The Financial Obligations of the Shareholder

Abstract

The vast theme “Financial obligations of the shareholder” requires some restrictions. This means that a comparative overview and comparison with other legislatures will not be presented in the following; my remarks are based on and confined to German corporate law. While it is true that basic traits of our European company law systems are commonly shared (as regards financial obligations of the shareholders, in particular due to the 2nd Company Law Directive of the EU), many differences remain. Hence it is left to the foreign reader to find similarities or differences in her or his own system with what follows here. A second restriction has to be made and mentioned. The chapter does not deal with the well-known debate about the usefulness of the traditional European system of a nominal capital which of course has implications for the financial duties of shareholders as regards the formation of a company; the raising of fresh capital; and for distribution of profits and assets to the shareholders (“capital maintenance”). The general debate about this has stalled meanwhile as the results of the various studies on the pros and cons of the different systems were inconclusive. An interesting side issue in this debate is the usefulness of a minimum capital requirement for smaller corporations which do not fall under the provisions of the 2nd Company Law Directive. Like other European legislations Germany has reacted to the regulatory competition triggered by the rulings of the EU Court of Justice in the well-known cases on the “immigration” of foreign companies by the introduction of the “One Euro-Company” (“haftungsbeschrankte Unternehmergesellschaft”; UG). The UG is a limited liability company (GmbH) with a stated capital below EUR 25,000 and not less than EUR 1. Hence the financial obligations of the founding shareholders are reduced accordingly. As the UG makes profits, however, it has to set aside one-quarter of the annual distributable profits into a special reserve until the amount of EUR 25,000 has been reached. I will get back to that in more detail below. After the introduction of this form of company the “invasion” of foreign companies (mostly British Ltds.) has come to a halt, due perhaps both to the attractiveness of this new form and because the market found out that the foreign company forms are not all that attractive (foreign company law is applicable; difficult and unsettled conflicts of laws arise; there is a costly duty to file annual accounts drawn up in English and reviewed by foreign accountants with a foreign commercial register). Another issue relating to financial obligations of the shareholder concerns open or hidden disbursements of company assets outside regular distribution of profits, the sanctions for such disbursements as well as other actions which lead or may lead to damages for creditors of the company. Apart from the sanctions provided for explicitly in our company and civil law the German Federal Supreme Court (Civil Matters) has developed recently a claim based on the reproach of an intervention of shareholders which destroyed the very existence of the company (“existenzvernichtender Eingriff”). This fits into the general discussion about in which cases German company law acknowledges a direct liability of the shareholder, a discussion which cannot be taken up here. The chapter refers to the legal framework in Germany; an English version of the laws mentioned in the following can be accessed on the homepage of the EMCA group. The chapter will first deal with the financial duties of shareholders when forming a company (see §13.02). In a further section, the duties when new shares are issued will be discussed (see §13.03). Of particular interest for the foreign reader may prove the new regulation of shareholder loans as a financing tool (see §13.04). If the company is in financial distress, the shareholders may provide voluntary bridge support and waive certain rights (see §13.05). The question of whether there is an obligation of the shareholder to finance a company in financial distress will then be dealt with (see §13.06). The chapter will end with a summary and conclusion (see §13.07).