Will there soon be a new limited liability company form for start-ups? Next round of discussions start on the limited liability company in steward ownership
Many founders of start-ups wish to ensure during the establishment phase or at an early stage that the company will be directed in “steward ownership”. This means that the capital of the company and the profits will be permanently linked and the responsibility at company level will be given to those shareholders, who are actively involved in the company.
While anchoring steward ownership during the early stages is comparatively uncomplicated in some countries (e.g. in the Netherlands a trust can be used with little regulation), the law in Germany currently makes it difficult to implement such ideas. After a working group of professors presented a first draft of a bill
to amend the German Limited Liability Company Act in June 2020 – a draft that has been discussed controversially - the working group has since presented a new draft bill that takes recent discussions into account. One of the proposed amendments is that, instead of speaking of a limited liability company in steward ownership (GmbH in Verantwortungseigentum, VE-GmbH), the bill now proposes a Limited Liability Company with Locked Capital (GmbH mit gebundenem Vermögen, GmbH gebV).
This article explains the draft bill (1) and the critical issues being discussed (2) and concludes with an outlook (3).
1. Which amendments does the draft bill entail?
The draft bill prepared by the working group of professors is based on the German Limited Liability Company Act. It proposes a new sixth chapter, which would establish the GmbH gebV as an alternative legal form to the limited liability company or entre-preneurial company (Unternehmergesellschaft, UG), with some mandatory character-istics. The general provisions of the German Limited Liability Act would apply except as where amended by the new Chapter.
The following guiding principles are particularly noteworthy:
Permanently tied capital
Where the capital is locked, shareholders will not have any claim to the profits or in the case of the dissolution or liquidation to the assets of the company. Even the settlement in the case of an exit will be limited to the refund of the contributions made. The draft bill also prohibits the repeal or modification of the principle of permanently locked capi-tal (eternity clause). However, the GmbH gebV does not need to pursue a sustainable or public interest purpose. The company name must still contain “mit gebundenem Vermögen” (with Locked Capital) or a generally accepted abbreviation thereof.
The old draft referred to the permanently locked capital as an “asset lock”. The new draft moves away from this, as it remains possible to sell the assets of the company.
The new draft bill also contains a provision that requires the purpose of the company to be business-oriented or charitable in order to avoid the form being used purely for asset management.
Characteristics and selection of shareholders
Supporting the idea that responsibility is transferred to those shareholders who actively participate in the company, the draft limits the circle of possible shareholders to natural persons, other companies with locked capital or other legal entities that have their capital permanently tied in a similar fashion (the latter is designed to make it possible or foreign companies to hold shares in a GmbH gebV). The shares in the company are subject to transfer restrictions, so that their assignment requires the consent of the shareholders. Autonomy principle does not rule out inheritance, but this will require the approval of the shareholders.
2. What are the main criticisms of the old draft bill on the limited liability company in steward ownership?
2.1 The new draft bill deals constructively with some of the criticism levied against the old draft:
Change of name
First, the name of the new form of limited liability company was changed from “GmbH in Verantwortungseigentum” (Limited in steward ownership, or responsible ownership) to “GmbH mit gebundenem Vermögen” (Limited Liability Company with Locked Capi-tal). This was in response to the criticism that the old name implied that one could ex-pect a company that had chosen this legal form to always act “responsibly”.
Stricter requirements for an amending resolution
A company with locked capital can be established as such. However, if the resolution to tie the capital is only adopted later, it must be ensured that all shareholders were sufficiently informed and were fully aware of the irreversible consequences when they voted on the resolution. In addition, workers’ rights must be protected. For this reason, the new draft provides detailed specifications on these aspects, similar to those under transformation law (substance of resolutions, information for the works council).
In reaction to the criticism that the formation of a limited liability company in steward ownership could mean that creditors of shareholders will be deprived of capital be-cause the creditor cannot access the capital tied to the company – just the sharehold-ers themselves cannot access it – through distraint of shares, the new draft provides for a right to claim security.
A security claim can be enforced if it is incurred prior to the tying of the capital. In line with the standard established under transformation law, creditors must plausibly show that the permanent tying of capital – more specifically the contribution of assets into a company with permanently locked capital – will en-danger the fulfilment of the claims of the creditor.
The mandatory capital lock has fundamental importance for governance because it structurally changes the incentives of the parties. Although there was some criticism that the creation of a limited liability company in steward ownership would circumvent the purposes of the Foundation Supervision Authority, the new draft still does not con-sider it necessary to have a state supervision body, similar to the Foundation Supervi-sion Authority.
The new draft instead proposes two alternatives, which would allow third parties to as-sess whether the principle of locking the capital is being maintained:
The first proposed option requires the preparation of a comprehensive annual report on various aspects of the principle of locking the capital, which would be audited by an independent auditor that does not also audit the company.
The second proposed option combines this report developed on the assurance of the principle of locking the capital with compulsory membership in an auditing association in line with a cooperative society law model; the auditing association would then audit the report.
2.2 Some fundamental issues, that were vehemently criticised, were not addressed:
One argument centres in particular on the issue of whether the prohibition against the collective deprivation of power, based on the intended eternity clause, could be partial-ly repealed for the limited liability company without introducing a (completely) inde-pendent legal form.
It is also alleged that the proposed new sub-form of limited liability company will elimi-nate the incentive mechanism underlying the legal liability company form, which is es-sential for free enterprise. The coupling of ownership with responsibility and risk with liability is no longer given.
These issues would not also be taken up by the working group of professors in the new draft bill because, as announced in the considerations for the new draft, an aca-demic publication will address in greater detail the issues raised in the discussions of the first draft.
3. Outlook for steward ownership
The new draft bill heralds in the next round of discussions about a new form of limited liability company. It remains to be seen, how the new draft bill will be accepted in polit-ical, commercial and legal circles and what new momentum the draft might provide.
 Sanders, Dauner-Lieb, Kempny, Möslein, Veil, von Freeden, Entwurf eines Gesetzes für die Gesellschaft mit beschränkter Haftung in Verantwortungseigentum, Stand 12.06.2020 (nachfolgend bezeichnet als alter Entwurf oder alter Gesetzesentwurf), der flankiert wurde von einer Initiative von mehr als 600 Unternehmern und Wirtschaftsexperten, „Weitere GmbH-Variante: 600 Experten fordern neue Rechtsform für Unternehmen“, Handelsblatt vom 1.10.2020, abrufbar unter: https://www.handelsblatt.com/unternehmen/management/verantwortungseigentum-weitere-gmbh-variante-600-experten-fordern-neue-rechtsform-fuer-unternehmen/26236822.html.
 Sanders, Dauner-Lieb, Kempny, Möslein, Veil, von Freeden, Entwurf eines Gesetzes für die Gesellschaft mit beschränkter Haftung mit gebundenem Vermögen, Stand 15.02.2021, abrufbar unter: https://www.gesellschaft-mit-gebundenem-vermoegen.de/, folgend bezeichnet als neuer Entwurf oder neuer Gesetzesentwurf; nachfolgend bezeichnet als neuer Entwurf oder neuer Gesetzesentwurf, oder auch nur Entwurf oder Gesetzesentwurf.