As a rule, numerous agreements will be negotiated and concluded between the existing shareholders and new investors in connection with financing rounds. These include the investment agreement (in the narrow sense, setting out the terms of the investment of the investor) and the shareholders' agreement. The articles of association of a start-up are normally recast or at least amended in relation to the execution of an investment. While only excerpts of the investment and shareholders' agreements need to be submitted to the commercial register, if any, the articles of association of start-ups are publicly available in the commercial register and can be accessed by anyone.
As the parties normally wish to keep certain details of the financing round confidential and depending on the content of the articles of association additional costs for notarial recording and filing with the commercial register occur, there is often a question of which elements of the investment documentation need to be included in the articles of association. This column examines this tension.
The investment agreement establishes the conditions for the investor’s investment, in particular the extent of the participation, the valuation and amount of the investment (supplementary payments or premiums in addition to the nominal contribution), maturity (closing conditions, milestones), rules for future changes to the shareholding structure (anti-dilution, ratchet) and a catalogue of guarantees and warranties made by the founding shareholders.
In contrast, the shareholders' agreement (in addition to the articles of association) deals with the future relationship between the shareholders. It establishes the rights of specific shareholders to have representatives on the executive or advisory boards, extends the information and approval rights of investors beyond the statutory standards, and establishes exit rules (restrictions on the transfer, tag-along rights, liquidation preferences, etc.) and management commitments (vesting rules and non-compete clauses). As a rule, this agreement is concluded by all shareholders as a single agreement.
Some of the typical areas of regulation mentioned above (even if only indirectly) must be included in the articles of association of the start-up in order to be effective. This is true when the start-up takes the legal form of a limited liability company (Gesellschaft mit beschränkter Haftung, GmbH). If the start-up is established as a stock company (Aktiengesellschaft, AG) or takes this legal form, the requirements are even stricter. Due to the frequency of use of the GmbH form for start-ups, we will now focus only on the requirements of this legal form.
The starting point for the catalogue of areas to be regulated in the articles of association of a GmbH are §§ 3 para. 1 and 5 para. 4 of the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG). According to these provisions, the articles of association must include the following elements:
In addition, the GmbHG establishes a number of specific elements; only the articles of association may include reservations or differing rules with respect to these elements:
It should be noted that it is also possible to conclude a purely contractual agreement – not an agreement under company law – that is not part of the articles of association with respect to some of the matters mentioned above, in particular in the following areas:
However, any contractual deviation from the statutory provisions only binds the contractual parties themselves.
Conversely, certain rules, which may only be contractually agreed and which go beyond the mandatory levels, should also be reflected in the articles of association, such as, for example:
In light of the legal and contractual framework that includes the investment agreement, shareholders' agreement and the articles of association, an analysis should be made of which elements must be included in the articles of association in line with the mandatory statutory provisions, as these will be made publicly available in the commercial register and may result in additional costs. Furthermore, it can also be advisable to include certain rules in the articles of association - which go beyond the mandatory levels - although this is not required.
(Lawyer)