Critical Note: The IAA is a proposal, not yet binding law. Final regulations may differ significantly from this proposal, as the legislative process is ongoing. It requires approval from the European Parliament and Council, with adoption expected in late 2026 or early 2027 at the earliest. 

For Chinese investors operating in the four emerging strategic sectors, the most significant challenge is the IAA's foreign direct investment (FDI) screening regime — a new industrial policy — focused framework that will operate separately from existing EU security-based screening mechanisms.

The European Commission's proposal for IAA stems from the need to address growing concerns about external market dominance, strategic dependencies on foreign supply chains for critical technologies, and the necessity to strengthen Europe's industrial base. By shifting towards a more active industrial policy, the EU aims to safeguard its manufacturing capacity, reduce reliance on external actors, and ensure competitiveness in a global landscape increasingly shaped by state-backed investments and strategic interventions.

Beyond "Made in EU" requirements for public procurement and streamlined permitting for industrial projects through digital one-stop-shops and designated acceleration zones, the IAA introduces a novel and strategically significant foreign direct investment screening regime — the focus of this analysis for Chinese investors.

The New FDI Screening Regime: A Distinct Industrial Policy Framework

1. A Separate System from Existing EU Security Screening

The IAA's FDI regime is fundamentally distinct from the existing EU FDI Screening Regulation (Regulation (EU) 2019/452). Where the current EU regime focuses exclusively on security and public order risks, the IAA introduces a new industrial policy-oriented screening mechanism designed to ensure that foreign investments deliver tangible economic benefits to the EU: technology transfer, job creation, value chain integration, and reduced strategic dependency.

This creates a dual-track screening system. Chinese investors will need to navigate both traditional security-based screening under EU Regulation 2019/452 and the new industrial policy conditions upon the adoption of the IAA — two parallel approval frameworks with potentially different timelines and approval criteria.

2. Scope and Triggers

The IAA's screening regime shall apply to investments exceeding €100 million from the date of its entry into force, targeting only the four emerging strategic sectors:

a. battery technologies and its value chain for battery energy storage systems;

b. pure electric vehicles, off-vehicle charging hybrid electric vehicles and fuel-cell electric vehicles, including components related to electrification and digitalisation; 

c. solar PV technologies; 

d. extraction, processing and recycling of critical raw materials.

All other sectors remain unaffected by this new screening regime.

Triggering the 40% Capacity Threshold: The regime only applies to investors from countries controlling more than 40% of global manufacturing capacity in the relevant sector, who is not covered by economic partnership and free trade agreements. China is currently the only country meeting this threshold across all four sectors.

Control Definition: Screening is triggered when a foreign investor acquires 30% or more of voting rights or ownership in a European target through acquisition or establishment. All investments by the same investor and affiliated parties are aggregated to determine threshold compliance.

3. Approval Process and Timeline

The FDI approval process unfolds as follows:
 

This extended process creates substantial execution risk, with potential delays in deal closing, financing complications, and regulatory uncertainty.

4. Value-Added Conditions: The Four-of-Six Test

Approval requires satisfying at least four of six specified conditions, with one mandatory prerequisite:

Mandatory Condition – EU Workforce: At least 50% of employees across all categories, including senior management, must be EU citizens or residents. This is non-negotiable for approval, regardless of other conditions met.

Optional Conditions (Choose 3 of 5):

1. Ownership Cap – Foreign investors shall not hold more than 49% of voting rights or ownership, preventing majority control in any Union target or over a Union asset.
2. Joint Venture Structure – For investment structured through a joint venture with EU partners, the foreign investors' shareholding shall be capped at 49% in any Union entity, ensuring European partners have effective participation in management, technology transfer, and capacity building.
3. Technology Transfer and IP Licensing – Foreign investors must license key intellectual property and know-how to Union entities. Pre-existing European IP remains fully owned by the EU target; jointly-developed IP is shall be owned jointly.
4. R&D Investment – Foreign investors shall commit at least 1% of gross annual revenue of the Union target to research and development within the EU.
5. EU Supply Chain Integration – Foreign investors shall publish a strategy prioritizing EU sourcing, with an aspiration to source at least 30% of manufacturing inputs from the EU.

5. Treatment of Subsidiary Investments: A Potential Regulatory Gap

The IAA proposal primarily targets direct investments by foreign investors. However, Article 18(4) of the proposal allows national Investment Authorities to apply some or all of the six conditions to investments made within the Union by a foreign investor's subsidiary, but only where this is deemed "essential" to prevent circumvention or where no less restrictive alternative measures are available.

This creates a regulatory asymmetry: direct investments face mandatory scrutiny, and the four-of-six test, while subsidiary investments face discretionary screening based on circumvention risk assessment. Investors should assume that sophisticated subsidiary structures designed to avoid the 30% trigger could face retroactive scrutiny and condition-imposition by national authorities seeking to prevent regulatory arbitrage.

6. Enforcement and Penalties

Non-compliance carries substantial consequences: administrative fines of at least 5% of average daily aggregate turnover for violations of notification requirements, false information, or breach of conditions. National authorities can modify or revoke approvals if conditions are materially breached.

7. Projected Timeline to Final Adoption and Entry into Force

The Industrial Accelerator Act (IAA) is currently progressing through the ordinary legislative procedure, which typically requiring 12 to 18 months from proposal to adoption. The public consultation will be closed on May 6, 2026. The negotiation process will proceed through several phases: first, parliamentary committees will elaborate their negotiating positions and amend the Commission proposal during the parliamentary first reading phase; second, the Council will adopt its position and negotiating mandate; third, trilogue negotiations will attempt to reconcile Parliament and Council positions, typically requiring multiple sessions that may extend across a three to six month period; and fourth, final adoption requires passage through both institutions' plenary bodies. Adoption is expected by early 2027 at the earliest, with the IAA entering into force shortly thereafter. 

Implementation will follow a staggered timeline: the FDI screening regime will take effect 12 months after entry into force, public procurement requirements will be phased in over 1 to 3 years, and Member States need to designate national industrial manufacturing acceleration areas within 12 months. This phased approach ensures sufficient time for businesses and administrations to adapt to the new framework.

8. Conclusion

The IAA represents a fundamental reconceptualization of European industrial policy. While the proposal is not yet law, it signals clearly where European regulation is heading.

The concept of IAA mirrors established Chinese industrial policies in striking ways. Both frameworks center on joint ventures and technology transfer as regulatory cornerstones. Both target strategic sectors to strengthen domestic industrial capacity and technological prowess. Both integrate investment screening and conditionality to govern foreign market access. Both establish thresholds — China through sector mandates, the EU through investment scale and market concentration metrics — that trigger regulatory requirements.

These parallel mechanisms pursue converging strategic objectives: maintaining equilibrium in capital flows, securing domestic benefits from foreign investment, and advancing technology transfer and indigenous industrial development. Yet the EU explicitly rejects replicating China's state-capitalist industrial policy model. Instead, the EU employs targeted public investment, regulatory coordination and demand-side instruments within a competitive market framework, fundamentally distinguishing its institutional architecture from China's state-directed approach.

Chinese investors, who may already have concrete plans to invest in Germany, should consider accelerating Greenfield projects before the IAA enters into force. This proactive approach could help mitigate the regulatory challenges posed by the new framework. Additionally, advisory services can play a critical role in guiding Chinese companies through the evolving EU regulatory landscape, ensuring compliance and strategic alignment with European industrial policy goals.

Chinese investors should prepare for a more restricted investment environment by restructuring acquisition strategies around joint venture models, building European partnerships, and recruiting local management teams. The window for accelerating deals under current rules may close in 2028.

Lelu Li

Last week, the European Commission presented its proposal for an EU Inc. In the following, we outline the key elements of the current initiative and consider how the proposed legal framework may take shape from both legal and tax perspectives.

Status Quo

Against the backdrop of corporate structures that have existed for decades, the concept of a European legal form — an EU Inc. — has emerged. While Europe constitutes one of the world’s largest internal markets in economic terms, it remains a regulatory patchwork. This presents particular challenges for innovative companies that depend on access to venture capital, pan-European mobility, scalability, a highly skilled workforce and long-term investment. To date, businesses operating — or seeking to operate — across borders have been required to invest significant time and resources in navigating divergent national regulatory regimes.

The existing European legal form available to companies, the Societas Europaea (SE), introduced in 2001, does not adequately address these challenges. As a result, it has not become the standard vehicle for start-ups. It is widely regarded as overly complex. In addition, it requires a minimum capital of €120,000 and leaves key governance matters to be determined by national laws.

EU Inc. Legal Form

After years of limited political traction, the idea of a European company form has regained momentum, driven in part by initiatives from European technology companies, investors and start-up associations.

The EU Inc. is envisaged as a uniform company form operating across Europe within a legal framework designed as a “28th regime”, existing alongside the national regimes of the 27 Member States. It is intended to be incorporated entirely digitally, with a minimum share capital of just €1, and could be established within as little as 48 hours. Start-up costs are expected to be capped at approximately €100.

Companies would therefore be able to operate under uniform capital requirements, supported by a central EU register, standardised investment documentation and a harmonised employee share ownership scheme across Europe.

If realised, the EU Inc. would offer clear economic advantages for both entrepreneurs and investors. Scaling businesses would become more straightforward, and investment processes could be accelerated — for example, through potentially shorter and more streamlined due diligence procedures.

National Tax Sovereignty Remains in Place

The intended simplicity and speed of incorporation should not be undermined by additional registration and onboarding requirements imposed by public authorities. In practice, obtaining a company registration number from the Federal Employment Agency, opening a business bank account and securing a tax registration number have proved particularly time-consuming. A meaningful reduction in administrative burdens would therefore be highly desirable.

However, as the proposed 28th regime is primarily focused on company law, no immediate simplifications in tax rights and obligations are expected. According to statements by the European Commission, certain areas of tax law may also be subject to future harmonisation, although the precise scope remains unclear. Any such measures would, in any event, likely require the unanimous consent of the Member States. Nevertheless, it would make sense to:

• remove tax barriers to cross-border business activities to ensure transparency and simplification; and
• establish uniform criteria for determining administrative headquarters to avoid the double taxation of companies.

Yet, the EU’s tax policy to date makes one point unmistakably clear: the harmonisation of cross-border taxation among Member States remains highly contentious.

Taxation lies at the heart of national sovereignty, as it constitutes the primary source of public revenue. Against this backdrop, the national tax regimes of the Member States will continue to apply within the framework of an EU Inc. Member States will retain full control over tax rates, assessment and enforcement. In practice, an EU Inc. would be treated in the same way as a German private limited liability company (GmbH) and, as a legal entity subject to unlimited tax liability, would be liable to corporate income tax and trade tax where it has its registered office or place of effective management in Germany, as well as to value added tax (VAT) to the extent that it supplies goods or services within Germany. 

Given the extensive harmonisation of VAT rules under the VAT Directive — Member States differ primarily in their rates, which range from approximately 16% to 25% — tax competition in the area of direct taxation will remain largely unaffected and may even intensify as a result of the EU Inc. As the EU Inc. is intended to simplify company formation and expansion (with incorporation possible within 48 hours, a minimum capital requirement of €1 and no need for notarial involvement), businesses will find it significantly easier to relocate their formal seat to any Member State. This is likely to increase competition between jurisdictions for corporate establishments.

As a result, the choice of seat may increasingly be driven by tax considerations, as other factors — such as legal form, administrative burden and costs — become less decisive. Member States will therefore need to offer more attractive tax frameworks to attract new businesses. In this respect, the EU Inc. would strengthen tax competition within the EU without harmonising substantive tax law. A greater alignment of the corporate tax base across Member States — similar to what has already been achieved in VAT — would enhance transparency in tax competition.

From a German policy perspective, the gradual reduction of the overall corporate tax burden to an internationally competitive level of no more than 25% by 2032 represents a key measure in maintaining the attractiveness of Germany as a business location.

Outlook

With its proposal for an EU Inc., the European Commission has sent a clear signal: the European Union intends to significantly simplify company formation and further strengthen the freedoms of establishment and movement of capital. The aim is to enable businesses to operate and raise capital across Europe as seamlessly as they do in jurisdictions such as the United States or China.

However, for all its potential, the transition to a new European corporate framework will be complex. Key considerations — including legal structuring decisions, employment law implications and integration into existing organisational models — will require careful planning and thorough preparation.

Markus P. Linnartz
Dr Christian Osbahr
Selina Köker

In Germany, this will be part of the updated German Civil Code (Section 356a) and take effect on 19 June 2026.

To whom does the obligation apply?

The withdrawal button requirement covers almost all online sales to consumers. The obligation applies regardless of whether the consumer purchases goods, digital content or services (including financial services). Exceptions apply only in cases where there is no right of withdrawal. Smaller businesses are not granted any special exemptions.

What are the requirements for the withdrawal button?

The legal requirements for the withdrawal button (or, as the lawmaker puts it, the withdrawal function) are quite specific:

First, there must be a clearly visible button labeled "Withdraw from contract here" (or equivalent wording). (The German law does not require the word “here”, contrary to the underlying EU directive). The button must be easily accessible, and available throughout the entire withdrawal period.

In a next step, the consumer must provide essential information to identify the contract:

1. The consumer's name,
2. Details identifying the contract (or specific part) they want to withdraw from,
3. Details regarding confirmation of receipt.

Then, there must be a ‘confirmation button’ clearly labeled "Confirm withdrawal" or similar and equally clear.

Finally, businesses must immediately send the consumer a confirmation of receipt via e-mail (or other permanent record).

EU Withdrawal Button vs. German Cancellation Button (Kündigungsbutton)

Companies offering subscriptions or ongoing services online in Germany might think this sounds familiar. You're right – it's similar to the cancellation button that's been required in Germany since July 2022 (Section 312k German Civil Code). However, unlike the withdrawal button, the cancellation button is not a requirement under EU law but German-specific. Even if a cancellation button has already been implemented, the requirement to provide a withdrawal button still applies. The legal consequences are also different: Cancellation (for instance, via the cancellation button) terminates the contract for the future, whereas in the case of withdrawal, the services already provided must (in principle, at least) be reversed.

Practical Information

19 June 2026 is less than three months away. Companies should move quickly to implement the withdrawal button if they haven't already initiated the process. Beyond the technical requirements, you'll also need to update your withdrawal policy and possibly your privacy policy. Non-compliance will almost certainly trigger warnings from competitors or consumer protection associations. Experience with the cancellation button (and other consumer laws) shows that consumer protection associations send out warnings shortly after new policies take effect and sometimes even provide consumers with ready-made reporting forms. 

If you don't respond to such warnings within a few days, this can lead to interim injunctions or other legal action. Additionally, incorrect withdrawal policy information can prevent the withdrawal period from starting, meaning it won't expire until 12 months and 14 days have passed. Fines may also be imposed in some cases, though experience shows the risk of monetary fines is low in the beginning after a new regulation takes effect.

Beyond that, e-commerce law is constantly evolving. Businesses should monitor other regulatory developments: additional information requirements (such as durability guarantees) and legally required warranty labels. The Digital Fairness Act also promises to further strengthen consumer protection.

Daniel Trunk

The following article is intended to shed light on central problem areas that repeatedly lead to conflicts in practice.

1. Unclear Inspection Deadlines Depending on the Type of Goods - Differentiation Between Open and Hidden Defects 

A central practical problem of Section 377 of the German Commercial Code (HGB) lies in the close connection between two questions: How long is the buyer allowed to investigate and what defects should have been detected in the process? The uncertainty surrounding the applicable inspection period is directly linked to the difficult distinction between apparent defects and hidden defects.

1.1 No Fixed Deadlines - Case-by-Case Assesment

The Federal Court of Justice (BGH) emphasizes in established case law that there are no fixed deadlines for the investigation. Rather, the relevant assessment depends on criteria such as:

• the nature and characteristics of the goods
• the scope and complexity of the delivery
• customary practices within the relevant industry
• the organization of the buyer’s business operations

decisive. 

Irrespective of these criteria, it can be stated that a strict standard applies in commercial transactions. An initial, random inspection must regularly be carried out within one working day of delivery. In the case of perishable goods, testing must begin immediately – in fact immediately – whereas in the case of technically complex products, on the other hand, the duration of the examination can extend to several days, in exceptional cases, up to approximately one week.

1.2 The Distinction as the Decisive Factor for Liability

Whether a defect is to be classified as “apparent” "concealed" determines the start of the period – and thus often the existence or loss of warranty rights.

Apparent defects are those that are easily recognizable during a proper examination, whereas hidden defects, as the name suggests, cannot be detected even after a careful initial inspection.

The practical difficulty lies in the fact that the question of whether a defect was “apparent” is assessed retrospectively based on the objectively owed intensity of the investigation. The standard is therefore not what the buyer has actually checked, but what he would have had to check if he had been properly organized.

This intertwines both problem areas:

If the inspection period is interpreted narrowly, the likelihood increases that a defect will be classified as apparent, which means that the complaint period begins to run as soon as it is delivered. If no immediate notification is then made, the fiction of approval under Section 377 of the German Commercial Code (HGB) applies.

In the case of latent defects, by contrast, the notification period begins only upon discovery of the defect. However, disputes frequently arise as to when the defect could have been detected through a proper inspection—an issue that often requires expert assessment.

2. Evidentiary Issues in Cases of Failure or Delayed Notice of Defects

In contentious disputes, the allocation of the burden of proof often determines the success or failure of a claim. The relevant principles are as follows:

• Delivery of the goods: burden of proof on the seller
• Timely inspection: burden of proof on the buyer
• Non-detectability of a latent defect: burden of proof on the buyer
• Time of discovery: burden of proof on the buyer
• Timely dispatch of the notice of defects: also burden of proof on the buyer

It is therefore advisable for merchants to design internal audit and documentation processes in such a way that the investigation and complaint remain provable in the event of a dispute (e.g. audit protocol, e-mail archiving, goods receipt documentation).

3. Particular Challenges in Drop Shipment Transactions 

In modern commercial traffic – especially within the framework of just-in-time structures – so-called drop shipping is becoming increasingly important. This is a model in which a seller sells to a first buyer, who then resells the goods to a second buyer. However, the delivery is made directly from the seller to the second buyer as the end customer. In fact, the first buyer never gets possession of the goods.

3.1 Complaint Along the Contractual Hierarchy

Due to the principle of relativity of contractual obligations, the notice of defects must generally be transmitted along the contractual chain:

Second buyer → initial buyer → seller

Between the second buyer and the initial buyer, notice must be given without undue delay. Subsequently, the initial buyer must also notify its seller without undue delay.

A direct notification from the second buyer to the seller may only suffice in individual cases to influence the relationship between the seller and the first buyer within the time limit.

3.2 No Access to the Goods by the Original Buyer 

A key point of tension arises from the fact that the initial buyer in drop shipping often has no actual possibility of inspection due to a lack of de facto possession of the goods. Nevertheless, he continues to be subject to the obligation to complain pursuant to Section 377 of the German Commercial Code (HGB).

He can de facto leave the inspection to the second buyer but must ensure that the initial buyer informs him immediately of any defects.

The constellation becomes particularly problematic if the second buyer is not a merchant. Although Section 377 of the German Commercial Code (HGB) only applies directly to commercial purchases by both parties, the obligations under commercial law continue to apply in the relationship between the initial buyer and the seller. Under the recourse provisions of §§ 478 (1), 445a (4) and § 327 (5) of the German Civil Code (BGB), the initial buyer is treated as if he had received the goods himself and had them properly inspected.

If avoidable delays occur, the initial buyer must bear the legal consequences under Section 377(2) of the German Commercial Code (HGB).

However, the same strict standards regarding the speed of notification cannot be applied in cases where delivery is made directly to the initial buyer. It would be contradictory if the seller agreed to a direct delivery, but at the same time demanded a notification of defects as quickly as it would be possible with its own incoming goods inspection.

3.3 Expectations and Reasonableness

In practice, sellers frequently adopt unrealistic expectations, assuming that notices of defects in drop shipment transactions must be given “immediately”.

However, the objective standard of immediacy remains decisive. The decisive factor is therefore the immediate reprimand by the second buyer against the first buyer and the immediate forwarding by the first buyer to his seller.

In principle, only culpable delays lead to the loss of rights.

3.4 Modification by General Terms and Conditions (GTC)

Companies regularly try to modify the obligation to complain by means of general terms and conditions – for example, by shortening or extending deadlines. However, a deviation in the form in the case of open defects regularly violates Section 307 (1), (2) No. 1 of the German Civil Code (BGB), as it is incompatible with the basic idea of Section 377 of the German Commercial Code (HGB).

In an individual contract, however, § 377 of the German Commercial Code (HGB) can be waived in favor of the buyer if the agreement does not violate § 138 of the German Civil Code (BGB).

4. Conclusion

The obligation to investigate and complain pursuant to Section 377 of the German Commercial Code (HGB) is not a mere formal instrument, but a course set the course under liability law. Unclear deadlines, problems with the burden of proof, difficulties in distinguishing between open and hidden defects as well as complex supply chains regularly lead to considerable losses of rights in practice.

Companies are therefore well advised to align their internal processes with the requirements of commercial law and to make clear contractual and organizational regulations, especially in drop shipments. Clear goods receipt processes, documented inspection standards, escalation and forwarding mechanisms or even training of employees should be in place. In addition, it is advisable for entrepreneurs to have their existing contracts regularly reviewed by a lawyer and, if necessary, to have them adjusted by a lawyer in order to avoid ambiguities and to reflect the requirements of Section 377 of the German Commercial Code (HGB) as clearly as possible in the contract. This is the only way to avoid the considerable risks of a late or omitted letter of notification of defects.

Moritz Kopp
Katharina Reichert

The upward tainting has the effect that the originally asset-managing partnership is considered a commercial enterprise for tax purposes from the time it earns commercial income. All income is then treated as commercial. However, this applies exclusively for income tax purposes, not for trade tax. The parent company remains exempt from trade tax liability if it does not carry out any original commercial activities itself. This interpretation was confirmed by the case law of the Federal Fiscal Court and adopted by the tax authorities in an identical state decree of 5 November 2025.

Even if the main tax risk of an additional trade tax liability is eliminated, the upward tainting entails numerous tax changes. In the following, some follow-up topics of an upward tainting are presented:

a) Contribution to the newly created commercial enterprise

With the tainting, a commercial enterprise is created. All assets of the partnership (including real estate, shareholdings, etc.) become business assets for tax purposes and must generally be deposited at the partial value (Teilwert) (Sec. 6 (1) No.. 5 German Income Tax Code).

Exceptions for the partial value contribution:

• Assets that were acquired or produced from private assets within the last three years prior to the date of the transfer (Sec. 6 (1) No. 5 a) German Income Tax Code), or
• Participations in corporations are always to be assessed at the acquisition cost (Sec. 6 (1) No. 5 b) and c) German Income Tax Code)

These assets are to be assessed at the amortised acquisition or production costs. As a result, the hidden reserves become taxable at the time of contribution and are subject to income tax or corporation tax at the latest when the respective assets are sold.

Exceptions also apply for commercial partners of the upper-tier partnership, as the proportionate assets are transferred from the commercial assets of the commercial partner at partner level to the commercial assets of the upper-tier partnership. In principle, the transfer is made at book value (Sec. 6 (5) German Income Tax Code).

Special features of real estate

• Real estate that was acquired in private assets more than three but less than ten years ago at the time of contribution is invested at partial value. If the property is later sold from the business assets and less than 10 years have passed since the original acquisition in private assets, the difference between book value and partial value is taxable (Sec. 23 (1) sentence 5 No. 1 German Income Tax Code).

b) Changes in depreciation rates for real estate

The reclassification as business assets may lead to an adjustment of the depreciation rates. Real estate that was previously depreciated according to Sec. 21 German Income Tax Code (rental and leasing) is now subject to the regulations for business assets (Sec. 7 German Income Tax Code). 

Important changes:

• The depreciation (Absetzung für Abnutzung, AfA) is calculated from the time of tainting in accordance with the tax rules for commercial businesses.
• If necessary, a new depreciation assessment basis (partial value) must be determined.

c) Special operating income and expenditure

The asset-managing partnership previously had no special business sphere (Sonderbetriebssphäre). The upward tainting must be used to check the existence of special business assets (Sonderbetriebsvermögen).

Changes in detail:

• Loans from the shareholders to the company, which were previously not recognised due to the fractional consideration (Bruchteilsebetrachtung), are now considered special business assets. The interest on this is special operating income and thus neutralises the interest expenses in the partnership’s undivided assets (Gesamthandsvermögen).
• The interest income of the shareholder does not constitute capital income, as before, but income from co-entrepreneurship (Mitunternehmerschaft) according to Sec. 15 German Income Tax Code.
• Special operating income and expenses of the general partner (e.g. liability compensation, expense allowances) must now be recognised as part of commercial income. It remains to be clarified whether a reduction in trade tax at the level of the general partner GmbH is required, even though no trade tax arises at the level of the partnership..

These changes also affect the preparation of e-balance sheets (see point e).

d) Over-withdrawals pursuant to Sec. 4 (4a) German Income Tax Code

With the tainting, the provisions of Sec. 4 (4a) of the German Income Tax Code apply to the upper-tier partnership. Withdrawals exceeding profits and contributions are treated as excessive withdrawals, which may result in a limitation of the deduction of interst expenses.

e) Preparation of amended assessments of results and e-balance sheets

The upward tainting requires the preparation of uniform and separate profit assessments (einheitliche und gesonderte Gewinnfeststellung) in accordance with Sec. 15 German Income Tax Code. Other types of income, e.g. income from capital assets or renting and leasing, can no longer be determined.

Major changes:

• Previous surplus income from renting and leasing (Sec. 21 German Income Tax Code) or capital assets (Sec. 20 German Income Tax Code) must now be reported as commercial income. The surplus of income over the income-related expenses no longer applies, but the profit is determined in accordance with Secs. 4 to 6 German Income Tax Code.
• The company must submit e-balance sheets in accordance with the requirements for commercial operations, including special and supplementary balance sheets.
• The declaration of assessment must reflect the amended impact on capital accounts and the offsetting of losses pursuant to Sec. 15a German Income Tax Code.

Special features in the event of liquidation or withdrawal of a shareholder:

• Negative capital accounts are subject to retrospective taxation pursuant to Sec. 52 (24) sentence 3 German Income Tax Code.

Conclusion

The upward tainting of an asset-managing partnership has far-reaching tax consequences. Even if trade tax is not liable, numerous changes in tax treatment must be observed. In particular, the contribution of assets, the adjustment of depreciation rates, the consideration of special operating income and expenses as well as the preparation of amended profit assessments and e-balance sheets require careful tax planning and implementation.

Final note

Caution is advised if the tainting is terminated by the commercial partnership, e.g. if it is sold or ends its commercial activity. Then tax implications arise again. A cessation of business occurs (Sec. 16 German Income Tax Code), and the business assets are transferred back into private assets.

Jens Müller

When it comes to distributing products to Indian customers on the ground, German manufacturers - as always - face the choice: make or buy. While the FTA substantially enhances India’s appeal as a strategic manufacturing base - by lowering trade barriers and deepening opportunities for supply‑chain integration, thereby offering European manufacturers commercially compelling pathway to leverage the “Make in India” ecosystem - alternate lighter entry models like distributorship arrangements provide a prudent initial step. It enables manufacturers to commercially assess the Indian consumer market, understand demand dynamics, and calibrate their long‑term investment strategy before committing to on‑ground manufacturing operations. 

European manufacturers can handle distribution themselves, from their home country, to access the Indian market, build distribution networks, and assess commercial viability without the immediate complexity of setting up a full-fledged local entity. They can also establish subsidiaries, branch or liaison offices in India. While establishing a subsidiary, branch or liaison office offers greater operational control and closer supervision over market activities, it typically involves regulatory approvals, compliance with foreign investment and corporate governance requirements, and the need to build local management and operational infrastructure. 

For distributorship, European manufacturers can appoint local companies as distribution intermediaries who know the market. In this context, it is possible for the European manufacturer to agree with its contractual partner in India either that its own (e.g. German) law applies or that Indian law applies. If the contract so provides, the contractual relationships are in principle subject to the same legal rules that would apply if the products were distributed in Germany. Or better still: Section 92c of the German Commercial Code (HGB) grants manufacturers who appoint commercial agents or distributors outside the European Economic Area greater contractual freedom than usual. In such cases, it is possible to deviate from all mandatory provisions of Sections 84 et seq. HGB - at least in the case of individually negotiated contracts. For example, the statutory minimum notice periods do not necessarily apply, and the goodwill indemnity under Section 89b HGB may be excluded or modified. 

Alternatively, the parties may decide that Indian distribution law shall apply. In that case, however, European manufacturers are well advised to seek advice from Indian lawyers regarding local regulatory environment.

While the parties may designate either German or Indian law as the governing law for their distribution arrangement, they retain full autonomy to structure, negotiate, and document a sophisticated cross‑border commercial relationship for commercial flexibility. However, in the Indian context – where no dedicated statute regulates distribution relationships – the practical commercial landscape necessitates the incorporation of appropriate contractual and regulatory safeguards. These safeguards must ensure a durable and compliant business presence in India, operating within the framework of the Indian Contract Act, 1872, and aligned with the on‑ground regulatory realities of the Indian market.

India’s exchange control regime is generally business‑friendly, allowing cross‑border payments such as distributorship fees, commissions, and royalties through established regulatory channels. However, the agreement must still be drafted with care so that its commercial structure and incentive mechanisms do not raise concerns under any Indian law. A clear, balanced, and well‑structured arrangement will support the parties’ commercial objectives while remaining comfortably within India’s regulatory boundaries.

India does not curtail commercial freedom in distribution arrangements; rather, it channels that freedom through a structured compliance framework. For any end‑product to lawfully enter and circulate within the Indian market, European manufacturers must comply with certain mandatory obligations such as certification standards, quality‑control approvals, labelling rules, and sector‑specific registrations. These requirements do not restrict the parties’ commercial choices; they simply ensure that products meet India’s consumer‑protection and regulatory expectations. For European manufacturers, careful structuring at the outset will ensure that commercial flexibility is harmonized with India’s mandatory regulatory environment. Success in India therefore demands both commercial foresight and regulatory discipline.

It is also important to agree that any disputes shall be decided by an arbitral tribunal. By contrast, agreeing on German jurisdiction would have the disadvantage that enforcement of a German court judgment - while theoretically possible - would require a very time-consuming recognition procedure in India, which would, among other things, necessitate bringing a new action. Enforcement of a foreign arbitral award in India is easier, as India (like, for example, Germany) is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Under this Convention, all signatory states have undertaken to enforce foreign arbitral awards within their territory without a renewed, full review of the merits.

India is an attractive enforcement jurisdiction owing to its distinctly pro‑enforcement stance toward foreign arbitral awards. Indian courts refrain from revisiting the merits or reopening factual findings, and the limited grounds for refusal are narrowly interpreted, with the burden placed squarely on the party resisting enforcement. Once enforceability is established, the award is treated as a decree of an Indian court to be executed against the opposite party in India without a fresh trial. For European manufacturers engaging Indian counterparties, this means that a well-drafted arbitration clause is a powerful risk management tool supported by an arbitration/enforcement‑friendly regime.

Oliver Korte
Sonil Singhania (Singhania & Partners LLP )
Jivesh Chandrayan (Singhania & Partners LLP)

Reform of the German Arbitration Law

On 27 January 2026, the German Federal Ministry of Justice presented a revised draft bill to modernize Germany's arbitration framework. While the 2026 version introduces two material modifications compared to the 2024 draft – notably with respect to Sections 55 and 1031 of the German Code of Civil Procedure (ZPO) (Modernisation of German Arbitration Law: Key Changes in the January 2026 Draft | ADVANT Beiten) – it retains the broader reform agenda already set out in 2024.
The overall objective of the reform remains unchanged: to strengthen Germany's position as a competitive place for arbitration, to further harmonize domestic arbitration law with prevailing international standards, and to enhance procedural efficiency in practice. To that end, the draft continues to provide for a number of structural adjustments, including the facilitation of digital proceedings, expressly permitting electronic awards and video hearings, and clearer rules on the publication of arbitral awards (subject to party consent). It also establishes a narrowly tailored retrial mechanism beyond the ordinary set-aside period and clarifies key issues such as multi-party arbitrator appointments, enforcement of foreign interim measures, judicial review of jurisdictional decisions, and the admissibility of dissenting opinions. Collectively, these measures reflect the legislator's intention to modernize German arbitration law in light of international developments and technological process. 

Within this broader framework, the 2026 draft introduces targeted refinements. The revised version of Sec. 55 ZPO now permits reliance on the principle of lex fori and habitual residence of the party concerned, rather than requiring recourse to foreign nationality‑based capacity rules. This approach aligns procedural capacity with modern principles of private international law. 
A further improvement concerns the revised wording of Sec. 1031, Subsection 1 ZPO. Under the draft, arbitration agreements shall be concluded or documented in writing or by any other means of communication that allows the information to be stored. This amendment brings German Law more closely into line with international legal standards while preserving the flexibility required in contemporary commercial practice. 
Taken together, the reform – both in its unchanged core elements and its 2026 refinements – signals a clear policy direction: Germany aims not merely to update its arbitration law, but to position itself proactively within an increasingly competitive global arbitration landscape.

Court of Arbitration for Nazi-Looted Cultural Property: First Cases Underway

The newly established Court of Arbitration for Nazi-Looted Cultural Property began its work in December 2025. It serves as an alternative dispute resolution mechanism for addressing disagreements regarding the restitution of cultural property confiscated as a result of Nazi persecution. Claimants can trigger arbitration unilaterally if public institutions in Germany refuse to return items, utilizing a "standing offer" system. It handles cases of cultural property lost between 30 January 1933 and 8 May 1945 due to persecution on racial, political, religious, or ideological grounds. The court is administered by the German Lost Art Foundation (Deutsches Zentrum Kulturgutverluste) in Magdeburg, with the arbitration office located in Berlin. The panel consists of 36 arbitrators. Its framework was negotiated with the Jewish Claims Conference and the Central Council of Jews in Germany. This institution represents a major shift in Germany's approach to restitution, aimed at providing legal certainty for both claimants and public holders of art. Something which is obviously well appreciated, given that as of February 18, 2026, already two cases have been brought before this institution.

Germany's Commercial Courts

The recent introduction of Commercial Courts in Germany, as part of the broader reform efforts surrounding German arbitration law, cannot be viewed in isolation from developments in arbitration. For decades, arbitration has been the preferred mechanism for resolving complex cross-border commercial or M&A disputes, largely due to its flexibility, international enforceability, specialized decision-makers, and the possibility of conducting proceedings in English. These advantages have increasingly shaped the expectations of multinational companies regarding dispute resolution.
Against this backdrop, the establishment of Commercial Courts represents a deliberate legislative response. By incorporating features traditionally associated with arbitration – such as English-language proceedings, procedural flexibility, specialized senates, and virtual hearings – the German legislator has sought to enhance the competitiveness of its state court system. In doing so, Germany positions its Commercial Courts not as a replacement for arbitration, but as a complementary and, in some cases, competitive alternative within the broader dispute resolution landscape.
Proceedings before Commercial Courts may be conducted in English at the level of certain Higher Regional Courts – a notable innovation within the German judicial system. 
The courts operate through specialized senates, with subject-matter expertise varying by federal state. For instance, two senates at the Hanseatic Higher Regional Court hear commercial disputes with an amount in dispute of EUR 500,000.00 or more, covering areas such as corporate law, post-M&A, banking and insurance law, transport, and shipping. Proceedings may be conducted virtually and offer enhanced confidentiality as well as verbatim transcripts – features traditionally associated with arbitration.
It is therefore unsurprising that the new Commercial Courts have been well received and are widely regarded as a success. Initial experiences suggest that both the Commercial Court and the Commercial Chambers established at certain Regional Courts, such as the Regional Court of Frankfurt am Main, are committed to conducting proceedings efficiently and resolving disputes significantly faster than is typically the case before state courts. 

AI-bitration

The rapid advancement of artificial intelligence has also reached the field of arbitration, bringing significant new developments. AI is increasingly influencing arbitral proceedings by offering transformative tools that promise greater efficiency and enhanced analytical capabilities. While it remains widely accepted that decision-making must rest with human arbitrators, AI's expanding capacity for analysis, interpretation, and drafting raises complex legal, ethical, and practical questions. 
A central issue for arbitral tribunals is whether, and to what extent, arbitration rules permit the use of AI – particularly given that neither international treaties nor most national arbitration laws expressly regulate its deployment. In the absence of legal provisions, parties and tribunals frequently look to institutional guidance. However, such guidance remains in an early stage of development. Examples include the 2024 Guidelines of the Silicon Valley Arbitration & Mediation Center, the SCC's 2024 Guide, and the CIArb's 2025 Guideline. Most recently the American Arbitration Association published its AI Arbitrator focusing on documents-only construction disputes. However, a real arbitrator remains involved and decisive in this procedure.
These initiatives seek to promote the responsible and effective use of AI in arbitration. Yet the existing guidelines remain deliberately broad and preliminary, while technological innovation continues to evolve at remarkable speed. Looking ahead to 2026, the growing relevance of AI in dispute resolution is likely to prompt further institutional guidelines and frameworks. As practical experience accumulates, existing guidelines will be tested, adjusted, and developed further to ensure that arbitral proceedings remain both technologically advanced and firmly anchored in fundamental principles of due process and fairness.

New Arbitration Laws and Rules

Across Asia, 2026, marks a year of significant regulatory reforms. China has introduced comprehensive amendments to its Arbitration Law, effective 1 March 2026. The reform constitutes a strategic step toward modernizing the domestic arbitration framework and further aligning the regime for foreign-related arbitration with international practice. Notable innovations include the nationwide introduction of ad-hoc arbitration, improvements to the recognition and enforcement of foreign arbitral awards, and the incorporation of additional internationally recognized key concepts, including a clearer statutory recognition of the separability of arbitration agreements and enhanced tribunal authority to rule on its own jurisdiction (Kompetenz-Kompetenz) – widely regarded as meaningful progress.
Pursuing a comparable objective of strengthening procedural governance and aligning its framework with internationally recognized best practices, the Asian International Arbitration Centre (AIAC) has introduced the AIAC Suite of Rules 2026. Effective from 1 January 2026, the suite comprises six new or revised sets of rules and guidelines. Key changes include an expanded scope of application, a clarification of party obligations, adjustments to procedural requirements, mandatory disclosure of third-party funding, and revisions concerning arbitrator conduct and tribunal powers.
In Korea, the 2026 version of the KCAB Rules has entered into force. Among the most notable developments are the establishment of the KCAB International Arbitration Court, the introduction of differentiated procedural tracks designed to enhance efficiency, the expansion of virtual proceedings, and the formal recognition of remote hearings.
From a European perspective, the ongoing reform of French arbitration law also merits close attention. The reform, expected to be finalized by autumn 2026, envisaged the codification of a unified and modern Arbitration Code aimed at harmonizing the legal framework and further consolidating France's position as a leading place of arbitration.

Dr. Ralf Hafner
Oliver Korte
Dr. Tobias Pörnbacher

Innovations in the field of defence and security are no longer optional but an imperative requirement to preserve one's own sovereignty. Not least because of this, the start-up community in the field of security technology is experiencing an upswing, driven by international investment and a growing awareness of the importance of autonomous defence capabilities, with a view to becoming independent of the United States. 

Current developments and market trends

The trend continues: In 2025, USD 8.7 billion was invested in European defence start-ups, according to a report by the NATO Innovation Fund and Dealroom. In 2024, it was still around USD 5.2 billion. This corresponds to an increase of 55% compared to the previous year. Germany and the United Kingdom remain European leaders in terms of total funding. Munich in particular has established itself as a European centre for defence tech, with USD 1.7 billion in investments in 2025 alone. 

The dominant technology in the sector is artificial intelligence in a wide variety of forms and applications, be it autonomous systems or data analysis. 

Growing political and institutional support

In 2025, the political and institutional flanking of the European defence start-up community has become significantly more concrete and operationalized than in 2024. While 2024 was still characterized by programmatic announcements and political policy papers, 2025 will focus on concrete funding instruments, procurement mechanisms and industrial policy programmes.

Central to this is the further development of European defence initiatives such as the European Defence Fund (EDF) and the implementation of new instruments to strengthen the European defence industry, especially with a focus on SMEs and start-ups. Programmes such as the European Defence Industry Programme (EDIP) explicitly aim to scale innovative providers, integrate them into European value chains and promote cross-border cooperation. This is shifting the regulatory framework from selective project funding to structural industrial development.

For start-ups, this results in new opportunities but also more complex regulatory requirements. Subsidies are regularly linked to consortium structures, export control requirements, security inspections and IP regulations. In addition, there are stricter requirements in the area of investment control (FDI screening), especially for investments from third countries. The increasing sensitivity to security policy means that transactions in the defence sector are being examined more intensively than in 2024.

From a legal perspective, this makes early structured advice all the more important. Many areas of law – such as corporate law, state aid law, public procurement law, export control and investment screening – are intertwined. Projects in the defence sector therefore regularly require a cross-jurisdictional and cross-border approach. Those who strategically anticipate regulatory requirements can ensure eligibility for funding, reduce transaction risks and accelerate scaling. 2025 clearly shows that the regulatory framework is no longer a mere side effect but a key competitive factor in the defence tech ecosystem.

Dr Mario Weichel
Kevin Einert, LL.M.

Global trends: stagnation and setbacks

The CPI assesses 182 countries and territories on a scale of 0 (high perception of corruption) to 100 (low perception of corruption) based on the assessments of experts and executives. 

CPI 2025 shows that corruption remains a widespread global problem:

• The global average score is just 42 points, the lowest level in over a decade.
• More than two-thirds of countries score less than 50 points – a clear indication that in most countries, control and rule of law structures remain weak or are under pressure.
• Even in established democracies, setbacks can be observed as democratic control mechanisms such as an independent judiciary, free media and transparent political processes come under pressure.

These findings have a direct impact on the legal certainty and risk environment for companies operating internationally. This is because perceived corruption influences not only political decisions, but also economic conditions such as procurement procedures, regulatory enforcement and the integrity of public institutions.

Germany in the CPI 2025

• Position in the global ranking

Germany scores 77 out of 100 points in the CPI 2025, which puts it in a respectable 10th place in the international comparison. This means that the Federal Republic remains one of the ten countries with the lowest perceived corruption worldwide.

At first glance, this positioning is positive – it signals reliable state structures and comparatively low corruption risks. However, a closer look reveals a more nuanced picture.

• Improvement by two points – but long-term decline

Germany has improved by 2 points compared to the previous year and has risen 5 places in the ranking – but this increase is not solely a reflection of real improvements in the corruption situation. Rather, it can be explained in part by the fact that other countries have fallen more sharply in the ranking.

The long-term trend is more critical: a comparison over the last ten years shows that Germany has lost a total of 4 points over this period. This suggests that effective measures to combat corruption may not have been developed to the same extent in practice as in other countries.

• Civil society and control mechanisms under pressure

The report by Transparency International Germany explicitly points out that civil society control bodies are increasingly exposed to attacks – for example, in the form of defamation, hate speech or political pressure on critical organisations.

This development is not only a democratic problem: a strong, independent civil society is a central component of effective anti-corruption structures. Where it is weakened, the risk of corruption going undetected or unpunished increases.

• Dismantling control mechanisms – a warning sign

An additional structural warning sign concerns legislative measures that are being discussed in public debate under the banner of "bureaucracy reduction". Transparency International Germany, for example, criticises the fact that certain protective mechanisms in public procurement law have been restricted by newly adopted acceleration laws, even though greater transparency and control are needed, particularly in the context of large public investment programmes.

This debate is particularly relevant for companies and compliance officers: weaker control mechanisms in public procurement or in the allocation of subsidies not only increase the risk of corruption, but also exacerbate legal risks for companies in the bidding or contract phase.

Relevance for companies and compliance officers

Why is the CPI 2025 so important for companies and their compliance strategies? The answer lies in several mechanisms:

1. Risk analysis and strategic decisions

The CPI serves as an indicator of the external risk environment for many companies. A low score or a negative trend can mean:

• a higher probability of bribery attempts,
• stronger informal influence on decision-makers,
• less reliable law enforcement.

A well-founded anti-corruption risk assessment is therefore essential, especially when making international market or investment decisions.

2. Expectations of regulators and partners

Regulatory authorities, investors and business partners are increasingly placing value on structural compliance programmes that also address political and institutional risks. Companies are assessed on the extent to which they implement active prevention and control mechanisms that go beyond internal ethical regulations.

3. Reputational risks and sustainable action

In an environment where perceptions of corruption and public scepticism are growing, mere participation in business processes can make a company appear to be involved in systemic risk – even if there are no specific wrongdoings. Effective compliance programmes therefore serve not only to avoid legal issues, but also to strengthen stakeholder confidence.

ADVANT Beiten: Your partner for robust anti-corruption compliance

Against the backdrop of the CPI 2025 results, it is clear that systematic and legally compliant anti-corruption compliance remains a key success factor – both for national companies and for internationally active corporations:

Risk-based compliance programmes

We help you develop risk-based compliance programmes that:

• are tailored to the specific risks of your industry and business processes,
• take into account legal requirements such as the German Section 299 of the Criminal Code, international standards (e.g. OECD anti-bribery rules) and EU directives.

Internal control and governance structures

We review existing control mechanisms, guidelines and internal processes to identify weaknesses and minimise legal risks – including in the areas of public procurement, lobbying, procurement law and third-party risks.

Training and awareness

A key component of any effective compliance strategy is training that equips managers and employees to deal with corruption risks and apply internal rules correctly.

Advice in suspected cases and crisis management

If you are confronted with suspected corruption, we will support you not only in the legal assessment, but also in communicating with authorities and developing strategic countermeasures.

Conclusion

Transparency International's CPI 2025 shows that corruption remains a global challenge – even for stable democracies such as Germany. Despite a good ranking for the time being, long-term trends and structural weaknesses are reason enough to view compliance not as a chore, but as a strategic necessity.

Especially in times of changing regulatory conditions and growing social expectations, it is crucial to anchor compliance systematically and sustainably. ADVANT Beiten supports you in this as a competent legal partner – in line with the growing relevance of the CPI in your business practice.

Martin Seevers

Unfortunately, the other party feels the same way. The other party also does not know the German sales law of BGB and HGB and would thus prefer to agree on its own sales law. It is a deadlock; neither party is willing to budge. 

It was precisely this finding that was the starting point for the creation of the UN Convention on Contracts for the International Sale of Goods (= United Nations Convention on Contracts for the International Sale of Goods, CISG). A supranational law was to be created to serve as a bridge to break the deadlock. And it actually fulfills this task quite well: It is modern, well structured, quite readable even for non-lawyers (with a few drawbacks), somewhat similar to our sales law and thus overall comprehensible – and fair. It does not want to favour any party. That is why the UN Convention on Contracts for the International Sale of Goods is not fundamentally particularly buyer-friendly or seller-friendly. However, there are some features that anyone wishing to make an informed decision about whether to accept or even propose the UN Sales Convention in contract negotiations should familiarise themselves with. The following aspects appear to be particularly important:

Finally, an important practical note because this often goes wrong - anyone who wants to deselect the UN Convention on Contracts for the International Sale of Goods must not only write: "German law applies". This is because the UN Convention on Contracts for the International Sale of Goods is part of German law. A clean formulation would be: "German law applies, excluding the UN Convention on Contracts for the International Sale of Goods". However, whether this is a good solution must be examined on a case-by-case basis. Important criteria for and against can be found above.

Oliver Korte

Ruling

Article 25 (1) of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters must be interpreted as meaning that a third party, as the assignee of a claim for damages arising from the non-performance of a contract containing a jurisdiction clause, may rely on that clause vis-à-vis the original contracting party, as the assigned debtor of that claim, under the same conditions as those under which the other original party to the contract could have relied on that clause against that debtor, for the purposes of an action for recovery of that claim and without the consent of that debtor, in a situation where, in accordance with the national law applicable to that contract, as interpreted by the national case-law, an assignment of a claim entails a transfer, to the assignee’s assets, not only of the right of claim, but also of the rights attached to that claim, including the right to rely on the application of an agreement conferring jurisdiction set out in that contract, unless the original parties to the contract have expressly agreed that that clause cannot be relied on against them in the event of assignment, to a third party, of a claim arising from that contract.

CJEU, decision of v. 23 October 2025 – C-682/23 – Prorogation de compétence

Facts

E.B. and E. PL., two companies incorporated under Polish law, entered into two contracts on 24 March and 24 July 2017. The first concerned the preparation of a plot of land for the construction of a new wood products factory in Poland. The second governed the performance of construction work for that factory. On 4 March 2017 E. PL. concluded a subcontracting agreement with E. S.A., a company incorporated under Romanian law. On 10 July 2017, the latter in turn concluded a subcontracting agreement with K.P., a company incorporated under Polish law ("Subcontracting Agreement"). The Subcontracting Agreement contains a jurisdiction
clause stating that "any disputes shall be settled by the court having jurisdiction over the registered office of the contracting party" ("Jurisdiction Clause"), without defining the term "contracting party" in more detail. All the agreements are governed by Polish law.

By an assignment of claim agreement dated 16 December 2021, concluded with the participation of E. PL., E. S.A. assigned a claim for damages to E.B. ("Claim"). This Claim was said to result from K.P.'s failure to fulfil its obligations under the subcontractor agreement.

On 21 December 2021, E.B. brought an action against K.P. before the Tribunalul Specializat Cluj (Romania) for payment of the Claim including default interest. To justify jurisdiction, E.B. invoked the jurisdiction clause in the Subcontracting Agreement. It assumed that the local (Romanian) court had jurisdiction due to the
registered office of E. S.A.

According to K.P., Art. 7 No. 2 of the Brussels Ia Regulation is applicable to tortious claims. As the damage occurred in Poland, the Polish courts should have jurisdiction. In K.P.’s view, E.B. could not invoke the jurisdiction clause as a third party for contractual claims.

In its judgment of 19 December 2022, the Tribunalul Specializat Cluj dismissed the action due to an assumed lack of jurisdiction. E.B. lodged an appeal against this judgment with the Curtea de Apel Cluj on 11 April 2023. E.B. is of the opinion that the assignee's consent to a jurisdiction clause, regardless of when it was given, would be sufficient to establish its validity vis-à-vis the debtor. The latter would already have consented to it when the contract was concluded. Renewed consent would therefore not be necessary. In such a case, the national court designated by the jurisdiction clause would no longer have to examine whether the assignee had assumed the rights and obligations of the assignor.

K.P. counters that a jurisdiction clause would have effect only between the original contracting parties. Due to its personal contractual nature, it could not be invoked against third parties. Furthermore, Art. 25 of the Brussels Ia Regulation would have to be interpreted narrowly. Therefore, the existence of a jurisdiction agreement would always have to be determined between the parties to the proceedings themselves. The referring court points out that, in the present case, E.B., as the assignee of the claim for damages, is relying on the jurisdiction clause and is thus exercising a right linked to the Subcontracting Agreement which it wishes to assert against K.P. as the debtor of the assigned claim. On the other hand, however, as the assignee of only this individual claim, E.B. would not have assumed all of E. S.A.'s rights and obligations under the contract.

Furthermore, under Polish law, on which E.B. relies, the assignment of a claim would not only lead to the transfer of the claim to the assignee's assets, but also to the transfer of the rights associated with it, including the right to invoke the application of a jurisdiction agreement contained in the contract. However, the assignment of the claim would not mean that the obligations which the assignor has entered into vis-àvis the debtor of the assigned claim would be transferred to the assignee.

In those circumstances, the Curtea de Apel Cluj (Court of Appeal, Cluj) decided to stay the proceedings and to refer the following questions to the European Court of Justice for a preliminary ruling:

(1) Can Article 25 of [the Brussels Ia Regulation] be interpreted as conferring on the assignee of a claim arising from a contract [for the performance of works] the right to enforce the jurisdiction clause in that contract against the original party to the contract, if the assignment contract has, in accordance with the national law applicable to the substance of the dispute, transferred the claim and its ancillary rights, but not the obligations arising from the contract?

(2) In a case such as the one described above, is the opposition of the party that agreed to the jurisdiction clause, against whom the action is brought, relevant for the purpose of determining which court has jurisdiction? In addition, is a new consensus required from that party, prior to or concomitant with bringing a legal action, in order for the third-party assignee to be entitled to rely on the jurisdiction clause?

Grounds

30 [The first sentence of Article 25 (1) of the Brussels Ia Regulation] does not specify whether a jurisdiction clause may be assigned, beyond the circle of the parties to a contract, to a third party, who is a party to a subsequent contract and successor, in whole or in part, to the rights and to the obligations of one of the parties to the initial contract (judgment of 25 April 2024, Maersk and Mapfre España, C-345/22 to C-347/22, EU:C:2024:349, paragraph 47 and the case-law cited) nor whether such a third party may rely on such a clause against one of those original parties. (…)

38 [The] objectives [of the Brussels Ia Regulation] could be jeopardised if the enforceability of a jurisdiction clause in the relationship between one of the original parties to the contract in which that clause appears and a third party to that contract depended on whether it is one of those original parties or that third party who first relies on it by bringing an action before the designated court, which would be the case if that third party could not rely on that clause vis-à-vis those original parties under the same conditions as those under which those original parties could, in accordance with the case-law referred to in paragraph 34 of the present judgment, rely on that clause against that third party.

39 It follows that, in a situation in which an original party to the contract containing a jurisdiction clause has not consented to that clause being relied on against it by a third party to that contract, that third party may nevertheless rely on that clause against that original party if that third party has succeeded to all the rights and obligations of the other original party to that contract. (…)

46 A dispute concerning the recovery of a claim for damages, on the basis of the liability of one of the original parties to the contract containing a jurisdiction clause, on account of an improper performance of that contract, does indeed arise from the legal relationship in connection with which that clause was agreed, with the result that that original party cannot be surprised to be sued before the court designated by that clause for the purposes of that recovery, even if that claim for compensation has been assigned to a third party to the contract. (…)

48 Consequently, it must be held that, in the event of assignment of a claim arising from a contract containing a jurisdiction clause, the assigned debtor, who is the original contractual partner of the assignor, must remain, in principle, bound by that clause.

49 The fact remains that, first, that original contractual partner must also not be placed in a less favourable situation as a result of that assignment of claim. In other words, that clause must be interpreted as preventing any situation in which that contractual partner could be sued before courts other than those before which the other original party to the contract could have brought proceedings under that clause. (…)

54 [Absent] of (…) an express agreement, in the event of assignment of a claim arising from a contract containing a jurisdiction clause, the assigned debtor, who is the original contractual partner of the assignor, must remain bound by that clause and cannot unilaterally oppose its application where the assignee of that claim brings proceedings, before the court designated under that clause, aimed at recovering that debt.

55 In the present case, E. S.A. and K.P., as the original parties to the subcontract in question, agreed, by means of the jurisdiction clause at issue, that the ‘court within whose jurisdiction the contracting party has its registered office’ would have jurisdiction to hear disputes arising from that contract, including as regards the claim for damages in question, arising from that contract. First, it is apparent from the order for reference that E.B., as the assignee of that claim, brought proceedings before the same court as that before which E. S.A could have brought proceedings under that clause if E. S.A. had not assigned that claim to E.B., with the result that K.P. does not appear to be placed in a less favourable situation as a result of that assignment. Second, it is not apparent from the file before the Court that those original parties agreed that, in the event of an assignment of a claim arising from the subcontract in question, that clause could not be relied on against them by the assignee. Therefore, subject to verification by the referring court, it appears that, in the context of the dispute in the main proceedings, E.B. is entitled to rely on that clause against K.P. in order to obtain recovery of the claim for damages in question.

56 In the light of all of the foregoing considerations, the answer to the questions referred is that Article 25 (1) of the Brussels Ia Regulation must be interpreted as meaning that a third party, as the assignee of a claim for damages arising from the non-performance of a contract containing a jurisdiction clause, may rely on that clause vis-à-vis the original contracting party, as the assigned debtor of that claim, under the same conditions as those under which the other original party to the contract could have relied on that clause against that debtor, for the purposes of an action for recovery of that claim and without the consent of that debtor, in a situation where, in accordance with the national law applicable to that contract, as interpreted by the national caselaw, an assignment of a claim entails a transfer, to the assignee’s assets, not only of the right of claim, but also of the rights attached to that claim, including the right to rely on the application of an agreement conferring jurisdiction set out in that contract, unless the original parties to the contract have expressly agreed that that clause cannot be relied on against them in the event of assignment, to a third party, of a claim arising from that contract.

Comments

1. The Sixth Chamber of the ECJ has decided that the assignee of a claim (in this case a claim for damages) has the right under Article 25 (1) of the Brussels Ia Regulation to invoke the jurisdiction clause agreed to in the original contract against the debtor. This also applies if the debtor has not again explicitly agreed to the clause. The decision ultimately strengthens legal certainty by increasing the predictability of the jurisdiction clause and is therefore welcomed.

2. The present decision further extends the rights of the assignee. In earlier cases (ECJ, judgment of 27 February 2025, Società Italiana Lastre, C-537/23, EU:C:2025:120, paragraph 34 and the case law cited therein = IWRZ 2025, 145 Anm. Fervers), the ECJ already emphasized that agreements on jurisdiction must be interpreted narrowly due to the exceptional nature of Article 25 of the Brussels Ia Regulation. Until now, the ECJ had merely decided that a jurisdiction agreement remains effective if a third party has expressly assumed all rights and obligations (see, ECJ, judgments of 21 May 2015, CDC Hydrogen Peroxide, C-352/13, EU:C:2015:335, BeckEuRS 2015, 477022, paragraph 65, and of 18 November 2020, Delay-Fix, C-519/19, EU:C:2020:933, BeckEuRS 2019, 665356, paragraph 47 and the case law cited therein).

3. However, the ECJ's decision could mean more work for courts. National courts must now carefully examine whether the assignee has acquired all rights in the present case and how the assignment has been contractually structured. This can only be done on a case-by-case basis.

4. The decision strengthens the rights of the assignee. In practice, when assigning a claim, it should be clearly specified in the contract which rights (not only in relation to jurisdiction clauses) are attached to the claim, particularly in the interests of the debtor as the original contracting party.

5. It might also be conceivable to transfer the reasoning behind the decision to the assignment in connection with arbitration clauses. According to Article 1 (2) (d) of the Brussels Ia Regulation, arbitration clauses do not fall within the scope of the Regulation. However, in its reasoning, the ECJ refers to the legal nature and the assertion of ancillary contractual rights by the assignee. Since arbitration clauses are generally considered to be ancillary contractual rights, it is not unreasonable to transfer the principles of the decision. Accordingly, the assignee can also invoke an arbitration clause in accordance with the principles laid down in the decision.

6. While, according to the prevailing view in German jurisprudence and legal scholarship, an arbitration clause is transferred to the assignee (see FCJ, judgment of 2 October 1997 – III ZR 2/96, NJW 1998, 371; Wolf/Eslami, in BeckOK, 58 ed. 9/2022, Sec. 1031 m.n. 10), it would benefit a unified legal understanding within the European Union if the ECJ, irrespective of the application of the Brussels Ia Regulation, would also apply these general principles to arbitration clauses as well.

Oliver Korte
Dr Tobias Pörnbacher

_{The article originally appeared in IWRZ 2026, p. 47 ff.}

Free Trade Agreement

The EU and India have concluded negotiations on a major new free trade zone. This was announced by EU Commission President Ursula von der Leyen and India's Prime Minister Narendra Modi in New Delhi.

The dismantling of trade barriers and tariffs is intended to boost the exchange of goods and services between the EU and India. The aim is to promote growth and jobs and at the same time reduce undesirable dependencies on other countries. 

Against the backdrop of the aggressive tariff and trade policy of the USA and China's increasing striving for power, the agreement is also considered a geopolitically significant step.

Which tariffs will be reduced or abolished?

The agreement paves the way for the opening of the Indian market, which has so far been very closed to companies from the EU, which is already the country's largest trading partner. Tariffs on more than 90 percent of EU exports to India will be abolished or reduced. For 30 percent of goods traded with the EU, tariffs will fall to zero. For example, most tariffs on industrial goods such as machinery, electrical equipment, chemicals and pharmaceuticals will be completely abolished. In addition, customs procedures are to be simplified. The EU said it is expected that the agreement will lead to a doubling of EU exports to India by 2032.

The European car industry will benefit in particular. India's car tariffs will fall from 110 to ten percent over five years. This applies under an annual quota of 250,000 vehicles and should significantly benefit Volkswagen, BMW, Mercedes-Benz and Renault. Also, for Italy, the agreement represents a particularly significant opportunity; the Italian automotive sector, with its premium and specialised brands, will surely benefit from the reduction of tariffs opening new growth prospects in the world's third-largest automotive market.

At the heart of the agreement is the agri-food sector, characterised by high levels of tariff protection in India, with average duties exceeding 36% and peaks of up to 150%. The agreement provides for a significant reduction in duties on numerous European products that are key to France, Italian and German exports: tariffs on wines will fall from 150% to 75% upon entry into force and subsequently to 20%; duties on olive oil will drop from 45% to 0% over five years; for processed agricultural products, such as pasta, biscuits and confectionery, duties of up to 50% will be eliminated.

For Italy, with its excellence in the agri-food sector, the agreement opens particularly favourable prospects. The abovementioned sectors represent the heart of Made in Italy agri-food and the reduction of tariff barriers could translate into a significant increase in Italian exports to a market of over 1.4 billion consumers, with a rapidly expanding middle class. 

What are the exceptions?

Agricultural products and cars from India are not affected by the tariff reduction. Beef, rice, sugar, dairy products and poultry are exempt from the agreement. EU food safety rules remain unchanged. In contrast to the postponed Mercosur agreement – the other major FTA that the EU wants to conclude – no protest from farmers is to be expected.

Where should cooperation be strengthened?

India is seeking better access to the EU's duty-free import quotas for steel. A decision on this is expected by June 30. Not only goods, but also services are affected by the agreement. The EU is opening more than 140 service sectors to India, and India is opening up almost 100 to the EU. The agreement also establishes binding rules on labour rights, environmental protection and women's empowerment. Digital trade rules are designed to support the economy while ensuring privacy and security.

Following the agreement on the new FTA, the EU and India also want to cooperate more closely in the areas of security and defence. Both sides agreed on a corresponding partnership in New Delhi. The aim should be projects in the areas of maritime security, counter-terrorism and cyber defence, the EU Commission announced.

Market with almost two billion people

Commission President von der Leyen said that the EU and India were making history today "and deepening the partnership between the world's largest democracies". A free trade zone with two billion people would be created, from which both sides would benefit economically. In addition, it sends a signal to the world that rules-based cooperation continues to deliver excellent results.

The agreement will not be as comprehensive as that of the EU with the Mercosur states. Given the size of the Indian market, it is nevertheless one of the largest that has been agreed so far.

Special attention from regulators will be required regarding the equivalence of standards and quality used for manufacturing products to be imported into the EU under this agreement, comparable to those imposed on competing EU-made products. Equivalence of rules regarding the free movement of goods enforced in the EU will also be necessary to ensure that EU producers are not disadvantaged by unfair or detrimental competitive conditions. For the same purposes, FSR rules will contribute to balancing the rights and obligations of non-EU manufacturers competing with EU producers.

India is the most populous country in the world with more than 1.45 billion inhabitants, ahead of China. Around 450 million people live in the EU. Together, the two sides represent nearly a quarter of the world's GDP and population.

The German-Indian trade volume was around 31 billion euros in 2024. Goods worth 17 billion euros were exported from Germany to India, from where goods worth 14 billion were imported. In the past ten years, the trading volume has almost doubled. In India, around 2,000 German companies are represented with subsidiaries that employ a total of more than 500,000 people.

Italy–India trade relations have also shown steady momentum in recent years. In 2024, bilateral trade amounted to approximately €14 billion, with Italian exports to India exceeding €5 billion and imports from India accounting for the remainder. Preliminary figures and official statements for 2025 confirm a broadly stable trade volume, with both governments emphasising the strategic importance of further deepening economic ties. The Italian Government has repeatedly highlighted India as a key partner in the Indo-Pacific region and has publicly supported the EU–India FTA as a crucial instrument to expand trade flows, enhance market access for Italian companies and foster long-term industrial and investment cooperation, with an explicit objective of significantly increasing bilateral trade volumes over the coming years.

What are the reactions?

In New Delhi, EU Commission President von der Leyen spoke of a signal to the world that rules-based cooperation continues to deliver excellent results. "The EU and India are making history today," the Commission President stressed. Indian Prime Minister Modi said the agreement opens up great opportunities for India's 1.4 billion people and people. Business representatives also praised the agreement. For example, Volkswagen CEO Blume said that India, as the world's third-largest automotive market, offers great opportunities.

It is likely to take some time before the agreement comes into force. The reason is that the text of the contract still has to be legally reviewed. It will then also need the approval of the Member States and the European Parliament.

German industry hopes for a speedy announcement of the agreement. This would be a real game-changer, said the head of foreign trade at the German Chamber of Industry and Commerce, Volker Treier. He added that it was important that market access was not prevented again through the back door with bureaucratic rules. "In order for companies to be able to use the agreement, the documentation of the origin of the goods must not contain any new documentation obligations."

Italian industry has also welcomed the conclusion of the EU–India FTA as a major strategic breakthrough. Confindustria described the closure of negotiations as “an extremely positive signal”. Italian business organisations have long been strong advocates of the FTA, emphasising that ambitious commercial policy and clear, high-standard rules can enhance competitiveness and strengthen supply-chain resilience for Italian firms. 

