A limited liability company in steward ownership?

Over the past few years, it has become increasingly popular in Germany for companies to choose steward ownership, even during the start-up phase, and to anchor this structure in young companies. The UN 2030 Agenda for Sustainable Development has played a role in this, as has the establishment of the Stiftung Verantwortungseigentum (Steward Ownership Foundation) in 2019 (to which the BMW Foundation, Alnatura and Ecosia all belong). The significant environmental and social challenges facing our society also raise the (rhetorical) question of whether companies should play a more important role in the solution to these challenges.

While the legal situation in some countries means it is less complicated to anchor steward ownership in the company structure in the early stages of establishment (in the Netherlands, for example, barely regulated foundations or trusts may be used), the current law in Germany makes it more difficult to implement this idea. For this reason, an academic working group has prepared a draft law[1] as a proposed amendment to the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG).

This article will explain the current legal position (1.) and the approach proposed in the draft (2.), it will look at some of the criticism of the draft (also 2.) and then consider the outlook (3.).

1. Current legal situation

1.1 Legal position

Steward ownership is designed to implement the principles of self-governance and profits serve purpose within the company from generation to generation.[2]

Currently, in principle there are three possible alternatives available under German law: the veto model, the single foundation model and the double foundation model.

While the single foundation model sees all of the shares in the company held by a single foundation, in the double foundation model, the shares are split between a foundation and a trustee (which might also have the legal form of a foundation).

The one-foundation model monitors the adherence to set principles through two boards of the foundation. One board oversees the non-voting stock while the other board oversees the shares with multiple voting rights but without the right to dividends.

In contrast, in the double foundation model, the trustee controls the shares with multiple voting rights without the right to a share of the profits. The non-voting stock with dividend rights is held by the foundation.

The veto model divides the ownership of the shares into two or three groups. The first group of shareholders (with voting rights) are people working within the company or those who are closely connected to the company. The second group (where the group exists) will be made up of investors, non-profit organisations, employees or founders who hold non-voting shares with dividend rights. The member of the final group holds shares that have a veto right over any decision that is contrary to the steward ownership.

1.2 Problems with implementation

There are various implementation problems with the current legal framework. First, due to the lack of norms for the protection of legal transactions for the benefit of third parties, foundations will not normally directly offer themselves as a holding company. Further, while careful crafting of the statutes of a foundation in line with the law can circumvent the prohibition against a foundation having a purpose that only involves holding assets, this can result in high fees for legal and other advisors.

The veto model does not guarantee 100% security as the holder of veto shares can, although by infringing certain rules, approve the adoption of a change of statutes that would eliminate the steward ownership.

2. Draft law

2.1 Amendments

The draft prepared by the academic working group builds on the German Limited Liability Companies Act (GmbHG). It proposes a new sixth part that would normalise the steward-owned legal liability company as a legal form of the legal liability company, similar to the approach taken for the entrepreneurial company (Unternehmergesellschaft), and establish some mandatory elements. The German Limited Liability Company Act will continue to apply as it is, except where it is changed by the new part.

In addition to various smaller amendments, two guiding principles are highlighted:

a) Permanent asset lock

The draft requires the assets of the company to be permanently locked within the company, the so-called “asset lock”. Shareholders will have no claim to the profits, or the company assets in the case of the dissolution or liquidation of the company. Even in the case of a severance payment upon exit from the company, any refund will be limited to the capital contribution. One of the provisions of the draft law prohibits the cancellation or amendment of the principle of permanent steward ownership (permanence provision). However, the steward-owned limited liability company does not require a sustainable or general interest purpose. The company must use “in Verantwortungseigentum” or an abbreviation of this in its name.

b) Independence

In order to guarantee the company’s independence, the draft limits the circle of potential shareholders to natural persons, other steward-owned companies or a legal entity with assets that are permanently locked in a similar legal fashion (this last option is designed to allow foreign companies to be shareholders in a steward-owned legal liability company). This independence does not prevent the stewardship from being passed on, but does make it dependent upon shareholder approval.

2.2 Comparison to the Veto Model

While the veto model separates the stock based on the underlying shareholder function, the draft uses the permanent asset lock, comparable to that of a foundation. The corporate principle of a steward-owned company is protected by the permanency clause. Shareholders have general voting and participation rights (with the exception of rights to dividends or the proceeds of liquidation), but are permanently bound by the stipulated corporate object. The new structure means it no longer necessary to supervise that decisions that might be contrary to the steward ownership are not resolved on.

2.3 Criticism

In addition to criticism of the mandatory use of “steward ownership” in the company name (the publicity of the steward ownership in the company), the “asset lock” has been criticised in relation to the association sovereignty principle. The argument questions whether the prohibition against collective self-disempowerment can actually be effectively repealed in part based on the proposed permanence provision without actually implementing an independent legal form.

3. Outlook

The draft law for the Amendment of the German Limited Liability Company Act is generally considered a success, especially by advocates of steward ownership. Despite the criticisms that need to be considered further on, the draft provides the first step towards the further promotion of steward ownership in Germany.

Tassilo Klesen

[1] Sanders, Dauner-Lieb, Kempny, Möslein, Veil, von Freeden, Draft Act for the German Limited Liability Company in Steward Ownership, 12 June 2020, page 9. The draft can be found under: LINK (retrieved on 28September 2020); Referred to as the “Draft” or “Draft Law”.

[2] See the article by Klesen, Tassilo “Steward ownership for Start-ups” dated 12 August 2019, available under: LINK


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