Small AGs – The five most common mistakes
The legal form of the German stock corporation (Aktiengesellschaft – AG) is very popular even outside the stock exchange. There are well over 13,000 unlisted AGs. The choice of the AG as a legal form often has a positive influence on the company’s reputation. In addition, it strengthens the management’s own responsibility and may therefore be more attractive for executives. It also ensures, via the independent position of the management board, the company’s ability to take action in disputes among shareholders.
Various facilitations are intended to make small AGs – i.e. non-listed AGs with a small number of shareholders – an alternative to German limited liability companies (Gesellschaft mit beschränkter Haftung – GmbH). However, these facilitations do not mean that a small AG would be just as easy to manage as a GmbH. On the contrary, a number of regulations under stock corporation law are applied which are not present in the law on GmbHs. In practice, mistakes can be observed in small AGs, which can have serious consequences. Often these mistakes can remain undiscovered for years. They usually come to light when the small AG is to be sold and subjected to comprehensive due diligence by a prospective buyer.
The five most common mistakes made at small AGs in practice include:
In the law relating to GmbHs there is generally no requirement to take minutes of resolutions made by the shareholders’ meeting. Accordingly, there are also no statutory requirements regarding the format and content of any minutes. The situation is completely different in stock corporation law, under which every resolution by the general meeting must be recorded.
For many resolutions in a small AG, the minutes may also be produced by the chair of the general meeting rather than by a German notary. However, the requirements regarding the content of the minutes still have to be observed. If the general meeting of a small AG is conducted like the shareholders’ meeting of a GmbH and, for example, details of the type and results of the vote or the formal adoption of the resolution are missing, then the resolution is void. If the effective appointment of supervisory board members fails for this reason, then all resolutions of the incorrectly appointed supervisory board may also be void.
Incorrect appropriation of profits
The resolution of an AG on the appropriation of profits differs significantly from that of a GmbH, because the management board is required and entitled to appropriate some of the profit to form reserves. Therefore, the shareholders of an AG decide on the distribution of the balance sheet profit, while those of a GmbH (usually) decide on the distribution of the net profit for the year plus or minus a carry-forward. But often resolutions on the appropriation of profits are made in the small AG which are based on those of a GmbH. The consequences of infringements include the personal liability of executives of the small AG or the invalidity of resolutions.
Lack of notifications of share ownership
Incorrect notifications can have serious consequences under stock corporation law, including the loss of voting and dividend rights from shares. This is one of the most frequent mistakes of small stock corporations (and unfortunately not only of small ones).
At listed AGs, notification requirements are triggered starting from a voting share of 3%. At a small AG, notifications are required for share ownership starting at 25%. While an event triggering the notification requirement may be a change in ownership, a change of form from a GmbH to a small AG also triggers the notification requirement for the first time. Particularly in small AGs, a loss of the voting right can have serious consequences on the balance of power. If general meeting resolutions have been made taking into account votes which are actually subject to a loss of rights, they may be contestable.
If the small AG itself holds investments in companies, it will have notification obligations towards such companies; such obligations have to be observed by the management board. Breaching these obligations entails a loss of rights and liability by the management board.
Absence of a share register
Since bearer shares are only allowed outside the stock exchange when kept by a central securities depository, registered shares are the rule in small AGs. Small AGs are therefore also obliged to maintain a share register and to keep it up to date. However, small AGs can rarely afford the luxury of assigning a service provider to specialise in this administrative task.
Vis-à-vis the small AGs, only such persons are deemed to be shareholders who are registered as such in the share register. Neglecting the share register can therefore have significant consequences, for example when owners of shares who are not registered in the share register are invited to the general meeting and participate in resolutions. Any resolutions adopted by the general meeting in this way can be contested.
The management board of a dependent AG must draw up an annual report on the relationships with affiliated companies, which must be audited by the supervisory board. This means that all legal transactions and measures relating to a controlling or affiliated entity must be recorded and assessed. Since even individuals can be “entities” within the meaning of corporate group law, the small AG is not exempted from the reporting obligation if only natural persons hold stakes in it.
Size-dependent facilitations do not help the small AG either. The final statement of the dependency report is, in principle, included in the management report. If no management report has to be drawn up, the statement must be included in another appropriate place instead (in the annex or under the balance sheet).
It is not uncommon for small AGs to enter into transactions with their anchor shareholders, who often also serve as board members. This involves significant liability risks for all parties concerned, especially if the transaction does not pass the arm’s length test and the AG becomes insolvent.
Compared to a GmbH, a small AG requires compliance with much stricter regulations and permits fewer mistakes. Those who want to operate their company in the form of a small AG should be advised early on which pitfalls to avoid. We at Noerr are happy to offer you such advice and provide you with sample documentation adapted to your company for the most frequent questions and situations. With our help, your small AG will become a success.