As far as France is concerned, the sectors most likely to benefit are the wine industry, which is suffering from declining domestic consumption, as well as the technology, automotive, and defense markets, which will benefit from expanded access to a rapidly growing Indian market. Sensitive agricultural sectors have also been protected, as mentioned above, which was essential for France. The full effects are expected to materialize over several years, with tariff reductions being implemented gradually.

ADVANT provides legal and tax advice to SMEs and has been supporting cross-border investments and M&A projects for many years. In recent years, India has taken on an increasingly important role – for internationally positioned companies or those that want to become one. 

We look forward to continuing to support our clients on their way to India.

Markus Linnartz
Filippo Federici
Paolo Gallarati
Fabien Pouchot
Marie Hindré

Germany's current arbitration framework in Book 10 of the ZPO dates back to 1997 and was based on the UNCITRAL Model Law in its 1985 version. After more than 25 years, the legal landscape has shifted significantly, for example regarding digitalisation. This evolution prompts the Federal Government to adapt the law to modern needs, improve procedural efficiency and enhance Germany's attractiveness as an arbitration venue. The reform process has been shaped by developments including the 2006 revision of the UNCITRAL Model Law, reforms in other jurisdictions, updated institutional rules and the ongoing digitalisation of procedural law.

The reform introduces several central innovations. These include the establishment of specialized Commercial Courts with English-language proceedings for arbitration matters under Sec. 1062 (5), 1063a, and 1065 (3) ZPO-Draft, along with procedural facilitation through English-language submissions pursuant to Sec. 1063a and 1063b ZPO-Draft. The draft embraces digital practice by permitting electronic arbitral awards and video hearings under Sec. 1054 (2), (5), 1064 (1), 1047 (2), and (3) ZPO-Draft. Additionally, it introduces the publication of anonymised awards subject to party consent or non-objection under Sec. 1054b ZPO-Draft and creates a narrowly framed retrial mechanism that operates even after set-aside deadlines have expired under Sec. 1059a ZPO-Draft.

The legislation also provides clarifications addressing multi-party appointment of arbitrators under Sec. 1035 (4) ZPO-Draft, enforcement of foreign interim measures under Sec. 1025 (2) and 1041 (2) ZPO-Draft, judicial review of both positive and negative jurisdictional decisions under Sec. 1040 ZPO-Draft, and the admissibility of concurring or dissenting opinions under Sec. 1054a ZPO-Draft.

In substance, the reform remains deliberately modest. Compared with the June 2024 draft (Draft bill on the modernization of the German arbitration law of the Federal Government of Germany | ADVANT Beiten), the version of 27 January 2026 differs in only two aspects: Sec. 1031 ZPO and Sec. 55 ZPO. These two amendments form the core of the following analysis.

Tightening of the Form Requirement for an Arbitration Agreement, Sec. 1031 (1) ZPO-Draft

The original Sec. 1031 ZPO-Draft limited formal requirements for arbitration agreements to consumer contracts only, proceeding on the assumption that parties in commercial transactions do not require the protective function of form. The abolition of formal requirements was intended to reflect modern commercial realities, particularly complex supply chains and framework agreements where the parties involved and their respective obligations may evolve over time, making the inclusion of a formal arbitration clause at an early stage impractical.

This approach attracted substantial criticism during the consultation process and parliamentary hearing. Practitioners emphasised that complete freedom of form entails significant risks and legal uncertainty. Without clear formal requirements, evidentiary problems would likely arise, and disputes over (i) whether an arbitration agreement has been concluded and (ii) its precise content would become more frequent, particularly in complex contractual structures. Cultural and linguistic differences in international transactions were highlighted as further factors increasing the risk of misunderstandings.

A further concern related to the enforceability of arbitral awards under the 1958 New York Convention, which requires arbitration agreements to be signed by the parties or contained in written communications such as letters or telegrams. Critics warned that arbitral awards based on purely oral or implied arbitration agreements could face serious obstacles in international enforcement proceedings. Additionally, the draft's reliance on the distinction between consumers and entrepreneurs was regarded as impractical, as the definition of "consumer" is difficult to apply in practice and particularly opaque for foreign parties.

Reflecting this criticism, the revised Sec. 1031(1) ZPO-Draft abandons complete freedom of form. It now requires that arbitration agreements are concluded or at least documented in writing or by any other means of communication that allows the information to be stored and reproduced at a later stage. This approach seeks to preserve flexibility for modern commercial practice while restoring the evidentiary and legal certainty functions traditionally served by formal requirements. Although it remains unclear which means of communication are sufficient to fulfil the form requirement, this amendment of Sec. 1031(1) ZPO represents a welcome improvement over the previous draft.

The new legal capacity regarding foreign countries, Sec. 55 ZPO-Draft

The current version of Sec. 55 ZPO governs the procedural capacity of foreign parties and remains based on nationality. It provides that a foreign party who lacks legal capacity under the law of its home state is nevertheless deemed capable of conducting legal proceedings if it possesses such capacity under the law of the court seized. In contrast, the new Sec. 55 ZPO-Draft abandons the nationality-based approach and links procedural capacity to habitual residence. A party who does not already have the capacity to conduct proceedings in its own name pursuant to Sec. 51 and 52 ZPO is deemed capable if it has party capacity under the procedural law of the state of its habitual residence.

This amendment was necessary following the reform of Article 7(2) EGBGB, which no longer determines legal capacity by reference to nationality but instead by habitual residence. Since under Sec. 51 and 52 ZPO a party's legal capacity is decisive for its capacity to be a party to proceedings, the continued reliance of Sec. 55 ZPO on citizenship created a systematic inconsistency. While substantive legal capacity was already residence-based, procedural capacity for foreigners still depended on nationality.

The new Sec. 55 ZPO-Draft resolves this conflict by harmonising the connecting factors and aligning procedural capacity with modern private international law. It simplifies judicial practice by allowing German courts to rely on lex fori procedural concepts and habitual residence rather than having to determine and apply foreign nationality-based capacity rules. This synchronisation enhances legal certainty, particularly in cross-border disputes and international arbitration-related court proceedings.

Summary

Overall, the modernisation of German arbitration law remains evolutionary rather than revolutionary. While the reform introduces a range of procedural improvements aimed at efficiency, digitalisation and international accessibility, the comparison between the June 2024 and January 2026 drafts shows that only two adjustments were ultimately required. The recalibration of Sec. 1031 ZPO restores legal certainty through a flexible documentation requirement, while the new Sec. 55 ZPO harmonizes procedural capacity with contemporary conflict-of-laws principles. Together, these targeted changes demonstrate the legislator's willingness to modernize German arbitration law without sacrificing predictability or enforceability.

Dr Ralf Hafner
Dr Tobias Pörnbacher, LL.M.

The NIS-2 Implementation Act changes the Act on the German Federal Office for Information Security (Gesetz über das Bundesamt für Sicherheit in der Informationstechnik, BSIG) and introduces new, stricter cyber security obligations. The group of companies that must implement cyber security measures will be significantly expanded compared to the previous group of addressees.

After the legislative process had been interrupted by the new elections in spring 2025, it went faster than expected. As the transposition deadline of 17 October 2024 had long since expired and the European Commission had already initiated infringement proceedings against the Federal Republic of Germany, the German legislator adopted the NIS-2 Implementation Act in an accelerated manner towards the end of the year 2025. It is therefore not surprising that the Act already entered into force one day after its promulgation in the Federal Law Gazette and without any transitional periods. For the companies concerned, this means that they must now implement the new cyber security obligations at very short notice. They are obliged to take suitable and proportionate technical, operative and organisational measures to ensure IT security in the company.

The NIS-2 Directive (NIS = Network Information Security), which was passed by the European Parliament on 10 November 2022, belongs to a series of EU legal acts that are part of the digital strategy of the European Commission. An evaluation of the European Commission had shown that the previous NIS Directive and its implementation in the individual EU member states had not led to a sufficient level of cyber security in the EU. Therefore, the cyber security obligations are tightened by NIS-2.

Scope Of Application: Which Companies Are Subject To The New Cyber Security Obligations?

Previously, the BSIG differentiated between three categories of companies: (1.) operators of critical infrastructure (Section 8a BSIG), (2.) providers for digital services (Section 8c BSIG) and (3.) companies in the special public interest (so-called "UBI", Section 8f BSIG).

Now, Section 28 BSIG (new version) differentiates between so-called particularly important facilities (Section 28 (1) BSIG) and important facilities (Section 28 (2) BSIG). The exhibits 1 and 2 to the BSIG define, when a company - depending on the affiliation to a particular sector / an industry - is to be qualified as a particularly important or important facility.

The following criteria are decisive for determining whether a company falls within the scope of application of NIS-2: (1.) the classification as a critical infrastructure operator ("KRITIS-Betreiber") (i.e. as a particularly important or important facility), (2.) the affiliation to a sector / an industry and (3.) the size of the company.

In addition to operators of critical installations, providers of qualified trust services and providers of telecommunications services or operators of telecommunications networks, companies that employ at least 250 people and have an annual turnover of more than EUR 50 million or an annual balance sheet total of more than EUR 43 million are also particularly important facilities.

However, important facilities are not only critical infrastructure companies but also manufacturing industrial companies with more than 50 employees and an annual turnover of more than 10 million euros, provided that they belong to one of the sectors / industries mentioned in exhibit 1 or 2 of the BSIG.

Therefore, the scope of application has been significantly extended compared to the previous NIS Directive of 2015.

NIS-2 is of particular importance for the "manufacturing" sector. For the first time, it is covered by the new cyber security obligations. Many companies, whose business models are neither digital nor have a special relation to data, will therefore have to deal with cyber security compliance in more depth for the first time.

Tightened Cyber Security Obligations Pursuant To The BSIG

In the implementation of the NIS-2 Directive, the BSIG significantly extends the scope of application of cyber security obligations. Compared to the NIS Directive, the NIS-2 Directive also contains a much more comprehensive catalogue of cyber security obligations. Violations of cyber security obligations are also to be severely sanctioned. According to the Act on the German Federal Office for Information Security (BSIG), fines of EUR 100,000 to 10 million are provided for violations. In addition, registration and reporting obligations are introduced for companies in the event of a cyber security incident.

Cyber Security Measures And Risk Management

Pursuant to Section 30 (1) sentence 1 BSIG, so-called particularly important and so-called important facilities are obliged "to take suitable, proportionate and effective technical and organisational measures in order to avoid disruptions to the availability, integrity and confidentiality of information technology systems, components and processes, that they use for rendering their services, and to minimise the impact of security incidents."

In doing so, the extent of risk exposure, the size of the facility, the implementation costs, the probability of occurrence and severity of security incidents and their effects must be taken into account, cf. Section 30 (1) sentence 2 BSIG.

The obligations for risk management include, among others, the following measures, to which Section 30 (2) BSIG refers as minimum requirements:

• Concepts relating to risk analysis and security for information systems
• Security incident management
• Maintaining operations, such as backup management and recovery after an emergency
• Crisis management
• Ensuring security in the supply chain
• Vulnerability management
• Risk management in the area of cyber security
• Training on cyber security
• Concepts and processes for using encryption technologies
• Personnel safety: access control and authorisation management
• Multi-factor authentication or continuous authentication
• Secured voice, video and text communication and, if necessary, secured emergency communication systems

Obligation To Register And Report Significant Security Incidents

Moreover, an obligation to register has been introduced, cf. Section 33 BSIG. The responsible German Federal Office for Information Security (Bundesamt für Sicherheit in der Informationstechnik, BSI) provides for a two-step registration process for facilities in Germany concerned by the NIS 2 Directive:

First, companies should create an account with "My company account" ("Mein Unternehmenskonto", MUK), in order to register in the second step with the MUK user account with a BSI portal newly developed for NIS 2. The BSI portal has been activated since January 2026. Among other things, it serves as a reporting office for significant security incidents. The deadline for the initial registration of companies with the BSI portal is 6 March 2026 or three months from the date when a company falls into the category of the important or particularly important facility.

Companies that fall within the scope of application of NIS 2 are therefore recommended to register via the BSI portal by 6 March 2026 at the latest. On the one hand, this is in order to comply with their obligation to register, and on the other hand to be able to report IT security incidents electronically within the prescribed deadlines.

The obligations to report significant security incidents have also been tightened, cf. Section 32 BSIG. Within 24 hours (so-called early initial report) or 72 hours (so-called report), reports on significant security incidents must be given in stages. After one month at the latest, a summary final report must be submitted. This entails a considerable administrative burden for companies, as they do not only carry out measures to maintain operations or to restore their IT systems in the event of a cyber-attack, but must report to authorities on type, scope and measures taken.

Cyber Security As A Compliance Issue And Liability Of The Management

In particular, the monitoring obligation of the management pursuant to Section 38 BSIG is new. The board or the management must ensure that suitable and proportionate technical and organisational measures are taken within the company to minimise cyber risks. Moreover, companies are obliged to offer training on IT security for leadership personnel and other employees. 

These obligations cannot be delegated completely. There remains always an ultimate responsibility at the management level. If the management violates these compliance obligations, it will be liable to pay damages to the company. 

The violation of cyber security obligations, thus, constitutes a substantial risk for the management. This risk could be hedged by a D&O insurance if necessary. Companies concerned should review existing insurance contracts. Moreover, it is recommended to evaluate whether it is worth taking out cyber insurance.

Pursuant to Section 91 (3) German Stock Corporation Act (Aktiengesetz, AktG), the establishment of a risk management system is already part of the obligations of the board of a stock corporation and, thus, part of general compliance obligations of the management of companies. However, the extension to cyber security obligations is new.

Practical Note

After the NIS 2 Implementation Act entered into force without transitional periods, it is high time for the companies concerned to act. The following summary shall provide the companies concerned with a (non-exhaustive) guide on the most important points to be clarified as a matter of priority, in order to implement the new cyber security obligations.

Clarification of applicability of NIS 2 and obligations to register: First, it should be clarified, whether and to what extent NIS 2 is applicable to the respective company and whether obligations to register exist with the BSI. This must be determined in the individual case based on the product/service portfolio of a company.

Inventory and documentation: Cyber security concepts already existing should be reviewed, risks should be evaluated and the required documentation, such as cyber security concepts, emergency plans, etc. should be developed together with technical and legal experts. 

Prevention of cyber-attacks: Investments in cyber security pay off, as they are an important contribution to protecting the corporate know-how against industrial espionage and to minimising the risk of high business interruption damage in the event of a cyber-attack. Prevention and timely preparation make the decisive difference here.

Compliance and liability: In the age of Industry 4.0 and with a view to the legal innovations, IT security should become a "matter for the boss" in companies. EDP and IT security are to be understood as management tasks in a company. This does not mean that managing directors and board members must be IT experts. Rather, they should consult IT security experts. However, it is not possible to delegate the responsibility completely, as the ultimate responsibility lies with the board or the managing director.

IT security in the supply chain: Even if a company does not fall within the scope of application of NIS 2, it will have to meet the NIS 2 requirements for its clients sooner or later. Companies will be confronted with the fact that their clients will pass on their cyber security obligations to their suppliers. 

The factual scope of application of NIS 2 is thus even wider. Numerous companies delivering to companies that must meet the new cyber security requirements pursuant to NIS 2 are indirectly affected. This applies, for example, to suppliers to the medical technology and pharmaceutical industries, but also to the manufacturing industry which only produces parts for use in the automotive industry, various areas of mechanical engineering or electrical engineering.

In fact, almost every company will sooner or later have to deal with the topic of IT security.

Dr Birgit Münchbach

For companies, this means significantly increased liability risks. In addition, there is an urgent need to overhaul compliance systems. The amendments will come into force immediately after their expected publication in the Federal Law Gazette.

1. Background

The amendments adopted in the German government's draft bill "on the adjustment of criminal offences and sanctions for violations of restrictive measures of the European Union" (21/2508) are intended to transpose the EU requirements of Directive (EU) 2024/1226 on the definition of criminal offences and sanctions for violations of restrictive measures of the European Union into national law. 

The aim of the EU Directive is to harmonise and standardise the enforcement of sanctions, which has varied significantly between Member States to date, by aligning the criminal law definitions and consequences for offenders who violate EU sanctions. Although the EU itself can issue binding sanctions regulations, the responsibility for criminal prosecution (criminal jurisdiction) of violations remains with the respective Member States. 

Although the German Foreign Trade and Payments Act (Aussenwirtschaftsgesetz, AWG) already went beyond the minimum requirements of the EU, the directive requires further additions to the criminal offences (e.g. circumvention, reporting obligations, reckless dual-use violations) as well as specific sanction frameworks for legal entities.

2. Key criminal law changes in the AWG

In order to implement the requirements of the directive, the Foreign Trade Act is being amended, primarily. This primarily affects the key criminal and administrative offence provisions of Sections 18 and 19 AWG as well as consequential amendments to Section 82 of the Foreign Trade Ordinance (Außenwirtschaftsverordnung, AWV). Further amendments concern the Customs Investigation Service Act (Zollfahndungsdienstgesetz) and the Residence Act (Aufenthaltsgesetz), which will not be discussed here.

2.1 Sanctions violations, particularly in the financial sector, become criminal offences

One of the most significant changes is the upgrading of numerous offences from administrative offences to criminal offences. Violations that could previously only be prosecuted as administrative offences are now subject to mandatory penalties if committed intentionally. This applies in particular to intentional violations of certain transaction bans, financial services and payment bans, circumvention activities and, beyond the requirements of the directive, investment bans. These include, among other things, the acts previously listed in Section 82 (9) Nos. 4, 6, 7 and 9 AWV, such as the purchase, trading or listing of Russian securities and money market instruments issued after 9 March 2022. Violations may in future be punished with prison sentences of between 3 months and 5 years.

Similarly, a violation of the so-called duty to report – the duty to report information, in particular about possible sanctions violations, to the competent authorities – is no longer punishable as an administrative offence, but as a criminal offence with a prison sentence of up to 1 year or a fine, provided that the information was obtained in the exercise of a professional duty and concerns funds or economic resources to be frozen. The legal profession is exempt from criminal liability if the information was entrusted to them in their professional capacity or disclosed to them. 

A particularly critical aspect is that the existing possibility of avoiding fines for a large number of negligent violations by means of voluntary disclosure pursuant to Section 22 (4) AWG will no longer apply in future due to the reclassification of administrative offences as criminal offences. This increases the pressure on companies to take action against preventive sanctions violations, as it will be much more difficult to limit the damage retrospectively.

2.2 Criminal circumvention of EU sanctions

A new separate criminal offence has been introduced in Section 18 (1) No. 3 AWG with regard to certain acts intended to circumvent EU sanctions. This makes any use of frozen funds and resources a criminal offence if it is done with the intention of concealment. In addition, the dissemination of false, misleading or incomplete information with the intention of concealing the sanctioned ownership or possession of funds or economic resources will in future be punishable by imprisonment of between three months and five years.

2.3 Tougher penalties for violations of goods-related sanctions 

The tightening of goods-related sanctions is particularly relevant in practice. Here, new risks arise in particular in the trade in goods that can be used for both civilian and military purposes (so-called dual-use goods). Until now, reckless behaviour was only punishable in the case of certain violations of arms embargoes involving goods listed on the EU Military Goods List. However, reckless violations of certain prohibitions relating to goods listed on the EU dual-use goods list were only punishable as administrative offences. In future, reckless conduct in the export of dual-use goods will also be prosecuted as a criminal offence for the first time and punished with imprisonment of up to three years or a fine. 

A particularly serious case with prison sentences of 6 months to 10 years is introduced in Section 18 (6a) AWG. This is the case for example, if, in the context of a goods trading transaction, incomplete or incorrect information is provided to public authorities about the end use, transport route, recipient, consignor, origin, buyer, seller, quantity, value or nature of the goods in order to conceal a violation of EU sanctions. The use of a third-country company to conceal such a violation is also punishable if the perpetrator exercises a controlling or decisive influence over that company.

2.4 Significant increase in corporate fines

The new law brings with it a significant tightening of the rules for legal entities and associations of persons. The upper limit of the penalty portion of a corporate fine under Section 30 of the Administrative Offences Act (OWiG) will be quadrupled from the current EUR 10 million to EUR 40 million for underlying sanctionable offences committed by managers. This also applies to breaches of supervisory duties under Section 130 of the Administrative Offences Act (OWiG). However, no use was made of the option provided for in the EU Directive to impose fines of up to 5% of global annual turnover.

2.5 Elimination of relief measures for the timely implementation of new sanctions 

The grounds for exemption from punishment in Section 18(11) AWG, according to which no punishment was previously imposed on anyone who committed the offence by the end of the second working day after publication of the legal act in the Official Journal of the European Union, has been deleted. In practice, this particularly affects the inclusion of new natural or legal persons on the EU sanctions list and the associated business prohibitions. For companies, this effectively means that they are forced to implement new sanctions requirements almost immediately. 

2.6 Trust administration for Russian subsidiaries

New are explicit regulations that allow for public-law trust administration for European subsidiaries of Russian parent companies in the event of a concrete threat to public security and Germany's foreign interests. At the request of the company, a share custodian can also be appointed by the court to exercise the administrative rights arising from the shareholder position. This is intended to strike a balance between preventing circumvention or violations of the EU sanctions packages against Russia on the one hand and preserving jobs and safeguarding creditor interests on the other.

3. Relevance of the new regulations? 

The reform of criminal sanctions law leads to a significant increase in liability risk for companies and their managers. The risk landscape in the area of sanctions is shifting significantly to the detriment of companies. Almost all intentional violations of EU sanctions regulations will be punishable by law, in some cases supplemented by reckless offences, and the upper limit for fines for companies will rise to up to EUR 40 million. This increases both the financial risks and the personal liability risk for executives and compliance officers, especially since typical organisational deficits (e.g. missing or insufficient sanctions list checks, incomplete documentation, inadequate training) can now quickly become relevant under criminal law. The elimination of the grace period forces companies to record changes in the EU sanctions situation on a daily basis and to implement them immediately in their operations; delays in IT systems, processes or internal communication can now directly result in criminal liability risks. 

4. What should be done?

Against this backdrop, companies should comprehensively review and refine their sanctions compliance systems. This includes, in particular, a risk-based approach with systematic risk analysis along the entire value chain, robust sanctions list screenings (customers, suppliers, business partners, beneficial owners), clear process responsibilities and complete documentation of checks and decisions. In the area of dual-use goods in particular, technical classification, end-use and end-user checks, and the monitoring of re-exports and transit trade relationships with third-country companies are essential in order to counter the new circumvention and recklessness provisions. 

Companies should also design reporting processes for frozen assets and other sanction-related information in such a way that deadlines are met and responsibilities are clearly assigned. Finally, in view of the stricter penalties, regular training of sales, export control, finance, procurement, logistics and management staff is essential in order to raise awareness of the increased personal and corporate responsibility under sanctions law.

How we can support you

ADVANT Beiten's tax and white-collar crime practice specialises in the prevention, support and resolution of tax and criminal law risks in the financial sector. As a highly specialised unit with many years of industry experience in the financial sector, we combine expertise in criminal law with in depth tax law and regulatory know-how.

We provide advice on tax and commercial criminal law, tax controversy, anti-financial crime financial sanctions, and all related compliance issues, as well as the conduct of internal investigations.

In addition to preventive advice, we provide comprehensive defence for companies and individuals in tax and white-collar crime cases and represent them before financial and specialist authorities (e.g. BaFin). All lawyers in the team are also qualified as Certified AML & Anti Fraud Officers.

Our team provides comprehensive support and advice on all aspects of criminal law law, including representation and defence in cases of sanctions violations. We also offer individual legal advice on embargo law issues, and assistance with the drafting, operational review and adaptation of your sanctions compliance programme (SCP).

Martin Seevers, LL.M. Tax (USA)
Guido Storck

Artificial Intelligence

Protecting games IP against AI 

IP law has always been crucial for games companies, who own valuable assets.

2025 saw a couple of landmark decisions at the intersection between AI and IP. While neither claimants nor defendants in these cases were games companies, these decisions are highly relevant for the games industry.

At the Regional Court of Munich, GEMA, Germany's collective society for music rights, secured a favorable ruling against OpenAI's ChatGPT (decision of 11 November 2025 – 42 O 14139/24). The Court found that ChatGPT's training model contained unauthorized copies of GEMA members' original works, which were subsequently reproduced and made available through user prompts. This was deemed a breach of copyright law. This precedent establishes important implications for the industry, as there is no reason to assume that games-related IP should be treated differently.

The Higher Regional Court of Hamburg ruled that AI training using copyrighted material may be permissible under the EU copyright law's Text and Data Mining exception, even if the rights holder had declared its “opt-out” in plain text (decision of 10 December 2025 – 5 U 104/24). The court held that plain text failed to meet the "machine-readable" requirement for a valid “rights reservation” (i.e. “opt out”). This ruling shows the importance to implement proper technical opt-out mechanisms for rights holders wishing to prevent their intellectual property from being used in AI training datasets.

At a regulatory level, the EU's AI Office published its General Purpose AI Code of Practice, providing guidance for businesses seeking compliance with AI Act obligations concerning safety, transparency, and copyright for general-purpose AI models.

AI Implementation: Ownership and Valuation Risks

Games companies are also leveraging AI for their own purposes, such as asset creation and AI-assisted coding, and must therefore consider the aforementioned decisions.

AI-generated content and code generally lacks copyright protection. This necessitates ensuring that key visual elements remain human creations rather than machine-generated content. The frequent use of coding assistants raises questions about code protectability. For companies heavily reliant on AI for asset creation or coding, this presents potential valuation challenges in merger and acquisition contexts, where intellectual property traditionally serves as a key value driver. (see our blogpost (German))

AI Implementation: Regulatory Constraints

The availabilty of AI solutions through “AI marketplaces” under open-source licenses has faciliated and integration into local clients and user interfaces. However, determining liability under the AI Act for companies integrating third-party AI into their interfaces remains complex.

Apart from such marketplaces, the AI Act's impact on the gaming industry has been limited thus far. While the European Commission has indicated that AI integration in games may be prohibited in certain cases, particularly for games designed to be highly addictive or exploit vulnerabilities in children, this remains more of a theoretical concern for the time being. Also, AI use cases specific to the games industry generally do not fall in the "high risk" category, but games companies have to be mindful of the more general requirements, e.g. when using AI for HR purposes.

More games-specific are the transparency obligations notably regarding NPCs and bot-filled competitive game lobbies. 

Data Protection

In a decision on AI training using publicly available data, the Higher Regional Court of Cologne ruled that Meta's use of Facebook data for AI training was lawful, rejecting an application for a preliminary injunction filed by the Consumer Protection Association of North Rhine-Westphalia (decision of 23 May 2025 – 15 UKl 2/25). The Court held that, in this specific context, Meta's "legitimate interest" in AI product development was outweighing data subject interests, provided that users were given transparent information and the opportunity to opt-out. This decision may be useful for games companies aiming to train AI themselves.

Terms of Use, EULAs, and Consumer Protection

The Consumer Protection Network (CPC) and European Commission published Key Principles that, while non-binding, were presented as if they were binding. 

According to the Key Principles, the extensive obligations of the European Consumer Rights Directive should also apply when premium in-game virtual currency is sold or spent. This includes, but is not limited, to the call for a display in real world money, and the sizes in which “bundles” of virtual currencies should be sold.

Regarding withdrawal rights when premium in-game virtual currency is spent, the CPC identified the following practices to avoid:

• Denying consumers' 14-day withdrawal rights for unused in-game virtual currency purchases
• Denying withdrawal rights for in-game digital content or services contracts, regardless of consideration provided by the consumer

In July 2025, the European Commission published guidelines on the protection of minors, addressing implementation of in-game purchases, virtual currencies, and communication features. These positions align with broader consumer and minor protection initiatives concerning allegedly manipulative design practices.

The European Commission has announced plans to work on the Digital Fairness Act. This will provide an additional layer of consumer protection, targeting dark patterns and addictive design.

Loot Boxes

In late 2025, the German Federal Council (Bundesrat) adopted a resolution calling for significantly stricter loot box regulation to enhance youth protection. The initiative urges an examination of whether loot boxes should be legally classified as gambling due to their "gambling-like mechanisms," potentially resulting in mandatory 18+ age ratings for games containing such features. The Council demands full transparency regarding winning odds and pricing while advocating for unified European regulation within the Digital Fairness Act framework.

IP Disputes

In Sony v. Datel cheating proceedings, the German Federal Court of Justice delivered its final judgement following a 2024 decision by the European Court of Justice, ruling that mere RAM modifications might not constitute copyright infringement. However, this ruling has limited impact on multiplayer game cheat enforcement, as it restricts specific copyright claims on the manipulation of data in the working memory while leaving the tools for enforcing unfair competition law and breach of EULA intact.

Youth Protection Beyond Violence

Interaction risks, including chat features and monetization mechanics, are increasingly considered in age ratings. Germany's rating authority USK estimates that approximately one-third of rated games contain such risks, with one-third of those (11% in total) receiving higher age ratings than they would without these mechanics.

Germany also updated its Interstate Treaty on Media Minor Protection, granting the Commission for the Protection of Minors in the Media (KJM) decisive new enforcement tools. The amendment specifically targets loopholes previously allegedly exploited by some foreign providers to bypass German age verification laws. Key measures include authority to order payment service provider transaction blocking to non-compliant platforms and, as last resort, network blocking implementation. The reform transforms KJM's ability to act against offshore violators, shifting from administrative warnings to revenue stream disruption. However, this legislation faces criticism regarding "over-blocking" risks, as broad technical mandates could lead to inadvertent censorship of legitimate content if automated filters lacking contextual nuance are introduced.

Dr Andreas Lober
Lennart Kriebel
Daniel Trunk
Fabian Eckstein

Introduction

Generative AI not only supports the writing of texts and the creation of images but increasingly also the programming of software. This can have an impact on the applicability of copyright protection to software. This is also important in the case of company acquisitions. Where the software has been largely developed by AI, it may lack copyright protection which affects the intrinsic value of the target company. This must be taken into account in the context of due diligence as well as in the drafting of contracts.

Legal Context

Computer programmes are protected by copyright if they represent individual works in the sense that they are the result of their author's own intellectual creation. According to this principle, computer programmes have usually been protected by copyright until now. Since generative AI has also found its way into software development, the question arises as to how this affects the protectability. In essence, a computer programme will be able to protect if a human uses AI only as a subordinate tool. This will be the case if, for instance, AI tests the software to be developed and uncovers inconsistencies. If, however, relevant parts of the code are generated by AI, they will in many cases lack protectability. The exact distinctions are currently still subject to further development. Nevertheless, one should not be too hasty to speak of a gray area overall. The principles are already relatively clear but the specific outcome depends highly on the facts of each individual case.

All this applies regardless of whether the AI provider grants the user (i.e. software developer) all rights to the work results of the AI. If no copyright is created because the human contribution is too small, no copyright can be transferred.

Effects on due diligence

Nowadays, software developers can hardly do without the use of AI in development. The question is thus less whether AI will be used but rather how it will be used. And this question should also be asked as part of the due diligence. Disclosed internal guidelines and documentation on employee training on the use of AI can provide information, as can relevant license agreements. In addition, it is advisable to consult dedicated experts so that the actual use can be verified as accurately as possible. With only superficial due diligence, risks could be overlooked; if W&I insurance is to be taken out as part of the transaction, the associated policy could cancel or reduce the scope of the guarantee to the extent that gaps have been identified in the due diligence. 

Effects on contract documents

In addition to general guarantees of ownership of all relevant intellectual property rights (IP), there are separate guarantees with regard to the use of AI, for which attachments with specific descriptions or disclosures may then be manufactured. If the guarantee clause were too generic, there would be a risk that, in the event of an (alleged) breach of the guarantee, legal ambiguity would arise as to whether the particular case falls under the guarantee or not. 

Other legal issues: Third Party Rights, AI Act, Scraping and Data Licenses, International Aspects

A question that must be separated from the above considerations but is nevertheless related, is whether any AI-generated code infringes the rights of third parties. This could be the case, for example, if the AI largely reproduces the foreign code – with which it was trained. The risk can be reduced with a software scan but not completely eliminated; on the other hand, there is also the risk of foreign code being incorporated when human programmers are used. On the other hand, there is likely to be a greater risk if visual content is AI-generated. However, this is not the subject of this article.

If the software solution in question itself represents AI as part of the target company or as an asset to be transferred, not only the AI Act should be kept in mind but also the origin of the datasets with which it was trained. If these are due to web scraping (automated reading of data on websites using software bots or scripts), copyright and data protection questions may arise. Even the acquisition of a license from a commercial provider is only useful if the latter in turn has all the necessary rights himself; a look at the license terms is advisable in any case (for instance, with regard to limits of use by the licensee).

In cross-border company acquisitions, particularly when the target company operates internationally or even globally, the copyright challenges relating to AI-generated software are even greater. Copyright is basically national law, although the requirements for the creation of copyright protection are similar in most countries and thus also the principles for the legal issues relevant here. However, developments are still ongoing at the international level, and a Chinese court may decide the legal issues raised here differently than an American court. The guarantee declarations of the transaction documents should also contain flexible wording that takes into consideration the different legal frameworks in the jurisdictions concerned. 

Conclusion and recommendation for action

If AI is not only used as a subordinate tool in the creation of software, the software may not be eligible for protection. The software development process should therefore be scrutinized as part of the due diligence process. The findings will have to be reflected in the contract documentation when the company is acquired. Other follow-up issues such as third-party rights, AI Act, scraping and data licenses as well as international aspects must also be considered. 

Dr Andreas Lober
Tassilo Klesen

The agreement marks a milestone in trade relations between Europe and South America, creating one of the largest free trade zones in the world with over 780 million consumers. Mercosur (Mercado Común del Sur – Common Market of the South), with Argentina, Brazil, Paraguay and Uruguay as members, represents the fifth largest economy outside the EU with a gross domestic product of 2.7 trillion euros (as at 2024).

Removing trade barriers instead of creating new trade barriers and tariffs is a welcome political signal for the economy and strengthens the EU's strategic position.

Opportunities for companies

The central element of the agreement is the gradual reduction of customs tariffs over the next few years. Many industries are to benefit from the agreement, such as mechanical engineering, the automotive industry, chemicals and pharmaceuticals. In addition to tariffs, non-tariff trade barriers are also to be eliminated, for example by harmonising technical standards and labelling regulations. However, the agreement will also cover the services sector, opening up previously protected sectors to competition and allowing EU companies to bid on public procurement in Mercosur countries on an equal basis with local companies. In addition, the posting of personnel will be facilitated. 

The European Commission forecasts that EU exports to Mercosur will increase by 39 percent (48.7 billion euros), with the largest gains in motor vehicles, machinery and equipment, and chemicals. Exports from Mercosur to the EU are expected to increase by 16.9 percent (8.9 billion euros). 

However, the economic opportunities go beyond a mere increase in trading volume. Since Mercosur has only a few free trade agreements, it offers a first-mover advantage to European companies. Furthermore, it is to be expected that the agreement also offers potential for strategic alliances and repositioning in global supply chains. Mercosur countries can become a more attractive destination for foreign direct investment through preferential access to the European market and the agreement could thus lead to greater integration of Mercosur countries into European value chains.

Legal Mechanics - Two Agreements

The EU-Mercosur agreement is divided into two legally distinct but interrelated treaties:

Interim Trade Agreement (ITA): 

ITA covers only trade-related provisions, including tariff dismantling, rules of origin, services, public procurement and intellectual property rights. It falls entirely within the exclusive competence of the EU under Article 207 of the Treaty on the Functioning of the European Union (TFEU). Approval is granted by a Council decision after obtaining the consent of the European Parliament in accordance with Article 218(6) TFEU. Ratification by the national parliaments of the EU member states is not required. 

A key mechanism of the ITA is the possibility of provisional application under Article 23.3 of the ITA. This allows the EU and individual Mercosur states to put the ITA into force as soon as the respective internal procedures (of the EU and the Mercosur signatories) have been completed. This will allow trade benefits to be realised even before the full ratification of the Comprehensive Partnership Agreement. 

EU-Mercosur Partnership Agreement: 

This more comprehensive agreement contains provisions on political dialogue and cooperation in addition to the trade pillar. It must first be ratified by all 27 EU member states according to their respective procedures. Once fully ratified, the ITA will be replaced by the Partnership Agreement and the ITA will cease to be in force.

ADVANT Spanish & LatAm Desk

At ADVANT, we guide our clients through complex legal landscapes across Europe. For the Mercosur countries, our Spanish & LatAm Desk is at your side. We support you in solving legal challenges and making the most of your economic opportunities.

Dr Philipp Sahm

In a recent inquiry issued in December 2025, BaFin requires supervised entities to provide comprehensive information by early March on potential exposures arising from the tax treatment of Cum/Cum transactions. This inquiry goes well beyond previous information requests. It is expressly issued against the backdrop of the increasingly intense debate in tax and criminal law and therefore also covers periods that are tax-relevant only if the underlying transactions are classified as criminal conduct. In addition, the inquiry is intended to support BaFin’s assessment of governance and business organisation pursuant to section 25a of the German Banking Act (KWG).

For the institutions concerned, this results in significant legal, regulatory and operational challenges. These range from the need for new and more in-depth transaction analyses, to potential parallel disclosure obligations vis-à-vis the tax authorities in order to mitigate criminal tax risks, and on questions concerning the design and adjustment of tax compli-ance frameworks.

This brief article provides an overview of the key challenges arising from BaFin’s current Cum/Cum inquiry.

Background

The tax treatment of “Cum/Cum transactions” and other tax-driven securities lending arrangements around the dividend record date has occupied the German financial industry and tax authorities for many years.

Until now, public and media attention regarding alleged tax fraud has largely focused on Cum/Ex cases. Their criminal nature has since been confirmed by the Federal Court of Justice (Bundesgerichtshof – BGH). Although Cum/Ex and Cum/Cum transactions are similar in name, they are structurally very different.

Put simply, Cum/Cum structures are designed to arrange share transactions around the dividend date in such a way that foreign shareholders are able to benefit economically from tax credits or refunds on domestic dividend income, similar to domestic taxpayers – even though, under the statutory framework, such benefits are not available to them, or at least not to the same extent.

Illegal Cum/Ex transactions, by contrast, were aimed at obtaining a double or even multiple refund of capital gains tax that had only been paid once to the German tax authorities. In other words, they involved a direct and deliberate extraction of tax funds and were in some cases pursued with considerable criminal energy.

Nevertheless, the tax revenue loss attributable to Cum/Cum structures is substantial. In Germany, it is estimated in part to exceed EUR 28 billion, which would make it more than twice as high as the losses caused by Cum/Ex transactions.

Unlike Cum/Ex, Cum/Cum structures were already classified as impermissible tax arrangements by the Federal Fiscal Court (Bundesfinanzhof – BFH) in 2015, and subse-quently by fiscal courts in numerous cases. However, a criminal law prosecution compa-rable to that of Cum/Ex cases did not materialise for a long time. This has now changed perceptibly as a result of the OLG Frankfurt decision of 10 December 2024 (3 Ws 231/24), which for the first time allowed an indictment for tax evasion based on tax-driven securities lending transactions. This decision is likely to have significant signalling effects for the criminal law treatment of Cum/Cum structures more generally.

Correspondingly, tax authorities – particularly in the German federal state of North Rhine-Westphalia – have adopted a noticeably more aggressive approach to Cum/Cum struc-tures. Similar to the OLG Frankfurt’s view, criminal tax allegations are being raised, and banks are being assessed for taxes arising from Cum/Cum transactions carried out more than 20 years ago in some cases.

BaFin has now taken up this development and expressly justifies the need for what is now its fourth Cum/Cum inquiry (following those in 2017, 2020 and 2021) by reference to the “increasing discussion in tax (criminal) law”.

Notably, BaFin does not regard the inquiry as relevant solely from a prudential risk perspective. Rather, it explicitly points out that participation in Cum/Cum transactions may also affect how BaFin assesses the governance and proper business organisation of supervised entities. This confirms our experience from BaFin special audits and statutory audits in connection with Cum/Ex cases: the handling of tax risks in the financial sector has firmly moved into BaFin’s focus. From BaFin’s perspective, tax compliance in the financial sector is therefore no longer an isolated task of the tax department, but part of the institution’s overall compliance organisation within its non-financial risk (NFR) management and subject to the statutory requirements for proper business organisation under section 25a KWG.

From Market Consensus to the OLG Frankfurt’s Reversal

Distinction from Cum/Ex

The comparatively lower level of attention paid to Cum/Cum transactions over many years was also reflected in their legal assessment, particularly under German criminal law.

The reluctance to treat Cum/Cum structures as criminal was largely based on their structural distinction from Cum/Ex. Cum/Ex transactions were deliberately designed to obtain multiple refunds or credits of capital gains tax without corresponding tax pay-ments having been made. Cum/Cum arrangements, by contrast, were “merely” intended to reduce the tax burden on domestic investment income for non-resident taxpayers as far as possible and to place them economically on a par with domestic taxpayers.

Against this background, the prevailing market view for a long time was that Cum/Cum arrangements did not fulfil the objective elements of tax fraud.

Decision of the Wiesbaden Regional Court

This view was still confirmed at the beginning of 2024 by the Wiesbaden Regional Court (Landgericht – LG). In its decision of 12 February 2024 (6 KLs 1141 Js 23929/12), the court refused to open main proceedings in relation to tax-driven securities lending transactions and denied the existence of the objective elements of tax fraud.

This decision reflected the long-standing market consensus and formed the basis for numerous internal review projects at financial institutions. It also often determined the scope of responses to BaFin’s previous Cum/Cum inquiries in 2017, 2020 and 2021.

Decision of the Frankfurt Higher Regional Court

However, with its decision of 10 December 2024 (3 Ws 231/24), the OLG Frankfurt called this line of reasoning into question. Contrary to the view of the Wiesbaden Regional Court, the OLG assumes that Cum/Cum structures can, in principle, meet the elements of tax fraud.

The decision was based on a tax-driven securities lending programme in which a domes-tic taxpayer lent fixed-income securities to a non-resident taxpayer and, in return, received German shares as collateral over the dividend record date. The tax benefit for the non-resident was realised through compensation payments between the parties. One of the particular features of the case was that the shares provided as collateral were subject to a prohibition on disposal, meaning that the domestic taxpayer could not freely dispose of them. This had decisive implications for the attribution of beneficial ownership of the shares and for the assessment of abuse under sections 39 and 42 of the German Fiscal Code (AO).

Despite these specific features – which may indeed not have been present in many other market structures – the decision has considerable signalling effect. For the first time, it clearly establishes that Cum/Cum transactions are not per se outside the scope of criminal relevance.

Consequences for Limitation Periods and Risk Analysis

The potential classification of Cum/Cum arrangements as tax fraud has significant practical consequences. In particular, the relevant limitation periods are substantially extended. Completed Cum/Cum review projects and tax corrections may therefore prove to be incomplete. While some institutions have responded to these developments with new analysis projects, others have so far taken no further action.

BaFin’s Inquiry of 15 December 2025

Against this backdrop, BaFin sent a new, comprehensive inquiry to financial institutions at the turn of the year 2025/2026. The aim is to reassess existing risks arising from Cum/Cum structures and their impact on financial market stability.

The inquiry explicitly refers to the OLG Frankfurt decision and is notable for its broad temporal scope: transactions dating back to 2010 are covered. Such a time frame is only tax-relevant if extended limitation periods of ten or even fifteen years apply as a result of a classification as tax fraud.

Although BaFin had already sent similar inquiries in 2017, 2020 and 2021, the current request represents a new level of intensity. Earlier inquiries could often be answered on the basis of the then prevailing assumption that Cum/Cum did not constitute tax fraud. As a result, analyses were typically limited to periods that were not yet time-barred for tax purposes, applying the standard four-year limitation period.

This approach is no longer readily available. The new inquiry forces institutions to include much earlier years if they could still be risk-relevant due to extended criminal limitation periods of up to fifteen years.

Important note:

The transaction analyses required to respond to BaFin’s inquiry should, as a matter of urgency, be accompanied by considerations as to whether and to what extent the results may need to be disclosed to the tax authorities in order to mitigate criminal tax risks – for example under section 153 AO (correction of tax returns) or even section 371 AO (voluntary disclosure). In individual cases, it may therefore be advisable to extend the analysis period beyond 2010.

Conclusion

Current developments significantly increase the pressure on financial institutions. Institutions that have already carried out comprehensive and complete Cum/Cum analyses in recent years are generally in a position to respond to the new BaFin inquiry in a robust manner.

By contrast, institutions that have not yet fully examined periods back to 2010 face considerable challenges. Until the beginning of March 2026, they must not only prepare well-founded responses to BaFin, but may also need to reassess the tax treatment of transactions from long-past years. This requires an extremely complex and data-intensive process.

Irrespective of this, the central legal question remains unresolved: whether Cum/Cum structures, in all their variants, ultimately qualify as tax fraud has not yet been conclu-sively clarified by German criminal courts. Regulatory and criminal law pressure on financial institutions is nevertheless continuing to increase – and is unlikely to abate in the short term.

How We Can Support You

ADVANT Beiten’s Tax and White-Collar Crime practice in the financial sector specialises in the prevention, management and resolution of tax and criminal law risks in the financial industry. As a highly specialised team with many years of sector experience, we combine criminal law expertise with in-depth tax law and regulatory know-how.

Our advisory focus includes tax and white-collar criminal law, tax controversy, anti-financial crime and financial sanctions, as well as all related compliance topics and the conduct of internal investigations.

In addition to preventive advice, we comprehensively defend companies and individuals in tax and white-collar criminal matters and represent them before tax and regulatory authorities (including BaFin). All lawyers in the team are also qualified as Certified AML & Anti-Fraud Officers.

Our team supports you in providing legally sound responses to BaFin’s current inquiry. We assist with the design and operational implementation of the necessary transaction analyses, considerations regarding potential disclosure obligations to the tax authorities to mitigate criminal tax risks, and the possible implications of investigation results for BaFin’s assessment of governance and business organisation.

Martin Seevers, LL.M.
Julian Niederlein

Such claims can be very expensive: In the case of commercial agents, the claim may be an average annual commission, and in the case of distributors, the equivalent (calculation: complicated – more on that another time). 

Manufacturers often want to avoid such claims: the distributor has earned well during the cooperation. Why should he still receive money after that? The perspective of the distributor is exactly the opposite: Where would the manufacturer be without us? We built up the market for him in the first place. So, it is only fair that we participate in it now, when the harvest is brought in. 

If manufacturers want to prevent having to pay indemnity after the end of the contract, then they must first know what the requirements are for this and, if necessary, design the contract accordingly. The decisive course is set in the drafting of the contract. And conversely, it is important for distributors to recognise which arrangements generate - or prevent - an indemnity claim.

In particular, the following approaches may be particularly important:

1. Section 89b of the German Commercial Code can only be applied if German law is applicable. In the case of cross-border contractual relationships, a court located within the EU would apply the law of the state in which the distributor has their "habitual residence" (Art. 4 para. 1 f) Rome I Regulation), unless the parties have agreed otherwise. If this country is Germany, what is explained in the following paragraphs applies. If this country is not Germany, then a different law applies. Both parties to the contract would then do well to determine whether or not there is an indemnity claim for distributors in that other country. This varies greatly around the world (in Belgium, for example, it is expensive, in England there is no indemnity, in Austria the analogy requirements are different than in Germany). Whether the parties, if the distributor is active in Germany, can effectively agree that another legal system applies, is disputed, if and to the extent that this results in no indemnity claim arising. The Berlin Court of Appeal (Kammergericht) ruled (indirectly) in 2025 that this was permissible and valid. However, other courts are not bound by this decision. In any case, in a constellation where both parties are German and where no other relevant elements are located outside Germany, such a choice of law would clearly not be effective with regard to the indemnity claim (Art. 3 para. 3 Rome I Regulation). It can be attractive for manufacturers to choose a foreign legal system that does not have an indemnity claim for distributors. And distributors should therefore (also) from this point of view not consider the choice of law to be of only secondary importance and, if necessary, insist on the application of German law.
2. If, according to the above statements, German law is to be applied, the question arises as to whether the criteria for analogy are met, i.e. the prerequisites for the provision of section 89b German Commercial Code applicable to commercial agents to be applied in the specific case. It is necessary for the contractual relationship to be so similar to a commercial agent relationship that it is appropriate to apply commercial agents law in this respect. The case law proceeds in two stages:
   1. At the first stage, it is verified whether the distributor is integrated into the manufacturer's sales organisation in the same way as a commercial agent. This is usually done with the help of a catalogue of criteria, which is used to check the written contract and the established contractual practice. The overall picture is decisive, not necessarily that all criteria can be affirmed. Important criteria include the existence of a sales obligation, the allocation of a contract territory, control rights of the manufacturer, reporting obligations of the distributor, etc. The manufacturer who wants to avoid an indemnity claim may consider how demanding he wants to make the catalogue of obligations of the distributor and, if necessary, waive obligations that are less important to him if this reduces the probability that he will have to pay indemnity one day. Conversely, the distributor could work to ensure that the contract provides for intensive integration. However, he should take into account that it is likely to seem strange and suspicious if he asks for the imposition of further obligations. Such approach would probably only be able to work if the distributor submits the first draft of the contract.
   2. At the second stage - i.e. only if the first stage (see paragraph above this) has been affirmed - the courts then examine whether the distributor was or is contractually obliged to transfer the customer base, i.e. to transmit the necessary customer data to the manufacturer that enables the manufacturer to contact the customers without significant intermediate steps. It is important to note that the prevailing opinion (at least still) requires that it be a contractual obligation. According to this, it is not sufficient that the manufacturer actually knows the customers, e.g. because the market is so small, or the distributor transmits the customer data without being asked. All of this is criticised and controversial for good reasons, and it may be that this analogy feature will be abandoned or modified in the foreseeable future. At present, however, one should still expect a court to demand such a contractual obligation. If a contractual obligation does not exist, there is no indemnity claim. And this results in several possibilities for the manufacturer to avoid having to pay indemnity by drafting the contract: He can simply refrain from providing for such an obligation in the contract. It is even better to explicitly write in the contract that the customer data should not be transmitted (e.g. in the context of any reporting obligations). But beware: You have to live it that way and as a manufacturer you must not demand the submission of customer data. Otherwise, there is a risk that a court will derive a tacitly agreed obligation to transfer the customer base from the lived contractual practice. If the contract does not provide for an obligation to transfer and the manufacturer asks for customer data, the distributor may conversely consider whether he complies with this request despite the fact that the obligation does not exist, and documents everything thoroughly and thus gives himself an improved chance of receiving indemnity later. Sometimes, of course, the manufacturer wants to have the customer data. But even then, there are approaches whose pursuit prevents the arising of an indemnity claim: For example, it can be regulated that the distributor does not have to transmit customer data, but can transmit it voluntarily - then in return for benefits to be agreed. Here, a certain degree of finesse is required to ensure that the arrangement does not result in an invalid circumvention of case law. It is also conceivable to regulate that the customer data is not to be transmitted to the manufacturer, but to an external marketing agency, and that this agency uses the data for the manufacturer's purposes during the term of the contract, but no longer thereafter. Other approaches that go in this direction are conceivable and, in some cases, have also been tried and tested in court. Distributors who see such provisions in draft contracts should recognise that the avoidance of an indemnity claim can be the background and objective and carefully examine whether they accept this as appropriate and fair or, if necessary, whether they want to demand further consideration. If they are assured in an open discussion that it is not at all a question of avoiding an indemnity claim, it may be advisable to counter this with the demand for an express regulation on the indemnity claim. This will probably be met with little approval, but it may reveal the true motives.
3. If, according to the preceding paragraphs, the application of German law is to be assumed and the two analogical criteria are also met, it could seem tempting from the manufacturer's point of view to simply exclude the annoying indemnity claim at the stroke of a pen by means of a corresponding contractual clause. However, this is not effectively possible if the distributor has to operate within the European Economic Area (EEA = EU + Iceland, Liechtenstein, and Norway), as the German Federal Court of Justice ruled in 2016: The indemnity claim is mandatory for commercial agents (section 89b para. 4 of the German Commercial Code) and this, according to the German Federal Court of Justice, also applies to distributors by analogy. However, the situation is different if the distributor has to operate outside the EEA: In that case, Section 92c of the German Commercial Code (HGB) allows the exclusion of the indemnity claim, at least in individually negotiated contracts. However, it has not been conclusively clarified how this applies to arrangements based on standard terms and conditions.

Oliver Korte

Information on shell companies in tax havens

Offshore service providers enable their customers to set up foreign companies, known as shell companies, in low-tax areas (tax havens). The intermediary role of the companies and, in some cases, straw men serves to hide money from the German tax authorities. This arrangement is often used to evade taxes or to conceal assets obtained through criminal activities.

The LBF NRW has more than one terabyte of data on foreign companies around the world and the beneficial owners behind them. This also includes taxpayers in Germany. Once the data has been processed, it will also be made available to authorities in other federal states and foreign partners.

Criminal prosecution and searches

It is to be expected that numerous taxpayers named in the data will be subject to both tax and criminal investigations; searches are also likely, as in similar cases in the past. Tax evasion has not been a trivial offense for years and can lead to heavy fines or prison sentences. According to the German Federal Supreme Court, tax evasion involving an amount of more than EUR 1 million should generally result in a prison sentence without parole. In most cases, hopes of the statute of limitations expiring are unfounded. Tax evasion in particularly serious cases does not expire before 15 years have elapsed. The courts consider cases involving amounts of EUR 50,000 or more to be particularly serious.

Voluntary disclosure exempting from punishment possible

As long as the tax authorities have not yet discovered a case, i.e., have not yet evaluated the data, it is still possible in individual cases to submit a voluntary self-disclosure that exempts from punishment. 

The decisive factor is now to disclose the facts in full to the authorities in a voluntary self-disclosure or, if not all documents are available, to first disclose the taxable income to the authorities by means of an estimate.

Whether voluntary self-disclosure exempts the taxpayer from punishment depends on whether the authorities discovered the offense first or whether the taxpayer preempted the discovery by making voluntary disclosure. Even if the offense has already been discovered, cooperative and complete voluntary disclosure and payment of the evaded taxes will in any case result in a more lenient punishment. 

Action is the order of the day

Our team of criminal defense attorneys, specialists in criminal tax law, and tax advisors will support you — even at short notice — in making your decision and represent you before the tax and law enforcement authorities.

Dr. Jochen Pörtge
Martin Seevers
Volker Küpper

Executive Summary (German)

Die Verletzung von Schieds- und Gerichtsstandsvereinbarungen ist für europäische Unternehmen mit Russlandbezug ein zentrales Risiko. Nach Artikel 248.1 der russischen Zivilprozessordnung können russische Gerichte internationale Zuständigkeiten ignorieren und sich selbst für zuständig erklären. Dies betrifft insbesondere Streitigkeiten mit europäischen Unternehmen, wenn russische Parteien von Sanktionen betroffen sind. Die Gerichte weisen Einreden mangelnder Zuständigkeit in der Regel zurück und setzen Verfahren in der Sache fort. Damit entsteht für europäische Unternehmen ein erhebliches Risiko, vor russischen Gerichten verklagt zu werden – unabhängig von vertraglichen Zuständigkeitsregelungen.

Die Europäische Union hat darauf reagiert und mit Artikel 11 a der Verordnung Nr. 833/2014 eine Möglichkeit geschaffen, vor Gerichten in EU-Mitgliedstaaten Schadensersatz gegen Parteien zu fordern, die Verfahren unter Verletzung solcher Vereinbarungen in Russland einleiten. Für Unternehmen ohne laufende Geschäftsbeziehungen zu Russland kann es sinnvoll sein, diese Ansprüche in der Europäischen Union oder vor vereinbarten Schiedsgerichten geltend zu machen. Unternehmen mit fortgesetztem Russlandgeschäft müssen dagegen mit Beschlagnahmungen oder Gegenklagen in Russland rechnen, insbesondere auch in Bezug auf russische Tochtergesellschaften innerhalb derselben Unternehmensgruppe.

Auch die Anerkennung und Vollstreckung europäischer Urteile oder Schiedssprüche gegen russische Parteien außerhalb der Europäischen Union bleibt herausfordernd. Umgekehrt besteht das Risiko, dass russische Urteile in Drittstaaten anerkannt werden, mit potenziell nachteiligen Folgen für europäische Unternehmen. Artikel 11 a der Verordnung Nr. 833/2014 kann Verluste zwar teilweise kompensieren, ersetzt aber keine vorausschauende Strategie. Dabei sind auch die komplexen Wechselwirkungen von Anti-Suit- und Anti-Anti-Suit-Injunctions zu berücksichtigen, die in verschiedenen Jurisdiktionen unterschiedlich gehandhabt werden.

Vor diesem Hintergrund ist die internationale Rechtslage für europäische Unternehmen deutlich komplexer geworden. Wer grenzüberschreitend tätig ist, muss rechtzeitig Maßnahmen ergreifen, um Zuständigkeitsvereinbarungen zu schützen und Risiken aus parallelen Verfahren zu minimieren. Ob eine Verletzung solcher Vereinbarungen hingenommen oder aktiv bekämpft wird, hängt von den jeweiligen Geschäftsinteressen und Vermögensrisiken ab. In jedem Fall sollten Unternehmen ihre Positionen in Russland, der Europäischen Union und in allen relevanten Drittstaaten sichern.

I. Introduction

Before Russian state courts there is currently a stable trend to apply Article 248.1 of the Russian Code of Commercial Procedure (hereinafter the “Russian Code”) to override choice of court and arbitration agreements. If a Russian party files contractual claims against a European counterparty, a Russian state court will declare itself competent to hear the dispute. Russian state courts routinely reject objections by European parties arguing that the claim should be dismissed without a hearing on the merits, due to the existence of an arbitration agreement designating an institution located outside Russia (such as the ICC, SCC, LCIA, SIAC, or others). Instead, courts proceed to hear the case on the merits, relying on Article 248.1 of the Russian Code.

This article analyses the risks and legal remedies available to protect the rights and interests of European parties involved in judicial proceedings before the Russian state courts.[1] European parties conducting – or having previously conducted – business in Russia bear a risk that Article 248 of the Russian Code will be applied, thereby overriding valid choice of court or arbitration agreements. This risk has already materialized and should not be underestimated (see No. II below).

If the European party already initiated proceedings elsewhere, there is a high probability that Russian courts will issue anti-suit or anti-arbitration injunctions. Whether a European party complies with such injunctions or seeks anti-anti-suit or anti-anti-arbitration injunctions in response is of crucial importance, particularly in relation to the imposition of fines. These injunctions place European parties in a legally precarious position, especially when confronted with conflicting obligations arising under international contracts and EU law. The decision to comply with or contest such Russian measures – potentially through counter-injunctions in EU member states or other jurisdictions – can have serious legal and financial repercussions, including enforcement challenges across borders (see No. III below).

While Regulation (EU) No. 833/2014, in particular Article 11 a, and domestic legal remedies, such as Section 280 (1) of the German Civil Code, may offer opportunities for European parties to recover damages resulting from these proceedings, their practical effectiveness remains uncertain (see No. IV below).

Much will depend on the willingness of European courts to grant relief and on the enforceability of such decisions in cross-border contexts. With all these challenges it is, furthermore, important to consider the enforceability and recognition of European decisions in Russia and vice versa (see No. V below).

In light of these developments, European parties must adopt a proactive and strategic approach to dispute resolution when dealing with Russian counterparties. This includes a careful assessment of legal risks, enforcement prospects and the coordination of parallel proceedings in multiple jurisdictions. Whether the remedies granted by EU law will be effective in mitigating risks and damages arising from these complex situations remains to be seen.

II. Overriding of Arbitration and Choice of Court Agreements by Russian State Courts

1. Exclusive competence of Russian state courts: risks for European parties

Russian state courts utilize Article 248.1 of the Russian Code to establish their exclusive competence. Article 248.1 of the Russian Code was introduced in June 2020. A translation of Article 248.1 of the Russian Code reads as follows:

“1. Unless otherwise established by an international treaty of the Russian Federation or by agreement of the parties, according to which the consideration of disputes with their participation is assigned to the competence of foreign courts, international commercial arbitrations located outside the territory of the Russian Federation, the exclusive competence of arbitration courts in the Russian Federation includes cases:

1. in disputes with the participation of persons in respect of which restrictive measures are applied by a foreign state, state association and (or) union and (or) state (interstate) institution of a foreign state or state association and (or) union;
2. on disputes of one Russian or foreign person with another Russian or foreign person, if the basis for such disputes is restrictive measures introduced by a foreign state, state association and (or) union and (or) state (interstate) institution of a foreign state or state association and (or) union in relation to citizens of the Russian Federation and Russian legal entities.”

The article establishes the presumption that Russian state courts have exclusive jurisdiction to hear any commercial disputes between Russian and foreign legal entities if a foreign state has imposed sanctions on the Russian party. This article permits a sanctioned Russian party to file proprietary and non-proprietary contractual and non-contractual claims against a European counterparty before Russian state courts.

Prior to 2022, it was fairly rare for Russian state courts to employ Article 248.1 of the Russian Code – it would be used primarily in cases where a foreign state had imposed personal sanctions against a Russian party.

However, the practice of applying Article 248.1 of the Russian Code became more common after 2022. Now the Russian state courts proceed on the assumption that Article 248.1 of the Russian Code applies not only in cases of personal sanctions against the Russian party, but in any other case where the Russian party has been affected by sanctions (for example, if the goods that are the subject of the dispute are covered by sanctions).[2]

Russian state courts apply Article 248.1 of the Russian Code when the contract has an arbitration agreement specifying an arbitration institution located outside Russia. It is also used in cases where the contract has a choice of court agreement which establishes that a foreign state court from a jurisdiction unfriendly to Russia shall be competent to hear disputes arising from the contract (for example, the state courts of England, Latvia, etc.). Over the past three years, there have been only a limited number of cases where a European party managed to prove the validity and enforceability of an arbitration agreement, resulting in termination of the proceedings in the Russian state court.

Thus, there is an enormous risk for European parties that Russian state courts may disregard an arbitration or choice of court agreement and hear the dispute on its merits, holding that the dispute falls under the exclusive competence of the Russian state court. In this instance, a European party, if it has assets in the Russian Federation or third countries which recognise the decisions of Russian state courts (for more details, see No. V below), must assess the risks if it were to participate in or to disregard the judicial proceedings before the Russian state court.

Only in some instances have European parties been successful even though the Russian state court disregarded the arbitration agreement and moved to the consideration of the dispute on its merits. European parties managed to refute the claims of the Russian party in total or to reduce the size of the claims to the minimum possible amount. However, these were the exception rather than the rule.

2. Exclusive competence of Russian state courts: risks for Russian subsidiaries that are part of the same group as a European party

The exclusive competence of Russian state courts bears a risk for Russian subsidiaries that are part of the same group of companies as the European contracting partner of the Russian party. Let us presume that a European party is unable to perform its contractual obligations to a Russian counterparty due to sanctions and has subsidiaries or sister companies in Russia (hereinafter “Russian Subsidiaries”). In such cases, the Russian claimant, understanding that the Russian state court decisions will probably be unenforceable in the European Union (hereinafter the “EU”), not only files claims against the European party (the contracting party), but also names the Russian Companies as co-respondents.

The Russian claimant demands that the Russian Companies be held jointly and severally liable for the defaulted obligations of the European party, asserting that all the co-respondents are part of a single corporate group and have a single decision-making centre, even in instances where the Russian Companies were not involved in the contractual relations between the claimant and the foreign party. For a Russian claimant, attaching the Russian assets of a foreign group is faster and simpler than litigating in foreign courts and/or arbitration institutions and trying to identify group assets in foreign jurisdictions.

This approach of the Russian state courts facilitates that Russian claimants see their claims satisfied with the Russian assets of the foreign group, without requiring recognition and enforcement in a third jurisdiction.

In 2023 and 2024 Russian state courts issued such rulings in various cases, affirming the legitimacy of the claims of Russian claimants,[3] even though previously Russian jurisprudence rejected joint and several liability in similar cases.

a) Important ruling of the Russian Supreme Court

In 2025 the Russian Supreme Court heard a landmark case between a Russian bank and Citibank Group.[4] Due to sanctions, the American-based Citibank had not paid a debt to the Russian bank PAO Sovkombank. PAO Sovkombank attempted to recover the debt from the Russian entity of the Citibank group, AO KB Citibank, as a debtor that was jointly and severally liable. All the lower courts had ruled in favour of the Russian bank.

The Russian Supreme Court did not exclude the possibility that Russian companies might be held liable for the actions and debts of a foreign company of their group. The wording of the court decision implies that Russian companies can be held jointly and severally liable, provided that certain preconditions are met.

The Russian Supreme Court stated that debtors only become jointly and severally liable if this is stipulated by contract or established by law. However, in exceptional cases a participant in a corporation and other controlling entities may be held liable to the creditor of the given legal entity if:

• the inability to meet the claims of the creditor was provoked by implementing the will of controlling entities;
• the behaviour of the controlling entities does not meet the criteria of being reasonable and in good faith;
• the behaviour of the controlling entities is unrelated to market factors and other objective factors or to the business risk inherent in business activity.

