assumed that the companies concerned will in future be treated according to one of the available fallback forms, that means as a commercial partnership (Offene Handelsgesellschaft, OHG) – if they are to engage in a commercial activity –, otherwise as a partnership under the Civil Code (Gesellschaft bürgerlichen Rechts, GbR ). If the companies in question have only one shareholder, he would again be treated as a sole proprietor or as an ordinary individual. This would result in personal and unlimited liability for the company's obligations.

 

On 10 October 2018, the German government submitted a draft of a "Fourth Law Amending the Transformation Act" (Viertes Gesetz zur Änderung des Umwandlungsgesetzes), intending to provide the undertakings affected by Brexit with an additional option for an orderly transformation to a limited liability corporate form in Germany. There are already various transformation options. However, these options do not account the specific demands of companies in the legal form of a Ltd.

 

According to the draft law, the Transformation Act is to be supplemented in its Sections 122a et seq. by provisions on the merging of corporations into partnerships, and the existing regulations should be adapted accordingly. This is intended to enable the companies affected by Brexit to transform, for example, into a limited partnership (Kommanditgesellschaft, KG), to which – depending on the capitalization of the company concerned – either a limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) or an entrepreneurial company (Unternehmergesellschaft, [UG] [haftungsbeschränkt]) becomes personally liable shareholder. This is intended to give the companies concerned an additional transformation option which they can use, but do not have to. In addition, a transitional provision is proposed for all transformations already initiated at the time of Brexit.

 

The draft law will now be discussed in the German Bundestag.




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