When deciding the issue of joint and several liability, the courts should examine the extent of the foreign company’s control over the Russian Subsidiary, based on the following criteria:

• the property criterion, specifically the scope of investments in the Russian Subsidiary;
• the amount of the foreign company’s property that is being used by the Russian Subsidiary;
• the presence and appurtenance of monetary funds received from the foreign company for the use of the Russian Subsidiary.

b) Its consequences

Since the Supreme Court has remanded the dispute for a new hearing in the court of first instance, it is still too early to talk about established case law on the issue of the joint and several liability of all group companies for obligations towards a Russian counterparty.

On the one hand, it follows from the decision of the Supreme Court that the mere fact of belonging to the same group of entities is insufficient for the legal entities within this group to be held jointly and severally liable. The position of the Supreme Court reflects the need for the lower courts to be more attentive when they apply the concept of joint and several liability, and to take a more rigorous approach as to what must be proven in this category of disputes.

On the other hand, in this category of disputes the Supreme Court has allowed broad criteria to be used for the joint and several liability of a group of entities; these criteria were initially developed for legislation on bankruptcy and have only been applied in extremely rare cases in non-bankruptcy disputes. The terms “behaviour unrelated to market factors and other objective factors”, “property criterion”, “business risks” and so on are matters of judgment, and may be interpreted differently by the lower courts.

In view of the foregoing, we presume that there is a clear risk for Russian subsidiaries that are part of the same group as foreign companies that they may be held jointly and severally liable for the defaulted obligations of foreign companies of this group to Russian counterparties.

The examples cited above show that Russian Companies risk being drawn into major court disputes as co-respondents regarding contracts between Russian and European entities which had not been performed owing to sanctions. At the same time, interim measures might be imposed on the property of the Russian Companies throughout the protracted litigation, such as the attachment of assets, injunctions on the sale of shares, etc. In this instance, the only option for the Russian Companies would be to proactively present their position in the Russian state court in order to challenge the Russian claimant’s bid to hold them jointly and severally liable and to have interim measures imposed.

If the Russian state court were to satisfy the claims of the Russian claimant with the assets of the Russian Companies, the European parent company might then be entitled to demand the collection of losses from the Russian claimant based on Article 11 a of Council Regulation (EU) No. 833/2014 (for more details, see No. IV below).

III. Battle of Russian and Foreign Anti-Suit (Anti-Arbitration) Injunctions

1. Injunctions issued by Russian state courts

Article 248.1 of the Russian Code leads to situations in which European parties will initiate arbitration proceedings or state court proceedings outside of Russia and will face parallel proceedings in Russia. If a European party wants to commence arbitration proceedings against a sanctioned Russian party at an arbitration institute, the Russian party is entitled, based on Article 248.2 of the Russian Code, to file a petition with a Russian state court and receive a court order which prohibits the foreign party from continuing the arbitration or court proceedings in the foreign jurisdiction or risk a fine (an anti-arbitration injunction).

Similarly, Article 248.2 of the Russian Code allows a court to issue an injunction on the discontinuation of the judicial proceedings in a foreign state court (anti-suit injunction).[5]

If a European party has assets in the Russian Federation and violates an injunction issued by a Russian state court (hereinafter the “Russian injunction”), then the Russian party is entitled to enforce the fine and satisfy its claim from the Russian assets of the opponent (hereinafter the “Fine”) equal in amount to the claim filed with the Russian arbitration institute (Article 248.2(10) of the Russian Code). It is common practice for a Russian state court to impose such a Fine in favour of a Russian party for the non-compliance by the foreign entity with a valid court injunction.[6] One of the largest Fines in the amount of USD 5 billion was issued by a Russian state court against Port Petrovsk Ltd should the company continue its judicial proceedings against PAO Transneft in the High Court of Justice.[7]

If a case is won by a Russian party, the decision of the Russian state court may be enforced with the Russian assets of the foreign party. The same applies if the Fine is awarded to the Russian party based on Article 248.2 of the Russian Code. In particular, in the dispute of UniCredit Bank vs RusChemAlliance, UniCredit had to withdraw the English injunction as otherwise it would have faced a Fine of EUR 250 million imposed by the Russian state courts. UniCredit pointed out that the English injunction was practically unenforceable as RusChemAlliance did not have assets outside Russia.[8] At the same time, however, maintaining the injunction carried the risk of a significant increase in UniCredit’s liabilities in Russia which could have been enforced with UniCredit’s assets in that jurisdiction.

For example, let us presume that European party X commences arbitration in Paris under the ICC Rules against Russian party Y, in which it demands the value of the work performed in the amount of EUR Z. The arbitral tribunal finds the claims filed by X to be substantiated and satisfies the lawsuit. In parallel, Y files a claim with a Russian state court, demanding that it prohibits X from continuing the arbitration in Paris under the ICC Rules, and – if the injunction is not observed – that X be fined EUR Z in favour of Y. The Russian judge holds that Y’s claims are substantiated and satisfies the lawsuit.

It is clear that subsequently X would secure the recognition and enforcement of the ICC arbitral award in the courts of the contracting states of the New York Convention of 1958 where Y has assets. In turn, Y would secure the recognition and enforcement of the Russian state court’s decision on the collection of the Fine in those countries with which Russia has concluded agreements on recognising court orders and in which X has assets. For the time being, we can only conjecture as to how a foreign court might respond if Y and X were to secure the recognition and enforcement of contradictory decisions in one and the same jurisdiction. Such settlements would result in Russian and European entities running through various jurisdictions in search of each other’s assets.

In the example above the European party X risks losing some or all of its Russian assets. At the same time X cannot fully rule out the risk that the decision of the Russian state court might be recognised in those jurisdictions with which Russia has bilateral agreements on the mutual recognition of the decisions of state courts in commercial disputes. The issue of recognising and enforcing the decision of a Russian state court issued based on Article 248.1 and/or Article 248.2 of the Russian Code would be subject to a review by a foreign court at the place of exequatur, in compliance with the norms of the national law of this state.

As such a decision of the Russian state court on the collection of the Fine would run counter to the provisions of the arbitration agreement and Article 2 of the New York Convention, we assess the likelihood that such a court order might be enforced outside of Russia as low (even in those countries with which the Russian Federation has concluded bilateral agreements on the recognition of court orders). Regarding recognition in the EU, EU courts are required by Article 11 c of Regulation (EU) No. 833/2014 not to enforce any decision based on Article 248 of the Russian Code.

2. Influence of a Russian injunction on arbitration proceedings

Such Russian injunctions may have an influence on arbitration proceedings as well. However, as arbitration is based on the competence-competence principle, which allows arbitrators to independently determine their jurisdiction, subject only to the mandatory rules of the applicable lex arbitri and the law applicable to the arbitration agreement (should it differ from the lex arbitri), it is highly likely that the arbitral tribunal would disregard the Russian injunction. For example, in the case of Uniper vs Gazprom[9] the arbitral tribunal disregarded the Russian injunction and issued an arbitral award in the amount of EUR 13 billion.

3. Injunctions outside Russia

In order to protect its procedural and legal position a European party may be entitled to take countermeasures against a Russian injunction. In particular, a European party is entitled, after the commencement of arbitration, to demand an interim injunction in a foreign court stipulating that the Russian counterpart takes all the necessary steps to seek a stay of the Russian proceedings and refrain from further action there, and also refrain from commencing or pursuing, either within Russia or elsewhere, any other proceedings pertaining to disputes, differences or controversies arising out of, relating to or in connection with the contract, in respect of which the dispute is being considered by the arbitration institution.

For example, the High Court of Hong Kong supported the German bank OWH SE i.L. (previously VTB Bank (Europe) SE) in a dispute with VTB which prohibited the collection of a Fine of EUR 112.6 million from the bank in Russia.[10] By contrast, the Russian commercial court issued a diametrically opposed decision on prohibiting VTB Bank (Europe) SE from commencing proceedings in the High Court of the Hong Kong Special Administrative Region, the Hong Kong International Arbitration Centre (HKIAC), and in other state courts, arbitral tribunals and arbitration courts located outside the Russian Federation. The injunction also included a section regarding the filing of motions and lawsuits on prohibiting the commencement of judicial proceedings in state courts within Russia. The Russian commercial court issued a Fine of approximately EUR 112.6 million to be collected from VTB Bank (Europe) SE in favour of PAO VTB Bank should VTB Bank (Europe) SE breach this injunction.[11]

Similar practice can be seen in the decision of the Court of First Instance of the High Court of Hong Kong in the dispute of Linde vs RusChemAlliance.[12] Notwithstanding the Russian injunction, the foreign court supported the demand of the German party and prohibited the Russian party from commencing court or arbitration proceedings in Russia or third countries arising from the contract.

4. Divergent requirements for issuing injunctions

However, there are different prerequisites for issuing injunctions, depending on the specific jurisdiction. For example, on 17 June 2024, the Higher Regional Court of Düsseldorf held that it was not competent to issue an anti-anti-suit injunction on conducting foreign arbitral proceedings or protecting assets abroad.[13] The Higher Regional Court of Munich issued a different decision in a patent-related case concerning an anti-suit injunction in the US.[14] Furthermore, the Higher Regional Court of Hamm decided that an anti-anti-suit injunction may be admissible and substantiated regarding an anti-suit injunction against the recognition and enforcement of an ICSID arbitral award in the USA.[15] Also in other cases requests for anti-anti-suit injunctions have received mixed results in Germany.[16]

A Dutch state court, which had to decide a request by a Dutch subsidiary of Linde Group to issue an injunction against RusChemAlliance, drew similar conclusions as the Higher Regional Court of Düsseldorf: it held that it lacked the necessary competence.[17]

Consequently, a European party seeking an anti-suit injunction against a Russian party should take note of the national specifics where the injunction has been requested. Furthermore, a European party should be aware of the fact that it may be exposed to fines in Russia.

IV. Potential Claims to be Filed by Foreign Parties in Connection with the Violation of Arbitration and Jurisdiction Agreements

In view of the apparent practice at present where Russian parties and state courts disregard choice of court or arbitration agreements, foreign parties may seek ways to file claims against Russian companies for damages. The issue as to whether claims might be filed directly against the Russian Federation is not covered in this article.

European parties, however, may have a claim for compensation against Russian parties under Article 11 a of Council Regulation (EU) No. 833/2014 (hereinafter “Regulation No. 833/2014”) (see No. IV.1 below). Furthermore, German parties may also have a claim under Section 280 (1) of the German Civil Code (see No. IV.2 below). German parties may recover damages incurred in the Russian proceedings as well as in proceedings for anti-suit injunctions (see No. IV.3 below). European parties can seek the payment of damages in front of arbitral tribunals or state courts of EU member states (see No. IV.4 below).

The 18th sanctions package against Russia, enacted on 20 July 2025, introduced a new potential claim for damages under Article 11 e of Regulation No. 833/2014. This provision specifically pertains to investor-state dispute settlement proceedings. Given that the same underlying rationale applies to Article 11 e as it does to Article 11 a of Regulation No. 833/2014, this article will not provide further elaboration on this new provision.

1. Claims under Article 11 a of Council Regulation (EU) No. 833/2014

In principle, Article 11 a and 11 b of Regulation No. 833/2014 give a claim for damages against a Russian party that filed a lawsuit in breach of an arbitration agreement. To date there is no case law on this new provision in Germany or, to the best knowledge of the authors, in any other member states of the EU. The reason could be that Article 11 a of Regulation No. 833/2014 has only been introduced by the 14th EU sanctions package against Russia in June 2024 and that there are a number of problems in connection with the unclear and vague wording of Article 11 a of Regulation No. 833/2014.

In general, Article 11 a of Regulation No. 833/2014 provides a new opportunity to claim damages against Russian parties:

“Any person referred to in Article 13, point (c) or (d), shall be entitled to recover, in judicial proceedings before the competent courts of a Member State, any direct or indirect damages, including legal costs, incurred by that person or by a legal person, entity or body that the person referred to in Article 13, point (d), owns or controls, as a consequence of claims lodged with courts in third countries by persons, entities and bodies referred to in Article 11(1), point (a), (b) or (c), in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, provided that the person concerned does not have effective access to the remedies under the relevant jurisdiction.”

Article 11 a of Regulation No. 833/2014 is closely connected to the prohibition of performance under Article 11 of Regulation No. 833/2014. Article 11 a of Regulation No. 833/2014 concerns scenarios where an EU party does not perform its contractual obligations due to the sanctions and a Russian party sues its counterpart before Russian state courts.

As only limited options are available to enforce judgments and arbitral awards in Russia (for more details, see No. V below), it has been discussed that this provision should at least provide EU parties with an offset option. However, the prerequisite is that the EU party has no effective access to legal remedies in the territory concerned. This in turn mirrors Article 248 of the Russian Code.[18]

In general, Article 11 a of Regulation No. 833/2014 does not provide much guidance for its applicants. The provision is vague and practical issues will arise in conjunction with the proof that must be provided as well. In any event, a lawsuit may be brought before European state courts for the recovery of the legal costs incurred in the judicial proceedings in Russia.[19]

2. Claims under Section 280 (1) of the German Civil Code

In addition, in general a claim for damages may be filed pursuant to Section 280 (1) of the German Civil Code. In its judgment dated 17 October 2019 – III ZR 42/19 – the Federal Court of Justice decided that a culpable breach of a jurisdiction agreement triggers the obligation to pay damages.[20] The issue as to whether these principles can be applied to a lawsuit filed in a state court in breach of an arbitration agreement is disputed in literature.[21] The Federal Court of Justice, so far, had no chance to decide on this. English courts and some arbitral tribunals, however, have already awarded damages in some cases.[22]

According to one opinion in literature, the principles of the Federal Court of Justice on the breach of a jurisdiction agreement can also be applied to arbitration agreements.[23] An arbitration agreement has the same meaning and purpose as a jurisdiction agreement: the parties should be able to rely on the agreement in order to achieve legal certainty.

The decisive factor in this respect is whether the requirements of Section 280 (1) of the German Civil Code are met. This presupposes that there has been a breach of duty, that the opposing party is liable and that the German party has suffered damages within the meaning of Section 249 of the German Civil Code:

a) Breach of duty

The issue as to whether conduct in breach of an arbitration agreement constitutes a breach of duty within the meaning of Section 280 (1) of the German Civil Code is disputed in literature. In the opinion of some legal scholars an arbitration agreement merely has a procedural effect. This procedural effect is that it waives the jurisdiction of the state courts and establishes the jurisdiction of a private court.[24] According to other scholars, in addition to the procedural effect, an arbitration agreement should also have the substantive obligation on the exclusive use of arbitration courts.[25]

The Federal Court of Justice adheres to the latter opinion. In its judgment dated 17 October 2019 the Federal Court of Justice decided that a choice of court agreement does not exclude the existence of substantive obligations and that, in addition to procedural obligations, a distinction must be made between the effects of the jurisdiction agreement in terms of disposition and obligation. However, this does not imply that these effects cannot be established simultaneously. This can be compared to a court settlement which has both substantive law and procedural effects.[26]

These principles can also be applied to arbitration agreements. The purpose of a jurisdiction agreement is legal certainty. The contracting parties want to create legal certainty and minimize litigation risks. An agreement on the place of jurisdiction makes it clear to the parties where they can assert their rights in the event of a dispute.[27] Arbitration agreements pursue the same objectives. Against this background, it can also be held that arbitration agreements have the duty of preventing damages if a claim is brought before state courts.[28]

b) Responsibility for breach of duty

According to Section 280 (1) sentence 2 of the German Civil Code, the plaintiff (in our case the Russian party) is responsible for breach of duty. The latter is in general responsible for intent and negligence under Section 276 (1) sentence 1 of the German Civil Code. In the event of conduct in breach of an arbitration agreement or a choice of court agreement, exculpation will only be possible in exceptional cases.

Russian parties may argue that they have not acted in a culpable manner as they merely used a provision provided by Russian law, i.e. Article 248 of the Russian Code. As Article 248 of the Russian Code contradicts (i) the parties’ intention when entering into an arbitration or choice of court agreement and (ii) the New York Convention, it may still be culpable if a Russian party utilizes this provision in its favor. Within the last years Russian courts started to decide most of the cases in favour of a Russian party. Thus, the Russian party’s behavior may be abusive and, therefore, a culpable or at least negligent breach of an underlying arbitration or choice of court agreement.

3. Damages that may be recoverable

Under Article 11 a of Regulation No. 833/2014 and Section 280 (1) of the German Civil Code, legal costs and probably other damages are recoverable. The German or European party must be placed in the same position as it would have been in if the Russian party suing in breach of the arbitration or choice of court agreement had complied with such agreement and initiated arbitration or state court proceedings. This derives from Section 249 of the German Civil Code.

If a Russian state court has not yet made a legally binding decision, the legal costs may be fully recoverable.[29] If the Russian state court had decided against the German or European party and compels it to assume all the costs, the German or European party must demonstrate that it would have obtained a more favourable decision in an arbitration or state court. It is only in this case that the European or German party is eligible for the difference between the value of the claim that would have been awarded if the case had been considered in the competent arbitration or state court and the value of the claim in the Russian state court ruling. Additionally, it is necessary that the arbitral tribunal or the state court does not recognise the substantive legal force of the Russian decision.[30]

A claim under Article 11 a of Regulation No. 833/2014 is explicitly not limited to legal costs. A European party may recover “any direct or indirect damages, including legal costs”. These direct or indirect damages could also be additional legal costs such as costs in conjunction with anti-(anti-)suit and anti-arbitration injunctions. Furthermore, if a Russian state court decides in favour of the Russian party and the European party is able to demonstrate that a competent court or arbitral tribunal would have decided differently on the merits, the overall loss may be recoverable as well.

Following the Federal Court of Justice, jurisdiction agreements can be interpreted in such a way that they oblige the parties to bring an action before the agreed court. If a party fails to do so, and the derogated court recognizes its lack of jurisdiction, the other party must reimburse the costs incurred on bringing the action before a court that had no jurisdiction.[31]

It should be noted that the derogated court declared that it did not have the necessary jurisdiction in the case resolved by the Federal Court of Justice, which dismissed the case without any deliberation on the reimbursement of legal fees. If some of the costs are awarded to the defendant in breach of the agreement, this amount should be deducted when calculating the damages.[32] If a German state court declares that it has no jurisdiction, the respective decision on costs generally takes priority over an additional claim for reimbursement of costs.[33] However, a claim may be made for the reimbursement of preparatory costs and any costs not covered by the decision of the German state court.[34]

It is highly unlikely that a decision on costs by a Russian state court would take priority over a claim under Article 11 a of Regulation No. 833/2014. Otherwise, the addition to the wording regarding legal costs within Article 11 a of Regulation No. 833/2014 would be meaningless.

It is also highly unlikely that a Russian state court would decline its jurisdiction. In particular, because of Article 248 of the Russian Code, the possibility that a European party will be reimbursed for its costs is largely theoretical. Instead, it can be assumed that the Russian state court would affirm its jurisdiction and rule in favour of the Russian party. Therefore, a European or German party would likely be entitled to claim damages for any losses arising from a negative decision by the Russian state courts. These damages may not be limited to legal costs but could include all direct or indirect losses.

4. Competent forum

If there is a claim for damages, European or German parties must determine the competent forum to decide this claim. In principle, jurisdiction is determined by the contractual agreements between the companies. Accordingly, if there is an arbitration agreement, the arbitration tribunal is responsible for deciding claims for damages arising in connection with circumvention of the arbitration agreement, to the extent that they are covered by its scope.

The objective and subjective scope of application of the arbitration agreement is a matter of interpretation subject to the law applicable to the arbitration agreement. There are essentially two starting points here: (i) the substantive law applicable to the contract as it may also apply to the arbitration agreement or (ii) the law of the seat of arbitration. The issue as to how to effectively determine the law that is applicable to the arbitration agreement is subject of a lively debate in court and legal literature.[35]

Under German law the following applies: Arbitration agreements are in general subject to broad interpretation. Even if claims for the breach of the arbitration agreement do not constitute a dispute based on the meaning of the main contract, they are related to it.[36] Such claims for damages in connection with a breach of the jurisdiction agreement must be brought before the duly designated court.[37] This rationale can be applied to claims under Section 280 (1) of the German Civil Code.

However, the specific forum that has jurisdiction if a claim for damages is brought under Article 11 a of Regulation No. 833/2014 is debatable. According to Article 11 a of Regulation No. 833/2014, the claim should be brought before the competent court of a member state, i.e. a state court. However, there are no clear reasons that prohibit a party from bringing a claim under Article 11 a of Regulation No. 833/2014 in an arbitration proceeding. According to Section 1030 (1) sentence 1 of the German Code of Civil Procedure, any pecuniary claim may be the subject of an arbitration agreement. A claim for damages under Article 11 a of Regulation No. 833/2014 is such a pecuniary claim. In any event, the claim for damages would be arbitrable under German law.

The issue as to whether a German party is required to initiate arbitration proceedings for claims under Article 11 a of Regulation No. 833/2014 if there is an arbitration agreement in a contract has not been discussed or decided yet. At first glance it would appear easy to resolve this issue by looking at the choice of court or arbitration agreement in the contract. However, it is highly likely that a German party could also initiate proceedings in a German state court. A Russian party could probably not raise an objection in connection with the arbitration agreement, as this could be interpreted as the inadmissible exercise of rights and contradictory behaviour. In most cases it has been the Russian party that violated the arbitration agreement.

In Germany there is no general or specific jurisdiction for such claims. Therefore, an international jurisdiction of the German state courts could be considered in this respect.

It might be advisable and helpful to bring such claims to the competent forum which has been chosen in the main contract. If a European party decides to claim before a state court of a member state of the EU under Article 11 a of Regulation No. 833/2014, an opposing Russian party may raise the argument that Article 11 a of Regulation No. 833/2014 imposes the same effect as Article 248 of the Russian Code. Under Article 11 a of Regulation No. 833/2014 a European party may as well be able to avoid an arbitration or choice of court agreement. Claiming damages out of such a breach and conducting a potential breach at the same moment may qualify as contradictory behaviour. In order to avoid a discussion in this respect, a European or German party should bring claims to the contractually agreed forum.

When choosing the forum for bringing such claims, the European or German party should consider whether the recognition and enforceability of the decision in Russia or other foreign countries is needed (see No. V below). If the Russian party has no assets outside of Russia, the recognition and enforceability in Russia would be crucial. If there are assets in Europe or any other country worldwide, either a judgment of a state court or an arbitral award would be most favourable. In order to enforce into assets in Germany, a German state court decision would be sufficient and most practicable.

V. Recognition and Enforcement of Decisions in Connection with the Violation of Arbitration and Choice of Court Agreements in Russia and Abroad

If a European or German party obtains a favourable decision regarding its claim for damages, the recognition and enforcement of this decision as well as the recognition and enforcement of a Russian decision is highly relevant. In the end recognition and enforcement is decisive for the financial benefit deriving from a favourable decision.

The recognition and enforceability of a decision in a foreign jurisdiction is contingent on several separate issues. A key factor is whether it is the decision of a state court or an arbitral award. An arbitral award benefits from the New York Convention and can be enforced in 172 member states[38] with less procedural effort than a foreign state court decision. State court decisions may in general be enforceable abroad, either if there are conventions such as the Lugano Convention[39] or the Hague Convention[40] or there is reciprocity between both states involved.

The issue as to whether a decision can be enforced or recognized must be addressed with respect to each jurisdiction individually. The article will focus on the recognition of German state court decisions and arbitral awards issued in Germany in Russia and vice-versa. This question is relevant for the question whether decisions under Article 248 of the Russian Code or decisions on claims for damages due to the violation of arbitration or choice of court agreements can be enforced in Russia and/or Germany.

1. Enforcement and recognition of arbitral awards

a) Enforcement of arbitral awards issued in Russia in Germany

In general, the enforcement of arbitral awards issued in Russia in Germany does not differ from any other foreign arbitral award issued in any other country that is a contracting state of the New York Convention. Under German law, the recognition and enforcement of arbitral awards is covered by Sections 1060 to 1061 of the German Code of Civil Procedure.

According to Section 1061 of the German Code of Civil Procedure, foreign awards can be recognised. These regulations enshrine the principle of the New York Convention. The Higher Regional Court of Munich held that the European Convention on International Commercial Arbitration of 1961 would in principle take precedence before the New York Convention in the case of arbitral awards issued by an arbitral tribunal located in Russia. However, the most favourable set of rules must be applied.[41] Thus, the enforcement of arbitral awards issued in Russia may be even easier than under the New York Convention. Article IX (2) of the European Convention on International Commercial Arbitration of 1961, for instance, limits the reasons for declining the recognition and enforceability of foreign arbitral awards under Article V (1)(e) of the New York Convention to the reasons listed in Article IX (1) of the European Convention on International Commercial Arbitration of 1961.

Contrary to this decision, on 13 May 2025 the Higher Regional Court of Stuttgart refused to enforce an arbitral award issued in Russia and held that it could not be recognised in Germany.[42] This decision is not a sign that German courts will be less arbitration-friendly in future. It is instead indicative of the European-Russian relations in the past years, i.e., the sanctions regime.

The dispute in question pertaining to the arbitration proceedings conducted in Russia derived from a supply contract between a German party and a Russian party. The contract included an arbitration agreement on the resolution of any disputes in Russia. After February 2022, the German party decided to stop delivering goods to Russia and to discontinue its business relations with Russia.

The Russian party initiated arbitration proceedings in Russia for the repayment of an advance. The German party referred to the sanctions against Russia and argued that it was unable at present to repay the advance. Additionally, the German party filed claims against the Russian party. The arbitral tribunal issued an arbitral award holding that the German party must pay to the Russian party. The Russian party initiated proceedings in the Higher Regional Court of Stuttgart for the recognition and enforcement of this arbitral award.

The Higher Regional Court of Stuttgart decided to refuse to recognise the arbitral award for the moment on the grounds that the recognition and declaration of the enforceability of the award would contravene the fundamental principles of the German legal system, i.e. ordre public, existing at the moment. A violation of the ordre public is assumed if the enforcement of the obligations arising from the arbitral award is not allowed under German law.

The Higher Regional Court of Stuttgart decided that the enforcement of the arbitral award would violate Article 3 k (1) of Regulation No. 833/2014. Article 3 k (1) of Regulation No. 833/2014 prohibits the direct or indirect delivery of certain goods to Russia. As the goods delivered by the German party are included in the respective list of goods in Annex XXIII of Regulation No. 833/2014, under Article 11 (1) of Regulation No. 833/2014, all claims in connection with contracts or business relating to these goods are not to be exercised and executed as long as a Russian person or party requests execution. Therefore, it was held that the repayment of the advance was prohibited under Article 11 (1) of Regulation No. 833/2014.

Such a violation of the EU sanctions against Russia would have constituted a criminal offence under Section 18 et seq. of the German Foreign Trade Act or would have qualified at the very least as an infringement under Section 82 of the German Foreign Trade Act. As the lifting of the EU sanctions cannot be predicted at the moment, the Higher Regional Court of Stuttgart decided that the arbitral award contravenes ordre public at the moment and, therefore, cannot be recognised and enforced in Germany. As the Higher Regional Court of Stuttgart has not acknowledged any of the other arguments raised by the German party, the arbitral award may be recognised whenever the EU sanctions in this respect are lifted.

The decision of the Higher Regional Court of Stuttgart is attributable to the EU sanctions against Russia. Consequently, the sanctions apply not only to the repayment of advances for the delivery of goods per se, but also to the recognition of arbitral awards which contravene EU sanctions. The Higher Regional Court of Stuttgart correctly pointed out that the recognition of such arbitral awards contravenes German law at present. If the EU sanctions are lifted, the recognition and enforcement of foreign awards concerning the performance of obligations previously subject to sanctions should no longer constitute a violation of ordre public. Consequently, and little surprisingly, the Kammergericht, i.e. the Higher Regional Court of Berlin, confirmed in proceedings under Section 1032 (2) of the German Code of Civil Procedure that arbitration is admissible even if one party is subject to sanctions in general.[43]

Following the enactment of the 18th sanctions package against Russia on 20 July 2025, Regulation No. 833/2014 has been amended to include provisions in Article 11 (2) stating that decisions not issued by a court of an EU member state, arising from investor-state dispute settlement proceedings in connection with measures imposed under Regulation No. 833/2014 and Regulation No. 269/2014, shall not be recognized or enforced. This applies equally to requests for assistance during investigations or any other adverse outcomes arising from such proceedings.

b) Enforcement of arbitral awards issued by arbitral tribunals outside Russia before Russian state courts

The procedure for recognising arbitral awards in Russia is based on the New York Convention, Articles 34–36 of Law No. 5338-1 of the Russian Federation dated 7 July 1993 “On International Commercial Arbitration” and Articles 241–246 of the Russian Code.

It is clear that arbitral awards issued by an arbitral tribunal in breach of a Russian injunction (for more details, see No. III above) will not be recognised in Russia. Regarding arbitral awards that do not violate a Russian injunction, there is still a risk that such arbitral awards may not be recognised in Russia.

Even though the Russian Federation is a contracting state of the New York Convention, at present there is a perceptible negative trend before Russian state courts regarding the recognition and enforcement of arbitral awards issued by foreign arbitration institutes in so-called “unfriendly” jurisdictions.

In a recent case the Russian Supreme Court refused to recognise and enforce a foreign arbitral award in the Russian Federation stating, inter alia, the following:[44]

• “The introduction of sanctions for political motives leads one to doubt that the dispute would be heard in a foreign jurisdiction in compliance with the guarantees of a fair trial, in particular, from the perspective of the impartiality of the court;”
• “If there are circumstances that indicate to an objective external observer that it is possible that the judge will be unable to hear the case in an absolutely unbiased manner, then his objective impartiality is placed in doubt, even if the judge’s subjective attitude is irreproachable.”

At present this negative approach is not predominant in Russian judicial practice. However, given the current sanctions regulations, one cannot rule out the risk that it might become more common.

2. Enforcement and recognition of state court decisions

a) Recognition of Russian judgments and state court decisions in Germany

The recognition of Russian judgments and state court decisions in Germany is subject to legal restrictions, primarily due to the lack of reciprocity required under Section 328 (1) No. 5 of the German Code of Civil Procedure. This means that in general Russian judgments and state court decisions are not recognised because Russia does not systematically recognise German judgments in return.

An exemplary decision in this context is the judgment of the Hanseatic Higher Regional Court of Hamburg dated 13 July 2016, in which the court denied the recognition of a Russian judgment due to the lack of reciprocity.[45]

In a notable exception, in a decision dated 23 October 2024 the Commercial Court of Saint Petersburg and Leningrad Region recognised the judgment of the Regional Court of Stuttgart dated 27 May 2021. This was based on the principle of international comity, despite the lack of a bilateral treaty between Germany and Russia.[46] This decision was recently overturned and is now being reconsidered.[47]

Unless Russia begins to recognise German judgments and state court decisions consistently or a binding agreement is established, Russian judgments and state court decisions will continue to face significant hurdles for recognition in Germany.

b) Recognition of foreign judgments and state court decisions in Russia

Foreign judgments and state court decisions must be recognized by a Russian state court before they can be enforced in Russia. Recognition and enforcement are carried out by a commercial court further to the respective application of a party. A judgment is recognised and enforced if there is a respective international treaty or in certain instances subject to the application of the principles of international comity and reciprocity.

The Russian Federation has concluded agreements with Algeria, Argentina, Armenia, Azerbaijan, Belarus, China, Egypt, India, Kazakhstan, Tajikistan, Tunisia, Uzbekistan, Vietnam and a number of other countries on the reciprocal recognition of court decisions.

Pursuant to Article 244 of the Russian Code, a Russian court may refuse to recognize a foreign judgment or court decision in instances where

• the respondent had not been notified of the judicial proceedings;
• the judgment or decision has still not entered into legal force;
• the decision of the court had been assigned to the exclusive competence of the Russian court (an exception to this rule occurs if the Russian party covered by the provisions of Article 248.1 of the Russian Code had not objected to the consideration of the dispute by the foreign court with its participation, inter alia, it had not filed a petition on prohibiting the initiation or continuation of the proceedings in the foreign court);
• a court in the Russian Federation is considering a case in a dispute between the same parties, on the same subject matter and on the same grounds in respect of which proceedings had been commenced prior to the commencement of the proceedings in the case in the foreign court, or the court in the Russian Federation was the first court to agree to consider a petition in a dispute between the same parties, on the same subject matter and on the same grounds;
• the limitation period for enforcing the foreign judgment or court decision had expired and this period had not been restored by the commercial court;
• enforcement of the foreign judgment or court decision would contravene the public policy of the Russian Federation.

The grounds for refusing to recognise judgments and court decisions may differ, depending on the provisions of the respective international treaty concluded between the Russian Federation and a foreign country, but are similar in most instances.

In addition, as indicated above, Russian courts may recognise and enforce foreign judgments and court decisions based on the principle of reciprocity. To do so, the applicant must not only provide the court with references to Russian and foreign procedural law, but also refer to the positive judicial practice in that foreign state which demonstrates that the judgments of Russian courts are recognised in that foreign state. The principle of reciprocity on recognising judgments and court decisions is stipulated by Russian law, namely by the bankruptcy laws (Article 6 of Article 1 of the Russian Bankruptcy Law), but can also be found in law enforcement practice in other branches of the law.[48]

In most instances, if there is no international treaty, Russian courts refuse to recognise foreign judgments and court decisions as the petitioner failed to prove that there is reciprocity in the foreign state.[49]

c) Recognition of Russian judgments and state court decisions outside the EU

As indicated above, the Russian Federation has concluded agreements with a number of countries on the reciprocal recognition of court decisions (see lit. b) above). In connection with this fact, there is a significant risk that the decision of a Russian state court on the collection of the Fine (see No. III.1 above) and/or decisions or judgments on the merits rendered by Russian state courts in breach of the arbitration agreement (or choice of court agreement) (see Nos. II.1 and III.1 above) might be recognised in the indicated jurisdictions.

Therefore, there is a significant risk that Russian judgments and state court decisions will be recognized and enforced in some jurisdictions. European parties with subsidiaries and assets worldwide will therefore face a financial risk in any of these jurisdictions.

3. Non-recognition and non-enforcement of decisions under Article 248.1 of the Russian Code in Europe

Within the EU, Russian judgments and decisions of a Russian state court under Article 248.1 of the Russian Code will not be recognized. In order to guarantee legal certainty for European parties Article 11 c of Regulation No. 833/2014 has been introduced. Article 11 c of Regulation No. 833/2014 expressly prohibits EU courts from recognizing and enforcing such Russian judgments and decisions. This might also apply to decisions by courts outside the EU on recognising or enforcing Russian state court decisions.

In June 2024 the Higher Regional Court of Düsseldorf decided that an anti-anti-suit injunction cannot be granted, inter alia, as the Russian decision under Article 248.1 of the Russian Code was legal under Russian law.[50] Applying this rationale to the recognition and enforcement of Russian judgments and decisions under Article 248.1 of the Russian Code, it could be argued that such judgments and decisions may also be recognisable and enforceable. This uncertainty has been resolved with Article 11 c of Regulation No. 833/2014 in the 15th sanctions package in December 2024.

Under Article 11 c of Regulation No. 833/2014, the opinion of the Higher Regional Court of Düsseldorf may no longer be correct. Russian judgments and decisions under Article 248.1 of the Russian Code are no longer considered to follow EU law. Consequently, the question whether a decision is legal under Article 248.1 of the Russian Code is not relevant for the recognition and enforcement in the EU.

Summary

In addition to the ongoing geopolitical tensions between the EU and Russia, legal systems in both regions have equipped parties to pursue reciprocal claims. While Article 248.1 of the Russian Code has long permitted Russian courts to assert jurisdiction despite arbitration or choice of court agreements, the EU has recently introduced countermeasures. Similar to the anti-anti-suit/arbitration injunction mechanism, the possibility of claiming damages in the courts of an EU member state under Article 11 a of Regulation No. 833/2014 forms part of the EU’s judicial defence system.

European parties without current business relationships to Russia and without any plans to conduct business there in the near future may wish to consider claiming damages in an EU state court or before a competent arbitral tribunal. Those with ongoing business in Russia risk having their Russian assets seized and lost, as it is safe to assume that Russian parties will seek injunctive relief against these proceedings or claim damages against them in Russia.

Attempts to have such judgments/arbitral awards against Russian parties recognised and enforced outside the EU may be challenging. Furthermore, European parties may face negative consequences if countries outside the EU recognise Russian judgments and decisions against them. Article 11 a of Regulation No. 833/2014 could help to offset those losses.

Overall, the international legal landscape has become significantly more complex. Companies operating across borders must adapt to these developments. Regulation No. 833/2014 reinforces the position of European parties seeking to uphold arbitration or choice of court agreements, aiming to ensure that disputes are resolved by the designated competent forum.

In any event, a European party must carefully consider whether to accept a potential breach of such an agreement or to actively challenge proceedings initiated in Russia. Regardless of the approach taken, it is advisable to safeguard the European party’s interests on all fronts – in Russia, within the EU, and in any other relevant jurisdiction.

Zusammenfassung (Deutsch)

Zusätzlich zu den anhaltenden geopolitischen Spannungen zwischen der EU und Russland haben die Rechtssysteme beider Regionen die Parteien befähigt, gegenseitige Ansprüche geltend zu machen. Während Artikel 248.1 des russischen Gesetzbuchs den russischen Gerichten seit langem erlaubt, trotz Schieds- oder Gerichtsstandsvereinbarungen ihre Zuständigkeit geltend zu machen, hat die EU kürzlich Gegenmaßnahmen eingeführt. Ähnlich wie der Mechanismus der Anti-Anti-Suit-/Arbitration Injunction ist die Möglichkeit, vor den Gerichten eines EU-Mitgliedstaates gemäß Artikel 11 a der Verordnung Nr. 833/2014 Schadensersatz geltend zu machen, Teil des Rechtsschutzsystems der EU.

Europäische Unternehmen, die derzeit keine Geschäftsbeziehungen zu Russland unterhalten und auch nicht vorhaben, in nächster Zeit dort Geschäfte zu tätigen, könnten in Erwägung ziehen, vor einem staatlichen Gericht in der EU oder vor einem zuständigen Schiedsgericht Schadensersatzansprüche geltend zu machen. Diejenigen, die derzeit Geschäfte in Russland tätigen, riskieren, dass ihre russischen Vermögenswerte beschlagnahmt werden und verloren gehen, da davon auszugehen ist, dass russische Parteien Unterlassungsklagen gegen diese Verfahren erheben oder in Russland Schadensersatzansprüche gegen sie geltend machen werden.

Versuche, solche Urteile/Schiedssprüche gegen russische Parteien außerhalb der EU anerkennen und vollstrecken zu lassen, sind schwierig umzusetzen. Außerdem könnten europäische Parteien mit negativen Folgen rechnen, wenn Länder außerhalb der EU russische Urteile und Entscheidungen gegen sie anerkennen. Artikel 11 a der Verordnung Nr. 833/2014 könnte dazu beitragen, diese Verluste auszugleichen.

Insgesamt ist die internationale Rechtslandschaft deutlich komplexer geworden. Grenzüberschreitend tätige Unternehmen müssen sich auf diese Entwicklungen einstellen. Die Verordnung Nr. 833/2014 stärkt die Position der europäischen Parteien, die Schiedsgerichtsvereinbarungen oder Gerichtsstandsvereinbarungen aufrechterhalten wollen, um sicherzustellen, dass Streitigkeiten durch das zuständige Gericht beigelegt werden.

In jedem Fall muss eine europäische Partei sorgfältig abwägen, ob sie eine mögliche Verletzung eines solchen Abkommens akzeptiert oder aktiv gegen ein in Russland eingeleitetes Verfahren vorgeht. Unabhängig von der gewählten Vorgehensweise ist es ratsam, die Interessen der europäischen Partei an allen Fronten zu wahren – in Russland, innerhalb der EU und in allen anderen relevanten Rechtsordnungen.

Dr. Tobias Pörnbacher
Natalia Bogdanova

Note: This article was originally published in IWRZ – Zeitschrift für Internationales Wirtschaftsrecht, 2025, p. 239.

^{1 The scenarios described concern not only European parties, but also parties from other jurisdictions that the Russian Federation considers “unfriendly” (including, for example, Australia, Canada, Japan, Singapore, Switzerland and the USA).}

^{2 For example, the decisions of Russian state courts in cases No. A40-302798/2023 (see https://kad.arbitr.ru/Card/40b71ef4-10e6-433f-a073-844e86c9123e), No. A40-167352/2023 (see https://kad.arbitr.ru/Card/40b71ef4-10e6-433f-a073-844e86c9123e), No. A56-26171/2024 (see https://kad.arbitr.ru/Card/a70273f5-0aca-4386-b4ab-d2115ab53586), No. A56-61398/2023 (see https://kad.arbitr.ru/Card/cd4a18bd-def6-4777-9fe5-a6719608aea5) and No. A57-348/2024 (see https://kad.arbitr.ru/Card/a4b94071-2aba-4e41-888d-9ee335174a45). In all of these and many other cases, the Russian state court disregarded the objections of the foreign respondent that the Russian state court was not competent to hear the dispute given that the contracts contained arbitration agreements in favour of such foreign arbitration institutions as LCIA, SCC, ICC, VIAC, and SIAC, and declared itself competent to hear the dispute on the merits.}

^{3 For example, the decisions of Russian state courts in case No. A40-258467/2022 (see https://kad.arbitr.ru/Card/cf2fddd9-3057-4e5c-85d3-ce0304ea9c14) and case No. A56-74595/2023 (see https://kad.arbitr.ru/Card/63751406-8c80-4adc-aa30-5e3c325e96dd).}

^{4 See Ruling No. 305-ES24-12635 of the Russian Supreme Court dated 12 May 2025 in case No. A40-167352/2023 (see https://kad.arbitr.ru/Card/0bc95653-db00-44dc-97a7-03c58001f0a7).}

^{5For example, see the ruling of the Russian state court in case No. A56-118993/2024 in the dispute of RusChemAlliance LLC vs Linde Group (see https://kad.arbitr.ru/Card/d6ba9ec3-db9e-42af-9039-48cca8305e6a).}

^{6 For example, see the rulings of Russian state courts in cases No. A56-13299/2024 Ruskhimalyans LLC vs Linde GmbH (see https://kad.arbitr.ru/Card/fcd79813-37a2-410c-9ae4-8c25bb7f7e3f), No. A56-103943/2023 PAO VTB Bank vs VTB Bank (Europe) SE (see https://kad.arbitr.ru/Card/2ec5b31c-c967-46ae-9d14-1e5e200f0fbb), No. A28-4778/2024 Mr A.S. Kuvyati vs AS PNB Banka (see https://kad.arbitr.ru/Card/51bff9a1-bee2-4c12-a05f-d127969798e9) and No. A56-90977/2024 RusChemAlliance LLC vs UniCredit Bank GmbH (see https://kad.arbitr.ru/Card/7177a44a-2840-403f-8611-9700baa404c3).}

^{7 See the ruling of the Commercial Court of Moscow in case No. A40-23676/2024 (see https://kad.arbitr.ru/Card/4a820032-5a7b-466f-a97c-64aee4c8e8ed).}

^{8 Judgment of the Court of Appeal of London (Commercial Court) dated 11 February 2025, UniCredit Bank GmbH vs RusChemAlliance LLC – [2025] EWCA Civ 99 (see https://www.bailii.org/ew/cases/EWCA/Civ/2025/99.html).}

^{9 While this decision has yet to be published, information appeared in the mass media, referring to Uniper (see https://www.reuters.com/markets/commodities/uniper-terminates-russian-gas-supply-contracts-after-arbitration-ruling-2024-06-12/).}

^{10 See the High Court of the Hong Kong Special Administrative Region, judgment dated 24 September 2024 – [2024] HKCFI 2529.}

^{11 See the decisions of the Russian state courts in case No. A56-103943/2023 PAO VTB Bank vs VTB Bank (Europe) SE (see https://kad.arbitr.ru/Card/2ec5b31c-c967-46ae-9d14-1e5e200f0fbb).}

^{12 See the judgment of the High Court of the Hong Kong Special Administrative Region dated 27 September 2023 – [2023] HKCFI 2409 (see https://jusmundi.com/en/document/decision/en-linde-gmbh-and-linde-plc-v-ruschemalliance-llc-decision-of-the-court-of-first-instance-of-the-high-court-of-hong-kong-2023-hkcfi-2409-wednesday-27th-september-2023).}

^{13 See the judgment of the Higher Regional Court of Düsseldorf dated 17 June 2024 – 26 W 7/24, ZASA 2024, 549.}

^{14 See the judgment of the Higher Regional Court of Munich dated 12 December 2019 – 6 U 5042/19, GRUR 2020, 379.}

^{15 See the judgment of the Higher Regional Court of Hamm dated 2 May 2023 – 9 W 15/23, EuZW 2023, 1062.}

^{16 In favour: judgment of the Higher Regional Court of Munich dated 12 December 2019 – 6 U 5042/19, GRUR 2020, 379; judgment of the Higher Regional Court of Hamm dated 2 May 2023 – 9 W 15/23, EuZW 2023, 1062; judgment of the Regional Court of Munich dated 20 July 2023 – 7 O 5416/23, GRUR 2023, 1683; judgment of the Regional Court of Munich dated 2 October 2019 – 21 O 9333/19, BeckRS 2019, 25536; Against: judgment of the Higher Regional Court of Düsseldorf dated 17 June 2024 – 26 W 7/24, ZASA 2024, 549; judgment of the Higher Regional Court of Düsseldorf dated 7 February 2022 – I-2 U 25/21, GRUR 2022, 318; judgment of the Regional Court of Essen dated 12 April 2024 – 2 O 447/22, BeckRS 2024, 9781.}

^{17 Judgment of the Rotterdam District Court dated 20 December 2024 in case No. KG ZA 24-1037 (see https://jusmundi.com/en/document/decision/nl-linde-gmbh-and-linde-plc-v-ruschemalliance-llc-uitspraak-van-het-rechtbank-rotterdam-friday-20th-december-2024#decision_71292).}

^{18 See Happ, ZASA 2024, 450.}

^{19 See also Happ, ZASA 2024, 450; Wuschka/Wachholz, SchiedsVZ 2024, 285, 291.}

^{20 See the judgment of the Federal Court of Justice dated 17 October 2019 – III ZR 42/19, NJW 2020, 399.}

^{21 See Schatz, LMK 2019, 422740; rejecting the judgment of the Federal Court of Justice: Kalin, GPR 2020, 234.}

^{22 See Pfeiffer/Weiler, RIW 2020, 641, 648.}

^{23 See Antomo’s notation to the judgment in EuZW 2020, 143.}

^{24 See Pfeiffer/Weiler, RIW 2020, 641; Sandrock, RIW 2004, 809; Korte, GWR 2020, 48; Köster, Haftung wegen Forum Shopping in den USA, 2001, 86; Gottwald in MüKoZPO, 6. Aufl. 2022, Art. 25 Ia-VO Rn. 102.}

^{25 See Pfeiffer/Weiler, RIW 2020, 641; Schatz, EWiR 2020, 95; Skauradszun, DB 2020, 100. If the agreement is not intended to have any binding effect, it should be expressly excluded, see Resch, NZG 2020, 241; arguing that adding the word “exclusively” is preferable to strengthen the legal consequences, see Graf von Westphalen, IWRZ 2020, 39.}

^{26 See the judgment of the Federal Court of Justice dated 17 October 2019 – III ZR 42/19, NJW 2020, 399 (401).}

^{27 See the judgment of the Federal Court of Justice dated 17 October 2019 – III ZR 42/19, NJW 2020, 399 (403).}

^{28 See Pfeiffer/Weiler, RIW 2020, 641; Antomo, in: BeckOK ZPO, Vorwerk/Wolf, 55. Ed. 1.12.2024, Brüssel Ia-VO Art. 1 Rn. 117.1.}

^{29 See Pfeiffer/Weiler, RIW 2020, 321, 328.}

^{30 See Pfeiffer/Weiler, RIW 2020, 321, 328.}

^{31 See the judgment of the Federal Court of Justice dated 17 October 2019 – III ZR 42/19, NJW 2020, 399 (402).}

^{32 See Pfeiffer/Weiler, RIW 2020, 321, 328.}

^{33 See in general the decision of the Federal Court of Justice dated 30 January 2007 – X ZB 7/06, NJW 2007, 3289, m.n. 6.}

^{34 See Schulz, in MüKo ZPO, 7th ed. 2025, Sec. 91 m.n. 28 et seq.}

^{35 See for example Mankowski, IPRax 2009, 23; Gebauer, in FS für Kaissis, 2012, 267; Epping, Die Schiedsvereinbarung im internationalen privaten Rechtsverkehr nach der Reform des deutschen Schiedsverfahrensrechts, 1999, 52; Geimer in Zöller, 35. Aufl. 2023, § 1029 Rn. 112; Münch in MüKoZPO, 6. Aufl. 2022, § 1029 Rn. 38.}

^{36 See the judgment of the Federal Court of Justice dated 17 October 2019 – II ZR 42/19, para 36 et seqq., NJW 2020, 399.}

^{37 See Pfeiffer/Weiler, RIW 2020, 641, 648.}

^{38 See https://www.newyorkconvention.org/contracting-states.}

^{39 See https://eur-lex.europa.eu/eli/convention/2007/712/oj/eng.}

^{40 See https://www.hcch.net/en/instruments/conventions/full-text/?cid=98.}

^{41 See the judgment of the Higher Regional Court of Munich dated 8 November 2021 – 34 Sch 34/18, BeckRS 2021, 44914, m.n. 22.}

^{42 See the judgment of the Higher Regional Court of Stuttgart dated 13 May 2025 – 1 Sch 3/24, IWRZ 2025, 206.}

^{43 See the decision of Kammergericht dated 1 June 2023 – 12 SchH 5/22, BeckRS 2023, 51295.}

^{44 See the ruling of the Supreme Court of the Russian Federation dated 26 July 2024 in case No. A45-19015/2023 (see https://kad.arbitr.ru/Card/90f33ca8-00fd-4247-a3ad-833287c15b3f).}

^{45 See the judgment of the Higher Regional Court of Hamburg dated 13 July 2016 – 6 U 152/11, BeckRS 2016, 15565; m.n. 27 et seqq.}

^{46 See the judgment of the Commercial Court of Saint Petersburg and Leningrad Region dated 23 October 2024 in case No. A56-49800/2024 (see https://kad.arbitr.ru/Card/5c4b5cc8-b202-4e7c-8a6f-002151c0da94).}

^{47 See the ruling of the Commercial Court of the North-West District dated 1 April 2025 in case No. A56-49800/2024 (see https://kad.arbitr.ru/Card/5c4b5cc8-b202-4e7c-8a6f-002151c0da94).}

^{48 Ruling of the Ninth Commercial Court of Appeals dated 24 September 2020 in case No. A40-308642/2018; Ruling of the Commercial Court of the North-Western District dated 4 December 2018 and 10 December 2018 in case No. A56-71378/2015; Ruling of the Commercial Court of the North-Western District dated 6 May 2019; Ruling of the Commercial Court of the Moscow District dated 19 June 2019 in case No. A40-68312/2018).}

^{49 Ruling of the first court of appeal of general jurisdiction dated 14 August 2024 in case No. 66-2003/2024; Ruling of the Commercial Court of the Moscow District dated 1 April 2019 in case No. A40-188140/2018; Ruling of the First Cassation Court dated 21 January 2021 in case No. 8G-27788/2020; Ruling of the Fifth General Court of Appeals dated 14 April 2021 in case No. 66-343/2021.}

^{50 See the judgment of the Higher Regional Court of Düsseldorf dated 17 June 2024 – 26 W 7/24, ZASA 2024, 549, m.n. 51; see Wuschka/Wachholz, SchiedsVZ 2025, 27; Wuschka/Wachholz, SchiedsVZ 2024, 285.}

Physical and Electronic Seals

Physical seals have for decades played an important role in Chinese legal and administrative practice: in many situations whoever controls the company seals controls the company - a concept unfamiliar in many other jurisdictions. 

Now, the new electronic seals offer the option of executing electronic documents with electronic seals. Electronic seals are data in specific cryptographic format that represent a seal based on digital technologies to realize reliable electronic signatures for electronic documents. The electronic seals typically contain data related to the seal image, name of the seal, seal owner information (= entity to which the seal is issued), electronic signature certificates and electronic signature production data.

These new electronic seals on electronic documents enjoy the same legal effect as physical seals affixed to tangible documents. They can hence be used for contracts, accounting/invoicing documents, employment/payroll matters and other internal and external documents in electronic formats.

Companies seeking to obtain electronic seals can apply to the officially designated electronic seal creation entities who will create and file the seals for record. Only legally established electronic certification service providers (for business use) or e-government certification providers (for government use) may issue the digital certificates supporting the electronic seals. In case of any change/expiration of the registered information pertaining to the electronic seals, the electronic seals must renewed or cancelled and the relevant applications must be made by the seal owner to the competent authorities without delay.

Functions and Legal Effects of Company Seals 

In China, company seals are more than administrative tools. Seals serve as legal representation of a company’s will, carrying the primary binding force in commercial transactions and official procedures. Whereas other jurisdictions where handwriting signatures or fingerprints are the main form to express legal will, PRC law presumes that a document bearing a company seal reflects the company’s authorized intention. Thus, managing the handling of seals is a very critical aspect of corporate compliance. This applies to physical as well as to the new electronic seals. 

Since company seals are the core tool for an enterprise to exercise its legal rights and assume obligations, the main functions of seals include:

• Validating Contracts and Agreements: Most commercial contracts (e.g., sales, investment, and employment agreements) require the company seal to be legally enforceable, especially for high-value or complex transactions.

• Authorizing Official Documents: Official communications, financial statements, tax filings, banking instructions, court correspondence and regulatory filings must bear the company seal to be recognized by authorities, courts and other receiving parties.

• Certifying Corporate Actions: Decisions approved by the board of directors or shareholders, such as mergers, acquisitions, or asset disposals, often require the company seal to confirm their validity.

Under the PRC Civil Code and the PRC Company Law, the company seals are presumed to reflect the company’s true intent even if the individual affixing the seal acted without proper authorization. Hence, a third party acting in good faith may still hold the company liable for actions validated by the company seal - highlighting the critical importance of robust seal management.

Appearance and Specifications

Chinese Company seals are strictly regulated by authorities and follow standardized specifications to ensure authenticity.  Physical seals usually conform to the following specifications:

Most company seals are circular, with a diameter between 3.8 cm and 4.5 cm. . Company seals typically include the full Chinese legal name of the company arranged around the outer circle of the seal and a five-pointed star in the middle of the seal. Seals are typically also embedded with a unique 13-digit registration code issued by the Public Security Bureau that is the authority in charge of seals engraving. The engraving of official company seals requires strict approval regime and must be processed by units designated by the local Public Security Authority. 

In addition to the primary company seals (公章), also other specific seals such as customs seals, contract seals, finance seals and legal representative seals exist that are used for specific purposes only. Still, the company seal is the most important among these seals. 

Seals Management and Risk Prevention

Given the apparent authority of the company seal, improper management of company seals can lead to severe adverse legal consequences, including financial liability, reputational damage, administrative penalties and even criminal liability and the directly responsible persons of the seal owner (company) can be exposed to personal liability. Core risk areas of seals mismanagement include:

• Unauthorized Use or Forgery: If a company seal is stolen, forged, or used by individuals beyond their authority (e.g., signing contracts without proper authorization), the seal owner (company) may be held liable for resulting debts or legal disputes. Under the PRC Criminal Law, forging a company seal constitutes a criminal offence and may even lead to imprisonment.

• Inappropriate Usage of Seals: Using the wrong type of official seals (e.g., affixing a customs seal to an employment contract) may lead to invalid transactions.

• Careless Seal Usage Recordation: Any usage of the official seals shall be properly documented, recorded and authorized by the company and its in-charge staff. Failure to maintain accurate records— of company seal usage (e.g., no log of who used the company seal, when, for what purpose and who authorized the usage, etc.) may constitute negligence on the side of the company and undermine the company’s legal position. 

Thus, implementing adequate and proactive measures to ensure a compliant seal management regime is mandatory. Companies must appoint dedicated company seal keepers and implement proper approval procedures for company seal usage. Official seals shall be kept in secure locations (e.g. a locked safe) with access restricted to selected authorized personnel.

In addition, compliance officers and designated senior managers shall regularly audit the company seal usage records and conduct random checks to detect any misuse at an early stage. 

In case of loss or theft of any official seals, the company as the seal owner must immediately report the incident to the Public Security Bureau and a public notice invalidating the missing seal shall be made. 

Thus, it is paramount for each company to develop, implement and monitor an Official Seal Management System with clear rules outlining company seal usage procedures, approval hierarchies and storage protocols. These rules shall be incorporated into the company’s internal rules and regulations and must be lawfully adopted through the statutory process to make them binding on all employees.

It is important that all staff (in particular those who have not been previously exposed to the particular seal regime in China) understand the legal significance of the official seals and the consequences of improper usage.  Thus, related training is required as well.

Given the new option to obtain and use electronic seals, all companies shall update their Official Seal Management Systems to properly accommodate digital usage protocols, including but not limited to compliance with mandatory legal provisions such as the PRC Cyber Security and Data Security Laws and the PRC Cryptography Law.

The new Measures for the Administration of Electronic Seals express the principle that “whoever owns the electronic seal shall exercise control, and whoever affixes the seal shall bear responsibility”.

Thus, it is necessary for each company’s Official Seal Management System to include rules and regulations governing the proper and standardized custody and use of the electronic seals. Particular care shall be taken to ensure that appropriate IT and procedural safeguards are implemented to regulate access and signature authorizations for electronic seals, as well as to ensure proper recording of such usage regimes.

Susanne Rademacher
Dr Jenna Wang
Kelly Tang

Case Background

The underlying case involves a German plaintiff, a consumer, who subscribed to profit participation rights in a German public limited company (AG) in October 2007. Following corporate restructuring, the company was converted into a GmbH and merged with a London-based company (the defendant) on 31 December 2018. When informed of the merger in February 2019, the plaintiff terminated her participation without notice in May 2019 and demanded repayment of EUR 7,438.99.

After the defendant refused payment, the plaintiff filed a lawsuit in November 2022 at the Regional Court of Munich I, which upheld the claim. However, the Higher Regional Court of Munich ("OLG Munich") overturned this judgment on 16 September 2024, dismissing the action for lack of international jurisdiction. The OLG Munich argued that the Brussels Ia Regulation was no longer applicable to the UK after Brexit, citing Article 67 (1a) and Article 126 of the Withdrawal Agreement. 

Key Aspects of the Judgement

Application of Brussels Ia Regulation

The BGH confirmed that the Brussels Ia Regulation remains applicable for determining international jurisdiction in cases involving UK defendants. The BGH emphasized that the UK's withdrawal from the EU does not automatically affect the Brussels Ia Regulation's applicability in EU Member States, particularly in the absence of explicit provisions in the Withdrawal Agreement excluding consumer protection mechanisms.

The BGH draws its reasoning from Article 216 Treaty on the Functioning of the European Union (TFEU), which allows the EU to conclude binding agreements with third countries. Since the end of the transition period on 31 December 2020, the UK is considered a third country, but this status alone does not preclude the application of EU jurisdictional rules designed to protect consumers.

Consumer Status and Jurisdictional Requirements

The BGH analyzed why the plaintiff qualifies as a consumer under Article 18 (1) Brussels Ia Regulation. The BGH confirmed the established jurisprudence of the BGH and ECJ that investments in profit participation rights constitute consumer transactions when made for private wealth management rather than professional purposes. The BGH noted that the defendant's predecessor had clearly directed its commercial activities toward German consumers, satisfying the requirements for establishing jurisdiction under the Brussels Ia Regulation. 

Relationship with Withdrawal Agreement

A key aspect of the BGH's judgment is the interpretation of the Withdrawal Agreement. The BGH found that the Agreement does not contain explicit provisions excluding Article 18 Brussels Ia Regulation's application. The BGH reasoned that excluding consumer protection provisions would render many of the Agreement's jurisdictional rules largely meaningless and would place EU consumers in a disadvantageous position compared to their dealings with traders from other third countries.

The BGH applied the "acte clair" doctrine, determining that the correct interpretation of the Withdrawal Agreement was so obvious that no reference to the ECJ was necessary under Article 267 TFEU.

Procedural Outcome and Significance

The BGH overturned the Higher Regional Court of Munich's decision and confirmed the international jurisdiction of German courts under Article 18 (1) Brussels Ia Regulation. However, rather than ruling on the merits, the court remanded the case to the Munich Higher Regional Court for further proceedings, as the lower court had not addressed the substantive issues raised in the defendant's appeal.

This decision aligns with recent jurisprudence from several German Higher Regional Courts (Frankfurt, Hamburg, Köln, Karlsruhe, Celle, and Stuttgart) and reflects academic commentary supporting the continued application of EU jurisdictional rules in post-Brexit scenarios.

Implications and Legal Context

The judgment has far-reaching implications for cross-border litigation involving UK parties. It strengthens legal certainty for EU consumers by ensuring that the special jurisdictional rules of Article 18(1) Brussels Ia Regulation remain available, even when dealing with UK-based traders. The decision underscores the continuing relevance of the Brussels Ia Regulation framework in determining competent courts for consumer matters, maintaining a level playing field for EU consumers regardless of whether they face defendants from within the EU or from the UK.

Looking ahead, an important question arises whether the principles outlined by the BGH will extend to B2B situations. While the BGH's reasoning was firmly grounded in consumer protection arguments the underlying interpretation of the Withdrawal Agreement's relationship with the Brussels Ia Regulation could have broader application. The BGH's analysis that the Withdrawal Agreement does not contain explicit provisions excluding the Brussels Ia Regulation's jurisdictional rules may provide a foundation for similar arguments in commercial disputes. However, the absence of equivalent protective considerations in B2B contexts could lead courts to adopt a more restrictive approach, potentially limiting the judgment's impact to consumer cases.

The BGH's approach reflects a balanced interpretation of the Withdrawal Agreement that preserves consumer protection rights while respecting the UK's new status as a third country, demonstrating how EU legal principles can continue to provide effective remedies in the post-Brexit legal landscape.

Dr Tobias Pörnbacher

We had already reported about the cabinet draft for the amendment of the KSpG on 3 September 2025. On 6 November 2025, the German Federal Parliament (Bundestag) has now adopted the KSpTG-E with the content of the latest draft law of 5 November 2025 (BT-printed matter 21/2594). The Act allows the underground storage of carbon dioxide and its export in the future. It thus paves the way for reducing emissions in the CO2-intensive cement, steel and chemical industries, for example, as well as in waste incineration. 

Status of the legislative procedure: How did we end up here?

As the KSpTG-E is an act requiring approval, however, it still requires the approval of the German Federal Council (Bundesrat) before it comes into force. 

This approval is expected to be granted in the upcoming meeting of the German Federal Council on 21 November 2025, provided that the German Federal Council does not raise any further objections to the draft law. The German Federal Council had previously expressed concerns about the details of the Act on 26 September and referred it back to the German Federal Government. The German Federal Government refused some of the proposals of the German Federal Council. However, some of the German Federal Council's wishes were also fulfilled in the latest draft: For example, the planning approval procedure has been further aligned with the regulations of the German Energy Industry Act and the protection of groundwater with regard to its use as drinking water has been regulated as a prerequisite for planning approval.

High costs and lack of CO2 transport network

The question of the costs of CO2 storage is particularly relevant for potential investors: Additional investment is required for capture, transport and storage, but this may be offset by the generation of a new source of income.

Within the framework of the European emissions trading system, companies are obliged to purchase CO2 certificates for the carbon dioxide they emit. In the past, these certificates were allocated free of charge to particularly energy-intensive companies under certain circumstances. This free allocation is to be phased out over time: From 2026, the allocation of free certificates is to be gradually discontinued or linked to energy efficiency measures. In this way, the emission of CO2 into the atmosphere becomes also more expensive, which creates an incentive for investments into CO2 storage in the long term. However, it is currently impossible to say whether this will remain the case in view of the European Parliament's likely postponement of the start of EU-ETS 2 (European Union Emissions Trading System 2) to 2028.

At the same time, CO2 storage entails technical challenges: An extensive pipeline network is required to transport CO2, as CO2-intensive companies are spread across the entire country in a decentralised manner. So far, such a transport network does not exist in Germany. The use of existing natural gas pipelines would be theoretically conceivable, however, will be excluded as long as they are still needed for the transport of natural gas. The storage and transport of CO2 can only actually begin with developing their own infrastructure. 

On the other hand, the opening up of new possibilities with the KSpTG-E also offers opportunities for new business models. This amendment raises the transport and storage of CO2 from a purely research area to an economic level where new markets can emerge.

Storage in Germany

Whether carbon dioxide may also be stored in Germany, depends on the individual German federal states. The KSpTG-E gives the German federal states the opportunity to permit the storage on their territory by law. 

In this respect, the demand for carbon for industry, such as in the production of plastics and synthetic fuels, is also likely to play a role. So far, carbon is generated from fossil raw materials. If fossil raw materials are no longer used in the future, this may open the door for so-called CCU technologies (Carbon Capture and Usage) and may have a positive influence on the cost structure of CO2 storage. At the same time, German companies have a strong market position in the construction of facilities for the capture and purification of CO2 which is further strengthened through the use of their own technologies. 

Conclusion

The storage of carbon dioxide offers a lot of potential to reduce emissions of CO2. Especially for companies with unavoidable CO2 emissions, storage represents an opportunity to continue their operations in the future despite strict legal regulations. Promising opportunities are therefore already opening up for the gradual use of new technologies. It would therefore be welcome if the appropriate regulatory course were already to be set this week.

Dr Malaika Ahlers
Anton Buro

Initial situation

Companies are currently facing a multitude of changes and uncertainties: a tense geopolitical situation, a volatile global economy, difficult external economic conditions (including US tariffs, resource bottlenecks, etc.), domestic economic stagnation and digital transformation. Dealing with these issues alone is challenging enough. According to a recent economic survey, one in three companies in Germany plans to cut staff in 2026, and investment is also likely to decline in 2026. In terms of sustainability, there is also the ESG backlash in the US, new targets set by the current EU Commission in the Clean Industrial Deal, uncertainties about or resulting from changes to sustainability-related laws that have emerged from the implementation of the previous Green Deal, such as the Directive on Sustainability Reporting (Corporate Sustainability Reporting Directive, CSRD), the EU Supply Chain Act (Corporate Sustainability Due Diligence Directive, CSDDD) and the EU Deforestation Regulation (EUDR), to name but a few. In this environment, does it even make sense to continue focusing on sustainability?

Desire for stability

Stable legal and economic conditions are usually seen as a key locational advantage for the economy. Of course, the opposite is also true. From a macroeconomic perspective, uncertainty is not exactly a growth driver. Of course, not every uncertainty can be resolved single-handedly. However, IW Director General Hüther recently criticised in the heute journal, a German news program, that the German economy lacks planning security for a green transformation and that there are investment brakes that need to be removed (see here: Hüther: "Müssen uns Klimaschutz leisten"). Of course, there is no consensus on whether climate protection is a competitive advantage or exactly the opposite. All of this is open to political debate.

The decision-making criteria for companies and their management

This does not help companies at all at present. So what can be done? Managers are not politicians. Their actions are subject to clear legal guidelines.This can certainly help here. The general diligence requirements for board members and managing directors are regulated in Section 93 of the German Stock Corporation Act (AktG) and Section 43 of the German Limited Liability Companies Act (GmbHG) (largely identical in content). According to Section 93 AktG, board members must "exercise the care of a prudent and conscientious manager in their management of the company". And further on it says that they should make business decisions "on the basis of adequate information for the benefit of the company". Being guided solely by political trends can prove problematic in this context. It is also inadvisable to make decisions based on sweeping judgements.

Rather, it is advisable to create an appropriate basis for decision-making and, building on this, to make commercially justifiable decisions. This means that board members and managing directors should give appropriate consideration to all aspects that are objectively relevant to the specific situation. Otherwise, in the event of an unfavourable development of the company, there is a risk of allegations of breach of duty and, as the case may be, personal liability of the managers for damages incurred. Regardless of the sustainability laws currently under discussion, all sustainability aspects that are relevant to the company in question in the respective decision-making situation should thus also be taken into account in the decision-making process (see Walden, NZG 2020, 50 et seq. for details: "Corporate social responsibility: rights, obligations and liability of the board of directors and supervisory board"). Of course, board members and managing directors are not expected to have magical abilities. If uncertainties cannot be clarified further, they must make upcoming decisions – as usual – under conditions of uncertainty.

Appropriate consideration of sustainability aspects continues to be sensible

Dismissing sustainability aspects as insignificant from the outset in view of current political developments could therefore prove to be a dangerous bias. This is evidenced, for instance, by the fact that the banking supervisory authority continues to regard ESG risks as a challenge to the security and stability of banks. Thus, it considers it necessary for banks to (also) take these risks into account in their risk management. It stands to reason that this also makes sense for companies in the real economy, not least because the measures taken by banks have a foreseeable impact on their customers – the companies in the real economy. Companies should consider this when making decisions. The same applies to the identification and exploitation of opportunities that may arise for the company in connection with sustainability. This is also reflected in the sustainability-related recommendations of the German Corporate Governance Code (DCGK) which remain relevant today and which the vast majority of DAX, MDAX and SDAX companies comply with, as evidenced by their declarations of conformity (see our blog post Nachhaltigkeit ist out! Oder doch nicht? Ein Faktencheck. | ADVANT Beiten). It therefore makes perfect sense, for instance, to make internal efforts to "understand the financial effects on the undertaking over the short- medium- and long-term of risks and opportunities arising from the undertaking's impacts and dependencies on climate change " (to quote one of the objectives set out in ESRS E1) – regardless of whether or not the company is required to report on this externally in accordance with CSRD. Incidentally, the EU insurance supervisory authority EIOPA already warned years ago about a concentration of sustainability-related liability risks among insurance companies and – similar to the banking supervisory authority in its area – called for appropriate risk management measures.

Compliance obligation on top

Furthermore, management is and remains obliged to comply with applicable laws – regardless of whether these are considered "good" or "bad". Compliance with applicable laws is not at the discretion of management and is thus particularly liability-sensitive. Management should also keep an eye on the risks arising from legal uncertainties, especially in the area of sustainability. This applies not only to new sustainability laws (e.g. the above-mentioned European legal acts, as soon as and to the extent that they apply) but also to general legal norms that also apply to sustainability-related issues (see, for example, our blog post Climate Change Litigation Update: Are Companies Liable for CO₂ Emissions? | ADVANT Beiten), and finally also sustainability-related contractual agreements.

Conclusion: Balancing short-term and long-term considerations

In the end, decision-making in times of uncertainty remains particularly complex. However, a systematic approach to problem-solving based on proven methods, as ultimately suggested by the diligence requirements applicable to management, is helpful. In other words: Understand the problem accurately, break it down into its constituent parts, gather the relevant information and arrive at a synthesis based on an assessment and weighting. In our view, it is particularly important (and equally challenging) to find an appropriate balance between short-, medium- and long-term aspects, i.e. to reconcile "today" and "tomorrow" as well as possible.

Dr Daniel Walden
Jole Inserra
Dr Andé Depping

The new Measures on National Cybersecurity Incident Reporting issued by the Cyberspace Administration of China (CAC) and coming into effect on 1 November 2025 require much faster action - between 1 and 4 hours if network operators detect a cybersecurity incident that has caused harm to networks and information systems, or their data and business applications, and has a negative impact on the country, society, or economy due to human factors, network attacks, vulnerabilities, software or hardware defects or failures, force majeure, etc.

Who is governed by the new Measures?

All network operators are governed by the new Measures, that is, everyone who, as an owner or administrator of networks or network services, builds, operates, or provides services through networks within China. This includes but is not limited to critical information infrastructure (CII) operators (so-called CIIOs, i.e., enterprises that operate CIIs and that have been notified by the competent authorities that they are categorized as CIIOs) as well as government entities.

What is considered a cybersecurity incident under the new Measures?

The new Measures divide such incidents into four different levels based on their severity and impact: 

Note: If any one threshold is met for one of the four incident levels, the network operator must be classified under the higher level of cybersecurity incident that has been met.  In other words, the thresholds for each incident level should be read independently, not cumulatively.

What are the reporting and other obligations under the new Measures?

Once a network operator becomes aware of a cybersecurity incident involving its own network/business, it must conduct an incident assessment following the Guidelines for the Classification of Cybersecurity Incidents which are appended to the new Measures. 

The new Measures allocate different reporting obligations depending on the nature of the network operator and the severity of the incident: 

CAC provides different reporting channels such as the telephone hotline reachable at 12387, as well as email (12387@cert.org.cn) and other reporting modes, all accessible via the CAC’s website https://12387.cert.org.cn/index.html. 

The reporting timelines are calculated from the point in time when the network operator becomes aware of the incident. If the circumstances of the incident cannot be determined in full within the statutory notification deadlines, the network operator shall submit a preliminary report (containing whatever information is available at that time) and then provide an updated comprehensive report as soon as possible once more information becomes available. 

In addition, interim updates on major developments, as well as a final summary report, shall be provided within 30 days after the incident has been remedied (including information on the cause of the incident, remedial measures taken, scope of impact, accountability, and improvements made).

Reports should include the following information:

• Affected entity and system
• Time, place, type, and level of incident; impact, damage, measures taken and results thereof
• Preliminary analysis of the cause of the  incident
• Suggested remedies and support
• Security measures in place at the time of the incident
• Potential attacker information, attack path, vulnerabilities, and, in the case of ransomware incidents, the ransom amount requested and payment method
• Other facts material to the incident

In addition, if for certain industry sectors special reporting obligations apply, these shall be followed as well and in case of any illegal or criminal activities being suspected, PSB must always also be notified.

If network operators employ external IT service providers, the contracts between them must require such providers to immediately notify the network operators of any incidents in their networks and to assist with the mandatory reporting thereof.

Any failure to comply with reporting obligations under the new Measures exposes network operators and their responsible employees or agents to liabilities under the Chinese Cybersecurity Law, Data Security Law, Personal Information Protection Law and other applicable Chinese laws and regulations. Fines can range from RMB 50k to RMB 50 mil depending on the seriousness of the incident and the type of data involved and network operators are exposed to heavier consequences if they delay of proper reporting caused more serious consequences. Any reasonable and necessary protective measures taken by the network operator may mitigate such liability. 

How should network operators react to the new Measures?

Considering the new Measures, network operators should review, revise, prepare and verify: 

• Incident response policies and plans to align with the accelerated notification requirements
• Internal procedures to ensure timely escalation of cybersecurity incidents to the appropriate personnel
• Report templates to align with the information requirements under the new Measures
• External IT service contracts to ensure they stipulate immediate notification and assistance obligations, or are amended accordingly

Susanne Rademacher
Dr Jenna Wang-Metzner
Kelly Tang

Statement of accounts 2024 of the BAFA

The BAFA has published its current Statement of Accounts 2024 on the LkSG (as of: October 2025) (BAFA - Overview - Statement of Accounts). In its report on the audits completed in 2024, it states "that most companies take their due diligence obligations under the LkSG extremely seriously and can demonstrate good to very good implementation." The "willingness to cooperate shown by the companies audited in each case" should be particularly emphasised. In 2024, the BAFA therefore initiated administrative fine proceedings only in "a few exceptional cases". However, the BAFA "did not evaluate or review in detail" the companies' reports on the fulfilment of their due diligence obligations pursuant to section 10 (2) LkSG in 2024, insofar as such reports were submitted at all. Background: In spring 2024, the BAFA had announced to review the availability of these annual reports for the first time as of 1 January 2026.

Immediate facilitations for addressees of the LkSG

In addition, a reference to "simplifications for companies in the Supply Chain Act" can be found on the website of the BAFA concerning the LkSG (BAFA - Overview) since 1 October 2025. The corresponding draft bill to amend the LkSG (more on this below) has not yet been passed through parliament. Nevertheless, the BAFA already announced that the audit of LkSG reports (already postponed until the beginning of 2026) will be discontinued with immediate effect. Furthermore, due to the lapse of the public interest in prosecution, all administrative offence proceedings relating to fines, which are to be deleted under the current draft bill, are to be discontinued. In view of the small number of administrative fine proceedings initiated to date (see above), this will not affect many companies but will certainly provide relief.

Reduction of the number of addressees of the Act only with future implementation of the CSDDD

Otherwise, the LkSG remains unchanged for the time being. This applies both to the group of addressees of the LkSG (cf. section 1 LkSG, in brief, companies based in Germany with more than 1,000 employees in Germany) and to the due diligence obligations of the relevant addressees provided for in the LkSG. Amendments in this regard are only expected in connection with the transposition of the European Corporate Sustainability Due Diligence Directive (CSDDD for short) into German law. This will presumably only take place once the revision of the CSDDD, among other things, which was initiated by the omnibus package on sustainability (see our blog post on this Omnibus Package on Sustainability: The Planned Amendments | ADVANT Beiten) has been completed. It is currently becoming apparent in the trialogue negotiations that the provisions of the CSDDD should in future only apply to companies with more than 5,000 employees and a worldwide turnover of more than EUR 1.5 billion. With the announced "seamless replacement" of the LkSG "by a law on international corporate responsibility that transposes the CSDDD into national law", the group of addressees of the Act in Germany is therefore likely to be considerably reduced in future. It is not yet clear exactly when this will happen. After setting a new deadline, the CSDDD is to be transposed into national law as of 26 July 2027 and has to be implemented as of 26 July 2028. Of course, even after such a transposition law came into force, many companies (especially European ones) would still be indirectly affected in their role as suppliers to companies subject to the CSDDD.

Continued compliance obligations for the time being and open question concerning benefits of the companies through implementing the LkSG

The LkSG thus remains applicable law for all previous addressees of the Act for the time being. It would therefore not be a good idea to disregard the LkSG now, even if the majority of the fines are deleted in the near future with the adoption of the LkSG Amendment Act as planned. On the one hand, inadequate fulfilment of the continuing LkSG due diligence obligations (such as refraining from a risk analysis) may trigger one of the remaining fines. On the other hand, and above all, the board of directors or management of the addressees of the LkSG are still (also) obliged to observe the provisions of the LkSG due to their general compliance obligation, irrespective of the deletion of the fines (see our blog post from December 2024 on the question: Why we (in particular the management) need to continue to take the German LkSG seriously and how it (also) relates to the pending implementation of the CSRD | ADVANT Beiten). 

Speaking of CSRD: According to the current status of the trialogue negotiations, companies with 1,000 employees and an annual turnover of EUR 450 million are likely to be obliged to submit sustainability reports in the future. In these reports, the respect for human rights in the supply chain, among other things, must also be reported. Although the planned simplification of the CSRD (Corporate Sustainability Reporting Directive) and of the ESRS (European Sustainability Reporting Standards) also promises simplifications in this respect, the basic reporting obligation remains unchanged in this respect. The topic of human rights in the supply chain will therefore not disappear completely from the "mandatory agenda" of most LkSG addressees in the future.

Apart from this, the question arises as to whether the implementation of the LkSG - and thus in particular the establishment of a human rights risk management system - has brought any benefits for the addressees in terms of content, apart from the high administrative costs, which are also due to the many uncertainties of the Act, and if so, what benefits? It would then be an obvious question for the companies that are likely to fall outside the scope of application in the future with the implementation of the CSDDD as to which of these benefits the company can and wants to maintain with reasonable effort - also with a view to the possibly continuing obligation to sustainability reporting in accordance with the CSRD.

More details on the Statement of Accounts 2024 of the BAFA

In 2024, the BAFA carried out a total of 851 ex officio audits, thereof 638 risk-based controls and 39 occasion-related audits. In addition, there were 314 processes from complaints and suggestions, of which 48 had an LkSG reference.

The focus was in particular on:

• determining the responsibility for risk management,
• establishing effective complaints procedures and
• first audits on the regular risk analysis and on the policy statement.

This revealed that many companies - particularly in the new size category of 1,000 employees or more - still faced challenges in the organisational separation of implementation and monitoring of human rights risk management and in the barrier-free design of complaints channels.

The occasion-related controls of the BAFA concerned, among other things:

• the transport sector (reasonable wage),
• the textile industry in Pakistan (child labour, occupational safety, freedom of association, unequal treatment, reasonable wage),
• the palm oil production in Central America (land grab, environmental offences) and
• the soybean cultivation in Brazil (land grab, environmental offences).

The BAFA names the following other countries affected: China, Germany, Morocco, Serbia, South Africa, Turkey and the USA.

Despite the increased audit activity of the BAFA, the number of sanctions in 2024 remained low:

• 18 administrative fine proceedings were initiated,
• 9 warnings were issued,
• no fines were imposed.

Backgrounds for the facilitations announced by the BAFA

It was already clear from the coalition agreement between the CDU, CSU and SPD that the "abolition" of the national LkSG announced there under the heading "Bureaucracy reduction" was to take place in two steps: (1) Immediate abolition of the reporting obligation under the LkSG and no sanctioning of the applicable due diligence obligations (with the exception of massive human rights violations), (2) Replacement of the LkSG in the course of implementing the European Corporate Sustainability Due Diligence Directive (CSDDD) with a "law on international corporate responsibility" (cf. Coalition Agreement-2025-1.pdf, there lines 1909 et seq.).

To implement the first step, on 3 September 2025, the German Federal Government presented the "Draft Act to Amend the German Supply Chain Due Diligence Obligations Act - Relieving the burden on companies through application and enforcement-friendly implementation" (see Act Amending the German Supply Chain Due Diligence Obligations Act - BMAS). According to this, the annual reporting obligation pursuant to section 10 (2) LkSG - which had previously been effectively postponed until the end of 2025 by the BAFA's announcement - will no longer apply with retroactive effect from 1 January 2023. In future, only those breaches of duty that the legislator has deemed to be particularly serious under the LkSG will be subject to a fine, i.e.:

• violations of the obligation to take preventive measures (section 6 (1) LkSG),
• violations of the obligation to take remedial measures (section 7 (1) sentence 1) and to develop concepts (section 7 (2) sentence 1 and section 9 (1) LkSG),
• violations of the obligation to establish a complaints procedure (section 8 (1) sentence 1 and section 9 (1) LkSG).

Even in these cases, the imposition of fines should be the last resort (cf. RefE, justification for Art. 1 number 6). The provision on increased fines for legal entities in section 24 (3) LkSG is apparently to remain in place - apart from consequential changes to the offences for which fines are imposed.

According to a press release of 26 September 2025, the Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie, BMWE) in coordination with the Federal Ministry of Labour and Social Affairs (Bundesministerium für Arbeit und Soziales, BMAS) has instructed the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) to "exercise restraint with regard to the Supply Chain Act" (BMWE - Immediate relief for companies - BMWE instructs BAFA to exercise restraint with regard to the Supply Chain Act). This instruction might be the reason for the current information on the website of the BAFA. sein.

Dr. Daniel Walden
Jole Inserra
Dr. André Depping

But is this actually possible without restrictions? The ‘Ingmar’ ruling by the European Court of Justice and subsequently also by German courts may give rise to doubts in this regard. In the ECJ's Ingmar decision of 9 November 2000 (Case C-381/98, confirmed by the "Unamar" decision of 17 October 2013, Case C-184/12), the ECJ ruled that the commercial agent's right to indemnity was a matter of (overriding) mandatory international law (. This mandatory claim may not be circumvented by deviating rules on jurisdiction or choice of law. In a nutshell: If the commercial agency agreement provides that a non-European law is applicable and a non-European court has jurisdiction, the commercial agent may, under certain conditions, be able to ignore this if it is to be expected that he will therefore not be awarded an indemnity claim and nevertheless sue in the EU and invoke European law.

Whether this Ingmar ruling also applies to distributors is disputed in legal literature. I believe (and others believe) that it does not (Westphal/Korte, Vertriebsrecht [Distribution Law], 2nd ed. 2023, ch. 27 margin no. 32). And this is how the Berlin Court of Appeal has now seen it in a recent decision (reference order of 1 July 2025, file no. 2 U 37/22). It is probably the first published court statement on this issue. In this specific case, a service agent (i.e. a commercial agent who brokers service contracts for a third company) was involved, not distributor. However, the decision also applies without restriction to distributors - these are also expressly mentioned. The court argued that it could be assumed that Delaware law, as applicable under the contract, did not recognise a claim for indemnity. However, the Ingmar case law was still not applicable as the content of the contractual relationship between the parties was not covered by the EU Commercial Agents Directive. This was because the object of the business was the provision of services while the EU Directive is limited to agents brokering contracts relating to the sale of goods. It is not applicable to service agents or distributors. In this respect, there are no standardised regulations in the EU anyway: In some EU states, distributors are entitled to indemnity, in others not. Hence, a lower level of protection in this respect is permissible under European law. Accordingly, a foreign manufacturer may agree with the European distributor or service representative that a non-European court has jurisdiction and that non-European law is applicable. Of course, the final word has not yet been spoken until the ECJ has had the opportunity to rule on the issue.

Oliver Korte

Climate lawsuits against companies: Status quo

In Germany at least, there are still no legally binding court rulings on the liability of companies for damage caused by climate change that could be generalised. And, to date at least, this issue is also separate from the new sustainability laws (LkSG, CSRD, CS3D, Deforestation Regulation, Ecodesign Regulation, etc.). Rather, the question still needs to be clarified: Can CO₂ emitters be held liable for climate damage under general civil law principles? It is even more unclear what consequences such liability on the part of the company would have for the liability of board members and supervisory board members or managing directors, and to what extent there would be cover for this under the relevant liability insurance policies.

The RWE case before the Hamm Higher Regional Court

One prominent example is the case brought by Peruvian farmer Saúl Luciano Lliuya against RWE. After almost ten years, the Hamm Higher Regional Court dismissed the case at second instance in May 2025. Media reports emphasised that the court considered the fundamental responsibility of large CO₂ emitters for the consequences of climate change to be obvious. However, the lawsuit failed in the end due to the circumstances of the individual case.

The dismissal of the action can thus not be generalised. On the contrary, the Hamm Higher Regional Court's decision is also not a blueprint for new climate lawsuits. A closer look reveals that the Higher Regional Court of Hamm has left central questions unanswered and has taken legal positions that even create new uncertainties. Hence, there can be no question of clarifying the question of liability. Details on this can be found in my (German language) article: "Tidal wave ahead? What Lliuya vs. RWE means for CO₂ emissions, liability and D&O, corporate liability and human rights violations" (ZIP 2025, p. 2218 et seq.).

What remains is legal uncertainty - also internationally

Essential questions regarding liability and coverage thus remain unresolved. This applies not only to Germany but also to other legal systems. This is also relevant for German companies (and vice versa) because in cross-border situations such as climate change, the first question that arises is: Which national law is applicable at all? In the RWE case, the Higher Regional Court of Hamm applied German law because the parties were in agreement on this and there was thus a binding choice of law. However, this will not be the case in every instance.

Parallels: Holcim lawsuit in Switzerland

A case in Switzerland raises similar questions: Residents of the Indonesian island of Pari are suing the Swiss cement company Holcim. They hold Holcim responsible for rising sea levels and the resulting threat to their livelihoods. The plaintiffs are demanding from Holcim:

• Compensation for loss of income (e.g. tourism),
• a reduction in CO₂ emissions,
• financing of protective measures (the Peruvian farmer Lliuya had also demanded this from RWE).

As with the lawsuit against RWE, NGOs are also supporting the plaintiffs here and attracting media attention. According to German broadcasting news platform „Tagesschau“, Holcim referred to the competence of the legislator in a statement when asked by the German news agency dpa: "In our opinion, who is allowed to emit how much CO₂ is a competence of the legislator and not a question for a civil court." This assessment is probably based on the following key question.

The key question: Where does liability begin - where is the threshold?

The Indonesian islanders point out that, according to the "Carbon Majors" database, Holcim is one of the largest historical CO2 emitters in the world. The Peruvian farmer Lliuya also pointed out that RWE is one of the largest historical CO2 emitters worldwide. However, compared to RWE, Holcim is likely to have caused lower CO2 emissions due to its industry and is therefore further down the "ranking list" of "carbon majors". This leads to the interesting question: At what point is a company (jointly) liable for the consequences of climate change due to its CO2 emissions? Does it only include the top 10, the top 100, or even more major CO2 emitters? The only thing that seems to be clear is that liability ‘from everyone against everyone’ cannot be reasonable in any way. The Higher Hamm Regional Court has also clearly rejected such liability for every small or large CO2 emitter. However, the Hamm Higher Regional Court has not defined a precise threshold at which such liability should be considered.

Conclusion: It is now up to the legislator

The actual reason for this is that general civil law apparently does not provide any clear guidance on where such a liability threshold should ultimately be set. The historical legislator did not think about climate change (which was not even known at the time) and its consequences and the resulting question of liability. In our abstract legal system, this does not fundamentally prevent us from subjecting circumstances that were not apparent in the past to legal assessment. However, the phenomenon of climate change and its consequences is so special that there are obviously no other constellations that can in fact be compared with it. The usual legal toolbox thus reaches its limits here.

And this is precisely where we come full circle to Holcim's press statement. After all, if it is not possible to reliably determine from the applicable general civil law when CO2 emissions give rise to liability, then it would obviously be up to the legislator to set such thresholds in the first place.

In Switzerland, however, the first question is whether the Indonesian plaintiffs are even allowed to sue in Swiss courts. The development remains exciting.

Improved governance 

Each arbitration institution shall be governed by one chairperson, two vice chairpersons and seven to eleven additional members. Among them, at least 2/3 shall have expertise in law, trade and economics, and scientific technology and every five years at least 1/3 of them shall be replaced for transparency reasons.

Online arbitration has become a common practice and is now confirmed as a legal and effective means of arbitration unless the parties opt out of this mode.

Prosecutors, judges and civil servants are barred from serving as arbitrators while non-PRC experts in the areas law, trade and economics, maritime, and scientific technology are invited to serve as arbitrators with Chinese arbitration institutions. 

Arbitrators are now by law required to disclose any potential situations to their arbitration institutions in which a reasonable doubt could be cast on their independence or impartiality.

In the case of three-member tribunals, the parties can opt for one of the following appointment modes for the third arbitrator: the chairperson of the arbitration institution shall make the appointment; the parties themselves decide on the appointments or the other two arbitrators appoint the third arbitrator. 

Interim measures in pre-arbitration proceedings

The amended law confirms the right of the parties to apply for interim measures or injunctions before the initiation of the arbitration proceedings but still provides that the competent People’s Court shall handle such applications.Thus, arbitration tribunals still have no power to rule on the parties’ applications for interim measures.

Enhanced evidence collection rules

Arbitral tribunals may collect evidence themselves and also request authorities to assist them in such measures. This gives the tribunals more power to independently collect evidence rather than mainly relying on their requests to the claimants and respondents to provide evidence.

Existence and validity of arbitration agreements

If one party claims the existence of an arbitration agreement while the other party fails to deny such existence prior to the first arbitration hearing, and provided the tribunal made a record of such situation, an arbitration agreement is deemed to exist.

Also, if a party challenges the validity of an arbitration agreement, it may either request a ruling from the competent People's Court or a decision from the chosen arbitration institution/tribunal. If in such case one party requests a ruling from the competent People’s Court while another party asks for a decision by the arbitration institution/tribunal, the ruling of the competent People's Court shall prevail.

Shortened period of setting aside and non-enforcement of arbitral awards

The time limit for applying for setting aside an arbitral award has been shortened from six to three months from the date of receipt of the award. During enforcement, respondents can invoke the same legal grounds of setting-aside the arbitral awards to resist the enforcement of the arbitral awards, thus unifying the legal grounds for setting-aside and non-enforcement applications of arbitral awards.

Seat of arbitration in foreign-related arbitration

Thus far the location of an arbitration commission determined whether the arbitration was considered domestic or foreign-related. From a PRC legal perspective this differentiation is important because therefrom e.g. the law governing the arbitration proceedings, evidence rules, nationality of the award, courts of jurisdiction etc. are derived. Parties to foreign-related arbitrations get to choose a seat of arbitration. Unless the parties chose otherwise concerning the law governing the arbitration proceedings, the seat of arbitration shall determine the law governing the arbitration process and the court jurisdiction. Arbitral awards are deemed to be made at the seat of arbitration. If the parties failed to (clearly) agree on the seat of arbitration, the seat of arbitration is determined according to the agreed arbitration rules. If such rules are unclear on this matter, the tribunal may select the seat of arbitration based on the merits of the case and the principle of best facilitating the resolution of the dispute of the parties. 

Ad hoc arbitration

The amended law allows parties in foreign-related maritime disputes as well as other parties residing in Chinese Free Trade Pilot Zones, in the Hainan Free Trade Port and in other regions approved by the PRC government to choose ad hoc arbitration. In case of such choice, the parties should still notify the Association of Chinese Arbitration about the parties’ names, seat of arbitration, composition of the tribunal and applicable arbitration rules. Such notification shall be made within three days after the formation of the tribunal. Thus, the scope for ad hoc arbitration still remains rather limited in China. 

Foreign arbitration institutions in Free Trade Zones

Foreign arbitration institutions from outside China are allowed to establish entities in Chinese Free Trade Pilot Zones, Hainan Free Trade Port and in other regions approved by the PRC government. The amended law however lacks clear provisions concerning what scope of action such foreign arbitration institutions could engage in in China.

Susanne Rademacher

1. EU Innovation Fund – Funding Procedure and Project Selection 

1.1. What is the EU Innovation Fund?

The Fund was launched in 2020 and is executed by the European Climate, Infrastructure and Environment Agency (CINEA). It is fully financed by the EU Emissions Trading System (ETS). From 2020 to 2030 revenue procured from the auctioning of 530 million ETS allowances have been allocated towards the Fund, resulting in an estimated total funding pool of 40 billion EUR (based on current carbon price of 75 EUR/tCO2). 12 billion EUR have already been granted to 214 projects (another 4.6 billion EUR are earmarked within running award procedures), still leaving future projects with a substantial funding capacity of 23.4 billion EUR until 2030. Funding per project averages 57 million EUR.[2] While Fund projects are locally bound to EEA state territory, project participation is open to non-EU entities. Currently only 10 out 472 participants are located outside of the EEA: five from the US, two from South Africa, two from Australia and one from Canada. 

1.2. How are projects selected? 

The majority of project selections are structured around a yearly application process, initiated by multiple grant calls for proposals. Nine calls have been completed since 2020. The calls cover a generalized topic field in accordance with current EU policy directions. For the latest calls in 2024 these were "Net Zero Technologies" offering 2.4 billion EUR in grants and "EEV Batteries" covering 1 billion EUR. The "Net Zero Technologies" call was broken down into 5 subcategories: Three general decarbonization topics differentiated by project size: large-scale (CAPEX above €100 million), medium-scale (CAPEX between €20 million and €100 million) and small-scale (CAPEX between €2.5 million and €20 million), a clean-tech manufacturing topic (manufacturing equipment and components for renewable energy, energy storage, heat pumps and hydrogen production) and pilot project topic for highly innovative technologies. 

Applicants first undergo a general financial and operational capacity check. Specific projects are then selected through a scoring system by an independent group of outside experts based on the following award criteria: degree of innovation, greenhouse gas-avoidance potential, project maturity (technical, financial, operational), cost-efficiency and replicability.[3]

Recently the calls have emphasized “supply-chain resilience and strategic autonomy” as a goal for funding projects, especially in regard to critical raw materials.[4] As of 2024 "Contribution to Europe's industrial leadership and competitiveness" was introduced as an explicit assessment factor, making up 7 % of awarded points in the general decarbonization topic and 9 % within the clean-tech-manufacturing topic. [5]

Resilience related requirements can also be found in the new competitive bidding mechanism of the Fund. This funding format was introduced in 2023 and has been focused on the production of renewable hydrogen. The 2024 Hydrogen Auction and the current draft of Terms and Conditions for the 2025 Hydrogen Auction for example both include explicit caps on the amount of project electrolysers originating from China.[6]

1.3. How is project funding executed? 

A Grant Agreement (GA)[7] sets the framework for the funding and its terms and conditions, in particular concerning deliverables, reporting and payments. The funding awarded through the grant calls is provided through a fixed lump sum grant. Up to 60 % of calculated project costs can be reimbursed. Interim payments for contributions to the project can only be requested upon completion of predetermined work stages or triggering of milestones set out in the GA. The eligibility of costs and contributions is based purely upon the achievements of results and therefore no cost reporting is necessary. Parties to the GA may keep any grant surplus, but bear the risks of overrunning costs, since the lump sum is not increased.

Up to 40 % of the maximum grant amount can be paid out until financial close, while the remaining amount of at least 60 % is reserved for the reporting periods after financial close; at least 10 % is reserved for a three-year period after entry into operation. Financial close represents the moment in the project cycle where all the financing agreements and permits have been signed and all the required conditions met. The maximum grant amount will only be paid out, if over the entire project course duration, the project reaches at least 75% of its greenhouse gas emissions reduction target. 

2. Project participation options 

The most relevant options for project participation are the roles of beneficiary, affiliated entity and subcontractor. The participation forms correspond to the level of project involvement and legal liability towards the granting authority. 

Beneficiary

Beneficiaries are the only participants who sign the GA. They are jointly liable for the technical implementation of the project and individually financially liable for their own costs, as for the tasks performed by their subcontractors and affiliated entities. A single beneficiary acts as contact point with the CINEA, so called Coordinator. They submit the deliverables and reports triggering payments in the system. It is mandatory for multiple beneficiaries to a grant to conclude a consortium agreement. Payments are made only to the coordinators bank account and it is an internal matter of the consortium how the payments are then distributed to each beneficiary. 

Affiliated Entities 

Affiliated Entities do not become party to the GA but are in many ways treated like beneficiaries. Affiliated Entities must have a permanent legal or capital link to the beneficiary, which is neither limited to the action nor established for the sole purpose of its implementation (see Art. 190 (1) (b) Financial Regulation 2024/2509)[8].

Affiliated entities must fulfil the same conditions for participation and funding as the beneficiaries. They can charge lump sum contributions to the project under same conditions and must implement certain project tasks attributed to them in the GA. The work for these tasks is carried out under their full and direct control, but the beneficiary remains responsible toward the granting authority for the work carried out by them and must ensure that all their obligations under the GA also apply to the affiliated entity. The granting authority may require joint and several liability of an affiliated entity, if the financial capacity of a beneficiary is weak and the beneficiary mainly coordinates the work of its affiliated entity.

Subcontractors

Subcontractors also do not become party to the GA. They preform project tasks attributed to them in the GA similarly to affiliated entities but do not charge costs to the grant. The GA must specify which actions tasks will be subcontracted and the estimated subcontracting amounts but does not require naming of a specific subcontractor. The subcontractor is paid by the beneficiary in exchange for its work and the beneficiary remains fully responsible towards the granting authority for tasks performed by its subcontractors and must ensure that their contractual obligations also apply to the subcontractor. The beneficiary must award the subcontracts based on best value for money and absence of conflict of interest. The eligible cost covered by the grant is the price of the subcontractor charged to the beneficiary, containing a profit margin directly for the subcontractor. 

3. The Legal Framework for participating Foreign Entities 

3.1. Open to Foreign Investment

The legal body surrounding the Fund applies to all project participants, including non-EU participants. The regulatory framework for the Fund can be found in the EU Financial Regulation (FR) 2024/2509, which sets out common rules for budget implementation through award procedure under the direct management of a commission agency like the CINEA. Foreign entities within the award procedure must make standard declarations regarding a common list of exclusion criteria found in the Financial Regulations. 

3.2. FSR

When participating in projects supported by the Fund, foreign investors must take into consideration the Foreign Subsidies Regulation 2022/2560 (FSR)[9]. Whereas the legal body governing the Fund does not foresee the application of the FSR in the award procedure, Art 143 (1) (e) Financial Regulation states that the addressee of a decision under the FSR rules, prohibiting the award of a contract for having received foreign subsidies distorting the internal market shall be rejected from an award procedure.

Art. 1 FSR clarifies that distortions created by foreign subsides can arise with respect to any economic activity, thus including the realization of grant projects in the EU. To date, there is no precedent indicating that the Commission would generally treat a foreign investor participating in a Fund award procedure and having received foreign subsidies in the same way as a subsidized foreign undertaking in a tender (Art. 5 (1) (e) FSR) within a procurement procedure. 

However, for the newer Fund programs that use auction and bidding formats, more closely resembling a procurement process, bidders must provide information on foreign subsidies beforehand, and, in case extraordinarily low bids are received, an investigation under the FSR can be initiated ex officio by the Commission.[10]
 

Dr. Christian von Wistinghausen
Johannes Supp

[1] Calls for proposals - European Commission

[2] Innovation Fund Project Portfolio - Innovation Fund - Portfolio of signed projects | Arbeitsblatt - Qlik Sense

[3] Example of award criteria point system for the 2024 Large scale project call, Page 19; Call document for the call "Innovation Fund call 2024 Net Zero Technologies"

[4] call-fiche_innovfund-2023-nzt_en.pdf, Page 9, 11. 

[5] Call document for the call "Innovation Fund call 2024 Net Zero Technologies" Page 25.

[6] IF25 Hydrogen Auction, Draft Terms and Conditions; ee3b468a-ee39-4748-b3be-5ce8f0fd4652_en 2.1 General Auction design elements, 1.14. 

[7] Model Grant Agreement for all Innovation Fund Projects till 2027, non-negotiable and applies as is;ls-mga_innovfund_v1.1-01102023_en.pdf

[8] EU Financial Regulation, Regulation - EU, Euratom - 2024/2509 - EN - EUR-Lex 

[9] Foreign Subsidies Regulation EU 2022/2560, EUR-Lex - 02022R2560-20221223 - EN - EUR-Lex 

[10] Questions and Answers, Innovation Fund 2024 Auction, Question 16, Page 6,7fc59da6-15a1-46a1-a015-fa9645789601_en

Anti-abuse rules against entities avoiding employer responsibilities through ambiguous and complex structures

Sometimes, companies try to evade legal responsibility as employers through complex employment structures. Interpretation II stipulates that when project owners subcontract/assign their business to entities without legal business qualifications, or when an entity without the corresponding qualifications conducts business activities externally through "affiliation" with a unit with legal business qualifications, the contractor/affiliated entity with legal business qualification will be legally recognized as the entity bearing the main responsibility as employer. This clarification aims to afford employees with a better protection of their rights in seeking payment of salaries and social insurance benefits because the responsibility for such claims will be borne by entities with legal status and (hopefully) sufficient financial means to honour such commitments.

In cases of so-called "group employment" or "affiliated company employment" (i.e. employment models where within a group of affiliated companies’ staff is transferred across different entities/units), it is often difficult to determine which particular entity is the “true” employer. Interpretation II provides that in determining the true employer, priority shall be given to the entity who signed the labour contract. If no written contract exists, the overall management behaviour and other comprehensive factors shall be considered. Specifically, one shall not only focus on formal aspects such as which entity pays salary and social security but also on actual factors such as which entity manages the staff, allocates work tasks, controls working hours, conducts performance evaluations, etc. and in such case the affiliated entities jointly are liable for salary payment and insurance benefits. This rule aims to better protect employees subject to business outsourcing models involving low-cost models and questionable third parties and is aimed to steer companies to simplify structures they may have set up to evade legal liability through untransparent structures.

Situations qualifying as “two consecutive fixed-term labour contracts” entitling employees to open-term labour contracts

PRC labour laws provide that in certain cases employees are entitled to ask for an open-term contract. Among others, employees are entitled to request an open-term contract after two consecutive fixed-term labour contracts with the same employer. 

Interpretation II provides that any of the following situations shall be considered as "consecutive conclusion of two fixed-term labour contracts":

• The parties agreed to extend the term of the first labour contract for at least one more year and such extension period has expired.

• The labour contract stipulates that the contract automatically renews upon the expiration of the first term for another fixed term and such second fixed term has expired.

• The employee “for reasons not attributable to himself” continues to work at his original workplace or job position after the first term of the contract expires and the employer merely changes the contracting entity of the (new) labour contract but continues to exercise labour management over the employee and the contract term expires. 

This addresses a scenario where the employee continues working in the same position/location after his contract has expired, even though the employer has changed the formal "party" (such as the company or organization) responsible for the contract, but the initial employer continues to manage the worker as before. In such cases, the court may treat this as a continuation of the same employment relationship and recognize it as meeting the conditions for signing two fixed-term contracts in a row, provided the continued performance at the same workplace/position with a new contract party did not stem from a voluntary decision of the employee himself. 

• After the expiration of the first contract, a new labour contract is signed by engaging in other actions that violate the principle of good faith to avoid obligations, and the contract term expires.

This refers to a situation where the employer signs a new labour contract under circumstances that violate good faith principles after the initial contract expires. Despite these circumstances, the contract is still recognized as having expired and requires legal consideration.

In essence, the last two bullet points focus on identifying situations where employers may try to circumvent labour laws by changing the structure of contracts or manipulating conditions, and the courts should still recognize the contracts as consecutive fixed-term contracts under those conditions.

Also, where, after the expiration of a given labour contract, the employee continues to work for his employer and the employer does not raise any objections against such continued performance for more than one month after the previous contract expired, the employee is entitled to a renewed labour contract under the terms of the expired contract. If at this point in time circumstances warranting the conclusion of an open-term labour contract exist, the renewed contract shall be entered into for an open-term if so requested by the employee. Should the employer rather choose to terminate the labour contract, this will subject the employer to bear liability for termination of a labour contract according to law (e.g. make severance payment if so required by law).

Consequences of failure to enter into written labour contracts

Under Chinese labour laws, not entering into a written labour contract with an employee carries serious legal and financial consequences for employers. An employer must sign a written labour contract within one month from the employee’s first day of work.

If the employer fails to sign a written contract within more than one month but less than one year, the employee is entitled to claim double his monthly wage for each full month worked without a written contract, starting from the second month. Interpretation II specifies that for a period of less than one month, the payment shall be calculated according to the employee’s actual working days in that month.  However, the employer is exempt from liability for double wage payment if it can prove any of the following circumstances:

• The labour contract could not be concluded in a timely manner due to force majeure.

• The failure to conclude the labour contract is attributable to the employee's own fault (e.g. refusal to provide necessary information).

• Other circumstances as stipulated in laws and regulations on this subject matter.

If the employer still fails to sign a written contract within one year from the employee’s  work start date, the employee is deemed to have entered into an open-term contract starting from the second year. In this regard, Interpretation II specifies that while the employee is entitled to sign an open-ended labour contract as of such second year, the employee is not entitled to claim double wages for the period as of such second year. The employee however remains entitled to claim double wages from the day following the expiration of one month from his work start date until the day before the expiration of one year from the work start date (so basically up to eleven months of a double wage claim).

Interpretation II further provides that where the term of a labour contract expires under any of the following circumstances and the court determines that the term of the labour contract automatically renewed/extended by operation of law, this situation shall not be regarded as a “failure to conclude a written labour contract”:

• The employer terminated the labour contract despite the terminated employee being under statutory protection against dismissal pursuant to Art. 42 Labour Contract Law (which lists situations such as medical treatment, occupational hazards/disease, maternity, other legally protected conditions). 

• The initial term of the labour contract expired but has been automatically extended 

in accordance with Art. 17 Labour Contract Law Implementing Regulations (extension until the agreed end of the service period after specific technical training under Art. 22 Labour Contract Law).

• The labour relationship is extended in accordance with Art. 19 Trade Union Law under the framework of a valid collective bargaining agreement. 

Clarifications for cases of breach of service period and non-compete agreements

Breach of Service Period: If the parties to a labour contract agreed on a minimum service period for the employee (e.g. following specialized training) and the employee breaches such obligation, PRC labour laws allow the employer to claim compensation for the resulting losses. Such labour contracts or training agreements often stipulate formulas for calculating such compensation. Interpretation II provides that courts shall not rigidly enforce such agreed formulas but comprehensively consider all actual losses of employers, such as the training expenses, housing subsidies, travel costs, the length of service that the employee has fulfilled and other special benefits granted to the employee. The compensation amount shall be proportionately adjusted based on factors such as the degree of fault of both parties regarding the employee's resignation. 

Validity of Non-compete Agreements: Under PRC labour laws non-compete obligations can only be imposed on employees having knowledge of and access to employers’ trade secrets and/or confidential information relating to intellectual property rights. Thus, in case of dispute, employers bear the burden of proof to demonstrate that the obliged employees did in fact have such knowledge/access during their employment period. If employers fail in such demonstration, the non-compete agreement is not binding on the employees. Additionally, when assessing the validity of non-compete agreements, court will put the substance scope, geographical area and duration of the non-compete restrictions into relation to the nature and scope of trade secrets and other protected information that the employee had access to. If a court finds that certain parts of the non-compete restrictions are incompatible with the trade secrets the employee had access to and thus the non-compete restrictions exceed the necessary scope for protecting the trade secrets, courts may determine such parts of the non-compete agreement invalid. Thus, employers are compelled to tailor the scope, geographical location and duration of non-compete restrictions based to the nature of the employee's position, job description and trade secrets he has access to because if excessive in nature/scope, the validity of the non-compete agreement can be challenged.

Procedural aspects regarding labour termination / labour disputes

A labour contract cannot continue to be performed: If an employer terminates a labour contract without being entitled to do so, PRC labour laws provide that employees can either claim for double severance payment or for reinstatement of the labour relationship if it is possible to continue to perform the labour relationship. Regarding the latter, Interpretation II provides that in the following cases, a labour contract cannot continue to be performed (thus making the reinstatement claim mute and compelling the employer to pay double severance):

• The labour contract expires during the labour dispute process and there are no legal requirements that mandate a renewal or extension of the labour contract.

• The employee has begun to enjoy the basic old-age insurance benefits according to law.

• The employer has undergone bankruptcy liquidation, had its business license revoked, been ordered to close down, been dissolved, or has decided to liquidate voluntarily.

• The employee has already been employed by another employer and the new labour relationship seriously affects the continued performance of the original labour relationship or the employee refuses to terminate the labour contract with the new employer. 

• Other circumstances exist make it objectively impossible to restore the labour relationship.

Salary calculation during the period until resumption of contract performance: If the employer is ordered to resume the performance of a labour contract with an employee, the employee's salary during the period from the termination date until the date of work resumption shall generally be calculated based on the normal labour wage standard of the employee (i.e. including base pay and fixed allowances but excluding performance-based salary/bonus, overtime pay and year-end bonuses). However, if the employee contributed to his dismissal and only the employer's dismissal procedure does not comply with the law, the court may, based on the degree of the employee's fault, proportionally reduce the wages that the employer should make up for.

Off-boarding occupational health examination: For employees engaged in operations with occupational disease hazards, conducting pre-departure occupational health examinations is a legal prerequisite for employers to dismiss such employees. If an employer terminates a labour contract without conducting a pre-departure occupational health examination for the employee as required, the employee has the right to request the continuation of the labour contract unless any of the following circumstances can be proven by the employer to exist:

• the pre-departure occupational health examination is completed before the conclusion of the first-instance court hearing, and the examination results show that the employee has no (suspected) occupational disease. 

• The employee refuses to undergo the pre-departure occupational health examination without a valid reason.

Defense of statute of limitation: In legal terms, "statute of limitation" refers to the maximum time within which a party can initiate legal action, such as a labour arbitration claim. If the time limit expires, the party may be barred from pursuing their case. In this regard, Interpretation II provides the following clarifications:

• No Raising the Defense During Arbitration: If a party did not raise the statute of limitations defense during the arbitration process (because of their own reasons), it cannot later use this defense during the litigation process (whether during the first or second instance of litigation). The court will not accept this defense in such cases.

• New Evidence: If the party has new evidence showing that the statute of limitations has indeed expired for the other party’s claim, the court will support this defense even during the litigation process.

• Failure to Raise the Defense in the Proper Time: If a party fails to raise the statute of limitations defense in arbitration or during the early stages of litigation, it cannot later seek a retrial or raise the statute of limitations defense during a retrial. The court will not entertain this defense in such cases.

This clarification encourages parties to raise relevant defenses (like the statute of limitation) in a timely manner during arbitration or earlier litigation stages. This rule prevents parties from using the statute of limitation defense as an afterthought if they failed to address it at the appropriate time.

Cases involving foreign nationals or entities

Foreigners asking for confirmation of their employment relationship: Interpretation II stipulates that foreigners employed in China by local employers are entitles to request courts to confirm the existence of their local employment relationship in the following cases:

• The foreigner obtained Chinese permanent residence status (aka Greencard).

• The foreigner obtained a Chinese work permit and resides legally in China.

• The foreigner has otherwise gone through the relevant legal procedures to work/reside in China.

Labor disputes involving foreign representative offices (FROs): According to Chinese law, FROs do not hold independent legal person status and are not entitled to directly hire Chinese nationals as employees. Rather, FROs must enter into labour dispatch agreements with qualified PRC human resources agencies to hire such Chinese staff through a three-party arrangement where the Chinese staff enters into the labour contract with the qualified agency and the agency in turn enters into a labour dispatch agreement with the FRO (or its foreign parent company). This arrangement has it made debatable how to involve the FRO/its foreign parent company in case of labour disputes involving dispatched staff. Interpretation II now confirms that legally established FROs may be parties to labour dispute cases and that in case any party to such cases applies for the participation of the foreign parent of the FRO to the lawsuit, the courts shall support such requests.

Opting out of mandatory social insurance is illegal 

According to PRC labour and social insurance laws, both employers and employees are obliged to participate in the mandatory basic social insurance in China. 

Any agreement between the parties to a labour contract, or any undertaking by the employee, waiving the employer’s obligation to pay social insurance contributions is invalid. 

If an employer fails to pay mandatory social insurance, the employee may terminate the labour contract for that reason and the employer must pay the statutory severance payment to the employee. 

If under any of these above circumstances the employer makes up the social insurance payments in accordance with the law, he is entitled to recover from the employee the employee portion of contributions.

Susanne Rademacher
Dr Jenna Wang-Metzner
Kelly Tang

Part 26A Restructuring Plan

Even after its exit from the European Union, the United Kingdom still strives to be an attractive location for insolvency and restructuring proceedings. In a number of high-profile cases, debtors have deliberately relocated their Centre of Main Interests (COMI) to the UK to take advantage of the comparatively debtor-friendly legal framework there. Of particular interest to debtors is a restructuring plan under Part 26A UK Companies Act 2006. This process allows for either all creditors or only certain classes of creditors to be included in the proceedings. The key advantage of this instrument, from the debtor’s perspective, is precisely that a large number of creditors can be excluded from participation in the process. The associated, significant, costs—typically running into the millions—for relocating the COMI, engaging specialised lawyers and advisors, and utilising the English courts are willingly borne by many companies in the hope of achieving more flexible debt relief.

The recent decision by the English Court of Appeal to tighten the fairness requirements for such restructuring plans (ruling dated July 1, 2025), was unlikely to significantly reduce the attractiveness of the Part 26A Restructuring Plan for debtors. However, the recent decision of 22 August 2025 from the Frankfurt am Main Regional Court changes the picture entirely: now, from the debtor’s perspective, a major obstacle has been put before them because such restructuring plans are not recognised in Germany. Although Germany is only one jurisdiction, this is of critical significance because, in principle, a cross-border restructuring plan can only be approved by an English court if there is a reasonable prospect of recognition in the other jurisdictions involved. So far, where English courts have considered the question of whether a Part 26A Restructuring Plan is capable of recognition in Germany, they have (until now) affirmed the possibility of such recognition.

Legal Assessment of Recognisability in Germany

The crucial question of how courts in Germany assess the recognisability of Part 26A Restructuring Plans has had many lawyers on tenterhooks. The opinion of the English courts on this matter is irrelevant for recognition in Germany: only German law is decisive.

The recognisability of a Part 26A Restructuring Plan under German law has been a matter of controversial debate. Possible legal bases for recognition include Section 343 of the German Insolvency Code (InsO), Section 328 of the German Code of Civil Procedure (ZPO), and Article 26(1) of the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (EuGVÜ). However, there have been significant reservations about applying any of these provisions, which is why the prevailing view in legal literature has so far been to fundamentally reject recognition. However, until now, no decision by German courts had addressed this question. 

The Frankfurt Regional Court decision and its significance

On August 22, 2025, the Frankfurt am Main Regional Court ruled that a Part 26A Restructuring Plan cannot be recognised in Germany. In doing so, it adopted the arguments frequently presented in legal literature and confirmed a legal position that ADVANT Beiten had already represented on behalf of creditors before the Frankfurt am Main Regional Court.

The court rejected recognition under Sect. 343 InsO, as this provision applies exclusively to insolvency proceedings. Insolvency proceedings under the German Insolvency Code are characterized by the inclusion of all creditors. Since the Part 26A Restructuring Plan does not include all creditors, the required collective nature of the proceeding is lacking.

The Regional Court also followed its previous case law by the Higher Regional Court (OLG Frankfurt am Main) rejecting the recognition of the restructuring plan under the EuGVÜ (Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters of 1968), on the basis that it was replaced in 2002 by the Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (EuGVVO). Although the EuGVVO no longer applies to the United Kingdom since Brexit, the EuGVÜ as its predecessor does not become applicable again due to Brexit. 

Regarding Sect. 328 ZPO, the Frankfurt am Main Regional Court emphasised that mutual recognition of judgments must be ensured. Accordingly, the recognition of a Part 26A Restructuring Plan in Germany depends on whether comparable decisions by German courts would also be recognised in England. According to the Frankfurt am Main Regional Court, this is a question of fact rather than law, as it depends on the actual practice of recognition. In the case at hand, evidence for the claimed recognition in England could not be provided. Therefore, the court, based on the burden of proof, denied reciprocity and thus rejected recognition under Sect. 328 ZPO. As this is a regional court ruling, the decision is not yet final. It is possible – though in our view unlikely – that evidence of reciprocity could still be submitted later in the proceedings. From our perspective, it is doubtful whether reciprocity can be proven at all. It seems unlikely that a German restructuring decision regarding a claim governed by English law would be recognised in the United Kingdom. This is particularly supported by the so-called Rule of Gibbs, recently confirmed in UK case law. According to this principle, rooted in English common law, foreign insolvency or restructuring decisions have no effect on claims governed by English law.

Conclusion 

The decision of the Frankfurt am Main Regional Court is welcome news for creditors, because it upholds the protection that German insolvency law intends to grant them. Moreover, it ensures that the choice of governing law made at the time of contract conclusion remains effective throughout the entire duration of the legal relationship. A relocation of proceedings and a flight to non-European jurisdictions aimed at circumventing the interests of specific creditor groups is no longer easily possible. Companies considering such an “insolvency relocation” must now seriously consider the lack of recognition of their restructuring measures in Germany. From the creditors’ perspective, this means that affected creditors in Germany no longer must accept the consequences of English restructurings and can continue to assert their original rights. 

If the Frankfurt court’s case law prevails, English courts will also have to take notice. They would be unable to approve Part 26A Restructuring Plan involving Germany, as the lack of recognition would be established. Whether this will happen, and the decision will become final remains to be seen. However, a clear first signal against insolvency tourism abroad has been sent. Creditors affected by a foreign restructuring should examine whether it is also recognisable in Germany and whether their claims have indeed been extinguished.

If you are affected by a foreign restructuring, we are happy to offer a consultation.

Dr Nadejda Kysel
Dr Philipp Sahm
Jessica Schneeberger

Summary of Facts

Just imagine: A guest orders "strawberries" in a restaurant. He then gets the strawberries (and only them), but he complains to the waiter: "It goes without saying that cream is a natural addition to strawberries!" The waiter calls the owner, who confirms the waiter's appraisal: It is perfectly reasonable to eat strawberries with cream, a win in terms of taste - but if the guest wishes this delight, then he has to order it that way.

The case recently decided by the Higher Regional Court of Frankfurt am Main was similar: The third-party manager of a GmbH (German limited liability company) was dismissed for cause, which led to a legal dispute. The Regional Court of Frankfurt am Main ruled in summary proceedings that the dismissal may not be enforced for the time being meaning that the former managing director dismissed by the contested decision must continue to be treated as managing director and allowed to continue his activities as managing director and representative of the GmbH. The GmbH complied with this and reappointed the dismissed managing director as managing director. However, the GmbH no longer paid him a salary - unlike before his dismissal. The plaintiff, who had successfully argued that the dismissed managing director is to continue to be treated as a managing director for the time being, believes that this constitutes an infringement of the decision of the Regional Court. From the point of view of the plaintiff, "in the case of an employed third-party manager, the payment of his remuneration is of course included."

Decision of the Higher Regional Court of Frankfurt am Main

The Higher Regional Court of Frankfurt am Main, which dealt with the matter as the appellate court, rejected the claim as unfounded. The (challenged) decision on the dismissal of the managing director on the one hand and a potential remuneration entitlement on the other hand, are possibly related in fact, but not in law, according to the Higher Regional Court. In principle, the status as executive body alone does not entitle the managing director to remuneration for his work performed for the company. Such an entitlement always requires a separate contractual basis.

Comments and consequences for practice

The decision is not objectionable, on the contrary: In pleasing clarity, it underlines the importance of a careful regulation of the conditions under which a managing director enters service with a GmbH.

As a managing director is not an employee by definition, many (practical) arrangements may be made in his service agreement, that an employer can otherwise only dream of. In particular, a coupling of the status as executive body and employment is possible. And as the status as executive body, in principle, can be revoked at any time, the agreement can also be designed to be terminable at virtually any time.

But there is also freedom of legal arrangement in the other direction - since not every managing director wants to take a seat on the ejection seat, managing director service agreements often contain long (fixed) terms, that secure a livelihood for the managing director, even if he or she is replaced as managing director (possibly for reasons for which they are not even responsible). And provision can also be made in this respect: Some managing director service agreements even provide for an entitlement to a position as managing director.

Particular caution is advised when "promoting" an employee to managing director. It is often overlooked that the "old" service agreement of the employee, if it is not properly terminated upon promotion, will continue to exist in the background. If the GmbH then pulls the emergency brake at some point and again dismisses the person promoted as managing director, the agreed coupling clause applies, and the managing director service agreement is automatically terminated. But at that moment, the old service agreement revives - and the person who has just been dismissed continues to receive their salary as former employee.

The decision makes it clear: ius scriptum vigilantibus - laws (and menus) are written for attentive people. Failure to exercise due care when structuring the legal relationship between a GmbH and its managing director often leads to disputes later on. And this often ends with a hefty severance payment for the dismissed managing director.

Higher Regional Court of Frankfurt am Main, decision as of 30 December 2024 - 26 W 1/24

Dr Jan Barth
Julius Bauer

This post also appears in the Haufe Wirtschaftsrechtsnewsletter.

Any natural person can serve as DPO and nationality or residency (Chinese or otherwise) is not relevant in this context as long as the data processor is based in China. If the data processor is however located outside China, it must appoint a DPO who is located in China. Either way, best practice regimes suggest that any DPO shall have relevant expertise in the field of IT/data protection as well as a certain proven track record/seniority in the field and a decent understanding of the Chinese regulatory and industry requirements.

On 18 July 2025, the China Cyberspace Administration (CAC) launched its new online registration platform Personal Data Protection System (个人信息保护业务系统, https://grxxbh.cacdtsc.cn/) (Platform) for DPO registration. 

According to PIPL, the "Measures for the Administration of Personal Data Protection Compliance Audits个人信息保护合规审计管理办法", and the "Instructions for Filling out the Personal Data Protection Officer Information Reporting System个人信息保护负责人信息报送系统填报说明", the DPO registration obligation shall apply to data processors who process personal data of more than 1 million data subjects during any twelve months period.

Registration must be completed on the Platform which involves among others uploading the following: 

• information forms for both data processor and the DPO
• IDs and DPO appointment documentation
• authorization letters and commitment statements
• application forms requiring disclosures of some specifics of the personal data processing activities.

From the online registration interface of the Platform, the system also provides an access for non-China based data processors. When registering an account, they need to provide their foreign and Chinese names as well as the names and contact information of their designated DPO in China and other related information.

For any DPO registration application on the Platform, the progress status will be notified via SMS to the person handling the application. Generally, the material review should be completed within 15 working days after the complete submission was uploaded onto the Platform. 

Depending on the actual status, the application status on the Platform will show any of the following: "Information Reporting Completed", "Returned for Rectification" or "Review Failed". If the status reads "Returned for Rectification", the applicant shall submit the missing/corrected documents within 10 business days of such status showing for the first time, otherwise the status will change to “Review Failed” eventually.

Except for the name of the data processor and the progress status, no other information will be available for online review. Thus, data processors are well advised to retain backup copies of the submitted materials.

The following deadlines must be kept in mind for the DPO registration on the new platform:

• 29 August 2025 for data processors who reached the 1 million data subject threshold before 18 July 2025

• for data processors who reach(ed) the 1 million data subject threshold after 18 July 2025, they must conduct the DPO registration within 30 days as of reaching the said threshold

Susanne Rademacher
Kelly Tang

Nowadays, many companies have a matrix structure where employees and executives of various units - even across national borders if necessary - cooperate. Often, employees are led by executives, who are at a different location, however, are working in the same company or with another group company. In the IT service company concerned, the work tasks were divided into different areas in which employees from various organisational units cooperated in teams and were led by so-called matrix executives. 

But how does such an organisational structure, where an executive leads employees in various units, relate to the eligibility to vote in works council elections? 

In the case at hand, the election committee had considered matrix executives to be eligible to vote who were superiors of the employees belonging to the respective unit. Therefore, the matrix executives participated in the works council election which was subsequently contested by the employer.

The BAG now affirmed a voting right of matrix executives and considered the works council election to be effective. In the press release published in this context, the BAG clarified that executives, who lead employees in several units of the same company due to an internal matrix structure and are integrated into the company organisation, have an active voting right in all of these units. Unlike the previous instance (Higher Labour Court (Landesarbeitsgericht, LAG) of Baden-Wuerttemberg, decision of 13 June 2024 - 3 TaBV 1/24), which only provided for an eligibility to vote of matrix executives in their "main unit" assigned to them under their employment agreement and denied it in all other units, the BAG, thus, assumes a multiple eligibility to vote. The eligibility to vote pursuant to section 7 German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG) is linked to the employee's affiliation to the company. This affiliation is founded on the integration into the company organisation. If an employee is already integrated into a unit and, thus, is eligible to vote in this unit, this does not preclude his additional eligibility to vote in another unit. Consequently, it is possible to be eligible to vote in several units. In the opinion of the BAG, multiple integration into different units results in a corresponding multiple eligibility to vote of the executives concerned. 

For a final assessment of the judgment and its consequences for the practice, the publication of the grounds of the judgment must be awaited. In the light of the works council elections already taking place next year, however, the considerable relevance of the BAG's current decision should already now be pointed out. The decision is of great practical importance for dealing with matrix executives in works council elections, since it results in a multiplication of the eligibility to vote for matrix executives who lead employees in several units. As a consequence, they must be registered on the electoral rolls of all units in which they lead employees.

For future works council elections, employers are therefore advised to take increased care when verifying eligible voters. Under certain circumstances, a significantly higher number of eligible voters must be expected. This will ultimately also influence the size of the works council committees (section 9 BetrVG): The number of works council members might increase, which will then be accompanied by an increased cost burden for the employer due to the works council work (section 40 BetrVG). The employer will also have to provide considerably more information to the election committee in order that an appropriate classification of the executives can be made by the election committee when preparing the electoral rolls (section 2 (2) sentence 1 First Ordinance on the Implementation of the German Works Constitution Act (Erste Verordnung zur Durchführung des Betriebsverfassungsgesetzes, Wahlordnung, WO). 

The BAG has only published a press release so far. As soon as the grounds of the judgment are available, a follow-up article on this topic will appear.

Main part

This obligation to provide information continues to apply to the managing director even after his recall and even after termination of his managing director service agreement to a certain extent. Scope and content of this post-contractual obligation to provide information are determined by the need for information of the company and by the scope and content of the managing director activities at that time. What information a former managing director must provide depends on what can be demanded in good faith in view of his previous tasks, the customs in business transactions and the purpose pursued by the company with the request for information.

If the company needs information of the former managing director to initiate liability proceedings against him, a need for clarification and information of the company already results from the justified suspicion of a breach of duty and the probability of resulting damage. The obligation to provide information of the managing director is also not restricted by the fact that the managing director would reveal his own breach of duty with the requested information.

The Brandenburg Higher Regional Court has recently addressed this issue.

Background (simplified)

In the proceedings decided by the Brandenburg Higher Regional Court, the plaintiff limited liability company (German GmbH) asserted comprehensive claims for information against its former managing director on the grounds of violations of the non-competition clause incumbent upon him and further breaches of duty. The information served to enforce claims for damages and liability of the company against the former managing director.

The Brandenburg Higher Regional Court ruled that the former managing director remains under a comprehensive obligation to provide information even after his recall and termination of the managing director service agreement. According to the decision of the Brandenburg Higher Regional Court, however, the obligation to provide information is not unlimited, but essentially depends on the need for information of the company. If the information is requested - as in the present case - to assert any main claims (here: claims for damages against the former managing director), the claim for information is determined by the need for clarification of the company. A need for clarification of the company can already be assumed if the justified suspicion of a breach of duty by the managing director exists and it is probable that the company is therefore entitled to claims. In the present case, there were sufficient grounds to suspect that the former managing director had breached his duties in several respects: in addition to breaches of the contractual and statutory non-competition obligation, the former managing director had also demonstrably withdrawn business opportunities from the company on several occasions and had used them for himself personally. It was also sufficiently probable that the company incurred damages to be compensated by the former managing director due to the aforementioned breaches of duty.

The obligation to provide information was also not restricted by the fact that the managing director would reveal his own breach of duty with the requested information. The unlimited obligation to provide information does not infringe the fundamental rights of the former managing director at least if a self-incrimination enforced outside the criminal proceedings is accompanied by a prohibition of exploitation under criminal law. This was true for the present case. For the same reasons, the constitutional principle of freedom from self-incrimination did not preclude the claim for information.

In contrast, the former managing director was not obliged to provide information, insofar as the company was not dependent on the requested information, as the company itself possessed the information.

Comments and practical advice

If a managing director behaves unlawfully towards the company, the company may enforce comprehensive claims for information - by compulsory measures if necessary - against the former managing director even after termination of the status as executive body and the managing director service agreement. The claim for information also includes the obligation of the former managing director to submit documents and records relating to the obligation to provide information. On this basis, the company is then in a position to claim damages from the former managing director. In terms of process tactics, it is recommended to assert claims for information and damages together in an action by stages (Stufenklage) against the former managing director.

Gerhard Manz
Lisa Werle

This post also appears in the Haufe Wirtschaftsrechtsnewsletter.

Cyber Resilience Act? (CRA): Uniform security standards for products with digital elements

The European Union is creating a comprehensive and binding set of rules and regulations to strengthen the cyber security of products with digital elements with the Cyber Resilience Act (CRA). The aim of the regulation is to establish uniform cyber security standards for the European single market and thereby significantly reduce the risk of cyber attacks. At the same time, the confidence of consumers and companies in digital technologies should be strengthened.

The CRA obliges manufacturers, importers and traders to meet cyber security requirements during the entire product life cycle - from design and development through manufacturing and marketing to continuous maintenance and updating. This is to ensure that products are not only safe when they are placed on the market but also meet current security requirements throughout their life cycle.

Which products does the CRA apply to?

In principle, the regulation covers all products with digital elements that are manufactured, imported or distributed in the territory of the European Union. Products with digital elements are both software and hardware products and their data teleprocessing solutions, as well as software or hardware components that are placed on the market separately. These include, in particular, products that are capable of processing, storing or transmitting data - such as smart home devices, networked household appliances, mobile devices as well as other internet enabled products. Software products such as firmware, operating systems and applications also fall within the scope. 

Products, however, that are covered by already existing, sector-specific EU rules with equivalent cyber security requirements - such as medical devices pursuant to the Medical Device Regulation or certain spare parts that must be manufactured to the exact specifications of the parts to be replaced and, therefore, do not involve any additional cyber security risks, are excluded from the scope of application. 

Schedule: Staged entry into force of the CRA and transitional periods

The CRA already came into force on 10 December 2024. The regulation will be implemented in several stages. Conformity assessment bodies should already assess the fulfilment of the requirements of the CRA for products with digital elements as of 11 June 2026. Reporting requirements for specialist units and security incidents will be in place as of 11 September 2026. The transitional period will end completely as of 11 December 2027 so that new cyber security requirements for products with digital elements will be binding as of that date. This applies to new products placed on the market as of 11 December 2027 and for products previously placed on the market that have undergone significant changes.

To whom do the obligations under the CRA apply?

The CRA does not only oblige manufacturers, but all actors along the value-added chain of a product - among them importers, traders and authorised representatives - to meet cyber security requirements. Companies managing, providing or significantly changing digital products are also covered by the obligations of the regulation. This also expressly applies to developers or operators of open source software, provided that they offer their products under normal market conditions (Art. 3 No. 12 CRA).

A key innovation lies in the legal extension of the so-called capacity as manufacturer. Pursuant to Art. 22 CRA, any natural or legal person is deemed to be a manufacturer who significantly changes a product with digital elements and places it on the market again - regardless of whether the person has previously acted as a trader or importer. The regulation thus follows the system of the European Product Safety Law, according to which the placing on the market of a product is the decisive criterion.

The term "placing on the market" is not linked to a physical handover for purely software-based products. The decisive criterion in these cases is the moment when the software is made available for download, the access code is transmitted or the activation for users becomes technically feasible.

1. Obligations for manufacturers

The cyber security requirements of the CRA are primarily aimed at manufacturers. The central message is: Who places digital products on the market, must ensure that they are safe - not only if he has manufactured and/or programmed them himself. The same applies to software components that originate from third parties. Pursuant to Art. 13 (5) CRA, manufacturers must ensure with "due care" that these parts do not endanger the product's safety. Open source software (OSS) also falls within the scope of application of the CRA. This also applies if OSS is available free of charge on the internet and is not offered by companies but by individuals. 

IT security throughout the entire product life cycle

Manufacturers of products must meet numerous requirements to guarantee the safety of their products during the entire life cycle. 

The cyber security of a product must be guaranteed during the entire so-called "life cycle" of a product, i.e., from development to the end of its useful life. For Software, this means in particular creating a secure architecture, using secure standard configurations and regularly providing security updates. Corresponding processes to continuously ensure product integrity must be set up if they have not been implemented yet.

Reporting Requirements

Manufacturers are obligated to report weaknesses and major security incidents of all products. The report must be addressed to the responsible Computer Security Incident Response Team (CSIRT) as well as to the European Union Agency for Cybersecurity (ENISA). Established deadlines must be observed: Incidents must be reported within 24 hours of becoming known, subsequently further relevant information will be provided.

Conformity assessments

Before a product is launched on the market, it must be examined whether it meets the requirements of the Cyber Resilience Act. This so-called conformity assessment is mandatory and depends on how the product is classified under the CRA. Depending on how safety-critical it is, varying strict requirements apply. If the product is successfully assessed, it will receive the CE mark - an official evidence that it meets the necessary standards.

Management of weaknesses and security updates

Weaknesses in a product must be remedied within a period of at least five years after discovery. This remedy takes the form of security updates and usually must be free of charge. This period corresponds at least to the expected useful life of the product.

Documentation obligations

The manufacturer is obliged to document compliance with the security requirements for the product. This documentation must be maintained during the entire life cycle of the product and must be kept up to date. The documentation must meet the minimum requirements of the CRA and must be traceable at any time.

2. Obligations for importers

Similar to the manufacturer, the importer may only launch his product if the requirements of the CRA pursuant to Art. 19 (1) CRA are met. The importer must be able to ensure and prove that the manufacturer's obligations have already been fulfilled. In addition, he is obliged to provide his contact details on the product (if this is impossible, on the packaging or the enclosed documentation). In case of safety deficiencies, both the manufacturer and the competent authorities must be informed. The user must also be informed when safety deficiencies become known.

3. Obligations for traders

At first glance, the trader has less obligations than the manufacturer and the importer. He must only verify whether the CE number, declaration of conformity, end date of the support period and the contact details of the manufacturer and importer are available. If the trader determines that the product is CRA-compliant, he may bring this product onto the market. If this is not the case, the trader must also take measures to combat existing security vulnerabilities. For instance, he is obliged to withdraw the product from the market and to inform the competent authorities.

Sanctions in case of violations of the CRA

Manufacturers, importers or traders who violate the new cyber security requirements pursuant to the CRA must, in principle, expect consequences. Pursuant to Art. 64 (3), fines of up to EUR 10 million or of up to 2% of the total worldwide annual turnover of the preceding financial year of a company may be imposed, whichever is higher. Violations of the manufacturer obligations can result in sanctions of up to EUR 15 million or 2.5% of the total worldwide annual turnover. Additionally, further restrictive measures may be taken. Pursuant to Art. 64 (10), exceptions are made for micro and small enterprises and for administrators of open source software. The fine imposed in individual cases will always be based on the specific violation, its gravity and also on the degree of culpability of the actor concerned, i.e., it must be proportionate. Nevertheless, companies should not take this possibility of sanctions lightly. As in data protection law, the same applies to the CRA: In the event of a violation, a good documentation of the cyber security measures taken helps to provide evidence that a company fulfilled its obligations.

Need for action for companies: What must be done now?

Companies that manufacture, import or distribute products with digital elements should check these products for possible cyber risks already now and take appropriate security measures if necessary. In addition, they should prepare themselves for their obligations to provide documentation and evidence. Targeted training courses and raising awareness among employees are also indispensable. Agreements with suppliers should be checked to determine whether the suppliers of components also meet appropriate IT security requirements. In addition, it is recommendable to develop an incident response plan which, among other things, ensures compliance with reporting requirements and clearly defines responsibilities in the company.

Last but not least, the new requirements of the CRA for products with digital elements should already be considered during product design in the development in order that manufacturers will not be taken by surprise by the new cyber security requirements for their products in December 2027. Here, legal and technical expertise have to be combined to find solutions that not only meet the requirements of the CRA but are also practicable and economical.

The existence of the AFSL, AFSL Provisions and the IP Dispute Provisions obliges any parties engaged in foreign (= outside China) or domestic legal action involving Chinese parties to carefully assess the risks of any dispute resolution strategies. Not only China-based enterprises but also foreign enterprises are affected by these regulations and must hence balance these Chinese regulatory and compliance requirements with other responsibilities resulting from conflicting sanctions regimes of other jurisdictions such as Europe and the US and general international compliance requirements.

I. Countermeasures under AFSL Provisions in case of “foreign litigation”

The AFSL Provisions allow the Chinese government to take countermeasures against “promoting and implementing litigation by any foreign country, organisation or individual”, which the Chinese government deems will “endanger the sovereignty, security, and development interests of China”. It is thereby irrelevant where such litigation occurs inside or outside China and the “foreign” element is rather established by a foreign (invested) party promoting or implementing such litigation.

The potential countermeasures faced by the affected litigation subjects (including natural and legal persons) range from restrictions to enter/leave China, seizing of any kind of property in China; prohibition/limitation on transactions and cooperation with third parties; compulsory property enforcement and other measures. 

Whether the AFSL Provisions will be applied also to private commercial disputes or are more directed against cases of important strategical/political matters remains to be seen. However, given the far-reaching wording and the lack of excluding private party legal action against Chinese parties, one would be amiss to think this could not become a tool at the convenience of Chinese regulatory bodies to invoke countermeasures even in cases of private commercial disputes against Chinese parties if China deems such legal action could endanger the sovereignty, security, and development interests of China.

II. Particular Importance of IP Disputes - Link between the IP Dispute Provisions & AFSL Provisions

The IP Disputes Provisions are expressly linked to the ASFL and AFSL Provisions. The IP Disputes Provisions emphasise that “containment or suppression” against China and “discriminatory restrictive measures” against Chinese citizens and organisations taken “under the guise of IP disputes” fall within the scope of AFSL. 

While the AFSL uses the terminology of “containment, suppression and discriminatory restrictive measures”, it fails to define these terms. To date there is also no other public legislation known that would specify these terms. This ambiguity makes it very daunting to predict situations in which countermeasures could be taken against what China believes to be a foreign containment, suppression or discriminatory restrictive measures under the guise of international IP disputes in which Chinese enterprises are a party. 

While the IP Disputes Provisions only became effective on 1 May 2025, already on 15 January 2025 the PRC Supreme People’s Court issued a ruling in patent dispute filed by Huawei against Netgear, prohibiting Netgear and its affiliates from seeking anti-suit injunctions in the US and other foreign countries that would restrict Huawei from initiating or continuing patent infringement proceedings in China. 

Given that Chinese enterprises having become increasingly active in the international arena and are leaders in many high-tech sectors, it appears plausible to believe that in the future one will rather see more than less international IP disputes between foreign and Chines parties. 

Therefore, with these new IP Disputes Provisions, any such international IP disputes between foreign and Chinese parties should be subject to a risk assessment if they could create cause for potential countermeasures being invoked by China against the foreign litigants. In addition, foreign parties starting litigation against Chinese parties for IP disputes may also risk other legal consequences such as refusal to recognise and enforce foreign judgments and arbitral awards in China if they would be considered by China to fall under these new provisions.

III. AFSL Provisions in General  

The AFSL obliges China-based organizations and individuals to implement China’s countermeasures to (a) safeguard China’s interests against discriminatory restrictive measures imposed on organizations and individuals, and (b) against interference with China’s internal affairs by foreign countries, or individuals and organisations that have directly or indirectly participated in the formulation or implementation of discriminatory restrictive measures. 

The AFSL entitles Chinese individuals or organisations to initiate civil legal action to demand cessation of infringement and compensation for losses against any organisation or individual that “implements or assists in implementing discriminatory restrictive measures” taken by any foreign country against them. 

Further, the AFSL Provisions allow administrative measures to be taken against such organisations or individuals, including conducting interviews, orders to make corrections and other corresponding measures. 

In both such cases (civil & administrative cases), the related liabilities and administrative penalties apply to China-based and foreign organizations and individuals.

Legal consequences suffered in case of a failure to execute China’s countermeasures can entail the following: being ordered to make a correction, prohibition/limitation to partake in government procurement and in import/export of goods & services in general, prohibition/limitation to transfer/receive data and personal information across borders and prohibition/limitation to enter/exit China. 

Cooperations involving organizations or individuals against whom countermeasures have been taken are generally prohibited or limited unless an exemption is granted as per the AFSL Provisions. Such an exemption application must be submitted to the State Council department and documentary requirements, review timelines, and substantive evaluation criteria of the exemption mechanism remain subject to further clarification. 

Susanne Rademacher

1. Introduction

On 28 June 2025, the German Accessibility Reinforcement Act (Barrierefreiheitsstärkungsgesetz, BFSG) entered into force with the objective of digital inclusion. People with disabilities, handicaps and elderly people should be given equal access to products and services that are important for participation in life in society. This entails new obligations for companies. Violations may result in fines and other sanctions. 

2. Who is affected?

The Act applies to companies that place the products specified in the BFSG on the market or render services after 28 June 2025. This includes, in particular, banking services for consumers, telecommunications services, electronic ticketing services, self-service terminals such as ATMs or ticket machines, hardware systems and their operating systems for consumers (computers, tablets, notebooks), devices with interactive performance capabilities such as smartphones and smart tvs, e-books and e-readers. 

In addition, the requirements of the BFSG also apply to all electronic commerce services. Thus, every company is concerned that sells its products or services via an online shop.

This applies in principle to all companies operating in the relevant areas. In case of services, only micro enterprises are exempted that offer employment to less than ten people and have an annual turnover or an annual balance sheet total of no more than EUR 2 million. However, they should receive advisory services in order to be able to provide services that are accessible to everyone. Companies, that manufacture, import or distribute products, must also meet the requirements of the BFSG as micro enterprises. 

Accessibility requirements, however, must only be met if their compliance does not require any fundamental change in the essential characteristics of a product or a service. The manufacturer or service provider must document such an assessment and submit it to the competent market surveillance authority upon request.

In addition, the accessibility requirements apply only insofar as their compliance would not result in a disproportionate financial burden on the company. Companies are obliged to carry out and document an appropriate assessment before providing a product or service and to inform the competent market surveillance authority immediately.

3. What needs to be done?

The BFSG transposes the EU Directive 2019/882 ("European Accessibility Act", shortly EAA) into German law. It obliges the addressees to make the products and services covered accessible und provide information. 

3.1 Ensuring accessibility

Products and services must meet specific requirements for accessibility. They are barrier-free according to the legal definition in section 3 (1) sentence 2 BFSG if they can be found, accessed and used by people with disabilities in the usual manner, without any particular difficulties and generally without external help. Regarding the specific requirements, the BFSG refers to the Regulation on the Accessibility Requirements (BFSGV) (in German).

Products must contain components, functions and characteristics that enable people with disabilities to access, perceive, operate, understand and control the product. The same applies to the product packaging, user instructions and warnings. For instance, they must be made available via more than one sensory channel, must be easy to find and linguistically understandable and must be displayed in an appropriate font size.

Services must provide for functions, procedures and possible changes in the performance that are tailored to the needs of people with disabilities. This relates, in particular, to information on the functioning of the service. Comparable requirements for the comprehensibility and perceptibility apply here as for product packaging.

If services are offered online, the corresponding websites, including mobile apps, must also be designed to be perceptible, operable, understandable and robust. This includes ensuring interoperability with assistive technologies, such as screen readers.

In addition to these general requirements, the BFSGV contains numerous additional regulations regarding certain products and services, such as telecommunications services, banking services or e-books. 

When fulfilling the requirements of the BFSGV, companies must observe the state of the art. For products and services that comply with harmonised standards or technical specifications, it is presumed that they meet the requirements of the BFSGV. 

Manufacturers and providers may only place their products and services on the market and/or offer them if they meet the accessibility requirements. Traders must monitor compliance with these obligations of the manufacturer and may only make a product available on the market if it is compliant. If there is reason to assume that a product does not meet the accessibility requirements, traders may not distribute it.

3.2 Information obligations

In addition to the implementation of the accessibility requirements, service providers are also obliged to provide information on how these requirements are actually met. Additionally, this information must contain at least a general description of the service in an accessible format, descriptions and explanations that are required to understand the performance of the service, and the indication of the competent market surveillance authority.

This information can be included in the General Terms and Conditions used, but may also otherwise be made available, e.g. via a separate link on the website, as far as this is clearly perceptible.

3.3 Effects on GTC & data protection declarations

Insofar as a product or service must be made accessible without barriers pursuant to the BFSG, all contents that functionally belong to the product or service must also be accessible without barriers. For instance, this may concern GTC, but also data protection declarations. 

In this case, it must be ensured in particular that there is a text structuring through headings, there are alternative texts for embedded images or other media, a clear, comprehensible language is used, the font size and contrast are appropriate, and the compatibility with screen readers is guaranteed.

4. Implementation deadlines and transitional provisions

In principle, companies have had to meet the new accessibility requirements since the Act came into force, thus, since 28 June 2025. Partially, transitional provisions take effect. By 27 June 2030, services may be provided using products that have been used lawfully by the service provider already before 28 June 2025. Agreements on services concluded before 28 June 2025 must be adapted by 27 June 2030 at the latest.

Self-service terminals that companies used to provide services before 28 June 2025, may continue to be used until the end of their economic useful life, but for no longer than fifteen years after they are put into use.

5. Sanctions

Negligent and wilful violations of certain requirements of the BFSG are subject to fines of up to EUR 10,000 in minor cases and up to EUR 100,000 in serious cases. The specific amount of the fine is based on the circumstances of the individual case. 

The market surveillance authorities of the federal states verify compliance with the requirements of the BFSG. This task should be carried out by the "Market Surveillance Authority of the Federal States for the Accessibility of Products and Services" (Marktüberwachungsstelle der Länder für die Barrierefreiheit von Produkten und Dienstleistungen, MLBF) centrally in the future. In addition to the imposition of fines, market withdrawals of non-compliant products and a prohibition of service provision are imminent.

Administrative offence proceedings can be initiated ex officio, at the request of a consumer, an association recognised under the German Act on Equal Opportunities of Persons with Disabilities (Behindertengleichstellungsgesetz) or a consumer protection association. Competitors may also take action against alleged violations by way of a warning under competition law. In this case, the assertion of claims for injunctive relief and damages is imminent.

6. Recommended course of action

Companies should verify whether they are addressees of the obligations of the BFSG. If necessary, they should check their digital offers for accessibility and adapt them where appropriate. An accessibility audit or a quick check may help to identify and to remedy weak points in the technical implementation of accessibility requirements or of information obligations.  

However, it can also make sense for companies that do not fall within the scope of the BFSG to improve the accessibility of their products and services. In addition to an image gain by supporting inclusion of disadvantaged people, this may also lead to a measurable increase in sales, by reaching new customer groups.

Kristin Trittermann, LL.M.
Mathias Zimmer-Goertz

1. Stimulating business vitality

• District and municipal incentives for top-performing software and IT firms with annual revenues over RMB 2 billion and above-average growth.
• One-time cash grants of RMB 5–30 million for SMEs reaching key revenue thresholds.
• Micro and fast-growing small firms may receive RMB 200,000–500,000 depending on scale and growth. 

2. Supporting AI‑driven industry upgrades

• Subsidies for computing power to support innovative AI and cloud-based projects.
• Funding up to 30 percent of investment in industry model projects across sectors including finance, education, health, and new economy services.
• Enhanced R&D pre-tax deduction policies for qualifying software firms.
• Rolling funding through municipal strategic and emerging‑industry funds, covering up to 30 percent R&D expenses, and up to 50 percent for priority strategic projects. 

3. Reducing costs and burdens

4. Cultivating digital content leaders

• A procurement incentives list: eligible software application projects receive subsidies of up to 80 percent of contract value.
• Support for building digital content clusters—covering games, film/TV, micro‑videos, music, live‑streaming.
• Pilot program to treat game titles developed by foreign‑funded studios in Shanghai as “domestic” games for licensing purposes (Pilot).
• Support for copyright-pledge financing trials for digital content firms.

What does this Pilot mean for foreign game developers if their games get classified as “domestic” if developed in Shanghai:

Foreign‑funded entities physically based in Shanghai (with real R&D teams and IP registered under the Shanghai entity) can now apply for game licensing via the domestic track instead of the imported-game route. 

Difference of Imported Games VS Domestic Games and why the reclassification under the Pilot could make a big difference: The China National Press and Publication Administration (NPPA) classifies all games into two categories — imported and domestic — when issuing game approvals, also known as ISBNs. Though there is no official definition distinguishing these two categories, imported games are generally understood to be those whose copyright (including game software and content) is held by foreign entities, including foreign-invested companies established in China. While domestic games are those whose copyright is fully owned by Chinese natural/legal persons. Legally speaking, NPPA should apply the same set of content censorship criteria when reviewing all games and granting the ISBNs. However, practically speaking, it is perceived that foreign game developers face more difficulties in obtaining approvals compared to Chinese game companies that seek approvals for domestic games. Also, much less ISBNs for imported titles are granted and according to public sources, ISBNs for imported titles averaged less than 10% of domestic titles (e.g. in 2024, China issued 1,306 domestic game licenses, but only 110 for imported titles). With the Pilot, a new pipeline for foreign-developed games to access the larger domestic quota could be opened.

Faster approvals: Imported games often take 18–24 months to get licensed; domestic titles typically 6–12 months. Thus, treating Shanghai‑based foreign games as domestic could cut approval times significantly. That being said, it will still be the case that unlike domestic titles tailored for Chinese users, imported titles need a certain degree of localization effort to obtain NPPA approval and meet Chinese users’ expectations. 

A significant number of domestic casual games can benefit from faster track approval, with ISBNs typically granted within 20 working days. This is designed to accommodate the short lifespan and development cycles of casual games. However, imported casual titles are explicitly excluded from this beneficial treatment according to the NAAP’s current rules.

Things to be aware of:

• Although the implementation details and timeline are yet to be disclosed, this Pilot addresses major challenges faced by international game companies.

• While procedural access is via the domestic track, foreign-origin games may still face tighter internal scrutiny compared to domestic Chinese games.

• It remains unclear whether games based partially on internationally licensed IP will qualify under this Pilot. 

• Foreign investors and their subsidiaries in China are still not allowed to engage in game publishing and operation business. Consequently, the prevailing model – licensing foreign-copyrighted games to Chinese partners who handle ISBN acquisition as well as game publishing and operation – should remain unchanged under the Pilot if not adapted further. 

• Without the clear implementation guidelines being issued, the requirements concerning game copyright registration, the number of development team members based in Shanghai and other factors, such as local software development in Shanghai while games are based on offshore-licensed works, remain yet to be clarified.

Thus, Shanghai-developed games of internationally invested companies based in Shanghai may not necessarily enjoy an entirely equal footing with those of Chinese competitors but at least the unequal treatment gap should be closed a bit more under the Pilot.

Susanne Rademacher

1. Data Security & Cross-Border Data Transfers

China’s data regulation regime remains a top concern.

Laws Involved:

• Personal Information Protection Law (PIPL)
• Data Security Law (DSL)
• Cybersecurity Law
• Cross-Border Data Transfer Assessment Measures

Issues for FIEs:

• Whether their operations involve "important data" or large volumes of personal data that must undergo security assessments before export.
• Mandatory localization of certain data.
• Uncertainty around Standard Contract Clauses vs. government-led security assessments.

To-Do’s for FIEs:

• Assess compliance with the PIPL, DSL and Cybersecurity Law.
• Ensure data localization for sensitive or important data, including personal information and key business data.
• Conduct cross-border data transfer assessments and consider Standard Contract Clauses or government reviews.
• Review data-related contracts for data processing and privacy policies aligned with Chinese regulations.

2. National Security Reviews & Anti-Espionage Law

National Security Review Mechanism has been expanding in scope, especially for:

• Investments in sensitive sectors like semiconductors, defence, biotech, energy, and AI.
• Acquisitions of Chinese companies by foreign firms.
• Anti-Espionage Law (revised 2023) now includes broader definitions (e.g., data theft), impacting due diligence, audits, and market intelligence work by FIEs.

To-Do’s for FIEs:

• Review investment in sensitive sectors (e.g., tech, AI, semiconductors, defence).
• Evaluate acquisition targets for national security review risks and submit for approval when necessary.
• Train staff on espionage laws, particularly those handling proprietary data or conducting market intelligence.
• Ensure compliance with China’s Anti-Espionage Law; check protocols for sensitive information handling.

3. Corporate Governance & Compliance Under the Revised Company Law 

The amended Company Law impacts both domestic and foreign-invested entities:

• Capital Contribution Rules: Paid-in capital must be contributed within 5 years, not the open-ended terms allowed before.
• Increased Director Duties: Enhanced obligations on directors and supervisors for corporate misconduct.
• Stronger Compliance Culture: Regulatory expectations for internal compliance systems are increasing, especially in listed companies and FIEs in regulated industries.

To-Do’s for FIEs:

• Update company articles of association to reflect the latest Company Law revision, particularly around capital contributions, director duties, and supervisor roles.
• Enhance internal compliance systems for ensuring corporate governance practices meet legal standards.
• Establish and monitor an effective system for director responsibilities and liabilities under the new laws.

4. ESG, Supply Chain Transparency, and Forced Labor Allegations

Driven partly by Western regulatory pressure (e.g., U.S. Uyghur Forced Labor Prevention Act, EU CSDDD), foreign companies are under pressure to audit and verify supply chains.

China has pushed back, citing sovereignty, but companies need:

• Detailed supply chain due diligence.
• Legal strategies for reconciling Chinese anti-sanctions laws and Western compliance expectations.
• Legal complexity arises when complying with foreign extraterritorial laws might contradict China's Anti-Foreign Sanctions Law.

To-Do’s for FIEs:

• Conduct supply chain audits for forced labour risks, including compliance with the U.S. Uyghur Forced Labor Prevention Act and similar EU regulations.
• Ensure internal systems can track ESG criteria like emissions, human rights, and anti-corruption.
• Assess risk of reputational harm from not meeting global or domestic ESG standards.
• Review supplier contracts and ensure supply chain transparency practices are in place.

5. Foreign Investment Negative List & Encouraged Industries Catalogue

• Although the Negative List has been gradually reduced, some strategic sectors remain restricted or sensitive.
• There’s growing incentive alignment through the Encouraged Industries Catalogue, which offers tax and land policy incentives for investments in western/central China and green technologies.
• Companies must evaluate corporate structure and local partnerships carefully.

To-Do’s for FIEs:

• Ensure compliance with the Foreign Investment Negative List and Encouraged Industries Catalogue.
• Assess potential investments and verify capital structure (e.g., joint ventures, VIEs, wholly foreign-owned enterprises).
• Explore tax incentives and investment opportunities in western/central China or in green tech sectors.

6. Intellectual Property (IP) Protection & Technology Transfer

Enforcement is improving, particularly in IP courts, but:

• Concerns remain about compulsory licensing, local joint venture pressures, and protection of trade secrets.
• Legal scrutiny over non-compete clauses and employee mobility is increasing.

To-Do’s for FIEs:

• Review IP portfolios to ensure it is adequately protected under Chinese IP laws, including trademark, patent, and copyright laws.
• Evaluate risks around tech transfer requirements, especially in joint ventures or local partnerships.
• Strengthen trade secret protection measures for R&D operations in China.
• Stay updated on IP litigation trends in China and enforcement practices in specialized IP courts.

7. Employment Law and Workforce Localization

• Labor disputes are rising, particularly regarding layoffs, contract terminations, and salary adjustments.
• FIEs are being pushed to localize leadership or reduce expat headcounts due to cost and availability reasons.
• Social insurance audits and back payments are becoming more frequent.

To-Do’s for FIEs:

• Review labour contracts and employee handbooks to comply with Chinese labour law, including termination conditions, non-compete clauses, and social insurance.
• Prepare for potential labour disputes by establishing internal dispute resolution procedures.
• Verify social insurance contributions and ensure compliance with local regulations.

8. Exit Barriers & Capital Controls

• Repatriation of profits, dividends, or liquidation proceeds can be delayed due to forex controls.
• Government increasingly monitors suspicious outbound payments under FDI and transfer pricing rules.
• Legal due diligence is critical for structuring exits (e.g., sale vs. asset transfer).

To-Do’s for FIEs:

• Where needed, develop an exit strategy for potential sale, liquidation, or other exit events.
• Review capital controls and profit repatriation procedures to ensure compliance with foreign exchange regulations.
• Consider structure of divestments to minimize regulatory hurdles (asset vs. stock sale, etc.).
• Assess the impact of outbound investment restrictions and foreign exchange controls on your business in general and on any exit plan.

9. Anti-Monopoly Law & Fair Competition Review

China's Anti-Monopoly Bureau (SAMR) is actively reviewing:

• M&A deals involving foreign parties.
• Platform economies and abuses of dominance.
• New focus on fair competition reviews during tendering or market access, especially where foreign companies are bidding against SOEs or domestic champions.

To-Do’s for FIEs:

• Review mergers and acquisitions for potential anti-monopoly issues, especially for deals involving foreign players.
• Conduct fair competition review when participating in government tenders or other market access procedures.
• Evaluate market dominance risks if operating in platform-based businesses or highly regulated sectors.

10. Anti-Money Laundering Law and Disclosure of Beneficial Owners

• With the recent tightening of China's Anti-Money Laundering Law (last revised in 2024), foreign-invested enterprises (FIEs) are also increasingly coming under the scrutiny of regulators.
• A key innovation concerns the obligation to disclose ultimate beneficial owners (UBOs) to financial institutions and potentially also to competent authorities when establishing a company, changing its structure, or conducting certain business transactions.
• The definition of beneficial owner is increasingly aligned with international standards (e.g., FATF), but with local interpretations and implementation requirements.

To-Do’s for FIEs:

• Identify and document the beneficial owners of your Chinese companies in accordance with the current requirements. This includes, for example, natural persons who directly or indirectly exercise control over the company or receive significant economic benefits.
• Review group structures and shareholdings, particularly in complex holding structures, trusts, or cross-border constellations, to meet transparency requirements.
• Ensure compliance with disclosure obligations to banks, authorities, or business registrations, particularly for account openings, corporate actions, or other compliance-relevant events.
• Update internal compliance policies to meet anti-money laundering requirements and train relevant employees on identity verification and reporting requirements.

Susanne Rademacher
Dr Jenna Wang-Metzner

From Property Rights to Instruments of Power

Intellectual property rights – particularly patents – are traditionally understood as tools for protecting technical innovations. However, their role extends beyond exploitation through licensing or litigation. Rather, IP rights can be leveraged strategically to block competitors from market access, strengthen one's own strategic position, or even control critical infrastructures.

IP rights can thus become a strategic instrument through the consistent use of the existing legal framework, for example, by withdrawing licenses from certain players or by selectively sharing know-how. The accumulation of extensive IP rights portfolios in security-relevant technologies – such as satellite communication, drone technology, sensor systems, cryptography or artificial intelligence – can also serve as a strategic deterrent.

Those holding exclusive rights in key markets can not only block third parties from entering the market, but also activate regulatory leverage – for instance in the context of export controls, security reviews or investment screening procedures.

In this context, IP rights can be used strategically in a number of ways:

• Strategic Acquisition and Monopolization: Companies may seek to acquire or assert control over critical IP rights in key areas as a means of excluding competitors, shaping supply chains or restricting access to essential technologies.
• Enforcement of Sanctions and Export Controls: IP licenses or the transfer of IP-protected technologies can be leveraged to pursue strategic goals or undermine the capabilities of competitors or adversarial players. This applies in particular to dual-use technologies that can be used for both civilian and military purposes.
• Active IP Protection and Enforcement: Safeguarding relevant technologies from unauthorized acquisition or reverse engineering requires a robust and proactive approach. This includes not only preventive measures and internal security protocols but also the consistent extrajudicial and judicial enforcement of IP rights so as to prevent the outflow of expertise and ensure long-term competitiveness.
• Defense against Unwanted Technology Transfer ("IP leakage"):
  IP assets and sensitive technologies must be protected from strategically motivated access attempts by potentially adversarial partners or entities.

Leveraging the Legal Framework

For companies in the defense and aerospace sector, but also for companies that develop dual-use technologies, it is essential to develop a proactive IP strategy that addresses the aforementioned risks and at the same time optimally protects and uses their own IP assets. The existing legal framework offers numerous ways to achieve this objective:

1. Robust IP Protection: One essential measure is the implementation of a comprehensive IP strategy, including the protection of trade secrets and technical know-how. This also entails the consistent implementation of strict internal processes to protect confidential information.
2. Due Diligence for M&A Transactions and Cooperations: In M&A transactions or R&D partnerships, a thorough IP due diligence process is essential – not only to uncover potential infringement risks but also to assess dependencies on critical technologies or third-party rights.
3. Strategic Licensing and Technology Transfer Agreements: By drafting contracts appropriately and implementing technology transfer controls, companies can manage access to their IP rights while ensuring compliance with export control laws. This can include the inclusion of "clawback" clauses that allow for the withdrawal of licenses in the event of certain geopolitical developments.
4. Active enforcement of IP rights: In the event of IP infringements, swift and consistent legal enforcement is crucial. This can include legal proceedings, arbitration or recourse to customs authorities to prevent the sale and import of infringing products.
5. Geopolitical Risk Management in Contract Drafting: Contracts with international partners should explicitly include clauses that address the impact of sanctions, export restrictions or other geopolitical events on IP usage rights.

Conclusion

The strategic deployment of IP rights described above illustrate the great importance of IP rights in a geopolitical context. For companies operating in the defense, aerospace dual-use sectors, a sound understanding of these relationships and the resulting dynamics is essential. IP rights are no longer just a competitive factor but an integral part of risk mitigation and national security.

The financing of the EU's tasks must be secured in the long term and requires comprehensive budget planning. The basis of this budget planning is the so-called "Multiannual Financial Framework“, and the next one must be adopted unanimously by the Member States for the years 2028 to 2034 on a proposal from the European Commission with the consent of the European Parliament. The Commission presented its draft on July 16, 2025, and it is quite ambitious. But what exactly is the "Multiannual Financial Framework"? Which changes does it make compared to the previous funding period? What happens next?

What is the "Multiannual Financial Framework"?

Based on Art. 312 of the Treaty on the Functioning of the European Union (TFEU), the "Multiannual Financial Framework" (MFF), which is the responsibility of the European Commission, covers the EU's budget planning for at least five – usually seven – years. It determines the financial scope of the annual EU budget by setting binding ceilings. The focus is always on promoting European cooperation, particularly in terms of growth and competitiveness. Long-term budget planning enables investment projects to be aligned over several years and thus designed more efficiently. Variable elements of the MFF allow a flexible response to crises and emergencies such as natural disasters. Moreover, it enables financial resources to be deployed quickly and precisely.

In addition to the MFF, the EU also has subsidiary budgets. The most prominent example of this is NextGenerationEU (NGEU). This is a temporary recovery program that was launched in 2020 to deal with the economic and social impact of the COVID-19 pandemic. With a volume of more than EUR 800 billion, NGEU aims to finance economic recovery in the EU and promote investment.

There are also other budgets outside the traditional financial framework, such as the European Peace Facility (EFF). The facility was set up for the period 2021-2027 with a volume of EUR 5.69 billion and serves to support countries affected by military conflicts.

What are the main innovations of the MFF 2028-2034?

A – Increasing the budget and new sources of revenue

The Commission wants to significantly increase the budget. The current MFF 2021-2027 has a total volume of around EUR 1,211 billion, which corresponds to around 1.11% of the gross national income (GNI) of the EU-27. In addition, there are funds from the "Next Generation EU" reconstruction program amounting to around EUR 800 billion.

The current EU budget, including NGEU funds, therefore amounts to around EUR 285 billion per year. In comparison, the German federal budget alone is already around EUR 450 billion, i. e. almost twice as much.

The European Commission considers the current budget volume for the future MFF 2028-2034 to be insufficient, particularly regarding the need to overcome global instabilities and to finance climate protection and biodiversity. The European Commission wants to invest EUR 2,000 billion to future-proof the EU. "The next Multiannual Financial Framework is the most ambitious we have ever proposed. It is more strategic, more flexible, more transparent", says European Commission President Ursula von der Leyen. But where will this funding come from?

To keep the Member States' national contributions stable, the European Commission is trying to tap into new own resources. At present, the fulfilment of EU tasks is largely financed by contributions from the Member States, and they would rather "transfer less to Brussels" than more. On the one hand, ecological levies are proposed, i. e. revenues from the EU Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM) are to be used permanently as own resources, with 30 % of ETS revenues flowing into the EU budget in addition to the proceeds from the CBAM. On the other hand, revenue is to be generated from the taxation of multinational corporations: With the planned taxation of corporate profits in the EU through the BEFIT (Business in Europe: Framework for Income Taxation) instrument as well as revenue from the OECD-driven Pillar One of the global minimum tax system.

B – Changes

The heart of the new MFF are the national and regional partnership plans, which shall form the basis for investments and reforms. The European Commission would like to invest EUR 865 billion just for this.

In addition, the European Commission intends to modernize the Common Agricultural Policy (CAP) and adapt it to new ecological and social requirements. A further EUR 300 billion has been earmarked as income support for farmers, which corresponds to double the amount of the agricultural reserve compared to the previous MFF.

In addition, programmes to reduce economic and territorial disparities between regions should be more efficient and customs and excise duties should be optimized.

Another important proposal is the establishment of a European Competitiveness Fund with almost EUR 410 billion. This fund bundles up to 14 previously separate programmes, including innovation, digitalization, climate protection, health and defence, into a single, thematically focused fund. The aim is to promote strategic investments in key technologies, drive forward industrial decarbonization and strengthen Europe's global competitiveness.

What criticism is there of the planned changes to the MFF 2028-2034?

The European Commission's draft has not met with a positive response everywhere. The European Parliament has already rejected the European Competitiveness Fund proposed by the European Commission as inadequate. Large funds are considered unsuitable for guaranteeing parliamentary control. It also criticizes the model of a national plan per member state ("single plan"), as is practiced with the Recovery and Resilience Facility. The European Parliament will not accept any restriction of its duty of oversight and democratic control over EU funds. Instead, it is calling for a differentiated structure with strong parliamentary control and the involvement of regional and local authorities.

Several member states also reject a significant increase in the EU budget. If this were to be accompanied by an increase in the expenditure ceiling above the current level of 1 % of GNI, which in turn is criticized by the European Parliament and the European Commission. "Frugal" states such as Germany have already spoken out against an increase in the EU budget. France has even announced its intention to cut payments to the EU budget in 2026.

Many member states are sceptical about new, mandatory own resources and additional financial burdens that go beyond management or structural reforms. Regardless of the Commission's proposals for new financing instruments, differences remain, for example regarding the integration of new thematic areas or centralized control.

How will defence be financed?

There is overwhelming consensus on increasing the defence budget. The financing of defence is based on the European Defence Fund (EDF). This is the central EU instrument for promoting research, development and joint procurement of modern defence technologies. For the current period 2021-2027, the fund has a budget of EUR 7.3 billion at its disposal. Given the current geopolitical situation, the European Commission has invested EUR 910 million in strengthening the innovative and interoperable defence industry in Europe this year. The European Commission's proposal provides for a special mechanism with a financial impact of almost EUR 400 billion to deal with serious crises. EUR 131 billion is to be invested from the Competitiveness Fund in the areas of defence and space. A further EUR 100 billion is earmarked for Ukraine's recovery and resilience. 

In addition to the EDF, the European Commission is planning a comprehensive rearmament as part of its "ReArm Europe" initiative. To this end, it plans to borrow EUR 150 billion through capital market bonds. This should enable rapid and targeted investments without placing an undue burden on national budgets. Over the next four years, around EUR 800 billion will be mobilized, a large part of which is to be covered by an increase in national defence spending by the member states of 1.5 % of GDP.

Further considerations concern the establishment of a so-called "rearmament bank", which is supported by EU member states as well as foreign partners such as the USA and the UK, to simplify and bundle financing for defence technologies. This bank would issue triple-A bonds backed by the shareholder states and thus mobilize additional funds without increasing the debt levels of the member states.

What happens next?

The proposal for the 2028-2034 MFF submitted by the European Commission on 16 July 2025 will be discussed over the next two years. The new MFF must be adopted unanimously in the Council and by simple majority in the European Parliament.

How the European Commission will manage the balancing act between future-orientated policy with new tasks and expenditure desired by the European Parliament and the savings wishes of the Member States cannot be predicted. So far, negotiations have been characterised by the paradox that every Member State wants to get more out than it pays in. Furthermore, in the EU as elsewhere, regrettably, different points are being linked together: For example, the approval of EU sanctions with commitments in favour of individual EU Member States, as in the recent case of Slovakia's delayed approval of the 18th sanctions package against Russia. In the next two years, there will certainly be tough disputes over the proposal. Besides, the MFF 2028-2034 will certainly look different from what was proposed.

Sources

Proposal of the European Commission

https://commission.europa.eu/strategy-and-policy/eu-budget/long-term-eu-budget/eu-budget-2028-2034_en

Parliament's priorities for the Multiannual Financial Framework from 2028 onwards | News | European Parliament

Budget proposal "simply not enough", say MEPs | News | European Parliament

Example comments from Baden-Württemberg

https://stm.baden-wuerttemberg.de/de/service/presse/pressemitteilung/pid/vorschlag-der-eu-kommission-fuer-mehrjaehrigen-finanzrahmen 

D&O insurance is deemed to be an indispensable instrument in the risk management of modern companies. It protects managing directors, members of management and supervisory boards, and other executives against the financial consequences of any erroneous decisions contrary to duty and organisational deficits. 

However, in practice, it turns out: D&O insurance is a complex insurance product that often raises many questions for those involved. Policyholders, intermediaries, injured parties and even insurers are often confronted with a variety of challenging questions. 

Insurance terms and conditions: Inconsistent and difficult to compare

The insurance terms and conditions of D&O policies are often complicated and hard to understand for laypersons. The benefits vary greatly from one provider to another. In addition to defending against unjustified claims and indemnifying against justified claims for damages, many insurers now offer numerous additional services, such as criminal law protection, continued payment of salary in the event of claims for damages, medical and psychological care, reimbursement of ransoms, PR advice and much more. 

Policies also often differ greatly from one another with respect to exclusions. Restrictions on insurance cover are often found not only in the general insurance terms and conditions, but also in the insurance policy or in separately agreed terms and conditions.

Therefore, the scope of cover of D&O insurances is difficult to compare. In any case, a comparison of the sum insured, and the premium alone is not very conclusive. 

D&O insurance usually does not protect against personal liability claims

Claim settlement shows that many policyholders and insured persons do not know how a D&O insurance is designed. They wrongly assume that the injured party can directly contact the D&O insurance company regarding the claim settlement, and, in this respect, no personal liability is threatening. In fact, a D&O policy, however, generally requires such a personal liability claim for the occurrence of an insured event.

In many cases, the existence of such a D&O cover is even the "motivator" for personal liability claims which often renders the insurance purpose absurd. For only in very few cases, D&O insurance provides for a so-called self-insurance which at least allows injured policyholders to make claims directly against the insurer. 

Ambiguities about the scope of insurance benefits

The typical benefits of a D&O insurance include on the one hand providing defence cost protection, i.e. covering the legal costs for the defence against unjustified claim, and on the other hand indemnifying against justified claims. Contrary to the widespread view, not every D&O contract also offers criminal law cover, in other words protection against criminal investigation proceedings. 

The situation is similar with covering fines and penalties, in particular with antitrust violations. In misjudgement of this, insurers are increasingly confronted with the reporting of claims which are already not covered on the merits according to the wording of the insurance terms and conditions. 

Potential for disputes in the event of a claim

Especially in the area of D&O insurance, there are often nasty surprises in the event of a claim.

The parties involved are often not aware of the obligations of a D&O insurance or they are disregarded by ignorance of the legal consequences. It seems to have become common knowledge among claimants that the D&O insurer must be informed immediately of the insured event; in the vast majority of cases, letters concerning liability claims contain such a notice. The legal consequences of a delayed or erroneous damage report, however, still seem to be unknown to the vast majority of claimants. In any case, the damage reports to the insurers are mostly made very late and often only very cryptically. 

But also, the violation of pre-contractual obligations may lead to a (total) loss of insurance cover, for instance where incomplete information is provided in the questionnaires or critical facts are not disclosed upon conclusion of the D&O contract. 

It is noticeable that such cases are becoming more frequent. The reasons therefor are manifold. Mostly, there is a fear that they will not receive any insurance cover or that they must pay a high premium if all information is provided. Often, the questionnaires are simply not given too much importance and are not completed with the necessary care. In this context, it is overlooked that the information for the insurers is relevant for decision-making and the insurers increasingly react to the violation of pre-contractual notification obligations with challenging the entire policy. 

By ignorance of the insurance terms and conditions, the primary obligation to provide coverage from other sources or from the previous insurer is often overlooked. Especially D&O insurances often provide for long subsequent reporting periods which may lead to an obligation to provide coverage of the previous insurer. As a result, the insurer actually responsible is usually informed far too late - in the worst case after expiry of the subsequent reporting period - about the event of a claim. 

In the event of a claim, it is also often revealed that the sum insured was set too low. Very often, this sum insured is not sufficient to cover the entire damage. In larger events of a claim with high amounts in dispute or many parties involved, the sum insured is often used up merely by defence costs. When concluding a D&O policy, it must therefore always be ensured that the sum insured is sufficiently high. In this context, the premium should not always be the decisive criterion. Affordable insurance cover can also be achieved by waiving certain - not always necessary - additional benefits or taking out excess insurances.

Incident reports and serial defect clauses also entail potential for disputes - especially also with regard to the often not sufficient sum insured. Through the incident report, an insured event can be drawn into a previous insurance period. Insurance exclusions are also often defined through incident reports. 

Serial defect clauses can be used to combine several insured events into one claim and assign them to a specific insurance period which may have implications for the sum insured (still) available or retentions. In practice, disputes regularly arise over the range and scope of such incident reports and serial defect clauses. The legal effectiveness of individual serial defect clauses is also highly controversial. 

Change of cover entails the risk of gaps in cover

Frequently, difficulties also arise when changing to a new D&O insurer. The reason for a change is usually striving for a more favourable premium or a better insurance cover. In case of a change, care must always be taken to ensure that the old and new D&O policy harmonise with regard to the insured periods (key word: retroactive cover) and their subsidiarity clauses. Otherwise, a game of ping-pong between the insurers is threatening in the event of a claim. 

In the worst case, changing to a new insurer may lead to the fact that no insurance cover exists for certain circumstances due to the resulting gap in cover. With regard to allegedly affordable premiums or better insurance cover, an expert comparison of the respective terms and conditions is therefore always required.

High demand for advice - expert advisors required

In case of D&O insurances, the demand for advice is high. The numerous insurance products on the market and the often very extensive insurance terms and conditions are mostly very difficult to understand for policyholders. They usually rely on the advice and the recommendation of their advisors and insurance brokers. The situation is similar with the insured persons who rely on their legal advisors in the event of a claim. Brokers and advisors should therefore also always be aware of the numerous pitfalls in processing in order to avoid falling into (their own) liability trap. 

Dr Florian Weichselgärtner

This article was first published in the Versicherungsmonitor magazine on 16 June 2025. Here you can find the original article.

Background

In civil proceedings, the parties must introduce all facts favourable to them into the proceedings (so-called principle of principle of party presentation). These facts may also be trade secrets. For example, a party may find itself in a situation where a trade secret is disclosed to the opponent without protection or the case is lost in favour of protecting the trade secret. Since the principle of publicity of the hearing also applies in accordance with Section 169 GVG (German Courts Constitution Act), there is also a risk that a trade secret introduced into the proceedings could even be made public.

Previously, the protection of trade secrets in civil proceedings was regulated solely in Sections 172 No. 2, 174 (3) GVG. Accordingly, "The court may exclude the public from a hearing or from a part thereof if an important business, trade, invention or tax secret is mentioned, the public discussion of which would violate overriding interests meriting protection". The adjudicating court was also able to oblige the persons still present to maintain secrecy about the disclosed facts.

However, trade secrets submitted in written submissions or as evidence were not protected. Furthermore, the protection did not continue after the conclusion of the civil proceedings. Rather, the special protection rules of Sections 16 to 20 GeschGehG (German Trade Secrets Act) only applied in proceedings in which claims were asserted under this Act or in patent litigation. The legislator has recognised this conflict and addressed it with the new provision of Section 273a ZPO.

New regulation

Section 273a ZPO came into force on 1 April 2025 in order to close the protection gaps identified. It states:

"At the request of a party, the court may classify all or part of the information in dispute as confidential if it may constitute a trade secret pursuant to Section 2 (1) of the German Trade Secrets Protection Act; Sections 16 to 20 of the German Trade Secrets Protection Act shall apply accordingly."

Sections 16 to 20 GeschGehG now apply to all civil proceedings. Trade secrets under the GeschGehG is information that

(i) is not generally known or readily accessible and therefore of commercial value

(ii) is the subject of confidentiality measures that are reasonable under the circumstances by its legitimate owner, and

(iii) for which there is a legitimate interest in confidentiality.

Section 273a ZPO covers all trade secrets that are introduced into the proceedings or become known in the course of the prosecution or defence.

According to Section 273a ZPO, a party's application is required for the court to classify information as confidential. The applicant must present all of the above-mentioned facts and make them credible. In addition, it must clearly mark the passages relating to a trade secret in the documents submitted.

If the court considers the facts of Section 273a ZPO to be fulfilled, it is at its discretion to classify the information in dispute as confidential in whole or in part by means of an order. The further consequences are then governed by the GeschGehG. Pursuant to Section 16 (2) GeschGehG, the parties must treat the information confidentially and may not use or disclose it outside the court proceedings. Pursuant to Section 18 sentence 1 GeschGehG, this obligation continues to apply even after the conclusion of the court proceedings. In the event of a breach of this obligation, the court may order an administrative fine or imprisonment in accordance with Section 17 GeschGehG.

The right of third parties to inspect files is restricted in accordance with Section 16 (3) GeschGehG by making trade secrets unrecognisable or removing them before granting access to the files. In addition, the court may, at the request of a party in accordance with Section 19 (1) GeschGehG, restrict both access to the documents requiring secrecy and access to the oral hearing to a certain number of so-called "reliable persons".

Practical Note

The application pursuant to Section 273a ZPO should always be filed when a trade secret is introduced into the proceedings. The party whose trade secret is affected is authorised to file an application. This applies regardless of who introduced the trade secret into the proceedings. It can also happen that the opposing party introduces the trade secret into the process. In these cases, too, the application pursuant to Section 273a ZPO should be filed in any case.

If a party intends to introduce its trade secret into the proceedings itself, the application should always be made with the proviso that the complete documents should only be introduced into the proceedings and made accessible to others if the court grants the application. This ensures that the information is only disclosed to the other party if the court classifies it as confidential or the party decides to disclose the information without special protection.

The possible exclusion of the public and the obligation of the other party to maintain confidentiality are effective instruments for protecting trade secrets. However, if information that does not constitute a trade secret in the narrower sense is also to be protected, or if the public is to be excluded in any case, it is advisable to agree arbitration in contracts.

Simon Schuler

This post also appears in the Haufe Wirtschaftsrechtsnewsletter.

BaFin is increasingly imposing fines on listed companies for violating the provisions of the German Securities Trading Act or the Market Abuse Regulation. Often, amounts in the millions are set for even minor offences. The amount of the fines also varies greatly from company to company for the same offence. This is due to the fact that BaFin bases the amount of the fines on the market capitalisation of the respective companies within the range stipulated by law. As a result, companies with a low market capitalisation have to pay much less for the same infringement than companies with a high market capitalisation.

Experience has shown that many companies agree to a "settlement" with BaFin as part of the fine proceedings. BaFin regularly grants discounts of around 30% on the threatened fine. In return, however, BaFin expects a waiver of legal remedies. 

However, practical experience shows that a significantly greater reduction can be achieved by lodging an appeal against the BaFin's fine notice in the subsequent court proceedings, which take place before the Frankfurt am Main Local Court. In such proceedings, the court has to deal with a very complex regulatory matter that is largely unknown to it and is therefore often interested in a quick resolution. In addition, the court may waive the grounds for its judgement in the event of a court settlement (Section 77b OWiG). The public prosecutor's office participating in the proceedings regularly raises no objections to such a procedure. 

In addition, there are cases in which BaFin interprets supervisory regulations too broadly or the alleged facts that are subject to a fine are disputed. In such cases, it is advisable to seek a complete cancellation of the notice in question - if necessary, by means of a legal appeal to the Higher Regional Court of Frankfurt am Main.

On 8 May 2025, the European Parliament adopted a far-reaching reform of the EU-wide screening rules for foreign investments. The reform is aiming at protecting critical sectors from security risks without jeopardising the openness of the single market. The adopted draft for a revision of the EU FDI Screening Regulation provides for mandatory screening in key areas and gives the Commission the authority to take final decisions in instances of disagreement.

Key elements of the new rules

1. Mandatory screening of sensitive sectors:
   Investments (including Greenfield investments!) in certain sectors such as media, critical raw materials, transport infrastructure, energy grids, aerospace and emerging technologies (e.g. semiconductors, AI, cyber security) will be subject to mandatory screening in order to identify security or public order risks. The purpose is to prevent foreign players from controlling strategic infrastructure.
2. Harmonised procedures across the EU:
   National screening mechanisms will be harmonised in terms of criteria, deadlines and transparency. This reduces red tape for businesses and gives investors planning certainty.
3. Strengthened role of EU Commission:
   For the first time, the Commission will have the power to intervene where there are disagreements between member states about potential risks emanating from a planned foreign investment or where the planned investment has impacts beyond national borders. The Commission will have the right to prohibit investments or impose data protection requirements or demand joint ventures with EU companies.
4. Wider scope of application: 
   Transactions within the EU are also covered by the rules if the investing company is controlled by investors from outside the EU.

Protection of economic sovereignty

Parliament’s rapporteur Raphaël Glucksmann (S&D, France) said:

'Right now, the EU’s foreign investment screening system is fragmented, costly for investors, and insufficiently effective at mitigating risks. Leaving large industrial plants, energy grids, and media giants open to foreign takeovers — whether from China, the US, or elsewhere — ultimately puts our security and economic sovereignty on shaky ground. Screening procedures will now be streamlined across member states, keeping the single market open and attractive, while also protecting our industries, safeguarding key sectors, and allowing our strategic industries to become more competitive.'

From patchwork to a common line

The current EU FDI screening system of 2020 allows screening on a national level but offers no effective tools for EU-wide risks. The reform is a response to geopolitical tensions and developments such as investments in harbours, technology companies or power plants by foreign wealth or companies outside the EU.

Next steps

Now that the report has been adopted in plenary, negotiations with member states on the final shape of the Screening Regulation can begin. Parliament and Council must adopt the final legislative act before it can enter into force.

Why this is important

The reform aims at protecting the EU single market as an attractive place to invest, but closes loopholes in investment screening that could be abused by geopolitical rivals. By empowering the Commission as an 'arbitrator', the EU is sending a clear signal of the EU's greater ability to act in an era of global competition for economic supremacy.

Dr Christian von Wistinghausen
Lelu Li

What is the current situation in the EU?

Securing the supply of critical minerals is becoming increasingly important also for the EU. The EU aims to increase extraction and processing of these minerals within the EU and to increase recycling rates, especially for metals used in technologies for the future, such as offshore wind turbines and electric vehicles. Germany basically follows this principle. There are no plans yet for commercial mining of polymetallic nodules to improve reliability of supplies.

What is the current legal situation with regard to deep-sea mining?

Germany is a member of the International Seabed Authority (ISA). The ISA Mining Code contains rules and regulations for all mining activities on the deep seabed, from prospecting and exploration to the actual extraction of minerals. The legal requirements for deep-sea mining, however, are still being discussed and negotiated. The ISA has undertaken to develop Regional Environmental Management Plans (REMPs) for all deep-sea regions in which mining activities are carried out or planned. Before individual projects are approved, these plans should be considered when deciding on the implementation of specific projects. Opinions differ as to whether they ought to be mandatory. The purpose of these plans is to strike a balance between deep-sea mining and environmental protection, to close knowledge gaps and identify collateral impacts, and to coordinate deep-sea mining with other permitted activities such as fishing and the laying of submarine cables. In 2012, a REMP was adopted for the Clarion-Clipperton Zone in the Central Pacific with the world's largest polymetallic nodule field. Others are being prepared. There are also negotiations going on to standardise the preparation and the contents of such REMPs. Germany submitted a REMP application in February 2020.

The ISA has reacted negatively to the Executive Order issued by President Trump, stating that any project that is not carried out in accordance with the recognised international framework or attempts to circumvent international law entails legal, diplomatic, economic, security and financial risks. Furthermore, a 'circumvention' of the ISA supervisory authority would violate international law. According to the ISA, the parties to the UN Convention on the Law of the Sea (UNCLOS) - which include Germany - are obliged not to recognise the acquisition or exercise of any rights to minerals extracted from the deep sea by any state, individual or legal entity that does not comply with Part XI of UNCLOS.

What does that mean for the German raw materials industry?

Even though the US and the EU have similar interests in terms of reliable supplies of critical raw materials, it remains doubtful whether the EU or Germany will join the US initiative to mine for deep-sea polymetallic nodules in the short term. In the event that polymetallic nodules will be imported to Germany for processing in the future, the question will arise as to whether the extraction has been carried out in accordance with UNCLOS and the ISA requirements, which have been transposed into German national law through the German Seabed Mining Act (Meeresbodenbergbaugesetz).

Dr Christian von Wistinghausen
Danah El-Ismail

While the German export model has occasionally come under pressure, German exports to India were able to increase by EUR 5 billion in the last five years. Overall, German companies exported USD 18.3 billion worth of goods to India in 2024 - 2.6 percent more than in the previous year and a new record. The total value of German imports from India was USD 15.1 billion in 2024. India's growing role as a procurement market for electronics is striking. German imports amounted to approximately USD 1.1 billion (plus 62 percent). According to the German Federal Statistical Office, the bilateral trade in goods between the Federal Republic of Germany and India reached an overall new all-time high in 2024. 

India is pursuing ambitious economic goals. The vision of expanding its own economy to a volume of 30 trillion US dollars is ambitious, but by no means utopian. A growing domestic market, favourable demographic developments and a progressive economic liberalisation make the country an attractive target for investments. Already today, India is the world's fifth-largest economy and a key player in world trade and in global supply chains. With the exception of the coronavirus crisis year 2020, the country has recorded stable economic growth for many years.

Diljinder Singh and Markus Linnartz had the opportunity to attend the conference of the International Bar Association (IBA) in Mumbai from 3 April to 4 April 2025. Under the title "Mergers and Acquisitions in India: A Key Engine to the USD 30 Trillion Goal" more than 230 lawyers and business representatives from more than 20 countries met together - an impressive sign for the growing international importance of the Indian market.

As the M&A activities in India in the financial year 2024-25 amount to almost USD 100 billion due to private equity and structural reforms, the role of M&A as an expansion tool for India's growth trajectory was highlighted at the conference. The IBA Conference was fully booked and offered a variety of exciting insights and perspectives. The increasing importance of financial investors positioning themselves as strategic buyers in India was discussed. The impact of geopolitical developments on international transactions were also intensively discussed. At the same time, it was clear how much technological innovations were now shaping M&A processes and how corporate governance standards for listed companies in the Indian market were evolving.

A panel discussion on private equity and financial investors was of particular practical relevance. The development of transaction structures and strategies as well as current trends were debated. This showed that the Indian market continues to struggle with uncertainties despite progressive legal frameworks such as the Insolvency and Bankruptcy Code (IBC) - among other things, with regard to deadlines, access to information and evaluation criteria. This makes it even more important for activities to be professionally supported by consultants who know the market, the business and the right contacts.

A particularly interesting aspect for international investors was the discussion about the so-called "clean slate" principle. It is intended to ensure that buyers are not liable for the insolvent company's inherited liabilities in the event of a takeover. However, there is still uncertainty, especially when it comes to tax liabilities: is it really guaranteed that any tax debts will be completely waived? This is a crucial point for investors - for, unanswered questions about tax treatment can have a significant impact on the risk assessment and transaction structure in the case of takeovers.

Conclusion and Outlook

Participation in the conference was extremely enriching, instructive and impressively demonstrated: India is not only one of the most exciting growth markets worldwide, but also an increasingly regulated and professional environment for international M&A transactions.  It is still important to always consider economic opportunities in conjunction with the legal and tax framework.

We look forward to contributing our expertise to the India panel at the IHK-Außenwirtschaftstag NRW in June 2025 and to supporting the economy in NRW on its way to India and its organisation.

ADVANT Beiten provides legal and tax advice to medium-sized companies and has been supporting cross-border investments and M&A projects for many years. In recent years, India has played an increasingly important role here - for internationally operating companies or those who would like to become one.

Autor: Markus P. Linnartz
Beteiligter Experte: Diljinder Singh Walia

Despite this, hydrogen remains a key technology in the eyes of the new coalition government. With the special infrastructure fund^[2] on the one hand and the prospect of an expanded framework for state aid on the other, there is indeed new impetus that gives hope.

Reason enough to take a look at the political agenda and the corresponding levers in the regulatory framework. 

What does the coalition agreement say?

The future of the hydrogen economy is negotiated centrally in the coalition agreement in no less than twenty lines (p. 34), which are a tough sell:

Pragmatism instead of dogmatism

The development of the hydrogen economy should be faster and more flexible. In addition, "all colours" of hydrogen are to be used - in other words, a technology-neutral approach is to be pursued. The previous focus on green hydrogen in particular will thus be abandoned. Moreover, the focus of the future certification system (probably for both green and low-carbon hydrogen) is on making it unbureaucratic.

Broad infrastructure expansion

With additional routes and taking into account hydrogen storage facilities, the hydrogen core network is to be supplemented by a distribution network infrastructure to ensure a connection to the industrial centres in the south and east. In addition, European and German harbours are to be integrated into and connected to the necessary infrastructure for the import of hydrogen.

Stabilise funding instruments

National and European funding programmes are still needed to develop infrastructures and domestic production capacities. The coalition agreement explicitly mentions H2Global, IPCEI projects and specific programmes for SMEs.

Further ideas for additional incentives for the demand for hydrogen can already be found on p. 6 of the coalition agreement. There, climate-neutral lead markets are outlined via the quota regime (e.g. for green steel) or levers under public procurement law.

What does the European Clean Industrial Deal make possible?

If the Commission has its way, Germany (and the other Member States) will in future have an extended framework under state aid law for the promotion of investments in hydrogen ramp-up.

The draft Clean Industrial Deal^[3] presented by the Commission in February also explicitly provides for a new aid framework (Clean Industrial State Aid Framework - CISAF^[4]). This is intended to complement the existing guidelines for state aid for environmental, climate protection and energy. As the name already suggests, the focus is on industrial policy requirements. In addition, the present draft explicitly recognises the challenge of the cumulation of different state aid vehicles and attempts to resolve this.

In addition, further impetus for the hydrogen industry is expected from Brussels. For instance, the delegated act on low-carbon hydrogen is to be adopted in 2025 to create clarity for investors. This will be accompanied by a study to assess the effectiveness of the current regulatory framework and to identify potential obstacles to the expansion of renewable hydrogen.

In the second quarter of 2025, a hydrogen mechanism is to be introduced via the European Hydrogen Bank (EHB) which will bring together buyers and suppliers and provide financing and risk mitigation instruments. A third bidding round of the EHB with a budget of up to EUR 1 billion is planned for the third quarter of 2025.

Seize opportunities - minimise risks

With the change of government acting as a catalyst, the legal framework for the hydrogen economy, including the funding landscape, is likely to change again over the next few months.

In addition to new funding vehicles, however, adjustments to existing privileges cannot be ruled out.

For instance, in its recently published discussion paper on the further development of the general grid fee system, the Federal Network Agency casts doubt on the appropriateness of the existing 20-year grid fee privilege for electrolysers.^[5]

Hence, flexible regulations are needed in the contractual design of projects that safeguard economic interests even against the backdrop of a constantly changing legal situation. 

In addition, funding law challenges must be overcome when cumulating privileges. This is because national regulations can also fall under cumulation bans beyond the subsidies approved under state aid law, e.g. as part of the IPCEI waves or the EHB tender processes. Finally, there is also a risk of reclaims if funding recipients violate public procurement law requirements when using the funding. In procurement processes, the framework set by the respective funding provider and the applicable public procurement law should therefore be observed without exception to avoid unpleasant surprises - e.g. in the context of a later audit of the utilisation of funds.

Conclusion

With the special infrastructure fund on the one hand and the short-term expansion of state aid instruments on the other, the chances of a successful market ramp-up in Germany are better than they have been for a long time.

In addition, Katherina Reiche is a proven expert at the head of the BMWE who credibly stands in favour of consolidating the legal framework. The speed at which the requirements for new projects and those already being realised are likely to remain high.

Authors: Sebastian Berg and Max Stanko

Experts involved: Julian Gruß and Johannes Voß-Lünemann

^[1] Cf. BDEW, Strombezugskriterien Delegierter Rechtsakt für RFNBO-konformen Wasserstoff, with clear criticism of the current design of the additionality and temporal correlation criteria, available at: Strombezugskriterien Delegierter Rechtsakt für RFNBO-konformen Wasserstoff | BDEW

^[2]In this respect, the DVGW is calling for a further 50 billion from the special infrastructure fund to finally boost the market ramp-up, DVGW e.V.: 2025-04-23 - Sondervermoegen.

^[3]See also: EU-Kommission stellt den Action Plan for Affordable Energy als Teil des Clean Industrial Deals vor | ADVANT Beiten

^[4] See draft version under 45b532ce-53fb-4907-975c-79edaa31a166_en.

^[5] BNetzA, Bundesnetzagentur - Presse - Bundesnetzagentur veröffentlicht Diskussionspapier zur Bildung der Stromnetzentgelte.

1. Facts of the case

In the opinion of the tax authorities in section 13b.11 (2) sentences 2 et seq. of the German VAT Guidelines (UStAE), an entrepreneur who owns a domestic property and rents it out subject to VAT is to be treated as resident in Germany and the transactions are to be declared in the general taxation procedure. A permanent establishment for VAT purposes is therefore assumed. However, the European Court of Justice (ECJ) ruled in the "Titanium" judgment of June 3, 2021 (C-931/19) that the letting of a property without its own staff does not constitute a permanent establishment for VAT purposes.

According to the German tax authorities, the entrepreneur based abroad must register for VAT in Germany, issue invoices to the tenant with German VAT and declare VAT and input tax to be offset in the general taxation procedure.

Under EU law, rents subject to VAT are subject to the tax liability of the service recipient/tenant in accordance with Section 13b of the German VAT law (UStG) and input tax must be refunded via the special input VAT reclaim procedure. For invoices issued with VAT, the issuer/landlord based abroad is liable for VAT in accordance with Section 14c (1) UStG; the tenant is not entitled to deduct input VAT so far.

2. Statement

Currently, there is protection of legitimate expectations vis-à-vis the tax authorities insofar as they must adhere to the administrative instructions. The risk is initially borne by the tenant, who does not declare VAT subject to reverse chare regime, although he would be obliged to do so under EU law. Under EU law, the tenant can still not claim any input VAT deduction from the landlord's invoices. If VAT issues relating to the tenant, which are not necessarily connected to the rental, go to court, these incorrect treatments under EU law may also be at issue, as the court will follow EU law and not the administrative opinion.

The landlord can remedy this by applying for a certificate in accordance with § 13b (7) sentence 5 UStG that the landlord is not treated as a resident abroad/other Community territory. With reference to VAT registration in Germany based on section 13b.11 (2) sentences 2 et seq. UStAE, the tax office of the landlord resident abroad should probably have to issue this certificate.

3. Conclusion

It would be desirable for the legislator to decide to enshrine the administrative opinion in law. Austria already did this in 2022 in response to the Titanium ruling. This can be done, for example, in an addition to Section 13b (6) No. 7 UStG, which states that Section 13b (1)-(5) UStG does not apply to the VATable letting of a domestic property.

In the meantime, to obtain legal certainty, in particular due to the risk for the tenant, the landlord should request a certificate in accordance with § 13b (7) UStG from the tax office responsible for VAT (form USt 1 TS) and present it to the tenant (without being asked).

Jens Müller

Path to an “AI Nation” and Cloud Infrastructure

The future government has outlined the ambitious goal of making Germany Europe’s leading “AI Nation.” At the core of this vision are substantial investments into developing a high‑performance cloud and AI infrastructure to serve as the foundation for data‑driven applications. Significant resources will also be devoted to integrating artificial intelligence with robotics. Lightweight construction technologies and 3D printing are identified as key drivers for modernizing traditional manufacturing processes.

Data Strategy and Data Protection

“Public money, public data” is the principle which shall make sure that any data generated with public funds is generally available for governmental and societal use. To this end, the future government plans a comprehensive “Data Code” to consolidate existing regulations and to establish a right to open data related to government institutions. Coupled with strengthened data trustees this measure is intended to ensure trust in the quality and integrity of such datasets.

There are plans to reorganize data protection supervision by bundling responsibilities and competencies under the Federal Commissioner for Data Protection, who may be renamed the Federal Commissioner for Data Use, Data Protection and Freedom of Information. The Data Protection Conference (DSK) will be anchored in the Federal Data Protection Act (BDSG) in order to continuously develop common standards. For public services, the future government aims to replace consent-based processes with “opt‑out solutions” where feasible. At the European level, it will seek to exempt nonprofit associations, small and medium‑sized enterprises, and low‑risk data processing from the scope of the GDPR.

Administration 4.0 and E‑Justice

A key priority is the digitalization of public administration and the justice system. Administrative processes will be automated and accelerated, with AI playing a key role. Formal requirements for written documentation will be eased so that digital documents can be used without legal barriers. A nationwide “Justice Cloud” is also planned, into which case files and documents from courts and public prosecutors’ offices will be migrated. This will be complemented by a user-friendly "Justice Portal" offering digital filing procedures, an enforcement register and, in the future, AI-assisted support functions - particularly aimed at significantly shortening civil proceedings.

European Framework and Platform Regulation

The parties in the future government intend to implement EU digital legislation in Germany in an innovation-friendly and coherent manner. They plan to set up a central service office to manage the national implementation of the AI Act in order to minimize bureaucratic hurdles for companies. To strengthen digital resilience against cyber threats, the EuroStack initiative will be supported. Regarding platform regulation, the focus will be on rigorous enforcement of the Digital Services Act (DSA). Providers will be required to promptly remove illegal content and actively combat systemic risks such as disinformation. The future government will also explore mandatory bot identification and a ban on manipulative design practices ("dark patterns"). At the same time, criminal law will be modernized to close gaps in the prosecution of deepfakes and image‑based sexual violence, and platforms will face stricter cooperation obligations. The planned “Digital Violence Protection Act” will enable the blocking of anonymous hate accounts and create an interface for law‑enforcement authorities. Independent bodies in media supervision will receive clear legal mandates to counter manipulation of information, hate, and incitement on digital platforms. The mass and coordinated use of bots and fake accounts will be prohibited. Finally, Germany will proceed with implementing the NIS 2 Directive, the implementation deadline having already passed.

Contract Law and Consumer Protection

Consumer and contract law will also become more digital. So-called "smart contracts" will allow simple compensation and refund cases - such as ticket purchases - to be processed almost automatically via pre-populated online forms where the necessary data is already available. A reform of the law on standard terms and conditions (AGB) is planned to give large companies confidence that their mutually agreed terms will be reliably recognized in practice; this may entail a relaxation of the control of terms in B2B transactions. For telephone-based subscription agreements, a universal confirmation solution will be introduced to avoid burdensome follow-up verifications. The "by design" and "by default" principles will oblige providers to make digital offerings consumer-friendly from the outset.

Copyright and Media Law in the Digital Age

According to the coalition agreement, the government aims to strike a fair balance between creators, industry, and users. Notably, it proposes to compensate authors for the use of their works in generative AI systems - suggesting a form of copyright levy. In the digital music market, streaming platforms would be required to transparently share revenues with artists.

Conclusion

Many topics are described only in broad strokes, but the coalition agreement between the conservative parties (CDU/CSU) and the SPD does contain some specific initiatives. Whether and to what extent these plans will be implemented remains to be seen. In any case, the declared objectives are to digitize processes, reduce bureaucracy, and make significant investments in the digital space. We will continue to follow developments closely.

Fabian Eckstein

The need for innovative technologies for defence, cyber security and reconnaissance is increasing. At the same time, start-ups that provide new impetus for Europe's security architecture with artificial intelligence, robotics and drone technologies are playing an increasingly important role However, one thing remains crucial for this trend to be sustainable: Without sufficient funding from venture capitalists on the one hand and the awarding of public contracts to start-ups on the other, many of these ideas will remain stuck in the early development phase.

Current developments and market trends

For a long time, defence start-ups in Europe were considered a niche phenomenon. But this is changing rapidly. According to a report by the NATO Innovation Fund and Dealroom, around USD 5.2 billion was invested in European defence start-ups in 2024 - an increase of 24 per cent compared to the previous year. Germany has surpassed the United Kingdom as the largest target market for investment in this sector. Munich in particular has established itself as the European centre for defence tech, with almost USD 1 billion in investments in 2024 alone.

Paradigm shift 2025: safety precautions are the new ESG

Since the Munich Security Conference 2025 at the latest, it has been clear that Europe must increasingly stand on its own two feet in terms of security policy. With Donald Trump's return to the White House and the clear strategic reorientation of the USA away from European security guarantees, the era of the American defence umbrella is in fact history. The consequence: Europe must secure its own defence capabilities - technologically, militarily and financially.

This geopolitical upheaval has also changed investment logic.

Just a few years ago, investments in military technologies were often rejected across the board with reference to ESG criteria. The idea that "defence" per se was incompatible with ethical and sustainable investing shaped the investment criteria of many VC funds. Today, this view is considered outdated, as a new understanding now prevails: There is no sustainability without security.

The defence of democratic societies, the protection of critical infrastructure and resilience to hybrid threats have become the central pillars of a new ESG approach - one that does not exclude geopolitical reality but rather integrates it.

This can be seen not least in practice: More and more family offices, sovereign wealth funds and topic-specific VC funds are opening up to investments in security-related start-ups. The NATO Innovation Fund (with a volume of EUR 1 billion), the Estonian DeepTech Defence financing model and new funds such as Helantic are examples of this development.

Helantic - a new defence fund based in Switzerland - plans to invest EUR 100 million specifically in defence and dual-use start-ups. The focus is not only on end products such as drones or robotic systems but also on components such as batteries, sensors or software architectures. What is crucial, according to the founders, is that a specific civil-commercial market is developed and that the founding team has commercial excellence and a sense of responsibility in terms of security policy.

A look at current fund structures in Europe shows a growing diversity of approaches that complement each other: Although Helantic is based in Switzerland, the investment focus is clearly on Germany and Europe. Around half of the planned fund volume of EUR 100 million is to be channelled into German start-ups. The high density of qualified engineers, the excellent research infrastructure and the large number of successful spin-offs from German universities are decisive for this focus. The allocation of funds reflects this strategic focus: 50 per cent of the fund volume is earmarked for Germany, 30 per cent for Central and Eastern Europe and 20 per cent for promising global markets.

Estonia is also increasingly positioning itself as a driving force for defence-related innovations: With a newly created state defence fund totalling EUR 100 million, the Baltic country is investing specifically in military and dual-use technologies. Managed by the investment company SmartCap, the fund supports both start-ups and specialised venture capital funds. The aim is to strengthen the domestic industry, create new jobs and expand Europe's technological sovereignty.

In Germany - especially in Munich, which became a hotspot for defence tech investments in 2024 - almost USD 1 billion has gone into defence-related start-ups. The trend is clear: Investing in security today means investing in stability - and in the future of Europe. 

Successful examples from practice

Taking a look at the start-up landscape reveals that success stories do exist. The Munich-based company Helsing develops AI solutions for analysing sensor data for military systems and closed a financing round of EUR 450 million in 2024. For instance, the German robotics start-up ARX Robotics, which develops modular unmanned vehicles, recently received funding from the NATO Innovation Fund.

Outlook and recommendations

To realise its full potential, the start-up scene needs:

• More specialised venture capitalists with a deep understanding of dual-use technologies,
• More efficient regulatory processes and better interfaces between companies, investors and ministries, in particular the possibility of awarding major contracts to young start-ups instead of only to established companies, and
• A broader social understanding that defence and innovation are not mutually exclusive.

Only if it succeeds in combining key elements - specialised capital, regulatory clarity and social understanding - will Europe be able to compete for security-relevant technologies in the long term. Venture capital plays a crucial role here. However, it is just as important for politicians to take a positive and pragmatic attitude towards the numerous defence start-ups. They should become an integral part of a new procurement strategy for European armies so that the latter can benefit from the fast innovation cycles of start-ups.

The initial positive trends in this field described above must now be transformed by all stakeholders into a sustainable development stage. To achieve this, it is essential to substantially increase the acceptance of both defence tech and venture capital across society as a whole. Only with the help of start-ups will we be able to at least partially close the innovation gap between Europe and the USA and Asia and at the same time improve the European security situation.

Danielle Golinski, LL.M.
Dr. Mario Weichel

These tariffs affect all sectors, but one of the most affected in Europe is the automobile sector, particularly in Germany: cars will now be taxed at 25%. The most affected sector in France are aeronautics, with 7.9 billion euros of exports in 2023, pharmaceuticals with 4.1 billion euros in 2023 and alcohol (especially wine) with 3,9 billion.

In addition, differentiated and higher tariff rates will apply on goods from the French overseas territories: Guadeloupe, Mayotte, Guyane and Martinique will be subject to a 10% tax in addition to the 20% levied on the rest of France, while Réunion will be subject to a total tax of 37%. Tariffs of 50% will be imposed on products from Saint-Pierre-et-Miquelon and 10% on those from French Polynesia, as these islands have not been considered part of the EU by Trump.

Commission President Ursula von der Leyen said she was ready to negotiate but was also ready for confrontation if necessary to assert the EU's interests and values. She said that the Commission is working on countermeasures. Several European heads of state are also working on measures to be adopted.

ADVANT has a team of international trade and national security attorneys, and government relations professionals ready to help European companies. Our dedicated team has decades of experience supporting clients across a range of industries – ranging from steel, chemical, rubber, mining, and agricultural products.

Prof. Dr Rainer Bierwagen
Christian Hipp
Dr Dietmar Reich
Gábor Báthory

What can buyers achieve with W&I insurance? It may help to

• increase the prospects for a successful bidding process when offering to acquire a buy-side W&I insurance policy,
• secure payment for warranty breaches,
• extend liability for the so-called enhancements beyond the scope of the SPA,
• protect the business relationship between seller and buyer.

Why is it also attractive for the seller side? It may help to

• receive the full purchase price without deductions, retention of collateral,
• reduce the risk of claims in the event of warranty breaches (clean exit),
• protect sellers who were not involved in the operative business.

With this in mind, it is always worth considering whether W&I insurance can be used in a transaction in a manner to add value to the transaction and achieve the desired result. W&I insurance is certainly not a universal remedy, and the cost incurred cannot be ignored. It should, however, be weighed against the strategic advantages such insurance offers.

Angelika Kapfer
Simone Schmatz

This is a blank check for the future government to borrow a theoretically unlimited amount for defence and security. This is also a significant increase compared to the (currently not yet exhausted) "special fund" from 2022, which was limited to 100 billion euros. It remains to be seen how high the new federal government will actually set defence spending, but considerable increases are to be expected.

The specific services to be procured have not yet been determined. It is planned to draw up a priority list for urgently needed armaments in the near future, from which initial details will emerge. 

How will it be possible for foreign companies to participate with their services in this massively increasing defence budget? The usual answer to this question would be: by participating in procurement procedures that are published in advance in the Official Journal of the EU. However, this answer does not apply without restriction in the defence sector anyway, as special procedural rules apply in some cases. These special rules have already been significantly extended for the "special fund" from 2022; the potential coalition partners from CDU/CSU and SPD are also planning to present a new law to speed up and simplify procurement within the first six months of forming a government.

In view of the still unclear situation as to which services are to be procured in which order and the expected simplification of procurement processes, it will therefore be crucial for foreign companies in particular to position themselves proactively with their products. With our experience in the defence and security sector, we can provide you with the following practical tips:

1. Understand the structures in the defence procurement sector
   
   The procurement of defence equipment in Germany is organized on a decentralized basis. In addition to the political level, the Federal Office of Bundeswehr Equipment, Information Technology and In-Service Support (BAAINBw), which handles the actual procurements, plays a decisive role. However, the role of the Bundeswehr Planning Office, which is usually involved in the run-up to procurement measures, in the upcoming decisions on the services to be procured has not yet been clarified and should be carefully observed.
   
    
2. Position your services at an early stage
   
   Particularly in view of the lack of clarity about which services should be procured and in what order, there are currently clear opportunities to position your own products. However, swift, proactive action is required here - once the priorities have been established, it will be very difficult to bring a product that does not fall under these priorities into the discussion.
   
    
3. Make your company known
   
   In general, it is essential that your company, your expertise and your product portfolio are known in the right places. This is the only way to have a chance of being involved in specific procurement measures. Relying on open competition is a risky strategy in view of the expected simplification of procedures.
   
    
4. Look for partners
   
   Establish contacts with established (especially national) companies in the defence industry in order to benefit from their experience and networks and go to market together.
   
    
5. Get professional support
   
   Whether in the run-up to or within a procurement measure - the public client in the defence sector is a "special" customer. Different stakeholders must be taken into account, who regularly have heterogeneous interests. If you are not familiar with the particularities of the German defence sector, you could easily end up with nothing - regardless of the quality of your products.
    

If you need support with your market access in the German defence sector, we can assist you. We have been advising public clients for more than 20 years, especially in the defence sector. As a result, we have first-hand knowledge of the existing structures and the key players in defence procurement. We are happy to share our expertise with you - from the initial contact to support in a specific procurement process.

Michael Brückner

D&O insurance taken out without disclosing the 'front director' status

In the case at hand, the 'front director' sued the D&O insurer for payment. He had stepped in when the founder of a German private limited liability company (GmbH) joined the civil service as a police officer and had to resign as managing director for legal reasons. As a result, the plaintiff had himself entered in the commercial register as managing director in June 2018 and granted the former managing director power of attorney for all commercial matters (Prokura). The former managing director continued to run the company's business alongside his main occupation as a police officer. The plaintiff was - in his own words - a 'managing director on paper' only. 

In May 2020, the plaintiff, as the legal representative of the GmbH, took out a D&O insurance policy with the defendant. When doing so, he failed to disclose the true management situation. The policy contained a clause stating that the defendant waived the right to contest the contract on the grounds of fraudulent misrepresentation, but that the persons committing the fraud were excluded from insurance cover.

On 1 October 2022, insolvency proceedings were opened over the company's assets and the insolvency administrator made a claim against the plaintiff under section 64 of the old version of the German Limited Liability Companies Act (GmbHG) (now section 15b of the German Insolvency Code (InsO)) for payments made by the company after it had become insolvent. The plaintiff sought indemnification from the insurer, who refused to provide cover. After the plaintiff had lost the first instance and lodged an appeal, the Hamm Higher Regional Court issued the commented decision.

No D&O cover provided for 'front directors'

The Hamm Higher Regional Court ruled that the defendant did not have to provide any insurance cover. The plaintiff had fraudulently misled the defendant when taking out the policy. Under the principles of good faith, he should have informed the defendant of this circumstance even without being asked about it.

The Court concluded this from the explanatory memorandum on section 19(1) of the German Insurance Contracts Act (VVG), which did not exclude avoidance for fraud. According to this rule, there was only an obligation to provide information on circumstances involving a significant risk that was requested by the insurer. A spontaneous duty of disclosure therefore had to meet high standards. It only applied where there existed obviously risk-relevant circumstances that were so rare and remote that the insurer could not be blamed for not having enquired about them.

It was evident that a merely formal managing director who is neither willing nor capable of fulfilling his duties as managing director was not acting with the due care of a prudent businessman. He therefore significantly increased the risk of becoming liable to pay damages to the company. This certainly applied if, as was the case here, the de facto managing director was unable to fulfil his corporate responsibilities due to his other, principal professional activities. Since the insurer would not have issued the policy if the required information had been provided and the Court assumed wilful intent, the Court affirmed fraudulent misrepresentation.

Disclosure of 'front director' status is necessary even when not asked for

D&O policies usually cover the liability of all managing bodies and senior executives of a company and its subsidiaries. This generally includes all formal and actual directors. Before an insurance policy is issued, the insurer regularly assesses the risk on the basis of a more or less standardised list of questions. Hence, insurers are free to ask risk-related questions to determine the circumstances that are relevant for deciding whether or not to issue a D&O policy to a company. If an insurer does not ask a question about a particular circumstance, the policyholder can generally assume that this circumstance has no relevance for the insurer's risk assessment.

With the commented decision, however, the Hamm Higher Regional Court makes it clear that the policyholder's duty to provide information to a D&O insurer is not limited to answering the risk-related questions truthfully. The Court sets high standards for a spontaneous duty to provide information and follows the strictest view expressed in legal literature, which has become the predominant view in the rulings of higher regional courts by now. A policyholder only has to disclose such circumstances without being asked that, on the one hand, have an obvious risk potential and, on the other hand, are so unusual that an insurer cannot reasonably be expected to ask any specific questions about them. In the commented decision, the 'front director' status of the sole managing director was such a circumstance.

The decision is therefore hardly surprising. In a ruling of 4 May 2016 (case no. 1 O 143/14), the Mönchengladbach Regional Court had also considered the status as a 'front director' to require disclosure. The Mönchengladbach Regional Court, however, found no evidence of fraudulent misrepresentation in that case, as it remained unclear whether the insurer was informed of the 'dummy' construct when the insurance was taken out. The plaintiff nevertheless did not receive cover in this case either, as the defendant D&O insurer was able to invoke exclusion on the grounds of wilful breach of duty. According to the Mönchengladbach Regional Court, the timely filing of an insolvency petition is a cardinal obligation where a breach of duty is presumed to be intentional.

The fact that the insurer became aware of the 'front director status' and was also able to prove this in court was, in the commented decision of the Hamm Higher Regional Court, largely due to the statements made by the formal managing director following the notification of the claim.

High risk involved for 'front directors'

The risk for 'front directors' is extremely high: they may be held liable with their personal assets (e.g. under section 15b(4) sentence 1 InsO, section 69 sentence 1 of the German Fiscal Code (AO) or section 43(2) GmbHG) even if they stay completely out of the company's business, and they must also fear that a D&O insurer may refuse to provide cover. The commented decision once again underlines that a registration in the commercial register as a matter of courtesy and without the intention of actually running the company's business can have devastating consequences and should not be made without careful consideration.

Dr Florian Weichselgärtner
Etienne Sprösser

This article was first published in the Versicherungsmonitor magazine on 13 January 2024. Here you find the original article (available in German only).

First of all: BAFA's explanations are not a law, but the legal opinion of the supervisory authority, which may not always be correct. It is therefore worth seeking expert advice when you are confronted with requests for information from BAFA as the addressee of the Supply Chain Act in order to set the right priorities. This is all the more important in view of the new reporting channel created by BAFA for suppliers feeling that they are being treated inappropriately by those bound by the Act. It would almost be a miracle if this new reporting channel, which can be used anonymously, did not lead to a large number of incident-related enquiries from BAFA to the addressees of the LkSG. But more on that further below.

According to BAFA, the FAQ paper is primarily meant to 'complement' the guidances on risk analysis, on collaboration in the supply chain and on appropriateness (BAFA - Guidances) with the aim of 'explaining how companies can effectively implement their due diligence obligations'. Whether BAFA has actually achieved this goal with the FAQ paper is a matter of personal judgement. The new FAQ paper clearly builds on the existing guidances, in particular on collaboration in the supply chain, so that companies subject to the obligations will find much familiar information in it.

• Companies are expected to obtain an overview of their suppliers, identify risks using an abstract risk analysis based on general sources and only then, if necessary, examine the risks so identified in detail with the suppliers concerned.
• Companies are to prioritise those risks on the basis of the appropriateness criteria and do not need to address all risks.
• Companies cannot simply replace the risk analysis by referring to contractual assurances or corresponding certificates of risk-free supply chains from suppliers.
• Suppliers not included in the 'general risks' identified during the abstract risk analysis of the company's supply chain do not need to be examined in the detailed risk assessment.
• General and indiscriminate enquiries to a supplier not falling within the identified general risks are inappropriate.
• Confronting suppliers with prevention measures such as training, contractual obligations or codes of conduct on an indiscriminate basis, regardless of the identified risk exposure, may be deemed inappropriate and generally ineffective by BAFA.

BAFA's desire to protect SMEs, as those indirectly affected by the LkSG, from unreasonable efforts is evident. However, BAFA is also emphasising the advantages for the actual addressees of the Act: they have much leeway in deciding which risks to tackle first, which measures make sense and which (high-risk) suppliers to focus on. They can and should prioritise. The LkSG does not stipulate a specific minimum or maximum number or a specific percentage. It is also an advantage for the addressees of the Act to have to deal with a much smaller number of supplier responses.

That is certainly true in principle. In reality, it is not uncommon for large companies to have more than 10,000 direct suppliers. The abstract risk analysis alone requires much effort here and even if abstract risks were identified for only 10% of these direct suppliers, it would still be an almost insurmountable mammoth task to examine the abstract risks in concrete terms and, if specific risks were identified, to agree individually customised preventive measures with hundreds of direct suppliers, as BAFA apparently expects according to the guidance and the FAQ paper. BAFA emphasises that companies should deploy their resources in a targeted manner but leaves it open which resources the business must use in order to be able to fulfil the mammoth task of a specific, individualised approach. As though this were not enough work, BAFA also states that companies should, as a rule, favour direct contact with those indirect suppliers in the deeper supply chain who are most likely to pose risks given the results of the risk analysis. Any company that has ever tried to contact raw material producers outside Europe across several stages of the supply chain knows that this is more of an adventure than part of normal business. That is, if you get the contact details of the indirect supplier at all. In its guidance on risk analysis, BAFA stated that companies are 'encouraged' to 'successively endeavour to increase transparency in the supply chain'. Although this sounds sensible at first, it leaves essential questions unanswered, for example as to the legal basis for the requirement and the scope of the successive endeavours that may be required.

What does all this mean for the addressees of the LkSG? Suppliers for which no risks are apparent when analysing industry and origin should not be bothered with questionnaires or codes of conduct. This is certainly a relief. Beyond that, however, it becomes difficult to give a recommendation. We believe that the key must unavoidably be the depth of the specific risk analysis and a strict prioritisation of a handful of truly relevant risks that the company can realistically tackle with the ambition and expectation of improving the situation. Wait, wasn't that actually the aim of the LkSG? Extensive organisational work with questionable benefits in terms of the rights to be protected by the Act certainly was not.

The FAQ paper also fails to explain how to sensibly proceed as suggested. Instead, when considering specific risks, the paper simply states that it is 'at the discretion of the company to choose an appropriate and effective method for obtaining information when determining the risks'. General and indiscriminate enquiries to a supplier beyond the identified general risks would not count as such. What would? General and indiscriminate enquiries to all suppliers within an identified general risk area? Or even asking individualised, specific questions to all suppliers within the general risk areas? Encouraging the addressees of the Act to limit themselves to realistically manageable queries and data volumes with a view to the aforementioned objective should clearly look different. A modular system for questionnaires might be an option, from which only certain modules will be used, depending on the industry and region of origin, once the suppliers have been clustered according to abstract risks. But even then, the company is likely to be confronted with a substantial data volume as a result. But what for if only a few priority risks will be left for the subsequent prioritisation anyway?

More trouble is looming when it comes to preventive measures. It is our belief that companies should continue to agree supplier codes of conduct, which are used by most of the addressees of the Act and beyond, at least with their high-risk suppliers. Customisation does not appear to be practical or necessary in this respect, even though BAFA apparently takes a different view. Standardised supplier codes of conduct were used in the market long before the LkSG came into force and were widely recognised as being effective. What exactly should be unreasonable or inappropriate about obliging your direct suppliers to respect fundamental human rights? After all, BAFA has not (yet?) challenged companies' internal practice of having employees sign a code of conduct with comparable obligations as being inappropriate. It is clear, however, that the supplier code of conduct must not go beyond the intended purpose and impose duties of care on suppliers that have originally been imposed only on the addressees of the Act, such as the implementation of a risk management system, in particular for the purpose of communicating the results of the risk analysis to the client/addressee of the Act or a complaints procedure. How the agreement of a customised supplier code of conduct is to be successfully agreed on an ad hoc basis in an ongoing contractual relationship as a preventive measure for identified specific risks relating to a supplier, and what the advantage is compared to an abstract general commitment to essential human rights, remains BAFA's secret.

Yet, BAFA also uses the FAQ paper to announce the key topic for the next inspections of companies: from now on, it will pay particular attention to the implementation of the risk-based approach by companies in its inspections and sanction any infringements. 'Anyone who fails to take a risk-based approach or who attempts to pass on their due diligence obligations to other companies is neither acting adequately nor acting effectively on a systematic basis and is therefore not fulfilling their own obligations.'

And it gets even better: Suppliers who are contacted by a contractual partner bound by the LkSG on a blanket and non-risk-related basis can now report this to BAFA (also anonymously) at the following contact address: LKSG.Kontrolle@bafa.bund.de. BAFA may use such information to initiate an audit by sending a written request for information to the company. Disputes with suppliers over the completion of standardised questionnaires and excessive codes of conduct may therefore fall back badly on the addressee of the Act in the form of a request for information from BAFA. The problem is that not every tip-off from a supplier is automatically justified.

Although the information provided by BAFA in the guidances and FAQs, as already said, is not legally binding and no court rulings have been handed down on the issues raised, it is unpleasant enough for companies to have to undergo intensive investigations by BAFA and to possibly be fined, even if the decision is later revoked by a court.

But it does not have to come to that. At least the last sentence in BAFA's FAQs sounds reasonable for the addressees of the Act: 'BAFA will appropriately consider plausible presentations of the risk-based approach with a view to the company’s efforts to meet the corporate due diligence obligations.' This means that companies know what they have to do, at least in principle: if they have not already done so, they should document and implement a coherent concept in which, based on the risk analysis, a large part of their suppliers remain unaffected and suppliers with clearly identified risks are required to comply with a moderate supplier code of conduct and, where necessary, are subjected to additional preventive measures such as targeted training and checks.

Dr André Depping
Dr Daniel Walden

Case Background

The dispute arose from an asymmetrical jurisdiction clause in an international contract related to a project undertaken by two individuals. The contract specified that disputes would be resolved by the court of Brescia, Italy. However, it also granted SIL the right to initiate legal proceedings in any other competent court, whether in Italy or abroad.

This type of clause is characterized by granting one party discretionary choice of jurisdiction, while binding the other party to a fixed forum. In this instance, SIL retained the ability to select the jurisdiction, whereas Agora was restricted to the court of Brescia.

Following alleged defects in project execution, both SIL and Agora were sued for liability and damages before the Regional Court of Rennes, France. Subsequently, Agora initiated proceedings in France against SIL based on a guarantee. SIL contested the French court’s jurisdiction, but both the Regional Court of Rennes and the Cour d'Appel ruled in favour of French jurisdiction.

Legal Issue

The Cour de Cassation referred the matter to the ECJ, questioning whether the asymmetrical jurisdiction clause aligned with the Brussels I Regulation and consumer protection principles. Specifically, the ECJ was asked to assess whether such a clause placed the weaker party at an unlawful disadvantage and whether it was legally enforceable. This necessitated an interpretation of Article 25 (1) of the Brussels I Regulation, particularly regarding the validity of jurisdiction clauses.

Key Aspects of the Judgment

The ECJ determined that an asymmetrical jurisdiction clause is not inherently invalid. Such clauses may be upheld if they comply with the Brussels I Regulation and do not impose an unfair disadvantage on the weaker party.

The court emphasized that the validity of such clauses must be assessed on a case-by-case basis. In this instance, the ECJ found no undue disadvantage for Agora, ruling that the clause remained effective as it did not contravene the Brussels I Regulation. Since the contract was purely commercial and concluded between two businesses, the consumer protection provisions of the regulation were deemed inapplicable.

The ECJ reaffirmed that jurisdiction clauses contribute to contractual freedom and legal certainty, both of which are protected under the Brussels I Regulation. Given that both parties had freely negotiated and agreed to the terms, the fact that Agora lacked the same jurisdictional flexibility as SIL did not constitute an impermissible disadvantage.

Conclusion

The ECJ's ruling in the SIL v. Agora case has significant implications for the enforceability of asymmetrical jurisdiction clauses in international commercial contracts. The judgment reinforces legal certainty in cross-border agreements and clarifies that such clauses are not inherently invalid but must be scrutinized on an individual basis to ensure compliance with the Brussels I Regulation and applicable legal principles. Ultimately, the ruling affirms that commercial parties’ contractual autonomy influences the validity of jurisdiction clauses.

Dr Ralf Hafner
Dr Tobias Pörnbacher

Understanding the Dual Investment Strategy

Let's examine both components of this historic financial commitment: 

The EUR 500 billion Infrastructure Special Fund

This fund, dedicated to rebuilding Germany's deteriorating infrastructure, will be deployed over ten years and represents more than one-tenth of Germany's GDP. SPD leader Lars Klingbeil emphasized that "Germany is running on wear and tear" and requires massive investment to modernize its roads, bridges, railways, and digital networks.

The Defence Spending Reform is equally significant. The constitutional debt brake (Schuldenbremse) will be modified: It will exempt defence spending above 1% of GDP from debt restrictions, allow theoretically unlimited credit-financed defence expenditures, and enable Germany to meet and potentially exceed NATO's 2% of GDP target for defence spending. CDU leader Friedrich Merz has called for a "whatever it takes" approach to defence, signalling a political commitment to substantial military modernization in response to evolving security threats in Europe.

Business Opportunities in Defence

The defence spending reform creates extensive opportunities for international defence contractors and related businesses:

1. Military Equipment and Systems Modernization

With the potential for substantially increased defence procurement budgets, companies in these areas stand to benefit:

• Land systems: Manufacturers of armoured vehicles, artillery systems, and ground equipment will see increased demand as Germany upgrades aging systems.
• Naval capabilities: Companies specializing in submarine technology, naval vessels, and maritime systems will find opportunities as Germany strengthens its naval forces.
• Aerospace and air defence: Producers of fighter aircraft, air defence systems, and military drones will benefit from Germany's focus on aerial capabilities
• Command, control, and communications: Providers of advanced C4ISR systems (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance) will see growing markets.

2. Defence Technology and Innovation

Investment will flow to cutting-edge defence technologies beyond traditional defence equipment:

• AI and autonomous systems: Companies developing artificial intelligence for defence applications, including autonomous vehicles and decision-support systems.
• Cybersecurity and electronic warfare: Firms specialising in protecting military networks and developing electronic warfare capabilities will be essential as warfare becomes increasingly digital.
• Space-based defence capabilities: With growing recognition of space as a military domain, companies providing satellite technology and space-based intelligence systems will find new opportunities.

3. Defence Supply Chain and Services

The broader defence ecosystem will also benefit:

• Logistics and supply chain management: Companies that can optimize military logistics and supply chains.
• Training and simulation: Providers of advanced training solutions using virtual reality and augmented reality for military personnel.
• Maintenance, repair, and overhaul (MRO): Firms specialising in the maintenance of complex military systems throughout their lifecycle.

Business Opportunities in Infrastructure

The EUR 500 billion infrastructure fund will create enormous opportunities across multiple sectors:

1. Transportation Infrastructure

Germany's aging transportation networks require comprehensive modernization:

• Bridge construction and rehabilitation: There are thousands of bridges in need of repair or replacement. Companies with expertise in accelerated bridge construction will be in high demand.
• Road development and maintenance: Firms specializing in highway construction, smart road systems, and sustainable pavement technologies.
• Railway modernization: Companies with expertise in high-speed rail, signalling systems, and railway electrification as Germany pushes to improve its rail network.

2. Energy Infrastructure

Germany's infrastructure plans make the energy transition a priority:

• Renewable energy systems: Developers and manufacturers of wind, solar, and other renewable energy technologies.
• Energy storage solutions: Companies offering grid-scale batteries and other energy storage technologies to complement renewable energy.
• Smart grid technology: Providers of intelligent energy distribution and management systems.
• Hydrogen infrastructure: Firms specializing in hydrogen production, storage, and distribution as Germany invests in this emerging energy carrier.

3. Digital Infrastructure

Germany's digital transformation is a critical component of infrastructure modernization:

• Broadband and 5G deployment: Telecommunications equipment providers and network deployment specialists.
• Data centres and cloud infrastructure: Companies building and operating the physical foundation of digital services.
• Smart city technologies: Providers of integrated urban management systems that connect transportation, energy, and public services.

4. Environmental and Climate-Resilient Infrastructure

Germany will prioritise infrastructure that supports climate goals:

• Flood protection and water management: Companies specialising in flood defence systems and sustainable urban drainage.
• Climate-adaptive infrastructure: Firms designing infrastructure that can withstand extreme weather events.
• Carbon-reducing building materials: Providers of innovative, low-carbon materials for infrastructure projects.

The Common Challenge: German Bureaucracy

Despite the massive financial commitment across both defence and infrastructure, foreign companies must understand that Germany's administrative processes remain a significant challenge. The same bureaucratic hurdles affect both sectors:

Administrative Realities in Germany

• Planning and approval processes for major infrastructure projects can take up to 5-18 years.
• Defence procurement processes are notoriously complex and slow-moving.
• Multiple levels of government involvement create coordination challenges.
• Environmental, historical, and social impact assessments add layers of complexity.

These administrative challenges mean that despite the availability of funds, actual project implementation may lag significantly. It is likely though that this will be changed by the Union and the SPD as well. However, companies should have experienced experts at their sides when dealing with the German administration.

Strategies for Success in both Markets

To maximize opportunities in both defence and infrastructure, it is recommended to:

1. Form strategic partnerships: Consider joint ventures or partnerships with established German companies that understand the administrative landscape and have existing relationships.
2. Invest in regulatory expertise: Build teams that understand Germany's complex regulatory environment, including defence procurement rules and infrastructure approval processes.
3. Offer integrated solutions: Companies, that can demonstrate how their offerings address both technical requirements and administrative efficiency, will have advantages.
4. Emphasize sustainability and security: Projects that demonstrate alignment with Germany's dual commitment to environmental sustainability and enhanced security will receive priority.
5. Be patient but persistent: Adjust business expectations for the reality of German administrative timelines while continuously engaging with stakeholders.

Sectoral Convergence: Where Defence Meets Infrastructure

An interesting aspect of Germany's dual investment approach is the growing convergence between defence and infrastructure priorities. Companies positioned at this intersection will find particularly valuable opportunities:

Areas of Convergence

• Critical infrastructure protection: Solutions that secure energy grids, transportation systems, and communications networks against physical and cyber threats.
• Dual-use technologies: Technologies with both civilian and military applications, such as advanced materials, autonomous systems, and certain types of sensors.
• Resilient supply chains: Systems and services that ensure continuity of critical materials and components for both defence and infrastructure.
• Energy security: Solutions that enhance Germany's energy independence, a concern for both economic and defence reasons.

A Dual Opportunity for International Business

Germany's historic investment in both defence and infrastructure represents a rare dual opportunity for international companies. The scale of investment is unprecedented, creating markets that will evolve over the next decade and beyond. Success will require a nuanced understanding of Germany's unique administrative environment, patience with its bureaucratic processes, and the ability to demonstrate value beyond mere technical capabilities. Those companies that position themselves as partners in Germany's transformation – helping not just to rebuild roads or modernize military capabilities, but to improve the systems by which these goals are achieved – will find themselves at the forefront of this historic opportunity. Foreign companies willing to make this investment in understanding and adapting to the German context will find substantial rewards in the next decade as Germany reinvents both its physical infrastructure and its security posture in response to evolving global challenges.

Do you have any questions? Do not hesitate to contact us.

Dennis Hillemann
Johannes Voß-Lünemann

The new reality - defence technology as a growth market

The global political situation has escalated dramatically in recent years. With the ongoing war in Ukraine, increasing tensions in various regions of the world and general uncertainty, we are experiencing a historic turning point. The much-cited "turning point" has long since become a reality - and with it, considerable sums are flowing into defence.

This opens up completely new perspectives: Companies that previously only manufactured civilian products are now seriously considering whether and how they can make their technologies and expertise usable for the defence sector. For medium-sized companies with technological expertise in particular, the question arises: What funding opportunities are there for entering the defence technology sector?

Here is an up-to-date overview of the most important programmes and instruments that will be available at the beginning of 2025:

European Funding Opportunities

European Defence Fund (EDF) - the flagship of EU funding

The European Defence Fund (EDF) will provide around 1.065 billion euros for defence research and development in 2025. Particularly interesting for newcomers: 4% of the budget is reserved for "disruptive" technologies and a further 6% for innovative projects focussing on SMEs.

The current 2025 work programme comprises 33 topics in nine tenders - from ground combat and cyber defence to environmentally friendly technologies. The focus is on projects such as cyber defence, marine and underwater capabilities and sensor systems.

Funding conditions in brief:

• Applications must generally be submitted by consortia of at least three independent organisations from three EU Member States
• Two partners from two countries are sufficient for disruptive technology projects
• Only companies/organisations based in the EU or Norway are eligible for funding
• Depending on the project type, the funding rate is up to 100% (especially for pure research)
• There are bonus points for the participation of SMEs

Important for your planning: The tenders have been running since mid-February 2025 and the deadline for submitting project applications is 16 October 2025.

Defence Equity Facility – capital for innovative startups

Another exciting opportunity is the Defence Equity Facility (DEF) which was launched at the beginning of 2024. This venture capital fund has a volume of 175 million euros and seeks to mobilise private venture capital for defence technology innovations with dual-use potential.

The DEF does not invest directly in companies, but in specialised private funds which in turn invest in security and defence companies. It is planned to initiate investments of up to 500 million euros in defence-related startups and SMEs by 2027.

The DEF could facilitate access to urgently needed growth capital, especially for innovative startups that develop new technologies such as AI, sensor technology or cyber security.

German Funding Opportunities

Dual-use potential in civil innovation programmes

An approach that is often neglected or ignored is to apply the classic innovation funding programmes such as ZIM (Central Innovation Programme for SMEs) or KMU-innovativ. Although these programmes are primarily civilian in nature, they can also be relevant for defence technology under certain circumstances.

The Federal Ministry for Economic Affairs and Energy is generally open to all technologies when it comes to ZIM. Defence technology companies can also receive ZIM grants, provided the project content can be used for civilian purposes - such as new material technologies, electronics or AI applications that could later be used for military purposes.

The same applies to BMBF programmes such as KMU-innovativ which offer calls for tenders in fields such as AI, electronics or security technologies. Although direct defence topics are excluded, security and defence as an area of application can benefit indirectly.

Cyber Innovation Hub of the Bundeswehr (German armed forces)

The Cyber Innovation Hub of the Bundeswehr (CIHBw) serves as an interface between the start-up scene and the Bundeswehr. It was launched as a pilot project to bring military users together with civilian innovations.

The CIHBw strengthened its partnerships in 2025. Particularly noteworthy is the strategic partnership concluded with the University of the Federal Armed Forces Munich on 11 February 2025. This alliance aims to closely link research and innovation with the requirements of the troops.

The hub also offers support for intrapreneurship and regularly organises innovation challenges - an exciting opportunity for innovative companies to develop their solutions directly with the Bundeswehr.

Strategic Orientation - What Is Being Promoted?

Anyone wishing to enter the defence sector should be guided by the National Security and Defence Industrial Strategy adopted in December 2024. This strategy defines clear key technologies that are prioritised for future funding:

• IT and communication technologies for military purposes
• Artificial intelligence (AI) and autonomous systems
• Naval shipbuilding
• Government shipbuilding
• Protected/armoured vehicles
• Sensors (reconnaissance, radar, optoelectronics)
• Protection technologies and electromagnetic combat

Other critical areas include quantum technologies, missiles and air defence, space technologies, munitions and unmanned systems (unmanned aerial vehicles).

Projects that fall into these categories have a much better chance of receiving funding and being awarded long-term contracts.

Practical Tips for Beginners

As experienced lawyers with a view to funding practice, we would like to give you some practical tips:

1. Use existing expertise: Cooperate with established companies in the defence industry to benefit from their experience.
2. Think dual-use: Develop technologies that can be used for both civil and military purposes. This strategy maximises your funding opportunities.
3. Form consortia: Cooperation with partners from other EU countries is essential for the European Defence Fund. Establish networks at an early stage.
4. Pay attention to safety aspects: The defence industry is subject to special security requirements. Make sure that your company fulfils the necessary requirements.
5. Plan early: The application deadlines are often long and the procedures complex. Start preparing at least six months before the deadline.

Conclusion - A Market in Transition

The current global political situation has caused fundamental changes in the defence sector. The massive investment in European security is creating completely new business opportunities - even for companies that were previously active in other areas.

The funding programmes presented offer various entry options. The combination of European funds (EVF) for research and development with national programmes for concrete implementation is particularly promising.

Those who act strategically now and adapt their civil expertise to the defence sector can benefit from this growth market in the long term.

Do you have questions about funding for defence technologies or need support with your application? Contact us - we will be pleased to help you!

Dennis Hillemann
Johannes Voß-Lünemann

High-Risk AI systems under the EU AI Act In a employment context, the new regulation concerns foremost: 
a) AI systems intended to be used for the recruitment or selection of natural persons, in particular to place targeted job advertisements, to analyze and filter job applications, and to evaluate candidates. 
b) AI systems intended to be used to make decisions affecting terms of work-related relationships, the promotion or termination of work-related contractual relationships, to allocate tasks based on individual behavior or personal traits or characteristics or to monitor and evaluate the performance and behavior of persons in such relationships.

The most important requirements for high-risk AI systems at a glance 

The providers of high-risk AI systems bear the following obligations: 

• Quality and risk management
• Technical documentation, record-keeping and logging obligations
• Consideration of accuracy, robustness, cybersecurity and accessibility during development
• Transparency and information obligations
• Registration in the relevant EU database and cooperation with the competent authority

Those who only deploy of high-risk AI systems generally have to fulfil fewer requirements than providers. However, there may be scenarios in which they can be subject to the same extensive obligations as the providers of high-risk AI systems.

Looking ahead, the AI Liability is poised to complement the EU AI Act. It aims to streamline legal pathways for individuals harmed by AI systems, including in employment related situations. However, the legislative process is still in its early stages and only rarely does a directive emerge from the legislative process in the form in which it was presented by the EU Commission.

One element of this package of measures is the Action Plan for Affordable Energy. It presents a roadmap for affordable and secure energy supply. 

The following text gives you an overview of the key points of this roadmap.

I. The EU action plans

Energy prices in the EU have risen dramatically in recent years, affecting households, companies and industry alike. Energy-intensive industries in particular are facing rising costs that jeopardise their competitiveness on the global market. At the same time, geopolitical uncertainties and dependence on fossil fuel imports are exacerbating the situation.

At the end of January 2025, the European Commission already described and announced measures in its Competitiveness Compass for the EU, based on the Draghi Report, that are intended to accelerate the transformation of the EU and increase its competitiveness. 

The Green Industrial Deal has now been published as part of this Compass. In this context, the EU Commission presents, among other things, the Action Plan for Affordable Energy.

The aim of this Plan is to reduce energy costs in the short term, accelerate structural reforms and create a stable, climate-friendly and competitive energy system within the EU in the long term.

II. High energy costs in the EU

The Commission lists several factors that are responsible for the high energy costs. On the one hand, it mentions the heavy dependence on imported fossil fuels, especially gas. High price fluctuations on the global markets and geopolitical tensions are inflating costs. On the other hand, the report identifies a disadvantage in the still inadequate integration of the European electricity grid, which leads to grid bottlenecks and inefficiencies and therefore to higher costs. High taxes, grid fees and levies in the individual Member States are also cited as major factors causing high and rising energy prices.

III. The four pillars of the Action Plan

In order to reduce these high energy costs quickly and systematically and to make the energy system fit for the future, the Action Plan presents four pillars containing a total of eight actions: Lowering energy costs (Pillar 1), completing the Energy Union (Pillar 2), attracting investments (Pillar 3) and being ready for potential energy crises (Pillar 4).

Pillar 1: Lowering energy costs

In Pillar 1, the EU Commission defines four actions to lower energy costs.

Action 1: Make electricity bills more affordable

As a first step, network charges will be reduced and taxes and levies lowered. The Commission intends to introduce new pricing structures for this purpose, designed specifically to promote flexible grid use and grid stability. The Commission also wants to issue recommendations to the Member States on reducing taxes and levies, with the costs to be shifted to the national budgets. In addition, switching energy suppliers will be made easier for consumers, and energy communities will be promoted.

Action 2: Bring down the cost of electricity supply

Besides the above, the Commission plans to develop legal guidelines for power purchase agreements (PPAs) and contracts for difference (CfDs) to promote more favourable procurement models and the integration of renewable energies also for those consumers who have so far had little access to this type of electricity supply. Regulatory obstacles will be removed by the Member States and certain instruments will be introduced to minimise risk. 

The Commission also intends to make legislative proposals to further shorten authorisation procedures for grids, storage and renewable energies. Member States will be supported in their efforts to improve the human and financial resources of the authorisation authorities. This should reduce approval periods to less than six months for simpler projects, such as repowering projects in acceleration areas.

The presentation of a European Grid Package, which will build on the Network Action Plan already in place since 2023, is also aimed at accelerating the modernisation and digitalisation of the networks in Europe. System flexibility is going to be increased through the further expansion of storage capacity and also through demand response. To this end, the Member States should implement the EU regulations on market access more quickly and offer better incentives to make flexibility more attractive for the individual stakeholders.

Action 3: Ensure well-functioning gas markets

The competitiveness of the gas markets will be improved through fair prices. It is planned that a Gas Market Task Force will thoroughly scrutinise the market and take steps to ensure the proper functioning of the market and prevent market distortions. A broad stakeholder consultation will be launched in the areas of regulatory oversight, alignment and strengthening of energy and financial market rules, reduction of administrative burden for companies trading in energy financial markets and the introduction of a common harmonised database. The work of the task force is expected to be completed by the 4th quarter of 2025 with the delivery of a recommendation.

Action 4: Energy efficiency - delivering energy savings

Another aspect of lowering energy costs is to reduce energy consumption, i.e. improve energy efficiency. Access to energy efficiency services will be facilitated and financial incentives increased, both for companies and consumers. Especially the latter will be offered easier access to energy-efficient products and products with a longer service life. To this end, labelling and ecodesign regulations will be adapted. 

Pillar 2: CompletIng the Energy Union

The Commission addresses the completion of the Energy Union in Pillar 2 of the Action Plan - which is also Action 5. Meeting this goal requires long-term structural measures. The Commission proposes, among other things, the introduction of an Energy Union Task Force for improved coordination between the Member States, the revision of the existing Energy Union Governance Regulations and the introduction of a Heating and Cooling Strategy. An investment strategy for clean energy and a strategic roadmap for digitalisation and AI in the energy sector will also be presented.

Pillar 3: Attracting investments

In Pillar 3, the Commission deals with the financing of the energy transition. Securing a stable and affordable energy supply for European industry in the long term will be made easier.

In Action 6, the Action Plan therefore provides for the creation of a favourable investment climate through a tripartite contract for affordable energy between energy producers, public sector and industry. The European Investment Bank (EIB), the Commission and the Member States are expected to support the parties involved. The aim is to provide predictability and scalability. 

Pillar 4: Being ready for potential energy crises 

Pillar 4 provides the Member States with appropriate instruments to enhance resilience of the energy market during future energy crises and to strengthen security of supply.

In Action 7, the Commission therefore announces a proposal to revise the current EU legal framework for the security of energy supply. The proposal will help to stabilise prices by drawing on the experience of the current energy crisis. This is aimed at ensuring better availability of energy at all times.

Action 8 guides the Member States on incentives through an appropriate remuneration system to reduce demand at peak times. Grid operators are encouraged to implement measures to reduce energy consumption at certain times. This is intended to keep the energy bill down and to reduce price volatility. Action 8 aims at stabilising the energy market and improving price control. In cases where a grid bottleneck or overload severely impedes the flow of energy, close cooperation between the transmission system operators (TSOs) and the national authorities will continue. Overall, cross-border electricity trading is to be maximised to mitigate local price peaks and guarantee the supply of energy.

IV. Conclusion and outlook

The measures presented in the Action Plan for Affordable Energy are numerous and range from specific adjustments to existing regulations all the way to reports by task forces yet to be established based on which specific measures will have to be developed. The Action Plan’s aim to reduce energy prices in the EU and thus strengthen competitiveness is certainly equally important and valid for all Member States, consumers and industry. It remains to be seen exactly which measures will be implemented and how they can and must be integrated into the German legal framework. The timelines for the implementation of the measures listed in the Action Plan range from ‘immediately‘, through the first calendar quarter of 2025, to the beginning of 2026. 

We will monitor the developments and the impact on individual market participants, analyse them and keep you informed.

Peter Meisenbacher
Dr Malaika Ahlers LL.M.

Sebastian Berg, Anton Buro und Dr Florian Böhm from our Energy team will also be happy to answer any questions you may have on energy law-related issues.

The first omnibus package contains the following steps:

• Make sustainability reporting more accessible and efficient  (relates to the Corporate Sustainability Reporting Directive – CSRD, more on it below)
• Simplify due diligence to support responsible business practices  (betrifft die Corporate Sustainability Due Diligence Directive – CSDDD bzw. CS3D, more on it below)
• Strengthen the carbon border adjustment mechanism for a fairer trade 
• Unlock opportunities in European investment programmes

For details see: Commission proposes to cut red tape and simplify business environment - European Commission

The individual steps are described more precisely on the linked pages. Regarding the first two steps, the EU Commission emphasises the following:

„Making sustainability reporting more accessible and efficient 

Specifically, the main changes in the area of sustainability reporting (CSRD and EU Taxonomy) will:

• Remove around 80% of companies from the scope of CSRD, focusing the sustainability reporting obligations on the largest companies which are more likely to have the biggest impacts on people and the environment;
• Ensure that sustainability reporting requirements on large companies do not burden smaller companies in their value chains;
• Postpone by two years (until 2028) the reporting requirements for companies currently in the scope of CSRD and which are required to report as of 2026 or 2027.
• Reduce the burden of the EU Taxonomy reporting obligations and limit it to the largest companies (corresponding to the scope of the CSDDD),  while keeping the possibility to report voluntarily for the other large companies within the future scope of the CSRD. This is expected to deliver significant cost savings for smaller companies, while allowing businesses that wish to access sustainable finance to continue that reporting.
• Introduce the option of reporting on activities that are partially aligned with the EU Taxonomy, fostering a gradual environmental transition of activities over time, in line with the aim to scale up transition finance to help companies on their path towards sustainability.
• Introduce a financial materiality threshold for Taxonomy reporting and reduce the reporting templates by around 70%.
• Introduce simplifications to the most complex “Do no Significant harm” (DNSH) criteria for pollution prevention and control related to the use and presence of chemicals that apply horizontally to all economic sectors under the EU Taxonomy – as a first step in revising and simplifying all such DNSH criteria.
• Adjust, among others, the main Taxonomy-based key performance indicator for banks, the Green Asset Ratio (GAR). Banks will be able to exclude from the denominator of the GAR exposures that relate to undertakings which are outside the future scope of the CSRD (i.e. companies with less than 1000 employees and €50m turnover).

Simplifying due diligence to support responsible business practices

The main changes in the area of sustainability due diligence will:

• Simplify sustainability due diligence requirements so that companies in scope avoid unnecessary complexities and costs, e.g. by focusing systematic due diligence requirements on direct business partners; and by reducing the frequency of periodic assessments and monitoring of their partners from annual to 5 years, with ad hoc assessments where necessary.
• Reduce burdens and trickle-down effects for SMEs and  and small mid-caps by limiting the amount of information that may be requested as part of the value chain mapping by large companies;
• Further increase the harmonisation of due diligence requirements to ensure a level playing field across the EU;
• Remove the EU civil liability conditions while preserving victims' right to full compensation for damage caused by non-compliance, and protecting companies against over-compensation, under the civil liability regimes of Member States; and
• Give companies more time to prepare to comply with the new requirements by postponing the application of the sustainability due diligence requirements for the largest companies by one year (to 26 July 2028), while advancing the adoption of the guidelines by one year (to July 2026).“

For details see: Commission simplifies rules on sustainability and EU investments

The proposals that have just been published will now have to be analysed more closely.

Please note: These are proposals for legislation by the EU Commission. The Commission has announced that it will submit these proposals to the European Parliament and the Council for examination and decision-making. So it remains to be seen when and with what specific content the EU Commission's proposals will ultimately be adopted.

Dr Daniel Walden
Dr André Depping

This is the third post in a series of blog posts on the topic of Football and the Law. While the first post (here) looked at the competitions and the second at the clubs (here), this third post focuses on the players. The article highlights the latest legal developments in relation to players and explains why a large number of further legal disputes (litigation) can be expected.

Fifa Regulations and national law

Professional football players are fundamentally employees, which means that their respective contracts fall under national (employment) law while the rules of the various football associations also apply. These are laid down by FIFA, the world football association, but are implemented by each national association. The FIFA "Regulations on the Status and Transfer of Players" (RSTP) stipulate, among other things, that a professional football player cannot change employers at will. Instead, player transfers must be registered with the national association within certain time frames, the so-called transfer periods, and players are not allowed to participate in competitions without registration. Failure to comply with these rules can result in significant penalties for both clubs and players. Furtherrules of association law can be drastic for professional footballers.

The case of Dani Olmo and Financial Fair Play

The case of Spanish international Dani Olmo is an example of how of the overlaps between national employment law and the self-imposed rules of Football associations can restrict the activities of players and clubs. Following his transfer from RB Leipzig to FC Barcelona, Dani Olmo was recently denied registration and thus eligibility to play in the second half of the Spanish league because his club, FC Barcelona, allegedly failed to comply with UEFA's Financial Fair Play rules. It was only after FC Barcelona had improved its balance sheet by selling usage rights to VIP boxes that the Spanish FA granted temporary permission to play (see reports here Dani Olmo: Barcelona forward granted temporary permission to play - BBC Sport and here: Laporta cierra un acuerdo de 100 millones para inscribir a Olmo y Pau Víctor | Marca). A final decision on the registration is still pending. 

Limits under European law

However, the far-reaching effects of the FIFA Regulations, as illustrated by the Dani Olmo case, are subject to the limits of European law. These limits have been shifted in favour of the players in current proceedings. The proceedings are based on the case of the player Lassana Diarra, whose change of club failed due to a lack of registration in accordance with FIFA rules. The player sued FIFA and the Belgian national football association for damages. The case is pending before the Court of Appeal in Mons (Belgium), which referred the question of whether FIFA's transfer rules (RSTP) comply with European law to the Court of Justice of the EU (CJEU) for a preliminary ruling. 

In its ruling of October 4, 2024, the CJEU (C-650/22 Link: CURIA - Documents) ruled that FIFA's rules on player transfers violate European law. Although FIFA may regulate the transfer market in the interest of sport, it must also respect the free movement of workers in accordance with Art. 45 of the Treaty on the Functioning of the European Union (TFEU) and may not unlawfully hinder competition in accordance with Art. 101 TFEU. The CJEU generally finds that the RSTP violates European law and criticizes in particular the harsh sanctions and the undefined legal terms of the RSTP. 

The Diarra proceedings have not yet been concluded and will continue before the Court of Appeal in Mons (Belgium). However, it confirms a trend that is already known from the Superleague ruling of the CJEU (judgment of December 21, 2023 European Superleague Company, C-333/21, EU:C:2023:1011). In this case, the CJEU also found that competition was unlawfully impeded and ruled that the organisation of football competitions constitutes an economic activity to which European competition law applies. In the Diarra case, the CJEU applied this reasoning to the players. Consequently, the practice of sport by players (as well as the organisation of competitions) is also an economic activity to which the rules of EU law apply. Also with regard to players, the CJEU subjects FIFA and UEFA to stricter control than before and thus continues the development that began with the Superleague ruling (see the first blog post in this series here). Dani Olmo could also benefit from this development.

Effects and Outlook

The CJEU has ruled that FIFA's rules are in principle contrary to European law. However, FIFA's rules could be covered by exceptions, the existence of which must now be decided by the Court of Appeal in Mons. In order to make use of the exceptions, FIFA would have to show that its rules are necessary for the proper conduct of club competitions. 

However, the CJEU's clear criticism of FIFA's transfer rules should prompt FIFA to reform its transfer rules, regardless of the outcome of the Diarra case. The reform should lead to greater flexibility for players when changing clubs. This could in turn lead to lower transfer fees in the future, as the selling clubs would have fewer opportunities to retain a player. The record-high transfer fees of the last transfer period would then be a thing of the past.

In addition, an increase in legal disputes is to be expected. In disputes with clubs, players can invoke the increased control density of European law. At the same time, clubs may be prompted to take action against players in breach of contract using national contract and tort law. For the further disputes to be expected in the area of sport, the applicable arbitration agreements, which can supersede state jurisdiction, must always be taken into account. The Diarra case was also initially brought before arbitration courts before it reached the CJEU. 

We are proud to have qualified in the Legal 500 league as one of the "Firms to watch" in Commercial Litigation (The Legal 500 Germany 2025) with ADVANT Beiten and are happy to advise you on all aspects of dispute resolution in and out of court, whether in or out of sport and whether before arbitration tribunals or state courts.

Philipp Sahm
Chiara-Lucia Peterhammer

The recent successful completion of a case in the Supreme Court of the Russian Federation serves as a good example of our permanent presence on site.

Background information:

ADVANT Beiten represented successfully the interests of a client (the subsidiary of a German concern) in the Supreme Court of the Russian Federation. In the dispute with the tax authority, the Russian Supreme Court agreed in full with the arguments put forward by ADVANT Beiten and recognised that the reduced rate of VAT might be applied to the sale of goods in Russia.

Within the framework of an audit the competent tax authority declared that the application of the reduced rate of VAT of 10% to the sale of goods was illegal. Our client contended that the application of the reduced rate of VAT to the sale of its goods was legitimate. During the consideration of the dispute the court of first instance and the court of appeal shared the position of our client, whereas the court of cassation adopted the tax authority’s position. On 22 January 2025 the Supreme Court of the Russian Federation brought an end to the dispute. During the consideration of the case the judges supported the arguments of our lawyers that the tax authority had during the audit applied criteria which are not established in Russian tax legislation as the grounds for disallowing the application of the reduced rate of VAT, in violation of Article 55 and Article 57 of the Constitution of the Russian Federation. As a result, the Supreme Court of the Russian Federation confirmed the legitimacy of applying the reduced VAT rate and ruled in favour of our client.

The Corruption Directive-D is intended to overcome obstacles that have been identified in cooperation between the authorities of the various Member States. The existing instruments, i.e. the Council Framework Decision 2003/568/JHA and the Convention on the fight against corruption involving officials of the European Communities or officials of Member States of the European Union, are not comprehensive enough in the opinion of the Council, as corruption is prosecuted differently from Member State to Member State. The recitals of the Corruption Directive-D state, among other things, that:

[…] These instruments are, however, not sufficiently comprehensive, and the current criminalisation of corruption varies across Member States hampering a coherent and effective response across the Union.

"[…] Corruption is a transnational phenomenon that affects all societies and economies. Measures adopted at national or Union level, should recognise this international dimension. […]"

In Chapter 2 "Corruption Offences", the Corruption Directive-D provides for minimum standards for

• offences (see 1),
• penalties and measures for natural persons and/or legal persons (see 2), and
• a catalogue of mitigating circumstances (see 3).

1. Offences under the Corruption Directive-D

The following offences are proposed:

• Bribery in the public sector, Art. 7 Corruption Directive-D,
• Bribery in the private sector, Art. 8,
• Misappropriation, Art. 9,
• Trading in influence, Art. 10,
• Abuse of functions, Art. 11,
• Obstruction of justice, Art. 12, and
• Enrichment from corruption offences, Art. 13. 

Articles 7 to 9, Article 12 and Article 13 define minimum standards for offences already contained in the German Criminal Code (Sections 331 et seq., 299, 266, 246 (2), 240 and 261 of the German Criminal Code). In this respect, adjustments may need to be made at most. Necessary adjustments with regard to the definition of advantage (see 1.1) and the effects of the definition of "public official" (see 1.2) are to be emphasised.

Articles 10 and 11, on the other hand, define minimum standards for criminal offences that are not yet known in this form in German criminal law and would therefore have to be newly introduced. Of particular note here is the trading in influence (Art. 10) (see 1.3). Unlike the European Commission's proposal of 03 May 2023, the Corruption Directive-D does not provide for attempted criminal liability (see 1.4).

1.1 The "undue" advantage 

Art. 7 defines advantage differently from Sections 299 and 331 et seq. German Criminal Code. While any advantage is sufficient for criminal liability under Sections 299 and 331 et seq. German Criminal Code, Art. 7 requires an undue advantage. The German Criminal Code already recognises this addition from Sections 108e and 108f German Criminal Code. According to the explanatory memorandum to Section 108e German Criminal Code, it is intended to take account of the special nature of bribery of members of parliament, as there are benefits in the political arena that appear to be permissible under general parliamentary practice. However, it is doubtful whether this principle can also be applied to the other corruption offences under the German Criminal Code. 

1.2 The definition of "public official"

The term "public official" is used throughout Art. 7 et seq. and is legally defined in Art. 2 para. 2. Public officials are accordingly Union or national officials of a Member State or a third country as well as persons who have been entrusted with public functions under national law and carry out such functions or persons who have been entrusted with public functions for an international organisation or international court and carry out such functions.

The term ‘national official’ according to Art. 2 para. 2 lit. a) ii) covers any person holding an executive, administrative, or judicial office at national, regional or local level. Thus, the Corruption Directive-D assimilates any person holding a legislative office to a national official. According to these guidelines, the German legislator would have to abandon the current differing criminal law treatment of elected representatives and public officials and establish a harmonised system.

1.3 Trading in influence, Art. 10

Art. 10 criminalises the so-called trading in influence. In contrast to the bribery offences under the German Criminal Code, an offence is to be introduced in which the advantage is not promised or granted to a public official. The advantage is promised to a person who "exerts illicit influence over a decision or measure to be taken by a public official in the exercise of that official’s functions" with a view to obtaining an undue advantage from that public official. As a result, a preparatory act in a tripartite constellation of persons is criminalised, which the German Criminal Code has known for the first time since the introduction of Section 108f German Criminal Code and which we have already examined here.

1.4 Attempted misappropriation

Unlike the Proposal for a Directive of the European Commission on combating corruption dated 03 May 2023, the Corruption Directive-D does not provide for attempted criminal liability. The reason for this could be the criticism of the introduction of attempted misappropriation.

2. Penalties and measures for natural and legal persons

For natural persons, Art. 15 provides for minimum standards for a maximum term of imprisonment (at least two years to four years as a maximum). In addition, it will be possible under Article 15 para. 4 to impose further sanctions such as fines, the removal, suspension and reassignment from a public office, or withdrawal of permits and authorisations to pursue activities that resulted in or enabled the relevant offence.

For legal persons, the turnover-related fine (Art. 17 para. 3) is to be emphasised in particular. According to this, the maximum level of such fines should not exceed 3% or 5% of the total worldwide turnover of the previous financial year of the legal person, or alternatively at least EUR 24 million or EUR 40 million, depending on the offence.

3. Mitigating circumstances

Art. 18a contains a catalogue of mitigating circumstances that can be transposed into national law. This includes, in particular,

• the implementation of internal controls and compliance programmes to prevent corruption (both prior to or after the commission of the offence), and
• the voluntary self-disclosure and the initiation of remedial measures.

In particular, the consideration of compliance programmes in the assessment of fines now corresponds to established case law. 

4. Outlook for companies

As a result, companies are likely to face higher sanctions in cases of corruption. Companies should monitor further developments in order to be able to adapt their compliance requirements in good time if necessary. 

Dr Oliver Ofosu-Ayeh

This is the second in a series of blog posts on the topic of football and the law. Based on current developments, the second instalment deals with the question of why football clubs establish cooperatives.

What is a cooperative?

A cooperative is a company the purpose of which is to promote the economic, social or cultural interests of its members through joint business operations. In contrast to other forms of company where the focus is on making a profit, cooperatives focus on the cooperative members and their support. Cooperatives are characterised by the so-called identity principle, which states that the members are at the same time co-sponsors of the cooperative's decision-making, investors by paying into the shares, and business partners of the cooperative. A cooperative is allowed to make profits, but must convert profits into support services (and not just money) for the benefit of its members. Furthermore, the cooperative is described as particularly democratic, as each member has one vote in principle, regardless of how many cooperative shares they have subscribed to. Members of the cooperative are not personally liable.

Cooperatives in professional Football

While the role of cooperatives as banks (providing their members with banking services) or in housing construction (providing their members with housing) has a long tradition in Germany, the interest of football clubs in this legal form is new. In the case of FC Schalke 04 and FC St. Pauli, the clubs want to secure their financing by founding a cooperative, issuing cooperative shares in return for the payment of a sum of money and raising a total of tens of millions. Financing through the issuance of cooperative shares is intended to strengthen equity without the clubs having to borrow money from outside investors. Purchasers of cooperative shares get a say in the cooperative and a share of the profits in return. In fact, according to their own statements, both football clubs have already issued over 10,000 cooperative shares and collected several million each (cf. reports by FAZ and The Athletic).

At both football clubs, the new cooperatives are to operate their respective stadiums. However, the legal form of a cooperative is not suitable for the licensed players' section. These are subject to the so-called 50+1 rule of the DFB statutes. According to this rule, the parent club must hold at least 50% of the voting rights plus an additional voting share. The (controversial) rule deserves its own blog post and is intended to prevent investors from gaining complete control over club teams. Compliance with the 50+1 rule is not possible in a cooperative because each member has one vote. Although multiple voting rights are possible, they are subject to strict limits.

Reform of the Cooperatives Act

The interest of football clubs in cooperatives coincides with a reform of the Cooperatives Act which came into force in January 2025. The aim of the reform was precisely to increase the attractiveness of this legal form. In particular, the cooperative projects at Schalke and St. Pauli directly benefit from the fact that the reform removes the written form requirement. Previously, membership of a cooperative could only be acquired by submitting a written declaration of accession. The legislator no longer considered a handwritten signature on paper to be in keeping with the times. Since the beginning of January, a declaration of accession in text form has been sufficient, meaning that membership can now also be acquired online. It is therefore possible to issue cooperative shares digitally.

The establishment of (funding) cooperatives as a financing vehicle is a form of crowdfunding. It is not limited to football and requires - in addition to compliance with the special features of cooperatives - a wide reach. Football clubs with a large number of members already have the latter. However, there are also large clubs outside of sport for whom this form of financing could be both interesting and viable.

Philipp Sahm
Chiara-Lucia Peterhammer

The underlying analysis by Commission President Ursula von der Leyen at a press briefing is interesting: "Our business model has basically relied on cheap labor, from China presumably, cheap energy from Russia and partially outsourcing security and security investment. These days are gone."

The consequence of this: the EU Commission's plans for the three core areas of action: innovation, decarbonization and security, which are based on the recommendations of the Draghi report and described in more detail in the Compass. The Commission's aim is to make Europe the place where tomorrow's technologies, services, and clean products are invented, produced and marketed, while staying on course for climate neutrality. The Compass thus provides a first perspective on the question of whether the ESG topic is facing an end in light of the current political developments in the EU (for some basic thoughts on this, see our blog post Is this the End for ESG? | ADVANT Beiten). At least from the perspective of the compass, it appears rather unlikely that the transformation of the economy as such will be put on hold for the time being.

What is obviously set to change significantly, however, are the means: In the Compass, the EU Commission describes five so-called "horizontal enablers for competitiveness" with which it intends to achieve its goals in the three pillars of innovation, decarbonization and security. The first enabler, "simplification", is particularly relevant from a regulatory perspective, as it aims to drastically reduce regulatory and administrative burdens. This simplification is complemented by the reduction of barriers to the Single Market, the idea of a "European Savings and Investment Union" to finance the whole project, the promotion of skills and quality jobs and better coordination of policies at EU and national level.

The aspect of simplification mentioned in the Compass obviously requires a fundamental change. The EU Commission itself wants to make progress here and has already announced a first series of "Simplification Omnibus packages" for February 2025. One - and also the first - omnibus is to cover far-reaching simplification in the fields of sustainability finance reporting, sustainability due diligence and taxonomy. This refers to the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the Taxonomy Regulation. The EU Commission had already announced facilitations in this regard following the Budapest Declaration on the "New European Competitiveness Deal" last fall. According to the agenda for the upcoming Commission meeting on February 26, 2025, Commission President Ursula von der Leyen herself is now responsible for the corresponding agenda item "Omnibus package: Chapeau communication and omnibus proposal" alongside Vice-President Stéphane Séjourné. This may reflect the political importance of this project and the many demands made on it (e.g. by the EPP as well as the German and French governments).

A first indication of the content of this "first omnibus" can already be found in the Compass: In order to ensure that regulation is proportionate to the size of the company, the EU Commission intends to propose a definition for a new category of company, the so-called "small micaps". These are to be companies that are larger than SMEs but smaller than large companies. The EU Commission announces that "thousands of companies in the EU will benefit from a tailored regulatory simplification in the spirit as SMEs". This could mean that the scope of application of the CSRD, which currently includes all large corporations as defined in Section 267 (3) of the German Commercial Code (HGB) from January 1, 2025, will be narrowed accordingly.

What does this mean for companies? As a rule, the implementation of the announced simplifications by the respective legislator alone will not be sufficient. In a second step, these simplifications will have to be implemented by the individual companies. The extent to which the processes set up by the respective company can and should be adapted in a meaningful way will have to be examined. The mere removal of a legal requirement does not automatically render an established process obsolete. To illustrate: If, for example, the obligation of the management board of a listed stock corporation to establish an appropriate internal control system (ICS) and risk management system (RMS), which was included in Section 91 (3) of the German Stock Corporation Act (AktG) in the wake of the Wirecard scandal, were to be repealed, it would be unwise to immediately abolish the ICS and RMS completely. However, it remains useful and necessary to keep an eye on what regulatory simplifications will result from the changes announced by the EU Commission over time, and how these can then be translated into corresponding simplifications in internal processes. Companies would have more room for maneuver, at least as long as it is ensured that decisions can be made on the basis of appropriate information, including ESG aspects where relevant. It therefore seems unlikely that ESG issues will cease to play a role for companies. On the contrary, the transformation of the economy and the resulting opportunities and risks for the business models of almost all companies remain on the agenda.

Dr Daniel Walden
Dr André Depping

For Entrepreneurs and Legal Professionals

This guide offers an in-depth explanation of the German Corona-Überbrückungshilfen system, designed for English-speaking entrepreneurs and legal professionals unfamiliar with German law. It combines a detailed overview, practical advice, and legal considerations, including recourse options for those facing challenges with audits, appeals, or repayment demands.

Table of Contents

1. Overview of the Corona Bridging Aid System
   • What is the Bridging Aid program?
   • Why is a Schlussabrechnung (final accounting) required?
   • Key terms: A glossary for entrepreneurs and legal professionals.
2. Application and Compliance: What You Need to Know
   • Eligibility and conditions.
   • Deadlines and required documentation.
   • Common challenges during the application phase.
3. Understanding Final Accounting (Schlussabrechnung)
   • What it is and why it matters.
   • Who must submit a final accounting?
   • Consequences of non-compliance with deadlines.
4. Audit Practices and the Total Reservation Clause (Totalvorbehalt)
   • How authorities approach audits.
   • The controversial Totalvorbehalt: Legal and practical implications.
5. Appeals and Legal Recourse
   • Tips for preparing for legal challenges.
6. Frequently Asked Questions (FAQs)
   • Addressing the most common concerns from entrepreneurs and legal advisors.

1. Overview of the Corona Bridging Aid System

What Is the Bridging Aid Program?

The Corona-Überbrückungshilfen program was a German government initiative to support businesses during the COVID-19 pandemic. Introduced in 2020, its goal was to provide financial assistance to companies that experienced significant revenue losses due to government-mandated lockdowns, supply chain disruptions, or other pandemic-related challenges.

This aid was designed as a temporary bridge to help businesses cover their fixed costs, such as rent, utility bills, and insurance premiums, during periods of reduced income. Unlike direct loans, the aid was non-repayable, provided applicants met the program’s strict eligibility criteria.

Phases of Bridging Aid:
The program evolved through several phases:

• Bridging Aid I-IV (2020-2022): Covering the early to late pandemic periods.
• November/December Aid: Specific programs compensating for the second lockdown in late 2020.
• Neustarthilfe (Restart Assistance): Tailored for self-employed individuals.

Each phase had unique eligibility requirements and funding limits, adding complexity to the application and compliance process.

Why Is a Final Accounting (Schlussabrechnung) Required?

The Schlussabrechnung is a mandatory final review of all funds received under the program. It ensures that:

• The applicant met the program's eligibility criteria.
• The amount of aid granted corresponds to actual revenue losses and fixed costs incurred during the eligibility period.

Initially, aid applications were often based on estimates or projections. The final accounting provides the government with a mechanism to verify these estimates against actual financial data.

Key Points About Final Accounting:

1. Submission Deadline: Businesses must submit the Schlussabrechnung through their prüfender Dritter (a third party, typically a tax advisor or accountant). Missing this deadline can result in full repayment demands.
2. Audits: Every Schlussabrechnung is reviewed by the granting authorities, some of which apply particularly stringent criteria.
3. Consequences of Errors or Non-Compliance: Errors or a failure to submit final accounting may trigger repayment demands or, in some cases, allegations of subsidy fraud.

Key Terms: A Glossary for Entrepreneurs and Legal Professionals

Understanding these terms is crucial to navigating the system:

• Corona-Überbrückungshilfen (Corona Bridging Aid): The government-funded program offering financial assistance to businesses affected by the pandemic.
• Schlussabrechnung (Final Accounting): The mandatory final declaration to verify eligibility and determine the final amount of aid received.
• Prüfender Dritter (Third-Party Auditor): A professional (e.g., tax advisor) responsible for submitting applications and final accounting on behalf of businesses.
• Bewilligungsstelle (Granting Authority): Regional or state-level offices responsible for reviewing applications and issuing funds.
• Totalvorbehalt (Total Reservation Clause): A controversial legal provision allowing authorities to reassess and reclaim funds, even after initial approval.
• Widerspruch (Appeal): The administrative appeal process for challenging repayment demands or adverse decisions.
• Klage (Legal Complaint): A court proceeding initiated when an appeal is rejected or unavailable.
• Neustarthilfe (Restart Assistance): A specific aid program for self-employed individuals and small businesses.

2. Application and Compliance: What You Need to Know

Eligibility and Conditions

To qualify for Corona-Überbrückungshilfen, businesses mainly needed to meet the following criteria:

1. Revenue Loss: Demonstrate a significant revenue decline (e.g., 30% or more) compared to a reference period.
2. Fixed Costs: Have fixed operating costs eligible for reimbursement under the program.
3. Business Status: Be a business or self-employed individual registered in Germany before a specified date.

Documentation Requirements

Applicants were required to provide comprehensive documentation, including:

• Financial records such as monthly turnover reports.
• Proof of fixed costs (e.g., invoices, rental agreements).
• Tax filings and bank statements.

The burden of proof lies with the applicant, meaning meticulous record-keeping is essential to avoid disputes during final accounting or audits.

Deadlines and Extensions

The German government set strict deadlines for the submission of applications and final accounting. For example:

• Initial Deadlines: Most programs required Schlussabrechnungen to be submitted by October 31, 2023 (Neustarthilfe even March 31, 2023).
• Extensions: Some applicants, upon request, received extensions until September 30, 2024.

Failure to meet these deadlines could trigger immediate repayment demands.

Common Challenges During the Application Phase

1. Documentation Errors: Missing or incomplete records are the most common reason for disputes.
2. Complexity for Groups: Companies within corporate groups (Unternehmensverbund) often struggled to clarify their eligibility, particularly in cases involving family ownership or cross-border subsidiaries.
3. Technical Issues: Many applicants reported difficulties navigating the government’s online portals for application submission.

3. Understanding Final Accounting (Schlussabrechnung)

What It Is and Why It Matters

The Schlussabrechnung acts as a reconciliation process between the estimated aid amount granted and the actual aid amount justified by financial records.

Key Objectives of Final Accounting:

• Verify that businesses met the eligibility requirements.
• Identify and recover overpayments.
• Prevent subsidy fraud through detailed audits.

Who Must Submit a Final Accounting?

Not all applicants are required to file a Schlussabrechnung. Businesses fall into three main categories:

1. Mandatory Submission: All businesses that received aid based on provisional approvals.
2. Exempted Entities: Companies whose applications were fully rejected or never submitted.
3. Corporate Groups: Only the main applicant within a group is typically required to submit.

Special Cases:

• Insolvent Businesses: Even if a company files for insolvency, the final accounting obligation remains. Responsibility shifts to the insolvency administrator.
• Individual Entrepreneurs Who Ceased Operations: Final accounting is still required, even if the business is no longer operational.

Consequences of Non-Compliance

Failing to submit a Schlussabrechnung can result in:

1. Repayment Demands: Authorities may demand full repayment of all aid received.
2. Legal Sanctions: In severe cases, failure to comply could be interpreted as fraud.
3. Limited Recourse: Missing deadlines can eliminate opportunities to appeal or negotiate.

4. Audit Practices and the Total Reservation Clause (Totalvorbehalt)

How Authorities Conduct Audits

Every Schlussabrechnung undergoes detailed scrutiny by the regional granting authorities (Bewilligungsstellen). Unlike the initial application process—where automated tools (Dunkelverarbeitung) played a significant role—final accounting is reviewed manually.

Key Features of the Audit Process:

1. Manual Review: Each Schlussabrechnung is examined in detail by human auditors.
2. Cross-Checking Data: Auditors compare submitted financial records with third-party information, such as tax filings or government records.
3. Focus on High-Risk Cases: Applications with large grant amounts (e.g., over €100,000) or discrepancies in documentation receive closer scrutiny.

Regional Differences in Practices:

• Certain states like Bavaria, Baden-Württemberg, and North Rhine-Westphalia apply stricter auditing criteria compared to others.
• Regions relying on large consulting firms audits tend to follow more meticulous and technical review processes.

Common Audit Red Flags

1. Discrepancies in Financial Data: Mismatched turnover figures in tax filings and Schlussabrechnung records.
2. Non-COVID-Related Declines: Authorities frequently dispute whether revenue losses were genuinely caused by the pandemic.
3. Incorrect Categorization of Costs: Claiming ineligible expenses, such as personal expenses or capital investments, as fixed costs.

Practical Advice:

• Ensure consistency between tax returns, BWA (business management accounts), and submitted aid applications.
• Be prepared to justify why revenue declines were directly linked to the pandemic.

What Is the Total Reservation Clause (Totalvorbehalt)?

The Totalvorbehalt is a legal mechanism allowing authorities to reopen and reassess funding decisions, even after they were initially approved. This means:

• Final decisions on aid applications are not truly final.
• Authorities can retroactively alter their interpretation of rules, leading to revised eligibility assessments and repayment demands.

Legal and Practical Implications of the Totalvorbehalt

1. Uncertainty for Businesses: Applicants cannot rely on initial approvals as guarantees of entitlement.
2. Evolving Legal Standards: Authorities have reversed decisions based on new interpretations of eligibility criteria, even if the factual circumstances remain unchanged.
3. Potentially Unlawful Practices: Legal experts argue that retroactive changes to approved applications violate principles of legal certainty and proportionality.

Examples of Totalvorbehalt in Action

• Corporate Groups (Unternehmensverbund): Authorities have retroactively declared corporate groups where none were initially assumed, impacting aid eligibility.
• Rejection of Fixed Costs: Previously accepted fixed costs, such as hygiene-related renovations, have been disallowed upon review.
• Disputes Over Seasonal Trends: Revenue drops initially attributed to COVID-19 were later deemed part of normal seasonal fluctuations, disqualifying applicants.

5. Appeals and Legal Recourse

Options for Challenging Repayment Demands

When facing repayment demands or adverse audit decisions, businesses can pursue two primary options:

1. Filing an Administrative Appeal (Widerspruch):
   • Must be submitted within one month of receiving the decision.
   • Allows businesses to request a review of the decision by the granting authority.
   • Typically involves presenting additional evidence or highlighting procedural errors.
2. Initiating Legal Proceedings (Klage):
   • If the appeal is denied or not possible (as in Bavaria), businesses can file a lawsuit in administrative court.
   • Courts will independently assess whether the repayment demand complies with the law.

Important: In some German states, the appeal stage (Widerspruch) has been abolished, meaning businesses must proceed directly to court.

Practical Tips for Successful Appeals and Lawsuits

• Focus on Procedural Errors: Highlight any deviations from legal or procedural requirements by the granting authority.
• Use Comparative Cases: Show how similar cases were treated more favorably to argue unequal treatment (Gleichbehandlungsgrundsatz).
• Challenge the Total Reservation Clause: If authorities rely on the Totalvorbehalt, argue that retroactive changes to eligibility criteria violate legal certainty (Rechtssicherheit).

6. Further Frequently Asked Questions (FAQs)

Who is required to submit a Schlussabrechnung?

All businesses and individuals who received provisional approvals for Corona-Überbrückungshilfen must submit final accounting unless:

• The application was rejected or withdrawn.
• The aid was denied in full without partial approval​​.

What happens if I miss the deadline for submitting my final accounting?

Failure to meet the deadline can result in:

• Full repayment of all aid received.
• Possible legal action for subsidy fraud if authorities suspect intentional non-compliance.
  In rare cases, authorities may accept late submissions, but this is not guaranteed​​.

How can I proe that revenue losses were caused by the pandemic?

• Provide detailed monthly revenue comparisons for the eligibility period versus the reference period (e.g., 2019 figures).
• Document pandemic-related factors, such as government-mandated closures or supply chain disruptions.
• Include third-party evidence, such as industry reports, showing the broader impact of COVID-19 on your sector.

Are there special rules for corporate groups (Unternehmensverbund)?

Yes. Only the main applicant in the group is responsible for submitting the Schlussabrechnung. However:

• Authorities may retroactively declare additional entities as part of the group, potentially reducing eligibility or triggering repayment demands​​.

 Can I appeal a repayment demand?

Yes. You can file an administrative appeal (Widerspruch) within one month of receiving the demand. If unsuccessful, you may pursue legal action (Klage) in administrative court​​.

What types of costs are eligible under the program?

Eligible costs typically include among others:

• Rent or lease payments for business premises.
• Utilities, such as electricity, water, and internet.
• Insurance premiums.
• Pandemic-related hygiene measures (e.g., partitions, sanitization).

Authorities may disqualify ineligible costs, such as personal expenses or capital investments​​.

What is the Totalvorbehalt, and how does it affect me?

The Totalvorbehalt allows authorities to reopen and reassess funding decisions even after initial approval. This means businesses cannot fully rely on earlier approvals, as authorities may retroactively change their interpretation of eligibility criteria​​.

Dennis Hillemann
Tanja Ehls

This is the first post in a series on the topic of football and the law. The series takes current developments in the sport as an opportunity to shed light on legal issues. In this first article, we examine who is allowed to organise football competitions and why the courts are involved. The article shows how litigation has developed and will continue to shape the law of the beautiful game.

The Super League is back

When plans to establish a new European club competition called the „Super League“ were published by 12 football clubs in April 2021, this sparked so much resistance that the project was abandoned within a few days. Now the Super League is back: on 17 December last year, A22 Sports Management S.L. launched a new attempt to obtain official recognition from UEFA and FIFA for the new competition in a modified form and with a new name: "Unify League" (see reports by the FAZ and The Guardian). The project has prominent supporters in Real Madrid and FC Barcelona.

The "constitution" of Football 

Who is allowed to approve football competitions? The question is not only economically exciting, but also legally. This is because there is no special state "football law" or European "sports regulation". Instead, football law is a self-imposed (internal) law of the clubs. So what prevents a private company, such as the initiator of the Super League – now Unify League- , from running its own football competition? The answer: it is the sanctioning power of the associations, in particular FIFA and UEFA. Football is organised by associations in the form of a pyramid. The individual football clubs are subordinate to regional and state associations and, in Germany, to the DFB as the supreme umbrella organisation. In Europe, the "Union of European Football Associations" (UEFA) stands above this. UEFA is in turn one of the six continental confederations of FIFA, the world football association. The upper associations exercise sanctioning power over the subordinate associations.

Although a club could decide to take part in a competition not approved by UEFA, such as the Super League, it would then face sanctions from the associations and could be excluded from playing in the Bundesliga, for example. The football associations can de facto make participation in competitive competitions impossible by imposing severe sanctions and thus act as "gatekeepers" for the market of professional football competitions.

European law and free competition

However, the traditional set up, of football is increasingly being called into question. New court rulings in particular have contributed to this by further developing the application of competition law to football. The starting point for the changes was a commercial court in Madrid, which referred the matter to the Court of Justice of the EU (CJEU) for a preliminary ruling. The CJEU ruled that EU competition law also applies to football and that the monopoly position of FIFA and UEFA is in breach of European law. The Treaty on the Functioning of the European Union (TFEU) is decisive for the question of whether football associations are allowed to prevent competitions. This regulates the European internal market, in particular the free movement of goods and services. As football competitions are a cross-border economic activity, the rules of European competition law apply to them. In the Super League case, the CJEU ruled that the sanctions threatened by the football associations constitute an unlawful restriction of competition. UEFA was exploiting its dominant market position in an unlawful manner. Instead, it must establish transparent and non-discriminatory criteria for the approval of new competitions. In May 2024, the Madrid Commercial Court finally ruled (see reports here by Sportschau and BBC Sport) that UEFA and FIFA had abused their market power by arrogating to themselves the power to prohibit participation in third-party competitions.

What does this mean for the Football associations?

However, the special position of UEFA and FIFA was not completely abolished. On the contrary, the CJEU has even strengthened the role of football associations in certain respects. It has recognised that football has a special social and cultural significance. This, as well as the large number of national and international competitions, justify the standardisation and coordination of football by uniform associations. The associations may monitor compliance with the necessary rules and, if necessary, impose sanctions, without this necessarily constituting an abuse of a dominant position. However, the special characteristics of professional football do not justify UEFA and FIFA being allowed to prevent any competitor from accessing the market. The associations do not have to admit every competitor, but they are obliged to establish transparent and non-discriminatory rules for admission. The decisions of the CJEU and the Madrid Commercial Court therefore do not mean that new competitions cannot be prohibited by the football associations. The CJEU has not fundamentally abolished the commercial monopoly of FIFA and UEFA, but it is subject to stricter controls.

What does this mean for the Super League?

Whether the new UEFA rules meet the legal criteria of the CJEU is already controversial. Due to their economic importance alone, further litigation on the topic of football competitions be expected in the future. It is therefore right to speak of "Super League = Super Litigation" (as Jan Zglinski does in his article "Who Owns Football" which is well worth reading). At this point in time, it is so not clear if any games will ever be played in the Super League (or Unify League). But it is very likely that further court cases will be brought about.

Philipp Sahm
Chiara-Lucia Peterhammer

All of this could be criticised as a hectic back and forth which seems to be rather far from the goals of clear and efficient guidance, predictability, and planning security. At the same time, the question is how this potential 'chopping and changing' on the part of the legislature may be perceived by the companies concerned. However, regardless of the ongoing political debate about the new ESG regulations, there are also some legal determinants for the ESG issue which can be expected to continue to be there in any scenario:

Laws already in force must of course be observed ('compliance') for as long as they will be in force. The mere possibility of a law being repealed is no justification for not abiding by it before this happens. This is true, for example, for the German Supply Chain Due Diligence Act which has been German law since 1 January 2023 (see our above-mentioned blog post). Applicable laws, however, also include the traditional general duty of care of board members and managing directors, where modifications − particularly with regard to the legal consequences of a breach of duty in the form of liability for damages - are discussed from time to time, but not their complete abolishment: 'In managing the affairs of the company, the members of the management board are to exercise the due care of a prudent manager faithfully complying with the relevant duties', section 93 (1) sentence 1 of the German Stock Corporation Act (Aktiengesetz, AktG). And sentence 2 of the provision makes it clear that entrepreneurial decisions are to be taken on the basis of adequate information and in the best interests of the company. What does this mean for entrepreneurial decisions − and especially key decisions on the corporate strategy and the business model, for which (also) ESG aspects are relevant and, therefore, part of the adequate information base? The management board should take adequate account of these ESG aspects when taking a decision (in addition to all the other relevant aspects) if it does not want to be exposed to allegations of breach of duty and liability claims later in the event of an unsatisfactory development of the company. And this regardless of CSRD, Taxonomy Regulation, CSDDD and the announced omnibus regulation (for details see Walden, NZG 2020, p 50 et seq: 'Corporate Social Responsibility: Rights, Duties and Liability of the Management Board and Supervisory Board').

Another closely related issue can be found in the field of banking supervision. Some years ago already, the supervisory bodies emphasised the relevance of ESG risks and the need to identify them in traditional risk management. Meanwhile, the minimum requirements for risk management of the German Financial Supervisory Authority (Mindestanforderungen an das Risikomanagement, MaRisk) contain numerous detailed provisions in this regard. And only on 9 January 2025, the European Banking Authority (EBA) published its 'Guidelines on the management of environmental, social and governance (ESG) risk' (Final Guidelines on the management of ESG risks.pdf). The executive summary states:

'ESG risks, in particular environmental risks through transition and physical risk drivers, pose challenges to the safety and soundness of institutions and may affect all traditional categories of financial risks to which they are exposed. To ensure the resilience of the business model and risk profile of institutions in the short, medium, and long term, the guidelines set requirements for the internal processes and ESG risk management arrangements that institutions should have in place. […] Institutions should integrate ESG risks into their regular risk management framework by considering their role as potential drivers of all traditional categories of financial risks, including credit, market, operational, reputational, liquidity, business model, and concentration risks.' (Emphasis added by the author)

This implies two things for companies in the real economy: Firstly, if ESG risks are relevant for financial institutions, then they are also relevant, and even more so, for their clients because ESG risks of the institutions often are the result of ESG risk of their clients, for instance where such a risk is passed on to the institution as a credit risk. Therefore, not only the institutions, but also the companies in the real economy do well to consider ESG risks in their traditional risk management systems (a legal requirement for listed companies under section 90 AktG since the Wirecard affair) in order to possibly avoid potential negative effects of any missing or inadequate consideration of ESG risks for the company. And secondly, regardless of the structure of the companies' own risk management, a 'trickle-down' effect can also be expected as the institutions must try to obtain relevant information from their clients for their own risk management processes and their clients are therefore confronted with corresponding requests for information. Thus, the inclusion of ESG aspects in the loan processes of institutions has already begun.

On the other hand, board members and managing directors should keep an eye on possible ESG opportunities in addition to ESG risks. For many companies, the transformation of the economy may also offer new business opportunities which need to be treated like any other business opportunities. 

All this, of course, applies primarily to the classic outside-in perspective of companies, but in some circumstances also indirectly to the inside-out perspective addressed by the CSRD from the point of double materiality, i.e. the impacts of business activities on the environment and society. This is because such negative impacts can reflect on the company if they are seen in a critical light by relevant reference groups such as (potential) customers and employees. And finally, looking into the supply chain is also nothing new, at least since the coronavirus and increasing geopolitical uncertainties.

As a result, dealing with the ESG risks and ESG opportunities relevant for the specific company appears to be appropriate with a view to the general duty of care of management board members and managing directors, even regardless of the CSRD. Interestingly, the Chief Sustainability Officers (CSOs) of more than 400 French companies who are members of the French C3D organisation have recently addressed the EU Commission regarding the EU Commission's omnibus plans and emphasised that 'ESG reporting and value chain assessment' are essential 'for resilience' as well as 'for survival, growth, and long-term competitiveness' of European companies. In addition, it would strengthen Europe's sovereignty by European norms setting global standards instead of leaving this to other, competing jurisdictions (presumably referring to what is known as the Brussels Effect). The French CSOs therefore advise the EU Commission to take practical measures to improve the clarity and effectiveness of the regulations without jeopardising their strategic goals. As has already been made clear at the beginning, there certainly are enough voices advocating the opposite view and seeing an unchanged continuation as a serious competitive disadvantage.

So, it definitely will be interesting to see how this discussion will develop. Neglecting relevant ESG aspects 'only' for this reason could prove risky for company managers. Making well-considered decisions on an adequate information basis is the be-all and end-all (also) in this respect.

Dr Daniel Walden
Dr André Depping

It happens just before Christmas, preferably on 23 December. The doorbell rings and a friendly postperson hands a registered letter to the managing director. The registered letter reads - in a more subtle way, but usually in exactly the same tone: 'Dear Mr Managing Director, you have breached your duties and have a liability towards the company of 10 million euros. Please remit the amount to the following bank account no later than by 27 December. Sincerely'.

At a first glance, such letters seem grotesque. What individual has several million euros available in their private banking account at short notice and would be willing to transfer them within a few days? At a second glance, they seem comprehensible at least from a legal point. They are not aimed at the managing director's private banking account, but at the D&O insurance policy taken out for the benefit of the director. Only a letter addressed to the managing director can trigger insurance coverage and also default interest. Yet, it does not take much to visualise what such a letter shortly before the Christmas holidays will do to the managing director receiving it.

Obligations under insurance law: notification of D&O insurer

Upon receipt of this kind of letter, the managing director must immediately report the claim to the D&O insurer. Failing to do so is a breach of the director's obligations under insurance law, something a managing director often is not even aware of. But more on that later. In the worst-case scenario, the managing director will lose insurance cover by failing to report the claim. The managing director will also try to find a suitable lawyer for his defence before the Christmas holidays.

Claimants often demand that the statute of limitations be waived at short notice to avoid a lawsuit. Such waiver also needs to be discussed with the D&O insurer and the director's own lawyer. This is often not an easy task during the Christmas season. It is a time that is often highly emotional and overwhelming for the director concerned. There goes Christmas. The holidays are overshadowed by dealing with the accusations and worries about a possible personal insolvency. 

Managing director liability: claims do not become statute-barred at the end of the year

But is it necessary? From a legal perspective, it is normally not necessary to make a claim at the end of the year. Claims based on the managing director's liability expire after five years (section 43 (4) of the German Limited Liability Companies Act (Gesetz über die Gesellschaften mit beschränkter Haftung, GmbHG)). The limitation period, however, does not begin at the end of the year in which the claim arose.

As section 43 (4) GmbHG makes no provision for the start of the limitation period, the limitation period commences immediately when the claim arises, regardless of the company's knowledge or grossly negligent lack of knowledge of such claim (section 200 sentence 1of the German Civil Code (Bürgerliches Gesetzbuch, BGB)). According to the ruling of the German Federal Court of Justice (Bundesgerichtshof, BGH) dated 29 September 2008 (case no. II ZR 234/07), any knowledge of the injured party is irrelevant. The question of why many claims, including demands for waivers of claims, are made at the end of the year can only be explained by the claimants' ignorance of the limitation periods. 

Foresight secures claims

Irrespective of the above, the question remains as to why the claimants mostly use a very harsh tone and why there is no explanation that the claim is being made primarily with regard to the D&O insurance. It is an open secret that the claim against the managing director is usually aimed exclusively at the D&O insurance, as the managing director's private assets are rarely sufficient to satisfy the claim.

D&O insurance is maintained precisely to protect the director against such claims. Why is this not disclosed to the managing directors to ease their worries? There are only a few claim letters that make any reference to the existence of D&O insurance and, more importantly, to what specifically needs to be done to fulfil the obligations imposed by insurance law. The obligations are set out in the terms and conditions of the D&O insurance policy, which the managing director does not usually know.

At the same time, it is also in the claimant's interest that the insurance cover is not unnecessarily jeopardised by not meeting obligations. Without insurance cover, the claimant’s only option would be to fall back on the managing director's private assets, which are usually not worth millions.

A question of style

This article is meant to be an appeal for mutual respect at Christmas time. From a legal perspective, it is normally not necessary to make a claim at the end of the year. If it is, however, it can be worded and timed in such a way that it will not become a Christmas disaster for the managing director and everyone else involved. Particularly in complex D&O cases with several parties involved, economically sensible solutions can often be found for all parties through a settlement process. The comparison and consideration of the different interests in a mediation approach requires good judgement and foresight and − right at the beginning of a dispute − good etiquette.

Dr Florian Weichselgärtner

This article was first published in the Versicherungsmonitor magazine on 9 December 2024. Here you can find the original article.

The year 2025 will be at least as dynamic as the years before when it comes to energy law. It remains unclear what impact the upcoming elections in February and the changing geopolitical situation will have on the direction and objectives in the energy sector. The following is a brief overview of what is already known to be introduced in 2025.

1. Obligation for meter operators to install smart metering systems pursuant to section 34 (2) sentence 1 no. 1 of the German Metering Point Operation Act (Messstellenbetriebsgesetz, MsbG)

As from 2025, every household may receive a digital electricity meter. Essentially anyone with an annual electricity consumption of more than 6,000 kWh, solar systems with an output of more than 7 kW and/or controllable heat pumps is eligible. Starting at the beginning of this year, metering point operators are obliged to equip, on request, metering points and submeters installed in a customer system and not requiring accounting with 15-minute smart metering systems (pursuant to section 2 no. 7 MsbG) earlier, but beware, the term 'customer system' has been fundamentally called into question by the ECJ ruling of 28 November 2024 (Case C-293/23) (you can read about this in our article in the December 2024 issue of the newsletter Focus on the Public Sector (available in German only)). The installation of smart meters used to be voluntary but is now mandatory within four months of being commissioned. This is another step in the 'smart meter rollout' announced by the legislature, which has made only slow progress in recent years.

2. Obligation for electricity suppliers to offer dynamic electricity prices pursuant to section 41a (2) of the German Energy Industry Act (Energiewirtschaftsgesetz, EnWG)

From 1 January 2025, all electricity suppliers will be obliged to offer end consumers electricity contracts with dynamic electricity rates, provided these consumers have smart meters. According to section 3 no. 31d EnWG, dynamic rates mean they that reflect the price fluctuations of the energy exchange. This allows end consumers to be flexible in their consumption of electricity and optimise it to coincide with periods of low electricity prices. Electricity suppliers must furthermore comprehensively inform their customers about the dynamic rates and offer information about the installation of a smart metering system.

3. Obligation for electricity suppliers to guarantee a change of supplier within 24 hours

Under ruling BK6-22-024 of the German Federal Network Agency (Bundesnetzagentur), electricity suppliers will be obliged as of 4 April 2025 to guarantee an accelerated change of supplier within a maximum of 24 hours on every working day if end consumers wish to do so.

4. Obligation for system operators to guarantee marking and lighting of wind turbines at night pursuant to section 9 (8) of the German Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG)

From 1 January 2025, onshore wind turbines must be equipped with aircraft detection lighting systems (ADLS) where this is required under aviation law. If system operators fail to comply with this obligation, they will have to make payments to the grid operator in accordance with section 52 (1) no. 3 EEG.

5. Increased CO2 price for end consumers pursuant to section 10 (2) sentence 2 no. 5 of the German Fuel Emissions Trading Act (Brennstoffemissionshandelsgesetz, BEHG) 

On 1 January 2025, the price per emissions certificate in national emissions trading will increase to EUR 55. With the higher CO2 price, the legislature wants provide incentives for end consumers to switch to low-CO2 or even CO2-free technologies. This marks the beginning of the last year of the fixed-price phase, in which the price of an emissions certificate is determined by law. From 2026, the price of an emissions certificate will be determined by auction, similar to the European emissions certificate trading system. A price corridor will limit the price of a certificate to range between EUR 55 and a maximum of EUR 65 in 2026.

6. Obligations for owners of combustion plants after the expiry of the transitional provisions in the German Federal Immission Control Regulation (Bundesimmissionsschutzverordnung)

The Federal Immission Control Regulation stipulates that owners of furnaces burning wood, coal and other solid fuels are obliged to adhere to specified carbon monoxide and particulate matter limits. The last transition period for compliance with these requirements ended on 31 December 2024. Owners of a furnace not meeting these legal requirements must make the necessary adjustments or take the furnace out of operation if these requirements cannot be met. Anyone who fails to do so will face fines.

7. Obligations for developers and owners regarding building automation pursuant to section 71a of the German Building Energy Act (Gebäudeenergiegesetz, GEG)

If a heating system or a combined heating or air conditioning and ventilation system with a rated output of more than 290 kilowatts is installed in a non-residential building, this non-residential building must be equipped with a building automation and control system as from 1 January 2025. The requirements for this digital energy monitoring technology are listed in section 71a (2) and (3) GEG. According to the legislature, building automation helps adjust operating times or prevents simultaneous heating and cooling. This Act transposes Article 14 (4) and Article 15 (4) of Directive (EU) 2024/1275 (EPBD).

8. Expiry of the innovation clause (section 103 GEG)

The innovation clause allows owners and developers to apply (usually with the lowest building authority and until 31 December 2025) for an exemption from certain requirements of the GEG on the basis of using innovative solutions. For the time being, this technology-neutral approach has been extended until the end of the year. Given the current, uncertain political situation, however, especially with regard to the GEG, it is impossible to say whether a further extension can be expected. It could therefore be worthwhile for project developers to start implementing innovative projects as early as 2025 and apply for an exemption under section 103 GEG.

9. Waste heat reporting obligation for companies under section 17 (2) of the German Energy Efficiency Act (Energieeffizienzgesetz , EnEfG)

Companies must report data on their waste heat quantities to the Federal Agency for Energy Efficiency (Bundesstelle für Energieeffizienz) for the first time on or before 1 January 2025. From this year onwards, such reports must be submitted every year on or before 31 March. Therefore, companies who report data on their waste heat quantities for the first time in 2025, will have to file two reports in 2025. This obligation applies to companies with a total annual energy consumption of more than 2.5 GWh within the past three years. Anyone who fails to comply with this reporting obligation could be liable to a fine, see section 19 (1) no. 9 EnEfG. This reporting obligation is meant to support mainly district heating network operators and other heat consumers: they will be able to view potential sources of waste heat in order to leverage any efficiency potential. Companies must reuse their waste heat to save energy to the extent this is possible and reasonable.

10. Rulings of the German Federal Network Agency; industrial grid charges and grid capacity

With its key issues paper of 24 July 2024, the Federal Network Agency (Bundesnetzagentur, BNetzA) initiated a reform of industrial grid fees. A new ruling of the BNetzA is meant to create new incentives for electricity-intensive companies. To make this possible, the band load privilege is to be abolished. The purpose of the band load privilege is to provide incentives for electricity-intensive end consumers to keep constant base loads.

In addition, the BNetzA has initiated a procedure to create uniform standards for the allocation of grid capacity above low-voltage level. The relevant consultation process ended on 31 December 2024, meaning that the BNetzA is expected to make a decision in 2025.

Dr Malaika Ahlers
Anton Buro

Introduction

The discussion about the irrebuttable presumption of joint action where there are family connections in business affiliations continues to cause confusion and considerable legal uncertainty with regard to their final accounts. In particular, the publication of the new guidelines by the Federal Ministry of Economics and Technology (Bundeswirtschaftsministerium, BMWK) on 19 July 2024 has not made the situation any easier, but has led to more controversial issues instead. The current practice of the granting authorities remains confusing.

Irrebuttable presumption or just a general rule?

Until mid-2024, the general rule of the granting practice was that family ties (for instance between spouses, parents and children or siblings) were always regarded as the basis of a business affiliation. This irrebuttable presumption (unwiderlegbare Vermutung) in many cases led to businesses being classified as affiliated although they operated independently.

With the new guidelines of 19 July, the BMWK appears to have watered down this general principle. It no longer speaks of an irrebuttable presumption, but merely of joint action to be 'generally' assumed where there are family connections. At the same time, it emphasises that atypical cases must be taken into account.

This statement, however, raises new questions:

• What is an atypical case? The guidelines do not provide any clear criteria as to which constellations could deviate from the general rule.
• Legal uncertainty: granting authorities and applicants must assess for themselves whether their situation constitutes an atypical case, something that will inevitably lead to inconsistent assessments and legal disputes.

Moving backwards: practice in Bavaria and other German federal states

While the BMWK gives the impression that the irrebuttable presumption has been abandoned, policies practiced in Bavaria point in a completely different direction. A circular from the Chamber of Industry and Commerce for Munich and Upper Bavaria dated September 2024 confirms that:

• The concept of the irrebuttable presumption still applies in Bavaria.
• No atypical cases are recognised, unless the individuals involved are travelling showpeople or divorced spouses.

This directly contradicts the BMWK's stance that administrative practice must leave room for deviating decisions. It becomes clear that the implementation of the guidelines continues to depend heavily on the regional granting practice, which can lead to considerable distortions of competition.

Other German federal states have not yet taken a clear position on what could be an atypical case either. We see different statements on the issue in practice. As a rule, atypical cases should be cases that deviate so far from the standard that it would be disproportionate to rely on the presumption. The question of when this should apply, however, remains completely open.

Conflict: guidelines and administrative practice

The inconsistency between the BMWK guidelines and regional practice reveals a fundamental conflict:

• BMWK position: in our view, the FAQs and the guidelines are intended to ensure uniform administrative practice nationwide and fair competition between companies. The granting authorities, however, dispute this, arguing that only their administrative practice matters.
• Granting authorities: administrative practice is defined at state level and the FAQs are not regarded as binding law.

This contradiction poses a dilemma for companies and tax consultants: should they rely on the BMWK's nationwide interpretation or strictly adhere to the statements of the regional granting authorities?

Practical consequences and risks for tax consultants

The legal uncertainty surrounding the topic of business affiliations entails considerable risks, particularly for tax consultants who advise their clients on these issues. Typical challenges:

1. Incorrect assessment of an atypical case: tax consultants run the risk of misclassifying family connections, which can lead to repayment claims and potential liability claims.
2. Ignoring the administrative practice of the relevant federal state: even if the BMWK guidelines formally apply, the granting authorities decide on the basis of their own administrative practice.
3. Neglected documentation: without clear and full documentation, including cover letters or expert opinions, clients have almost no protection against claims for repayment.

Recommendations

• Cover letter: every application or final account statement should be accompanied by a legally sound cover letter detailing the individual situation. Such letter can (and should in many cases, especially in contentious ones) also be submitted later. Tax consultants' chambers have informed their members that it is important to justify any deviation from established administrative practice in writing.
• Obtain an expert opinion: in complex cases, an experienced lawyer should be involved to minimise risks.
• Be honest: all relevant family connections and business structures should be disclosed to avoid later sanctions.

An outlook on possible legal developments

The inconsistencies between the FAQs, the new guidelines and regional practice will inevitably end up in court. It is foreseeable that these disputes will go as far as the German Federal Administrative Court (Bundesverwaltungsgericht) or even the European Court of Justice. The focus is particularly on the following question:

• Binding nature of the FAQs: are the guidelines of the BMWK actually binding or can granting authorities set their own rules?
• Is the current practice compatible with constitutional law, in particular Article 6 of the German Basic Law (Grundgesetz) (protection of marriage and family) and Article 3 of the Basic Law (principle of equal treatment)?
• Is the interpretation of the granting authorities compatible with EU law, especially EU fundamental rights?

Tax consultants and companies should therefore be prepared for lengthy disputes and document their cases as well as possible. Experienced lawyers should be consulted in the event of queries from the granting authorities on the subject of business affiliations and families.

Conclusion

The confusion about the irrebuttable presumption for business affiliations once again shows the challenges and uncertainties in dealing with the temporary coronavirus aid. Companies and tax consultants must adapt to regional deviations and at the same time keep an eye on the BMWK's nationwide line.

It is essential for tax consultants to comprehensively inform their clients and to obtain legal support in order to minimise potential liability risks. You can also use the temporary aid network to exchange information with other experts and keep up to date with the latest developments.

We at ADVANT Beiten will be happy to assist you. Please feel free to contact us at any time.

Dennis Hillemann
Tanja Ehls

The Hayden vs. Take-Two Case: When Tattoo Art Goes Digital

Jimmy Hayden is a renowned tattoo artist from Cleveland. He counts several NBA stars among his clients, including Shaquille O'Neal, Kyrie Irving and, relevant to this case, LeBron James. His tattoos have been the subject of a long-running legal battle with video game publisher Take-Two Interactive, the company behind the popular "NBA 2K" series of video games.

Hayden filed a lawsuit in 2017. In his lawsuit, which was revised in 2019, he argued that the detailed reproduction of the tattoos he had engraved in several titles in the "NBA 2K" series infringed on his copyrights. 

The key legal question was: Does a video game company need the tattoo artist's permission to display the tattoos as part of a licensed likeness of the athlete? Take-Two argued that the license to use James' likeness included the right to display his tattoos. The Ohio federal jury agreed with this argument. It ruled that Take-Two's agreement to use James' likeness impliedly granted it the right to display his tattoos.

But this is not the only case of its kind. Take-Two won a similar lawsuit in a New York federal court in 2020. The case concerned the depiction of tattoos of the late basketball player Kobe Bryant and other NBA players. 

However, another case shows that the law in this area is not yet fully established: In 2022, an Illinois jury ordered Take-Two to pay damages to a tattoo artist whose work was featured on the body of wrestler Randy Orton in the "WWE 2K" game series, even though the damages amounted to only $3,750.

These differing decisions illustrate that the legal assessment of tattoos in another medium is still evolving, as tattoo artist Hayden is said to have already appealed the most recent decision.

What the "photo wallpaper rulings” of the German Federal Court of Justice have to do with it

Although there has not yet been a comparable decision in Germany regarding the depiction of tattoos in video games, the recent rulings of the German Federal Court of Justice (BGH, rulings of September 11, 2024 - I ZR 139/23; I ZR 140/23; I ZR 141/23) regarding so-called photo wallpapers could provide an indication of how such a decision would turn out in German courts.

The BGH had to deal with a number of cases concerning the display of photo wallpapers on the Internet. The cases before the BGH revolved around a company founded by a professional photographer that marketed photo wallpapers featuring his photographs. In three different constellations, these wallpapers were placed on the Internet as images by the respective defendants: A private user showed the wallpaper as a background in Facebook videos, a media agency presented a client project in which the wallpaper could be seen, and a hotel operator advertised with photos of its decorated rooms. In each case, the photographer's company took legal action against the use, seeking damages and reimbursement for the cost of the warning.

However, the BGH clearly rejected these claims and assumed "clear consent". The core consideration of the court: Anyone who places a copyrighted work such as a photo wallpaper on the market without special restrictions must expect certain usual uses. Today, this includes the fact that the wallpaper can be seen in photos or videos posted on the Internet - not only in a private context, but also in a commercial context.

It is particularly interesting that the BGH did not limit these considerations to the direct purchaser of the wallpaper. Third parties, such as the media agency in this case, may also rely on implied consent if their use is considered customary. The court emphasized that the author is, of course, free to prohibit certain uses - but he must then also make such restrictions clear, for example through corresponding contractual agreements or clearly visible reservations of rights.

These considerations should also apply to celebrity tattoos in video games. A tattoo artist also takes his or her work "out into the world" without any particular restrictions - moreover, he or she applies it to the skin of a person who naturally moves around in public and is photographed or filmed doing so. In the case of prominent sports stars such as LeBron James, this media presence is even an essential part of their professional activity. Following the logic of the BGH, a tattoo artist would therefore have to expect that his work would be depicted together with its "wearer" - be it in traditional media, on social networks, or even in video games.

It is up to the authors of the tattoos to regulate their works in explicit agreements with their "objects", the tattooed persons. The extent to which such regulations would then be effective, particularly with regard to the personal rights of the tattooed person, offers potential for further decisions by the BGH.

Fabian Eckstein

Once investors have invested in a company, it is common for founders to agree on what is known as vesting clauses. A vesting clause is a contractual provision stating that a founder only acquires the right to certain shares over a fixed period of time, which usually lasts three to four years. Vesting arrangements aim to bind the founders to the company and motivate them to continue to contribute their full expertise. If a founder leaves the company before the end of the vesting period, such founder will only retain the shares earned up to that point during the vesting period. The first shares are, however, often only released after the first year (known as cliff). The Berlin Higher Regional Court (Kammergericht Berlin, KG) recently ruled that a termination clause in the form of a vesting provision for a start-up may be valid. The clause in question stipulated that a shareholder must transfer such shareholder's shares to the co-shareholders at their request if the shareholder's employment relationship with the company is terminated within the first year of the vesting period.

Facts

In the appeal proceedings, the parties disagreed on the shareholder status of the claimant, who was a co-founder of C-GmbH. This company, originally founded as an entrepreneurial undertaking with limited liability, known as Unternehmergesellschaft or UG, signed an investment agreement with investors investing EUR 1.373 million in return for the issue of shares. As part of the deal, the founders agreed to vesting and had to define a corresponding exit provision for their holding company, which stipulated that the founders would lose all shares if their employment contracts were terminated within the first year of the three-year vesting period. The claimant was released from his duties and negotiated his resignation for six months, which was finally confirmed by regular termination. The claimant felt that the purchase option for his shares was contra bonos mores and therefore invalid. The Berlin Regional Court (Landgericht Berlin) dismissed his claim in the lower instance. The claimant's appeal to the Berlin Higher Regional Court was unsuccessful.

Decision of the Berlin Higher Regional Court

The Berlin Higher Reginal Court in its notice to the parties found, among other things, that a termination clause in the form of a vesting schedule is valid if the intention is to link a founder's shareholder status in a start-up company with his continued commitment to the company.

Background and Reasoning

The Berlin Higher Regional Court (Kammergericht Berlin, KG) initially refers to rulings of the German Federal Court of Justice (Bundesgerichtshof, BGH). The BGH considers termination clauses in which the other shareholders of a GmbH (i.e. a private limited liability company under German law) are granted the right to exclude a co-shareholder from the company without objective reason to be null and void. The affected co-shareholder is no longer in a position to exercise his membership rights in the company and meet his membership obligations. This is because the possibility of free termination can actually be interpreted by him as a disciplinary tool ('Damoclean sword') and prevent him from exercising his membership rights. Termination clauses are only justified in exceptional cases if there is an objective reason. If the behaviour of a shareholder is reproachable, it is much easier to objectively justify a termination (bad leaver event). If, however, the termination is not based on reproachable behaviour - as is the case here with the regular termination (good leaver event) - the requirements for the objective justification of a termination clause are higher. However, it is always necessary to analyse all the relevant circumstances of the individual case.

The Berlin Higher Regional Court makes it clear that it could be justified to completely force a founder out of his shareholder position during the first year of the three-year vesting period by means of a cancellation clause. It is true that the founder may lose the rewards of his previous contribution to the (future) success of the company. However, a certain period of time, in this case the first year, may be used to resolve any differences between the shareholders and find workable compromises.

According to the Court, such arrangements were in the interests of both the investors and the founding shareholders: investments in start-ups involve uncertainty for investors, particularly as to whether the company will successfully survive the start-up phase. Investors needed to rely on the founders to continue to contribute their expertise and hard work to the company, particularly because the founders could not offer them any traditional collateral. At the same time, there might be an interest in subjecting the founders to a probation period to avoid having to be more restrictive with regard to placing trust or calculating with an increased failure risk as part of the investment decision.

The KG not only considers the perspective of the investors and their financial risk, but also emphasises that the vesting rule is in the ex-ante interest of the founders. The crucial factor was that the (urgently needed) financial resources could be raised and (future) disagreements among the shareholders could be resolved as easily as possible without the need for the successive retransfer of shares. In this important phase for the company, it was therefore justified to link the continuation of the founder's shareholder status with his continued commitment to the company.

Practical Advice

This decision makes it clear that a termination clause may be effective even when there is no reproachable behaviour, provided there are objective justifications. The notice by the Berlin Higher Regional Court to the parties is fully consistent with the past BGH decisions on termination clauses. The BGH had already previously assumed objective legitimate grounds in several individual cases, such as the temporary 'probation period' of a new partner in a joint practice.

A vesting provision also usually includes arrangements for the amount of severance pay. However, the KG leaves it open whether a severance payment at the nominal price is appropriate in the case of a good leaver clause, as an appropriate severance payment could replace the agreed one. According to established case law, the market value settlement is the standard case. There are limits to the restrictions that may be imposed. In practice, deductions are often made as a percentage of the market value depending on the leaver event. It seems reasonable to assume that bad leavers would lose 40% and good leavers 20%. A distinction is also made as to whether shares that have already been vested are lost or whether only unvested shares are to be transferred back. For bad leavers, a settlement at nominal value is common, as this corresponds to the acquisition costs. In the case of a good leaver, usually only unvested shares are retransferred at nominal value.

Severance pay at the nominal price or with a small premium may also be justified for good leavers. The KG emphasises that the start-up gains considerably in value through investor capital, while the founders have to earn this value over time. 

In practice, it is advisable to use fall-back clauses for retransfers. These stipulate that the lowest permissible severance payment applies if a court declares the original severance payment provision invalid.

Berlin Higher Regional Court, notice of 12 August 2024 – 2 U 94/21

Christian Burmeister
Damien Heinrich

^{This blog post also appears in the Haufe Wirtschaftsrechtsnewsletter.}

The LkSG, which was passed in 2021 by the grand coalition government of the time and deals with companies' obligations to protect human rights, has now been in force for almost two years. Nevertheless, it once again is the subject of many a political debate. Mostly in connection with the topic of red tape and red tape reduction. One could almost get the impression the LkSG had been identified as the main cause of the German economy's problems and that everything would be fine once it was removed. It was suggested that the LkSG 'had to go' (Federal Chancellor Olaf Scholz). There was even talk of chain saws to 'cut away' the Act (Economics Minister Habeck). Beyond the pithy political statements, however, there was some confusion as to the details of what should actually be implemented and how. The 'growth initiative' of the traffic-light coalition initiated in the summer of 2024, which is now a thing of the past, could certainly be understood to merely restrict the scope of the LkSG's application (see Initiative for Growth of the Federal Government of 5 July 2024). According to this initiative, only those companies that must be registered under the requirements of the CSDDD as of 2027 should be subject to the LkSG. In 2028 and 2029, the LkSG's application should then be expanded again in line with the requirements of the CSDDD.

The growth initiative also referred to the fact that the law on the implementation of the Corporate Sustainability Reporting Directive (CSRD) planned for the second half of 2024 would remove the specific reporting obligation set out in the LkSG for companies that prepare a sustainability report in accordance with the CSRD. The corresponding draft bill of the German government was submitted to the Bundestag, the German parliament, in September 2024 (see BT-Drs. 20/12787 (available only in German)). Although the EU Commission has already initiated infringement proceedings against Germany for not having transposed the CSRD into national law in Germany in time (i.e. by June 2024), it is unclear whether this bill will still be passed in the current legislative period after the German traffic-light coalition has failed. This has unpleasant consequences for all those companies that have prepared themselves to produce a mandatory sustainability report in accordance with the CSRD for the first time for the 2024 reporting year. As the CSRD reporting obligation can probably no longer be introduced retroactively for the 2024 reporting year in 2025 (at least according to the IDW in a newsletter to its members dated 14 November 2024 (only available in German)), companies may have to re-plan at short notice and submit a 'non-financial report' again for 2024 to comply with the still existing legal situation. This would render companies' extensive preparations for CSRD reporting obsolete for the time being. Also, the originally planned liberation from parallel reporting under the German LkSG would not materialise either, with the result that these companies would have to prepare an LkSG report for 2024 in addition to the non-financial report. This 'back and forth' is highly unlikely to generate any enthusiasm in corporate circles. 

The Bundestag is now once again addressing the issue of a complete abolition of the LkSG, after a draft by the CDU/CSU parliamentary group for a 'Supply Chain Due Diligence Obligations Cancellation Act' ('Lieferkettensorgfaltspflichtenaufhebungsgesetz') (BT-Drs. 20/11752 (available only in German)) failed only two months ago (in October 2024) due to the opposition of the former traffic-light coalition, after the AfD parliamentary group's attempt had been unsuccessful in early 2024. Following the end of the traffic-light coalition, the CDU/CSU parliamentary group has reintroduced a draft for a 'Supply Chain Due Diligence Obligations Cancellation Act' ('Lieferkettensorgfaltspflichtenaufhebungsgesetz') (BT-Drs. 20/14015 (available only in German)). And now that it has left the Federal Government, the FDP parliamentary group has also introduced a draft bill to repeal the LkSG with the meaningful name 'Supply Chain Freedom from Bureaucracy Act' ('Lieferkettenbürokratiefreiheitsgesetz') (BT-Drs. 20/14021 (available only in German)). The drafts were discussed in the Bundestag in first reading on 5 December 2024 and referred to the relevant committees (for more details see German Bundestag - discussion of drafts to repeal LkSG (available only in German)). It will be interesting to see the outcome of these two current drafts within the short time left of the legislative period, and of the draft CSRD Implementation Act (CSRD-Umsetzungsgesetz), which is already slightly more advanced in the legislative process, (and the numerous other ongoing legislative procedures). 

Even if, in our experience, most of the companies affected have basically come to terms with the LkSG, upgraded their personnel and implemented the necessary due diligence measures, a very dangerous potential earthquake fissure is opening up in day-to-day business. Driven by current political statements, the view that the LkSG does not need to be taken so seriously (any more) is evidently growing at management level. After all, it has already been announced at the highest level that the LkSG is 'going away', especially as there seems to almost be a rare cross-party consensus on this. The situation with the LkSG is, however, somewhat different to that relating to the CSRD Implementation Act. This is because sustainability reporting in accordance with the CSRD still has to be transposed into national law; there will be no mandatory sustainability reporting before then. The LkSG, on the other hand, has been national law for some time, with the result that the addressees of the regulations must fulfil the human rights and environmental due diligence obligations set out therein. And this will remain the case, regardless of the current political discussion, until the Bundestag has passed a law to repeal the LkSG and such law has come into force. However, for the reasons outlined above, it is uncertain whether this will happen in the short term.

For the management, the LkSG will therefore remain part of their general compliance obligations until further notice. In other words, the management is responsible for ensuring that the laws applying to the company (including, for the time being, the LkSG) are indeed observed by the company. If, however, in view of the current political discussion and the expected or anticipated future repeal of the LkSG on this basis, the management now lets go of the reins and company-internal measures to implement the LkSG are no longer pursued with the necessary vigour, it risks coming into conflict with its obligation to comply with the LkSG, which definitely is still currently in force. The (debatable) prediction that the LkSG will soon be repealed does not make any difference in this context. This is because the LkSG contains ongoing obligations, i.e., for example, that the company must perform an event-based risk analysis at any time a reason to assume such risk arises. Preventive measures, too, must be implemented on an ongoing basis. 

Inadequate implementation of the LkSG may constitute an administrative offence and accordingly lead to a fine of up to 2% of annual global sales. If such a fine were to be imposed, the question (that has not yet been answered from a legal perspective) would immediately arise as to whether the company can (and possibly must) seek recourse against the individual members of the management on the ground of inadequate implementation of the LkSG, which may have caused the fine. Even if D&O insurance cover is in place, the defence against such a liability claim by the company is not exactly a pleasure for the defendant director. Not to mention other consequences beyond any personal liability. A prudent and conscientious director (according to the legal model of section 93 of the German Stock Corporations Act (Aktiengesetz, AktG) should therefore ensure implementation of the LkSG for as long as the current political discussion remains a discussion and the LkSG remains applicable law.

The potential hope that the supervisory authority responsible for monitoring the implementation of the LkSG (Federal Office for Economic Affairs and Export Control, Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) will no longer so intensely engage with the LkSG in view of the current political discussion and that any insufficiencies will therefore not lead to a fine seems unfounded to us in this generalisation. In September 2024, the Ministry of Labour and the Ministry of Economic Affairs announced the implementation of an 'Immediate programme for sub-legislative measures for the practical application of the LkSG' ('Sofortprogramm für untergesetzliche Maßnahmen zur praxisnahen Anwendung des LkSG')(for more information in German please follow this link). However, this does not affect the statutory monitoring of compliance with the LkSG by BAFA. Nor the fact that BAFA is said to have meanwhile initiated some 40 (!) administrative offence proceedings in connection with the LkSG.

Dr. Daniel Walden
Dr. André Depping

The Forced Labour Regulation is explicitly not intended to create any additional human rights due diligence obligations for economic operators that are not already provided for in Union or national law. Rather, the Forced Labour Regulation is intended to complement the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D), which is to be transposed into national law by mid-2026, and the human rights due diligence obligations for certain (large) EU and non-EU companies to be introduced by mid-2027 at the latest (cf. our German blog post from March 18, 2024: EU Supply Chain Act: Agreement and agreement text | ADVANT Beiten) or alongside the German Act on Corporate Due Diligence Obligations in Supply Chains (LkSG, see the commentary on the LkSG by Depping/Walden). In contrast to the aforementioned "due diligence laws", the Forced Labour Regulation contains a general ban on products made with forced labour (see our German blog post from 14.03.2024 EU Regulation banning forced labour is coming (and EU Supply Chain Act perhaps still?) | ADVANT Beiten). In order to avoid the sanctions that could be imposed in the event of a breach of the ban, the companies concerned have an economic incentive to ensure that the products they sell are not made with forced labour.   

1. Rules for economic operators, the Commission and the Member States

The ban is aimed at economic operators. This is any natural or legal person or association of persons who places or makes available products on the Union market or exports products, regardless of their registered office, company size, sector or similar. In future, the authorities designated by the Member States or the Commission will monitor whether economic operators comply with the obligations under the Regulation - i.e. not placing on the market, not making available and not exporting the relevant products.

For cooperation and communication between the authorities and the Commission, the Commission coordinates the work on the Union network. The Commission provides a website, the forced labour single portal. In particular, helpful information is to be published on this portal. This includes, for example, guidelines still to be drawn up by the Commission (including with regard to due diligence obligations in relation to forced labour), a database still to be set up for areas and products with a risk of forced labour and notifications in connection with inspections and bans. The monitoring authorities are going to use these, for example, to transmit data in connection with investigations.

2. Official investigations

In future, economic operators must be prepared for preliminary and main investigations and field inspections by the competent monitoring authorities. As part of the preliminary investigation, they must provide the competent monitoring authority with documentation on their measures to identify, prevent, mitigate or even end the risk of forced labour in their operations and supply chain at short notice. If there are reasonable grounds for suspicion, the authority will initiate a main investigation, which is accompanied by in-depth inspections. The authorities should apply a risk-based approach to the investigations. They use information from various sources and apply the following criteria:

• the scale and severity of the suspected forced labour, including whether forced labour imposed by state authorities could be a concern.
• the quantity or volume of products placed or made available on the Union market.
• the share of the part of the product suspected to have been made with forced labour in the final product.

The lead competent authority may respond differently if it determines that the product under investigation was produced with forced labour. Depending on the product and the type of violation, it can, for example, prohibit the placing on the market or making available of the product or request the economic operator to prove that forced labour in the supply chain has been eliminated within a certain period of time. Fines can also be imposed.

The Commission is responsible if the suspected forced labour takes place outside the EU. If the forced labour takes place on the territory of a member state, the authority there has lead responsibility. They may cooperate with other competent authorities and request information.

3. Challenges for economic operators

All economic operators should (also) take a critical look at the supply chain of their products with regard to the EU Forced Labour Regulation and the sanctions that may be imposed in the future for violations of the ban on forced labour (in addition to fines, in particular the ban on further distribution of the products in question). To this end, they can also make use of the tools provided by the Commission. In future, companies should monitor their supply chain and document this in order to prepare for investigations. They must be able to make their findings available within a few working days in order to be able to refute the suspicions of the respective authority that justify the preliminary investigation as far as possible. In particular, companies that are subject to the Act on Corporate Due Diligence Obligations in Supply Chains (LkSG) can draw on their already established risk management measures and supplement them accordingly.

4. Outlook

The Forced Labour Regulation is intended to open new possibilities for the authorities to intervene in EU law, such as the detention of products, and thus take a further step towards combating forced labour. Once the Regulation has been signed by the President of the European Parliament and published in the Official Journal of the European Union, the Forced Labour Regulation will enter into force on the day after publication. It will apply three years after its entry into force, i.e. probably at the end of 2027.

Dr Daniel Walden
Prof. Dr Rainer Bierwagen
Dr André Depping

^{1 See the press release of the Counsil and the English version of the Regulation}

In the above decision, the Federal Fiscal Court stated that the purchase of a share in a community of heirs (Erbengemeinschaft) does not constitute an acquisition within the meaning of section 23 (1) sentence 1 EStG and therefore does not qualify as a sales transaction subject to taxation. A community of heirs does not constitute a partnership (Personengesellschaft), meaning neither the purchase nor the sale falls under the provisions of section 23 (1) sentence 4 EStG which sets forth that the purchase and sale of shares in partnerships are deemed to be equivalent to the purchase and sale of the proportionate assets. Thus, in practice, it made sense to acquire a co-heir share (Miterbenanteil) instead of an individual asset because such acquisition did not qualify as a private purchase or sales transaction within the meaning of section 23 EStG and was therefore exempt from tax. 

At the recommendation of the German Finance Committee, the legislation recently decided to fill this loophole. Section 23 (1) sentence 4 EStG now does not only mention the partnership but also the community of joint owners. In doing so, the purchase or sales of a share in a community of joint owners has been equated with the purchase and sale of an asset associated with the joint ownership. The consequence is that the speculation period is based on the time when the share in the joint ownership was acquired and that the sale may fall under section 213 EStG.

By means of this reform, the legislation fills the loophole which was often used in practice to avoid speculation periods and, subsequently, the taxation of profits from private sales. This is relevant, in particular, for communities of heirs. The reform has less significance for partnerships under German civil law (GbR), i.e. another form of communities of joint owners, because they were already covered by section 23 (1) sentence 4 EStG as partnerships. 

The newly-amended section 23 (1) sentence 4 applies to all sales where the speculation period has not yet expired.

Teresa Werner
Alexandra Wolter

If a managing director and an authorised signatory (a Prokurist) each grant a power of attorney for the commercial register as 'grantor' in two separate deeds, it cannot be assumed that the power of attorney is granted on behalf of the GmbH. If the applicant refuses to submit the additional documents requested by the registration court, the application for registration must be rejected.

In German limited liability companies, GmbHs, powers of attorney for commercial register matters are granted by as many members of the managing board as are needed to represent the company. These powers of attorney must be notarised. In a GmbH with joint representation, usually two managing directors, or one managing director together with one authorised signatory (Prokurist), are authorised to represent the company. In a recent decision, the Dusseldorf Higher Regional Court made it clear that two separate powers of attorney for commercial register matters, one signed by a managing director and one signed by a Prokurist, are not sufficient for a valid power of attorney. Because in a company with joint representation, two separate powers of attorney do not clearly establish that the undersigned intend to act on behalf of the represented GmbH.

Facts

The applicant is a notary authorised to act on behalf of the GmbH and filed for registration in the commercial register of a joint authorisation to represent the company in legal transactions (Gesamtprokura) for four individuals. The shareholders' agreement of the GmbH provided for joint representation. Two managing directors, or one managing director together with one Prokurist, were entitled to represent the company. B, in the role as an authorised representative of C (one of the managing directors of the GmbH) and D (Prokurist of the GmbH), signed the application for an entry in the commercial register. The request was accompanied by copies of two authorisations, in which C and D as 'grantors' each separately granted B power of attorney. The registration court initially dismissed the application with an informal interim order on the basis that B's power of attorney had not been proved to the registration court in due form. The applicant refused to submit further documents, whereupon the registration court issued the interim order against which an appeal was brought.

Decision by the Dusseldorf Higher Regional Court

The appeal was successful, but only temporarily. The Dusseldorf Higher Regional Court decided, among other things, that B had not been validly authorised. Moreover, the registration court should not have decided by way of an interim order but should have dismissed the application for registration after the applicant's refusal to submit the requested documents.

Background and Reasoning

The Higher Regional Court first clarified that the GmbH may in fact be represented by an authorised person for its registration request. Requesting the registration of a joint authorisation to represent the company in commercial matters (Prokura) in the commercial register is not a strictly personal obligation of a managing director. The senate points out that a registration requires a power of attorney certified by a notary (section 12 (1) sentence 3 of the German Commercial Code (Handelsgesetzbuch,HGB)). In a GmbH, such power of attorney is granted by as many members of the management board as are needed to represent the company.

In this respect, the Dusseldorf Higher Regional Court concludes that the powers of attorney granted by C and D are invalid, as they conflict with the stipulation on the joint representation of the GmbH. One managing director (here C) and one authorised signatory (Prokurist, here D) who each appear as 'grantors' in separate powers of attorney cannot validly grant power of attorney to a third party (here B) for commercial register applications on behalf of the GmbH. As (i) the power of attorney was not signed jointly by C and D, and (ii) the term 'grantor' used in both powers of attorney was not explicit, it cannot be assumed to imply that the power of attorney was supposed to be granted on behalf of the GmbH.

Furthermore, the registration court should have declined the request earlier, i.e. once the unsuccessful informal interim order had been issued. The interim order is an instrument for the registration court to demand the removal of obstacles to registration such as an incomplete filing. The applicant, however, refused to remove the obstacle after an (informal) interim order, insisting on the applicant's original request instead, which the Higher Regional Court finds must be considered a final refusal. This constituted a final obstacle which in turn had to result in a decline of the request for registration.

Practical Advice

In principle, powers of attorney do not have to be in the same form as the legal transaction to which the power of attorney relates (section 167 (2) of the German Civil Code (Bürgerliches Gesetzbuch, BGB)). In derogation from this principle, powers of attorney for commercial register applications must be certified by a notary (section 12 (1) sentence 3 HGB). A representation by power of attorney for commercial register matters is, however, inadmissible, if the applicant has to make strictly personal affirmations - for example as a newly appointed managing director of a GmbH (section 39 (3) of the German Limited Liability Companies Act (GmbH-Gesetz,GmbHG)

In order for a power of attorney to be valid for the entry of the joint authorisation in the commercial register, the power of attorney must be signed by as many members of the company's management board as are required for the company's representation (i.e., if necessary, together with an authorised signatory (Prokurist). The applicant submits the original copy of the power of attorney to a notary who will submit it as an electronically certified copy, together with the actual application, to the registation court.

Two separate powers of attorney, each signed individually by the managing director and an authorised signatory as 'grantors', do not suffice in the case of a joint representation scenario. It is therefore necessary to explicitly clarify in the power of attorney that the authorised persons act on behalf of the GmbH (rather than acting as 'grantors' themselves). We further recommend that the authorised persons sign one and the same power of attorney.

Should the registration court issue an interim order (even an informal one), demanding that the applicant complete the registration filing, the applicant should think twice about refusing to give the requested information and insisting on the original filing. A refusal leads to a rejection of the registration request, with fees still being charged. Until an entry has been made, the applicant can still informally withdraw (revoke) the registration request at any time, which comes at a lower cost than a rejection.

Dusseldorf Higher Regional Court, decision of 29 August 2024 - 3 Wx 115/24

Christian Burmeister
Damien Heinrich

This blog post also appears in the Haufe Wirtschaftsrechtsnewsletter.

The Basics on Typical Silent Partnerships

A typical silent partnership describes a person or a company investing in the commercial business of a company as a silent partner. It is called a 'silent' partnership because the legislature provides for the silent partner to not generally appear in external relationships in contrast to an open participation. The silent partner and the company merely form an undisclosed partnership (Innengesellschaft) based on a partnership and participation agreement.

There are only very few legal provisions concerning silent partnerships, for example in sections 230 et seq of the German Commercial Code (Handelsgesetzbuch, HGB). The distinguishing feature of a typical silent partnership is the share of the silent partner in the profit of the company in return for the contribution of assets (section 231 HGB). Generally, a silent partner also participates in losses of the company up to the amount of such partner's contribution (section 232 (2) HGB). The partnership and participation agreement, however, may provide otherwise. While the typical silent partner has the right to be informed by the company, it does not usually have voting rights nor the opportunity to influence the management. The partner benefits from the economic success of a company but it is not able to exert any influence on it.

Due to the particularities mentioned earlier, a typical silent partnership is an agreement as to the partial absorption of profit and loss (Teilgewinnabführungsvertrag) within the meaning of section 292 (1) (2) of the German Stock Corporation Act (Aktiengesetz, AktG) Although the provision originates from stock corporation law, it is generally accepted that agreements as to the partial absorption of profit and losses may also be concluded with a GmbH. However, the prerequisites as well as the legal consequences in this context greatly vary between a GmbH and an AG with differing effects on the silent partnership.

Typical Silent Partnership with a GmbH

A typical silent partnership is a relatively frequent way of financing for a GmbH. In addition to the usual investors, banks often use this opportunity to participate in companies, often indirectly through their own holding companies. A typical silent partnership is appealing for a GmbH, mainly because it is fairly simple.

An informal partnership and participation agreement between the company and the silent partner suffices to establish a typical silent partnership. While this agreement is usually made in writing for documentation and verification purposes, it is not mandatory to do so. The prevailing opinion is that there are no further validity requirements; at least not if the typical silent partnership has no effects that amend or override articles of association, in particular does not restrict the shareholders' right to participate in the profits, and if the silent partner will not receive the majority of the profits of the company. While there are no strict limits, this should regularly only be the case beyond 50%. In the internal relationship, it is advised that the company passes a resolution in this respect before establishing a typical silent partnership. The same is true for the amendment of a typical silent partnership even if no particular requirements for its effectiveness exist in this respect either.

In accordance with the intentions of the legislature, the silent partner thereby remains anonymous. This makes the typical silent partnership with a GmbH particularly appealing for investors who want to benefit from the economic success of a company but do not want to be disclosed to the public.

Typical Silent Partnership with an AG

Matters are different for an AG. A typical silent partnership is classified as an agreement as to the partial absorption of profit and loss (Teilgewinnabführungsvertrag) which means that the provisions of sections 291 et seq AktG apply. 

In contrast to a GmbH, an AG has to sign a written partnership and participation agreement requiring the consent of the general meeting to be effective. On top of that, a silent partnership must be registered in the company's commercial register - and is therefore not 'silent' but visible to any interested party. The typical silent partnership will only become effective upon its entry into the commercial register. Furthermore, the consent of the general meeting as well as the registration in the commercial register are required not only for the conclusion but also for each amendment of the partnership and participation agreement. These strict validity requirements are mainly in place to protect the shareholders and creditors of the company to a much larger extent in the AG than in the GmbH.

As the anonymity intended by the legislature is lost at the AG, it comes as no surprise that the typical silent partnership is much less popular in practice with an AG than with a GmbH.

Munich I Regional Court - Decision of 25 August 2023

The case recently judged by the Munich I Regional Court (decision of 25 August 2023, 5 HKO 4013/22) illustrates what consequences the differences between a silent partnership with a GmbH and an AG can have.

In this case, a GmbH entered into a written partnership and participation agreement on a typical silent partnership with a silent partner which provided for a share in the profits but not in the losses. When the company later changed their legal form from a GmbH to an AG, the typical silent partnership was continued unchanged but not recorded in the commercial register. Then, the partnership and participation agreement was amended to include a provision stating that the silent partner would also have to share the losses of the company up to a maximum amount in the future. This amendment was not recorded in the commercial register either, nor was the consent of the general meeting obtained. When the share in losses of the silent partner was later taken into account in the annual financial statement of the company, a shareholder filed an action for a declaration of invalidity of the annual financial statement.

The Munich I Regional Court ruled in favour of the shareholder who had brought the action. It decided that considering the obligation of the silent partner to compensate losses in the annual financial statement was a mistake. It argues that instead of a claim, a liability - i.e. the remuneration claim of the silent partner - should have been recorded and that the annual financial statement is therefore void.

In its reasoning, the court explains that the amendment to the partnership and participation agreement is void because neither has the general meeting consented nor has the amendment been recorded in the commercial register. It states that while it is true that the silent partnership as such has not been recorded in the commercial register either, this does not affect the validity of the typical silent partnership as the partnership and participation agreement had effectively been entered into with the company at the time it was signed. The court is of the opinion that the change of legal form from a GmbH to an AG performed in the meantime did not lead to a termination of the typical silent partnership because the company as a legal entity continued to be a contractual party. It comes to the conclusion that registering it in the commercial register has thus at no time been a validity requirement against the background of contract continuity. 

The court argues that this, however, does not apply to the amendments to partnership and participation agreements. As the amendments were made after the conversion to an AG, the court states that the provisions of stock corporation law apply without any restrictions and therefore a resolution adopted by the general meeting as well as a registration of the amendment in the commercial register were mandatory. As neither requirement has been met, the court comes to the conclusion that this results in the silent partner's share in losses as intended by the amendment agreement is void.

Conclusion

As this case illustrates, the differences between a typical silent partnership with a GmbH and a typical silent partnership with an AG are not always taken into consideration in practice with a potential for far-reaching consequences for both the company and the silent partner. In particular where the legal form of a company changes, the impact on existing or intended silent partnerships should therefore not be overlooked.

Gerhard Manz
Stephan Strubinger

Bremen Higher Regional Court (OLG), judgment of 17 March 2023 – 2 U 32/20

Where the purchase is a commercial B2B transaction, the buyer has a duty under section 377 of the German Commercial Code (Handelsgesetzbuch, HGB) to inspect the goods: the buyer must inspect the goods immediately upon receipt to determine whether they are the correct goods, whether the seller has delivered the contractually agreed quantity and whether the goods have any material defects. Such inspection must be made without undue delay once the buyer has received the goods. There is no general definition of the period between delivery and inspection that can be deemed 'without undue delay'. Crucial factors include the nature of the goods, the sector, the size of the business, the organisation of the business and the need for a complex investigation. In the case of perishable goods, only a few hours may be allowed for the inspection of the goods. For complex technical products, an inspection within one to two weeks may still be considered 'without undue delay' in certain cases.

The type, form and scope of the inspection again depend on the nature, quantity and intended use of the goods. The costs incurred for the inspection, the time required, the risk of damage resulting from a defect and the technical inspection options available to the buyer must also be taken into account. The scope of the examination must be within the bounds of what is usual and reasonable. There is no need for an 'all-round inspection' for all potential defects in the goods. For larger quantities of goods, testing in the form of representative random samples is usually sufficient. Where successive and partial deliveries are made, however, the buyer must check each individual delivery separately.

If the buyer discovers defects when inspecting the goods, the buyer is obliged to notify the seller of the defects immediately − this is known as the obligation to give notice of defects. When doing so, the buyer must inform the seller of the nature and extent of the defect. Where larger quantities of goods are involved, a rough estimate of how many individual items are estimated to be defective must always be given. If there are several defects, all defects must be reported. A separate notice of defects must be issued for each partial and successive delivery. As a rule, general complaints are not enough. The notification of defects does not require any particular form, unless agreed otherwise in the relevant contract. It is, however, recommended that the written form be observed as a form of proof. After all, in the case of any doubt, it is the buyer's responsibility to prove that the seller was informed of the defect. Here it is sufficient for the protection of the buyer's rights that the buyer has sent the notification of defects in good time. The actual notification period directly follows the investigation period. Due to today's modern means of communication, it normally is no more than one to two working days. Defects in perishable goods such as fruit or flowers must be notified much earlier, in some circumstances within a few hours.

If the buyer fails to notify recognisable defects or fails to do so in good time, the buyer will lose all claims and rights based on defects that were not notified or were notified too late. This includes all warranty claims in the broadest sense with regard to defects that would have been recognisable if the goods had been properly inspected. If a defect that could not be recognised during a proper inspection of the goods is discovered later, the buyer must notify the seller of the defect as soon as it is discovered. Otherwise, the goods will be deemed approved with this hidden defect; the buyer will lose all rights and claims with regard to such defect.

The Bremen Higher Regional Court recently dealt with questions relating to the obligation to inspect for and give notice of defects in commercial sales of goods.

Background

In the matter at issue, the buyer claimed damages from the seller for the delivery of defective stainless steel elements. To no avail. Some stainless steel components were indisputably defective. Yet, the Bremen Regional Court dismissed the action because the buyer did not report the defect until 15 days after delivery of the stainless steel components and the associated test certificates.

Some of the stainless steel elements were defective because, contrary to the contractual agreement, they did not come from properly registered and certified manufacturers. The corresponding test certificates clearly showed this. The buyer could have discovered and reported the defect if the test certificates had been checked properly and in time. The buyer had in fact performed random checks. Representative samples are, however, only suitable for identical bulk goods to satisfy the inspection obligation. Rather than supplying similar bulk goods, however, the seller had supplied various types of steel elements for the manufacture of complex pipe systems, in different dimensions and strengths. When inspecting the delivery of a large number of parts of different types and dimensions from several manufacturers, the buyer must not merely take random samples if the buyer can verify the agreed quality by comparing documents and a simple visual inspection, as otherwise there is a risk of considerable consequential damage. This was the case here. It was foreseeable for the buyer that the installation of the various stainless steel components would lead to considerable installation and removal costs if defects were found. It would have been possible for the buyer to recognise the defects with reasonable effort by checking the test certificates. The promise of a certain quality by the seller does not release the buyer from the buyer's obligation to inspect the goods and give notice of defects. A (particular) confidence in the existence (or absence) of the relevant quality based on the seller's guarantee does not mean that the buyer may blindly rely on the guarantee and waive the inspection or may exercise less care.

The duration of the investigation period to be granted is influenced by the fact that the investigation depends on the submission of accompanying technical documents. A notification of defects within two weeks, starting from delivery of the goods or from receipt of the test certificates, whichever was later, was nevertheless required. As the buyer did not give notice of the defect until 15 days after receiving the goods and the separately transmitted test certificates, this was no longer 'without undue delay'. The buyer has therefore failed to fulfil the obligation to give notice of defects in due time. As a result, the buyer has lost all warranty rights (section 437 of the German Civil Code (Bürgerliches Gesetzbuch, BGB)) with regard to defects that would have been recognisable during a proper inspection. The same goes for all claims, within the broadest meaning of the word, that are based on defects that could have been recognised during a proper inspection.

Comments and Practical Advice

The ruling of the Bremen Higher Regional Court illustrates the need to know the requirements and the rights and obligations in connection with the obligation to inspect for and give notice of defects in B2B transactions. Reasonable inspection of goods and corresponding notification of defects immediately upon receipt of the goods are indispensable in commercial transactions.

The law does not state exactly how and when the goods are to be inspected. It is therefore advisable to reach individual agreements regarding deadlines and the type and manner of the inspection in order to avoid discrepancies and disputes in advance. It is also permitted to entirely exclude the buyer's obligation to inspect for and give notice of defects − for example with regard to the outgoing goods inspection taking place at the seller's premises. This, however, requires an individual agreement; general terms and conditions or standardised quality assurance agreements will not suffice.

There are particularities in cross-border commercial sales. If the buyer and the seller have not made a choice of law, the obligation to inspect the goods and notify defects is generally determined by the law applicable at the seller's registered office. As a rule, the UN Convention on Contracts for the International Sale of Goods then applies first. The UN Convention also distinguishes between the obligation to inspect the goods and the notification of defects. However, the requirements and the content of the regulations are not synchronised. The UN Convention on Contracts for the International Sale of Goods is more buyer-friendly than German law with regard to the obligation to inspect for and give notice of defects − in particular, the notice period under the UN Convention is much more generous from the buyer's point of view.

Lisa Werle

_{This post also appears in the Haufe Wirtschaftsrechtsnewsletter.}

What is the DSA? Who does it apply to?

The DSA aims to create a safe and transparent online environment by strengthening consumer protection and the safeguarding of fundamental rights in the digital space. This regulation, which applies to the provision of intermediary services since February 17, 2024, entails extensive due diligence obligations on hosting services and especially online platforms to regulate the handling of illegal content, disinformation and other digital risks.

Online platforms are, simplified, services that allow the publication of information provided by and stored for the user (the user can also be a business!), if that is not merely a subordinate function.

The DSA as a toolbox for your IP:

IP infringements are common on online platforms (think, for example, of online marketplaces) and other hosting services. Movies or music are uploaded to file-sharing sites, where they are freely available to other users them. Online marketplaces list unlicensed and counterfeit goods sold at low prices. A mobile clone of a popular video game is released in an app store, generating revenue from in-app purchases while exploiting the original game's IP. In many cases, uploaders do not use their real names or provide an address. Sometimes they are based in countries where intellectual property rights are difficult to enforce. The DSA is primarily a set of rules for the providers of these services used by uploaders. However, it also offers some help for taking action against infringing content and can facilitate access to information about its uploaders. 

Contact the service provider:

Under the DSA, hosting services and online platforms must provide an easily accessible and user-friendly notification mechanism that allows individuals or entities to notify them of illegal content on their services. Typically, this mechanism is accessible either in the footer or next to shareable content. Upon the receipt of this notice, it is deemed that service providers have actual knowledge of the existence of the specific content reported. As long as the provider of the service (e.g. the online platform) does not know about infringing content the content, it is generally not liable. This exception has been known for many years as the "host provider privilege" or "safe harbor" for hosting providers. It was established in the EU through the EU by Directive 2000/31/EC, also known as the E-Commerce Directive (and is pretty similar to the “safe harbor” under the DMCA in the United States). If providers are informed about an infringement, they must review and act in a timely, diligent, non-arbitrary, and objective manner. Otherwise, they might be liable for the infringing content themselves. This is nothing new, but it should be easier and there is additional pressure on the service provider. (As far as copyright infringements go, the ECJ and national courts such as the German Federal Supreme Court have established some other criteria when service providers can be liable for infringing content. This regime is not restricted by the DSA.)

Breaches of the DSA on their part can be reported to the competent Digital Services Coordinators (i.e., the authorities responsible for the DSA), which can lead to investigations and ultimately fines. (We won't mention the fines anywhere else in this blog article, but they're worth keeping in mind).

Online marketplaces:

The DSA has even more specific rules for online platforms that allow consumers to enter into distance contracts with traders. We see these as potentially powerful tools to reduce counterfeit and pirated goods and other IP infringements. In the past, traders offering illegal products on online marketplaces often provided fake names and identities – IP owners could send take-down notices to online platforms, but did not get hold of the trader actually offering the goods.

Under the DSA, providers of online marketplaces now have to ensure what is called the “traceability of the traders” (aka “Know Your Business Customer”). The provider of the online marketplace must obtain the following information:

• the name, address, telephone number and email address of the trader;
• the trade register, registration number or equivalent means, if applicable; and
• a self-certification by the trader to only offer products or services that comply with the applicable rules of Union law

This information must be easily accessible and comprehensible to any user of the online marketplace.

Additionally, the provider of the online marketplace must obtain

• a copy of the identification document or other electronic identification;
• the payment account details.

This information must be collected before the trader can offer its products on the online marketplace, and the provider must use best efforts to assess whether the provided information is reliable and complete. For traders who were already active on the online marketplace before the DSA entered into force, the provider must obtain the relevant information until February 17, 2025. If the trader's information is inaccurate, incomplete or out of date, the online marketplace must ask the trader to rectify the situation. Otherwise, the service provider must suspend its service to the trader. These obligations are now starting to show an effect, and the information can be found on many online marketplaces where it wasn't available before. Recently, the online marketplace TEMU undertook to comply with the Know Your Business Customer obligations under the DSA after being sued by the Wettbewerbszentrale, a German organization for the enforcement against unfair commercial practices. 

Providers of online marketplaces must also randomly check whether products or services offered have been identified as illegal through official, freely accessible and machine-readable online sources. If products or services are identified as being illegal, the provider of the marketplace must inform all the purchasers of the fact that they were illegal, along with the identity of the trader and any relevant means of redress. 

Consequently, persistence can pay off. Traders who repeatedly offer infringing products mean a lot more work for online marketplaces. There is also an increased risk of personal liability. In addition to costly claims and court orders, reporting slow or inadequate DSA-compliance to the Digital Services Coordinators can be issues that make the online marketplace less attractive to bad actors.

Very Large Online Platforms:

Very Large Online Platforms (VLOPs) are online platforms with at least 45 million monthly active users in the EU on average, and are designated by the European Commission. These VLOPs must perform risk assessments on a regular basis to identify systemic risks in the EU stemming from the design or functioning of their service and related systems. The repeated violation of IP rights can be seen as such a systemic risk which must consequently be mitigated in the future. It remains to be seen how IP infringements on VLOPs will be mitigated if they are identified as a systemic risk. At least for VLOPs that repeatedly offer products and services in breach of EU law, the mitigation measures could become much stricter than what is already covered by the DSA to deal with such illegal offerings.

Seek the assistance of a trusted flagger:

Trusted flaggers are special entities under the DSA that detect specific potentially illegal content and notify the online platforms. Providers of online platforms must prioritize reports from trusted flaggers and process them without delay. Trusted flaggers are designated by the competent Digital Services Coordinator in the state they have their establishment if they meet the respective criteria. They have particular expertise in their field of competence which is taken into account by the service providers who receive the notice. The European Commission has updated a list of trusted flaggers. The list will be updated regularly as more will be added in the future.

Conclusion:

While the legal grounds for taking action against infringing products on the internet remain unaffected, the DSA is more than just a comprehensive set of difficult obligations to comply with. It is a robust framework designed to make it easier to take action against illegal content by simplifying notifications and putting appropriate pressure on online service providers. If they do not respond diligently and promptly, they may not only lose their liability privilege, but also be subject to enforcement by the authorities. One important aspect will be how rigorous the authorities are in ensuring compliance. Advocating for proper regulatory action is, therefore, crucial. If applied wisely, it can be a powerful tool for protecting intellectual property rights in the European Union. 

Daniel Trunk

The introduction of the Business ID will require credit institutions to make necessary adjustments to their Know Your Customer (KYC) processes: In the future, they will have to also collect and record the Business ID for each account holder, each other authorised person and each beneficial owner as defined by the German Anti-Money Laundering Act (Geldwäschegesetz, GwG) to ensure account accuracy in accordance with s154 AO and include it in their reports to the German Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt).

Please find below an overview of how the introduction of the Business ID will affect the KYC process of credit institutions.

The Business ID

With the 'Business Identification Number Regulation' (Wirtschafts-Identifikationsnummer-Verordnung)¹ published in the German Federal Law Gazette on 2 October 2024, the Federal Ministry of Finance (Bundesministerium für Finanzen, BMF) is making use of the power under s139d AO to issue a regulation on the introduction of a Business ID more than twenty years after the legal basis for such ID was created in s139c AO:

As from November 2024, the BZSt will, in several steps and automatically, assign a Business ID to every individual and legal entity doing business in Germany for their unambiguous identification.

The Business ID will be kept for the duration of the entire business activity and will not change. This will also be the case when, e.g., the name or the address changes. The identification number of s139b AO, the tax number and the VAT identification number will remain in place in addition to the Business ID.

Structure of the Business ID

The structure of the Business ID corresponds to that of the German VAT Identification Number (VAT ID). Like the VAT ID, the Business ID consists of the letters 'DE' and nine digits plus a five-digit distinguishing feature for each economic activity, starting with 00001 when first allocated. 

For each additional economic activity, each additional business and each additional permanent establishment of an economically active individual or legal entity, more distinguishing numbers will be assigned to them in consecutive numbering and in the chronological order of data transmission to their competent tax authority as from 1 March 2026.

Example: Business ID initially allocated: DE123456789-00001, and from 1 March 2026, when taking up another economic activity: DE123456789-00002.

Progressive Introduction

As from November 2024, the Business ID will be issued by the BZSt in several steps and without any application process either by public notification or electronically via the ELSTER user account.

Stage 1: In a first stage, individuals and legal entities doing business who have been issued a VAT ID by 30 November 2024 will be assigned a first Business ID with the distinguishing number 00001. It will correspond to the existing VAT ID but will include the additional distinguishing feature. The issuance is expected to start in November 2024 by an announcement in the Federal Tax Gazette (Bundessteuerblatt) and can be found on the BZSt website.

Stage 2: In a second stage, the Business ID is issued to individuals and entities who are registered for VAT purposes or are small entrepreneurs (Kleinunternehmer) as defined in the German VAT Act (Umsatzsteuergesetz, UstG), but who have not been issued a VAT ID by 30 November 2024. In this case, the BZSt will allocate the Business ID electronically via the ELSTER user account as from 1 December 2024.

Stage 3: All other individuals and legal entities doing business will receive their Business ID as from 1 July 2025.

When the Business ID is issued for the first time, it will have the distinguishing number 00001. The allocation of distinguishing numbers for any additional economic activity (00002, 00003, etc.) will not start until 1 March 2026.

Impact on the KYC Process of Credit Institutions

The introduction of the Business ID will require credit institutions to make necessary adjustments to their KYC processes. Since 2018, these have included extensive tax-related KYC obligations in addition to those under anti-money laundering law with regard to account authenticity as set forth in s154 AO. 

Complying with both tax and anti-money laundering KYC obligations continues to be a challenge for many credit institutions due to the different areas of law involved. At the same time, the importance of tax-related KYC obligations and the associated interface issues continues to grow following new legislative initiatives to combat tax evasion and money laundering, such as the new EU anti-money laundering package or the reform(s) of the capital gains tax relief procedure (see: Withholding Tax Relief Modernisation Act (Abzugsteuerentlastungsmodernisierungsgesetz, AbzStEntModG), EU FASTER initiative). Violations are increasingly coming into the focus of supervisory and tax authorities and entail risks under criminal tax law.

Specifically, the following immediate need for action arises:

Pursuant to s93b (1a) AO in conjunction with s24c of the German Banking Act (Kreditwesengesetz, KWG), s154 AO, credit institutions must now also collect and record the Business ID for each account holder, each other authorised person and each beneficial owner and store it in the account retrieval file. In addition, reports to the BZSt must from now on include the Business ID. So far, the statutory transitional provision of s154 (2a) (1) AO applied, according to which the tax number for taxation of income was to be used until the Business ID was issued if the party doing business was not a natural person.

With the allocation of the Business ID as from November 2024, it must now be ensured that the Business ID is collected for new customers in future. The existing KYC processes, reporting channels to the BZSt, documents for customer onboarding and procedural documentation must be adapted appropriately. The same applies to system-based plausibility checks, which must now also include the Business ID.

In the interests of legal clarity and to avoid the threat of significant compliance costs that would otherwise arise, it is to be hoped that an appropriate transitional arrangement will be found, which is currently being discussed as part of the Annual Tax Act 2024.

Martin Seevers
Guido Storck

¹ Regulation on the Issuance of Business Identification Numbers for Tax Purposes (Verordnung zur Vergabe steuerlicher Wirtschafts-Identifikationsnummern, WIdV) dated 30 September 2024, German Federal Law Gazette (Bundesgesetzblatt, BGBl.) 2024 Part I No. 293).

The authors are members of ADVANT Beiten's tax and white-collar crime law department and specialise in the avoidance, support and resolution of tax and criminal law risks in the financial sector.

As a highly specialised unit with many years of industry experience in the financial sector, we combine criminal law competence with tax law expertise and regulatory know-how.

The advisory services focus on tax and white-collar criminal law, anti-financial crime and financial sanctions as well as related compliance issues and the conduct of internal investigations. In addition to preventive advice, we advise and defend clients in tax and white-collar criminal matters and represent companies and individuals in tax and regulatory proceedings before financial and specialised authorities (e.g. BaFin, Bundesbank).

All lawyers in the team are also qualified as Certified AML & Anti-Fraud Officers and have extensive litigation and implementation experience with regard to updating tax and anti-money laundering obligations in the KYC processes of credit institutions.

Background

The new EU regulation on foreign subsidies 2022/2560 ("Foreign Subsidies Regulation" or FSR) has become an important tool of subsidy control since its entry into force. The FSR contains rules that enable the European Commission to address distortions caused by foreign subsidies, and thereby allows the EU to ensure a level playing field for all companies operating in the EU internal market comprising 27 countries, while remaining open to trade with and investment from third countries. The FSR applies to foreign subsidies granted to companies engaging in economic activities in the EU, regardless of their ownership, legal structure or origin, and this to merger and acquisitions as well as participation in public tenders. The rules complement those concerning imports of subsidized goods.

Chinese subsidies were often investigated 

There has been a greater number of cases than expected and the attention has primarily focused on merger and acquisitions. The European Commission expected some 30 notifications in the year 2024 but was dealing within the first 100 days with pre-notification discussions in over 50 M&A cases. The cases examined ranged from mergers within the same Member State to mergers between EU and non-EU countries. The cases came from a wide variety of sectors, ranging from basic industries to fashion retail and high-tech sectors; for instance the planned acquisition of a telecommunication provider's pension fund by a State-controlled actor telecommunications provider domiciled in the United Arab Emirates. 

The Commission highlights the fact that an investment fund was involved as the notifying party in around a third of the cases. (It should be noted that M&A projects may also be subject to EU- or national merger control rules and the screening rules concerning foreign investment in sensible sectors.)

As regards the participation of non-EU companies in public tenders, to date, the Commission has opened: in-depth investigations following public tenders notifications for solar photovoltaic supplies in Romania and electric “push-pull” trains in Bulgaria, ex officio investigations in wind turbine supplies for wind parks in Romania, Greece, Bulgaria, Spain, and France; and security equipment, including a dawn-raid at the producer’s premises in the Netherlands. The Commission decision ordering the inspection in the security equipment case is contested by the company in court.

All but a few of the Commission's in-depth investigations concerned Chinese companies that may have received potential subsidies from China. While the FSR is designed to be country-neutral, as a matter of fact mostly Chinese subsidies were scrutinized, as the Chinese economy is the world's second biggest with Chinese companies investing in the EU and participating in public tenders.

Chinese officials and industry groups have nevertheless repeatedly criticized the EU’s FSR, arguing the regulation is just another protectionist tool created by the EU to target Chinese businesses. In July China's Ministry of Commerce announced that it launched a trade and investment barrier investigation into EU's related practices in its investigations of Chinese enterprises based on the FSR. 

The outcome of the investigations so far is mixed. In some cases, the companies withdrew or modified their projects.  In March 2024, Chinese train maker CRRC withdrew from a EUR 610 million public tender for a Bulgarian railway project, after the EU launched an investigation into the bid under the FSR framework. In other cases, offers were even withdrawn without a formal investigation opened.

Preliminary Clarifications

In a speech in April 2024, Competition Commissioner Margrethe Vestager outlined the direction for the Commission's enforcement efforts and criticised distortions of competition caused by subsidies granted by non-EU countries. She emphasised that in some markets, Chinese companies repeatedly offer significantly lower prices than EU companies, which are allegedly financed by State aid from third countries and often include payment deferrals that are not granted to EU companies. This practice leads to a considerable competitive disadvantage for EU companies, especially in sectors such as solar or wind energy. 

In July 2024 the European Commission published a Staff Working Document providing preliminary guidance concerning the distortion test under the new rules. 

The Commission mentions that in the context of M&A transactions, different standards of review apply under the FSR and under the European Merger Regulation, as the two procedures serve different purposes. Consequently, the two procedures can also lead to different results. 

In the context of public procurement procedures, the Commission's review is however limited to the specific public procurement procedure and the distortion test applied is different for M&A deals than it is for public tenders. The Commission only examines whether the respective public procurement procedure is potentially distorted by the foreign subsidies. Only those third-country subsidies are relevant that enable a specific economic operator to submit a bid that is unjustifiably favourable in relation to the tendered services.

Beyond that nothing new emerges from the clarifications.

Early planning is the key

A major challenge for companies remains obtaining and preparing the right data for an eventual review of their bid. In particular, companies potentially subject to the obligations under the FSR must consider preparing and setting up a comprehensive and complete information gathering process to collect the necessary FSR data on a global and group-wide basis for the last three years at the same time or before launching a bid or participating in a tender. The correct identification of reportable foreign financial contributions, their precise differentiation from those categories that are most likely to distort competition, as well as a prudent interpretation of the exemptions granted, is essential in this context. Legal tech solutions and the early involvement of experts can help.

Outlook for the future

As the FSR consists of a novel legal framework, companies face significant uncertainty in assessing when non-EU subsidies may be problematic. Pending further guidance, it is more likely that certain case characteristics will require detailed questioning or a longer-term review based on EU enforcement practice. 

The establishment of information systems will continue to pose challenges for companies. At this point, we recommend that affected companies plan to collect and organize information at an early stage. We will continue to monitor further developments in the area of FSR and are ready to assist companies concerned. 

Prof. Dr Rainer Bierwagen
Lucas Nowottny

Further information can be found in the press release of the Court of Justice of the European Union.
 

The Action Plan sets out a series of measures to address the challenges posed by e-commerce. Here is a closer look at its key elements.

Enhanced Market Surveillance and Customs Controls

The BMWK proposes to extend the powers of market surveillance authorities so that they can take direct action against online platforms if no responsible economic operator can be identified. Additionally, it proposes a collaborative approach between national and European market surveillance authorities and customs. This would include automated controls, coordinated inspections and test purchases to ensure that imported goods comply with EU safety, environmental and quality standards. Economic operators shall ensure that they can be contacted by the authorities throughout the distribution of their products and appoint a legal representative in the EU.

Abolition of the EUR 150 duty-free limit

The Action Plan provides for the rapid end of the EUR 150 duty-free limit quickly. At present, only import VAT is payable on purchases from online retailers outside the EU worth less than EUR 150, but not customs duties. This has led to a flood of cheap goods on the European market. It is even suspected that many of these goods are split into several packages to remain below the duty-free limit.

Enforcement of the Digital Services Act (DSA)

The BMWK calls on the European Commission to strictly enforce the DSA. Illegal offers, such as unsafe products or product piracy, must be removed and must not be available in the European Union. For active enforcement the DSA, the European Commission should work with the national Digital Services Coordinators to collect data on infringements so as to identify systematic violations. In addition, fines should be imposed to deter operators from committing further infringements. The reporting tool of the Federal Network Agency, Germany’s (main) Digital Services Coordinator, should be more strongly promoted.

Informing Consumers

The BMWK is proposing a “Digital Product Pass” containing all relevant information on the safety of a product, as well as on environmental and health protection. Operators of online trading platforms shall be obliged to review this information for completeness and plausibility.

In addition, the BMWK and associations shall provide information with the aim of motivating consumers to make sustainable purchasing decisions.

Data Protection

The Action Plan also addresses data privacy concerns, calling for closer collaboration between national data protection authorities and the creation of an EU-wide data protection body to ensure that personal data collected by online platforms is handled responsibly and in compliance with the General Data Protection Regulation (GDPR).

Representative Actions

In addition to market surveillance authorities, associations should also be able to enforce the provisions of the EU Market Surveillance Regulation.

Continuous Evaluation

Finally, the Action Plan includes provisions for regular public reporting by the European Commission to ensure continuous evaluation and, if necessary, adaptation of the strategies.

Increasing Pressure on Online Platforms

The BMWK takes the view that the level playing field is threatened by non-EU economic operators that do not comply with existing EU legislation. It refers in particular to the range of products offered on Temu and SHEIN, which have recently become very successful in Germany. This increases the pressure on both online platforms which have also received requests for information under the DSA from the European Commission. It remains to be seen what the results of the Commission's investigations will be and how the DSA will be implemented in practice. What is certain is that market surveillance authorities, consumer watchdogs and competitors will be watching these developments closely.

Daniel Trunk

Section 26 of the German Telecommunications Digital Services Data Protection Act (TDDDG), which was introduced in December 2021 as the "TTDSG", provides the Federal Government with the power to issue regulations to govern so-called consent management services.

The original idea of such services, which are also discussed under the keyword of "Personal Information Management System (PIMS)", was that the internet user would submit their personal cookie preferences once to the PIMS and the providers of digital services would be able to request these preferences from the PIMS. Users would have the option of agreeing to all cookies, generally accepting or rejecting individual categories of cookies across the board (e.g. statistics cookies or marketing cookies) or rejecting all unnecessary cookies.

(In)permissibility of general consents

The problem with such blanket consent to the use of cookies, even if it is only given for certain categories of cookies, is that the internet user cannot really give informed consent in this case. Even though providers of digital services often use similar cookies and tools, they are not exactly the same. Each provider uses different cookies in some cases and therefore also transmits information from internet users to different recipients. Internet users would thus never know exactly what processing they are consenting to at the time of giving their consent, let alone to whom their data is being transmitted. For this reason, the German government has also decided against blanket default settings and comments on this in the explanatory memorandum to the regulation:

“General default settings for possible consent requests from the provider of digital services, which are made by the end user without reference to the specific use of a digital service, do not meet the requirements for the management of consent.”

However, this also means that the desired effect of PIMS, namely, to reduce the number of cookie banners, is lost. 

Solution through the EinwV?

Section 3 (1) of the now adopted Consent Regulation (EinwV) stipulates that the approved consent management service (i.e. the PIMS) stores the end user's cookie settings when they use a digital service for the first time. According to its wording, internet users will still have to see a cookie banner every time they visit a website for the first time.
The approved service must also be user-friendly, i.e. transparent and comprehensible, and a request to review the end user's settings may only be made after one year at the earliest (Section 4 EinwV). It must also be possible to switch to another approved consent management service at any time (Section 5 EinwV). Furthermore, in accordance with Section 6, a competition-compliant procedure is required for providers of digital services. Finally, integration into so-called retrieval and display software (usually presumably Internet browsers) should be made possible (Section 7 EinwV).

As the name "approved consent management service" makes clear, the service must be approved. This is done in accordance with the procedure described in Part 3 of the Regulation. The competent body for this is the Federal Commissioner for Data Protection and Freedom of Information (Section 8 EinwV).

Part 4, the last part of the regulation, defines technical and organizational measures for providers of digital services as well as manufacturers and providers of retrieval and display software. Particular attention should be paid to Section 18 (1) of the Consent Regulation, which declares the integration of approved consent management services by digital service providers to be voluntary. This provision has been criticized by consumer advocates as the requirements of the regulation can easily be circumvented in this way. Moreover, the fact that the use of consent management services is voluntary will probably result in them rarely being used, especially in practice. In light of the study cited at the beginning, the proportion of those who use such a service to generally reject non-optional cookies is likely to be very high. The providers of digital services will also assume this and therefore have no interest in using such services. They will be inclined to continue to use cookie banners to access the data of at least those users who click on "accept all" because they actually want to give their consent, do not really care or simply like to press green buttons.

Conclusion

There are major doubts as to whether the adopted regulation can really reduce the number of cookie banners on the internet. It can also only regulate consent in accordance with Section 25 (2) TDDDG. In practice, however, consent is often also obtained via cookie banners in accordance with the GDPR (in particular also in accordance with Article 49 para. 1 a) GDPR). Strictly speaking, these cannot then be obtained through the consent management service, which would probably entail that the previous cookie banners would have to remain in place for these consents in any case.

However, another argument against the regulation is that the use of the consent management service does not appear to have any added value for either users or service providers. Users would still have to make a setting at least for every new website and even several times if the website uses new cookies or other tools, because no blanket default setting for different providers of digital services is to be legally permissible. Service providers, on the other hand, are presumably not interested in participating in consent management, which will probably result in more refusals of optional cookies.

Ultimately, though, the relevance of the services for consent management will depend on the specific technical design. If this is kept as easy to install and low-threshold as possible, it could perhaps be attractive for some digital service providers. With a well-functioning solution that actually makes things easier for the user, these service providers could then advertise particularly user-friendly cookie handling.

Fabian Eckstein

Facts

The decision is based on the facts concerning the dismissal of the disgraced managing director of Hannover 96 Management GmbH ("GmbH"). The GmbH’s articles of association expressly provide that the competence to remove the managing director does not lie with the shareholders' meeting, but with a voluntarily established supervisory board. Within the scope of a voting commitment agreement, the sole shareholder of the GmbH in addition undertook towards a third company not to amend the articles of association or not to amend them without the company’s prior written consent. According to the agreement, this applies in particular to the passage governing the function and composition of the supervisory board.

The sole shareholder ignored this and adopted the resolution − explicitly breaching the articles of association − to remove the managing director of the company from his role with immediate effect. In preliminary injunction proceedings, the Regional Court of Hanover granted the request of the managing director to be allowed to continue to act as managing director until the decision in the main proceedings was made. The Higher Regional Court of Celle agreed with the opinion of the Regional Court of Hanover and considered the resolution of the shareholders' meeting to be null and void. The defendant filed an appeal on points of law against this with the German Federal Court of Justice (Bundesgerichtshof, BGH).

BGH, Judgment of 16 July 2024 - II ZR 71/23

The defendant's appeal was successful. The BGH considered the resolution to remove the plaintiff from his role as managing director of the defendant to be valid.

Contrary to the opinion of the Higher Regional Court of Celle, the removal resolution is not incompatible with the nature of the GmbH and, thus, not null and void by analogy with section 241 No. 3 of the German Stock Corporation Act (Aktiengesetz, AktG). In contrast to a violation of the law or the articles of association, for which a resolution of the shareholders' meeting can be contested, only a violation of fundamental structural principles of the German legislation regarding limited liability companies (Gesellschaft mit beschränkter Haftung, GmbH) could justify any incompatibility of the resolution with the nature of a GmbH. The nature of the GmbH does not follow from the individual provisions in the articles of association of the company at issue, since the nature of the GmbH is defined by the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG) and the abstract general structural features of German legislation regarding limited liability companies (GmbH) and, thus, is not at the shareholders' discretion. These abstract general structural features also include the autonomy of the articles of association, which, however, must not be confused with the specific regulations in the articles of association set out in exercising this autonomy. According to the BGH, provisions in the articles of association which assign the competence to remove the managing director from office to the optional supervisory board of the company do therefore not constitute any fundamental structural principles of the German legislation regarding limited liability companies (GmbH), as the removal right is reserved to the shareholders' meeting by law (sections 45 (2), 46 No. 5 GmbHG).

The disregard of the stipulations of the voting commitment agreement does also not justify the assumption that the removal resolution is incompatible with the nature of the GmbH. Observing such voting commitment agreements is not part of the fundamental structural principles of the German legislation regarding limited liability companies (GmbH). Shareholders of a GmbH could commit themselves to a certain voting at any time. However, this agreement is, in principle, only binding on the contract partner due to the distinction between the level under the law of obligations and the corporate level so that the consequences of a violation are not to be resolved with the company.

The BGH further assumes that the removal resolution is not null and void as an offence against common decency, which would require that the resolution "considered in isolation" was contra bonos mores. Resolutions in which not the actual content of the resolution, but "only" the motive or purpose are against common decency, or in which the offence against common decency lies in the way in which they were adopted, are only contestable.

Accordingly, an invalidity of the removal resolution due to an immoral damage could at best come into consideration if the conduct of the shareholder had not only violated the shareholder’s competence and contractual duties, but circumstances beyond that had justified its reprehensibility. The court of appeal, however, had not found such circumstances in the specific case.

Conclusion

Voting commitment agreements are a common means to ensure a uniform voting of all shareholders or of a group of shareholders. In pooling agreements, which are very frequent in family-owned companies, the parties undertake to exercise their voting rights in a certain way. According to the controversial, but prevailing opinion, such an agreement may also be entered into with third parties.

If a shareholder violates a voting commitment agreement, such shareholder’s vote is generally valid in the shareholders' meeting. The commitment is limited to the contractual relationship of the parties involved and does not affect any third party. After the Higher Regional Court of Celle had partially eroded this principle, the BGH emphasises with welcome clarity that a distinction must be made between the level under the law of obligations and the corporate level and that a contractual breach of duty does not directly affect the shareholder relationship. Accordingly, the contract partners regularly only have the option to enforce the voting agreed under the law of obligations against the shareholder violating the agreement in court. Whether the voting behaviour contrary to the agreement is immoral and the resolution therefore contestable or even null and void, so that the action must be directed against the company itself, always depends on the individual case.

Dr Moritz Jenne
Andreas Scheffold

This blog post also appears in the Haufe Wirtschaftsrechtsnewsletter.

1. Invoice formats in the transition phase

The various possible invoice formats and their treatment during the transition phase are briefly discussed below:

1.1 Paper invoice

From 1.1.2025 with the transitional periods 1.1.2027 and 1.1.2028, paper invoices will no longer be the rule for supplies between VAT-registered businesses based in Germany ("B2B"). However, it remains the rule for invoices to private customers ("B2C") or to VAT entrepreneurs not located in Germany, unless they agree to an electronic invoice.

The decisive factor for the 1.1.2025/27 or 28 deadlines is when the service to be invoiced is deemed to have been "performed". In the case of deliveries, this is generally when the recipient acquires the power of disposal and, in the case of other services, when the service has been completed.

1.2 E-invoice according to structured electronic format

There are two recognized formats according to the CN 16931 standard: (i) X-Rechnung and (ii) ZUGFerD.

X-Rechnung formats are already standard for public contracts ("B2G"). X-invoices are initially not human-readable but are pure xml files, which can be made human-readable with the appropriate IT software.

ZUGFerD is a hybrid format. The xml files are embedded in human-readable PDF/A3 files.

The receipt of these formats must be guaranteed by the invoice recipient for B2B from 1.1.2025. The invoice recipient does not have to agree.

1.3 E-invoice interoperable with a structured electronic format

Other e-invoice formats that allow extraction into the X-invoice or ZUGFerD format are also permitted. However, this requires the consent of the invoice re-cipient.

Extraction is necessary because electronic invoices are to be exchanged in real time with the taxpayer and the tax authorities after the transition phase.

1.4 Other EDI formats not interoperable with structured electronic format

These e-invoice formats are still permitted until 31.12.2027 with the consent of the invoice recipient; after this date, they will no longer be permitted.

1.5 E-invoice in another electronic format (e.g. PDF)

These invoices are permitted until 31.12.2026 with the consent of the invoice recipient. Companies/VAT groups with turnovers within the meaning of the small business regulation (Section 19 (3) German VAT Code “UStG”) of no more than EUR 800 thousand in the 2026 calendar year can still use these formats until 31.12.2027 with the consent of the invoice recipient.

1.6 Invoices for small amounts and tickets

There is no e-invoice obligation for these invoices. Receipt of an e-invoice generally requires the consent of the service recipient.

If the invoice issuer did not issue an e-invoice by mistake, but was obliged to issue an e-invoice, any other invoice issued instead can be corrected by issuing an correct e-invoice in accordance with Section 15.2a (7) UStAE. The correcting e-invoice must express this in a clear reference to the original other invoice. Subject to the other re-quirements, the correction is effective back to the date of issue of the other invoice, even if the input VAT deduction is not permitted in accordance with para. 47 of the BMF-draft (para. 48 of the BMF draft).

2. Consent of the invoice recipient

The recipient's consent to the issue of an invoice in a different electronic format does not require any special form. Consent can be given in the general terms and condi-tions or concluent.

3. Electronic storage obligations

Invoices received electronically must also be stored electronically by VAT entrepre-neurs. A human-readable copy is not sufficient. A VAT audit will use the technical pos-sibilities of electronic evaluation in the future. Extraction into the financial accounting system is not mandatory, but it is recommended.

4. Other comments

If there is no invoice for small amounts (gross amount up to EUR 250), the e-invoice obligation also applies if the entrepreneur makes purchases "at the counter" (e.g.sales at Metro Markets). This also applies, for example, to business meals in a restaurant.

Credit notes are also invoices for VAT purposes and the e-invoicing obligation applies.

5. Conclusion

In future, it will be important for entrepreneurs to differentiate when issuing invoices, at the latest after the transition period:

a) Invoices to other entrepreneurs must be issued electronically.

aa) The X-Rechnung or ZUGFerD formats do not require the consent of the in-voice recipient.

bb) Formats interoperable with the X-Rechnung or ZUGFerD format require the consent of the invoice recipient.

cc) Other electronic formats are no longer permitted.

b) Invoices to (i) non-entrepreneurs, (ii) entrepreneurs for their non-business area, (iii) entrepreneurs not established in Germany (without a VAT permanent estab-lishment) and (iv) small-value invoices and travel documents remain other invoic-es in paper or e.g. as a PDF-document. Service recipients must agree to an e-invoice. This is particularly relevant for supplies of work and other services in connection with a property to non-entrepreneurs, as there is an invoicing obligation under Section 14 (2) No. 1 UStG, but e-invoices would require consent.

Practical tip: It may make sense to send electronic invoices in future that are also human-readable, e.g. with or embedded in a PDF document.

6. Concluding remarks

It is recommended that the introduction of e-invoices be seen as an opportunity to in-crease the efficiency of automated processing in invoicing processes. VAT audits by the tax authorities should also run more efficiently in the future. ADVANT Beiten's tax teams at our 6 offices in Frankfurt, Düsseldorf, Munich, Hamburg, Berlin and Freiburg will be happy to assist you with tax-related questions and the technical implementation of e-invoices.

Jens Müller

Narrative of the case:

On 23 July 2020 AO Novosibirskkhleboproduct, a Russian company, (the "Supplier") and C. Thywissen GmbH, a German company, (the "Buyer") concluded a contract through a broker for the supply of Russian-grown linseed. The contract was governed by the laws of England and Wales. It included a FOSFA (Federation of Oil, Seeds and Fats Association) arbitration clause with seat in London.

For the purposes of meeting its contractual obligations, the Supplier concluded a contract for the supply of linseeds with the company Dubrovinskoe, which operates in Novosibirsk Region.

Russia’s Novosibirsk Region experienced a drought in summer 2020 On 22 July 2020 the regional government issued Resolution No. 289-P, which declared a state of emergency covering 16 grain-growing municipal districts in the Region.

Due to the poor linseed harvest, the Supplier was unable to supply the linseed to the Buyer. It proposed to the Buyer citing force majeure that the delivery dates shall be deferred. However, the Buyer declined to extend the deadlines for delivery and filed a claim against the Supplier with FOSFA Arbitration. It asked to be compensated for losses in the amount of the difference between the agreed price of delivery and the market price of linseeds at the time of the breach of contract, to a total of USD 600,000.00. However, the Buyer did not actually enter into a replacement transaction.

The arbitral tribunal, whose members were from Ukraine, the United Kingdom, and Denmark, issued an award on 16 November 2022. It granted the Buyer’s relief regarding its claim for the compensation of losses in the amount of USD 600,000.00, with interest. Even though Art. 7 FOSFA Arbitration Rules foresee a proceeding for appeal, the Supplier did not appeal this decision. Thus, the award became binding on 28 December 2022.

The Buyer then initiated proceedings for recognition and enforcement of the award in Russia. The Commercial Court of Novosibirsk Region, decided that the award is recognisable and enforceable in Russia. The Court of Cassation dismissed the Supplier’s appeal and upheld the decision of the Commercial Court of Novosibirsk Region.

The Supplier filed an appeal with the Russian Supreme Court. He claimed that the court orders issued in the case were a breach of the public order of Russia and should be overturned.

The Russian Supreme Court granted the Supplier’s appeal, laying out the following key legal positions:

(a) The recovery of losses cannot be aimed at enrichment in the context of legal defence, but only at the restoration of an infringed right.According to the Russian Supreme Court, it is contrary to public order in Russia to collect funds to compensate for losses without providing evidence that the losses were actually incurred, for example by providing evidence that the party has entered into a replacement transaction.

(b) The courts of the first instance and cassation failed to take into account the "public significance of the Supplier" and the fact that "enforcement of the award risks creating financial instability for the Supplier and would have a material effect on public employment and social stability in the region."

(c) The arbitral tribunal, composed of citizens of "unfriendly countries" , cannot be impartial and objective. "Given there is no evidence to the contrary". The Russian Supreme Court has thus formulated a - questionable - presumption of partiality for any arbitration in which an arbitrator from an unfriendly country is involved. The Russian Supreme Court’s position is based on the position taken by the European Court of Justice in the cases of Kyprianou v Cyprus, case No. 73797/01 and Revtyuk v Russia, case No. 31796/10.

Significance of the New Legal Positions of the Russian Supreme Court

The Russian Supreme Court’s decision and newly developed approaches are currently the subject of lively discussion in the legal community in Russia and in arbitration communities around the world, with reference to both the positive and negative consequences of the approaches that have been developed.

First and foremost, it should be noted that the Russian Supreme Court went far beyond the scope of reviewing the grounds for non-recognition of an arbitral award set forth in Article V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958). The Russian Supreme Court conducted a review of the merits of the dispute, including a reassessment of evidence in the case as to the existence of losses and occurrence of force majeure.

It should also be noted that the "public significance" of the Russian debtor in the dispute and the possibility of an adverse effect on social stability in the region, if the award were to be recognised and enforced, cannot constitute grounds for refusing to recognise and enforce the award. However, a similar position has been previously taken in the court decisions of commercial courts of various levels, for example, in the judgment of the Commercial Court of Volga-Vyatka District dated 27 December 2021 in case No. A79-9284/2020. With this approach, the Russian Supreme Court essentially negates the purpose of judicial protection of a violated right – to restore the rights of the injured party.

Finally, it is important to comment on the "presumption of partiality" of arbitrators from unfriendly countries as formulated by the Russian Supreme Court.

In the Russian Federation, it is common practice to follow the IBA Guidelines on Conflicts of Interest in International Arbitration and the Rules of the Chamber of Commerce and Industry of the Russian Federation when considering issues relating to the impartiality of arbitrators. Neither document considers citizenship as a reason for disqualifying a person from acting as an arbitrator, nor does it require disclosure of this information to the parties.

At the same time, the provisions of the UNCITRAL Code of Conduct for Arbitrators in International Investment Disputes should be noted. According to Article 3, an arbitrator shall not be influenced by loyalty to a party to the dispute or to any other person or entity, nor shall he take any action which might create an appearance of lack of independence or impartiality. A broad interpretation of these criteria may be considered a reason to doubt an arbitrator's impartiality if the arbitrator has taken a categorical position against one of the countries of domicile of a disputing party. Citizenship of an unfriendly country could be considered to fall under "other circumstances likely to raise doubts as to impartiality". However, in our view, the mere fact of citizenship is not sufficient to support an allegation of lack of impartiality. There must be other evidence of a lack of objectivity and impartiality. Otherwise it would be evidence of discrimination for nationality.

The Russian Supreme Court has formulated a presumption of the lack of impartiality, shifting the burden of proving an arbitrator’s impartiality to the procedural opponent of the Russian party. At the same time, the text of the decision does not contain any examples of evidence that could be used to confirm the impartiality of an arbitrator from an "unfriendly" country. Consequently, in the absence of any guidelines, it seems virtually impossible to provide evidence of an arbitrator’s impartiality (rebuttal of the presumption). In any case, the lack of criteria makes it possible to declare that the presumption of partiality has not been rebutted by admissible evidence, which excludes the possibility of recognising the award in Russia.

In addition, the Russian Supreme Court’s presumption raises several questions. Can an arbitrator from an unfriendly country consider a case administered by a Russian arbitration institution? Should an arbitrator who is to hear a case before the ICAC of the Russian Chamber of Commerce and Industry provide additional evidence to rebut the "presumption of partiality" before starting to hear the case? What are the consequences if a foreign arbitrator is chosen by the Russian party or if the parties to the dispute are all Russian persons or companies? Could that party later invoke the arbitrator’s "partiality", even though the Russian party itself chose the arbitrator? In any event, we will see fewer, if any, arbitrators with the nationality of "unfriendly states" being appointed to arbitration proceedings in the future if a potential award is also to be enforced in Russia.

The Russian Supreme Court’s example should not be followed by the courts in other countries. It’s stance severely damages the internationalism of arbitration.

Dr. Tobias Pörnbacher
Alexander Bezborodov

Background

During the term of their service contract, managing directors of a GmbH are subject to a statutory non-compete obligation requiring them to always keep in mind the best interest of the company and thus banning them from taking advantage of business opportunities for themselves or for third parties. The non-compete obligation ends upon their leaving the position. This (statutory) non-compete obligation will not survive the directors’ term of office. Managing directors are also subject to a contractual non-compete obligation for the duration of their service under their contract.

A post-contractual non-compete obligation may, however, also be agreed with a managing director for an appropriate period after the end of their service term. While sections 74 et seq of the German Commercial Code (Handelsgesetzbuch, HGB) provide for a mandatory non-competition compensation for employees, it is the prevailing opinion in legal literature and practice that these sections apply neither directly nor mutatis mutandis to managing directors. At least part of legal literature argues that the requirement of a non-competition compensation could, however, be derived from section 138 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) in connection with Art. 2 of the Basic Law for the Federal Republic of Germany (Grundgesetz, GG) (moral law check). According to (consistent) rulings of the BGH, it is not mandatory to promise any non-competition compensation to the managing director at all for the duration of the non-compete obligation. The effectiveness of a non-compete obligation is not contingent on any compensation. If the decision is taken to pay a compensation regardless of the above, the amount of such compensation will therefore be at the discretion of the parties.

Facts

In the case ruled upon by the BGH, a former managing director of a GmbH requested to be paid a non-competition compensation. The managing director was removed from office at the end of May 2012. According to his service agreement, he was subject to a two-year post-contractual non-compete obligation banning him from working for a competitor. The service agreement stipulated monthly payments for the duration of the non-compete obligation as a compensation. This compensation was, however, going to be forfeited retroactively (ex tunc) should the managing director breach the non-compete obligation.

The managing director started working for a competitor in mid-June of 2013. The GmbH therefore took the stance that it had not been obliged to pay any non-competition compensation from the start due to the violation of the non-compete obligation. The former managing director, on the other hand, believed that the contractual agreement regarding the complete and retroactive withdrawal of his right to compensation was invalid and that the ban particularly violated the principle of proportionality.

Decision of the BGH

The BGH ruled in favour of the GmbH confirming the effectiveness of the contractual agreement. It argued that non-compete obligations were only valid if they did not go beyond the scope necessary in terms of place, subject-matter and time.

The BGH stated that the retroactive withdrawal of the non-competition compensation agreed in the employment contract was not an unfair burden on the managing director. The reasoning behind this was that it was, in fact, not mandatory to promise and pay a non-competition compensation to the GmbH’s managing director who did submit to a post-contractual non-compete obligation. The BGH is of the opinion that if a compensation is agreed despite this fact, the parties are free to negotiate any amount. It reasoned that, consequently, the GmbH and the managing director may effectively agree that the right to compensation in its entirety was forfeited retroactively should a managing director breach the non-compete obligation.

The Court also disagreed with the managing director's view that the non-competition compensation constituted a what is known as income replacement benefit which could not be forfeited retroactively as the managing director was even contractually allowed to unilaterally waive the non-compete obligation.

Comment and Implications

This decision is consistent with past rulings of the Senate according to which a GmbH is not obliged to promise its managing director a non-competition compensation in exchange for the agreement of a non-compete obligation. The possibility of a (complete) loss of the compensation following a breach of the obligation lies within the scope granted to the GmbH by judicial decisions.

Such retroactive withdrawal is, however, most likely invalid when it comes to employees. The non-compete obligation of an employee is, in fact, not freely negotiable (unlike the obligation of managing directors). Pursuant to section 74 (2) of the German Commercial Code (Handelsgesetzbuch, HGB), the employee's non-competition compensation is the designated consideration for the employee assuming and complying with the obligation. The non-compete obligation of an employee is only valid if a compensation has been agreed for its duration, the amount being at least half of the last remuneration contractually received by the employee and it is paid at the end of each month pursuant to section 74b (1) HGB. When it comes to the fixed payments granted, payments depend on the last monthly salary before leaving the company. Pursuant to section 74b (2) HGB, one-off payments and variable remuneration are based on the average of the last three years broken down to monthly payments.

In practice, this ruling opens another option for drawing up and negotiating managing director service agreements.

Dr Barbara Mayer
Dr Christian Osbahr

This post also appears in the Haufe Wirtschaftsrechtsnewsletter.

Background

The right of shareholders to attend the general meeting of a German stock corporation is a fundamental membership right and may only be restricted to the extent necessary to ensure the proper conduct of the meeting. An inadmissible restriction of the participation right may result in the contestability of resolutions adopted at this general meeting. The Higher Regional Court (Kammergericht) in Berlin had to deal with the question of whether a ban on bringing private devices able to make image or sound recordings infringes the participation right of the shareholders.

Facts

In the case decided by the Berlin Higher Regional Court, a German stock corporation as defendant and several of its shareholders as plaintiffs had a dispute over the lawfulness of various general meeting resolutions.

The invitation to this general meeting had contained the information that image and sound recordings were not permitted during the general meeting for the protection of the personality rights of the shareholders and that devices able to make image or sound recordings may not be brought by the shareholders. Access controls were carried out at the entrance to the meeting room to ensure that the ban on such devices was complied with.

The defendant offered security lockers for storing the banned devices at the place of the general meeting. The defendant in addition provided the participants with PCs with internet access in the meeting room. Apart from that, the company set up signs in the entrance and common area informing the attendees that a service provider would receive important calls for them at an emergency number and would immediately inform them in the event of a call.

Some of the shareholders taking legal action were denied access to the general meeting after they had refused to hand over their mobile phones and laptop computers at the access control. The other plaintiffs attended the general meeting but, for the record, declared their objection to the resolutions adopted.

The Berlin Regional Court upheld the action for annulment and declared the contested resolutions null and void. The defendant filed an appeal against this judgment.

Decision of the Berlin Higher Regional Court

The Berlin Higher Regional Court dismissed the defendant's appeal.

The Court reasoned that the plaintiffs' participation rights were violated by the ban on bringing certain devices.

The Higher Regional Court first established that the defendant's articles of association did not contain any provision on certain devices in the general meeting which could justify the ban on bringing these devices.

The Court stated that the prohibition of the corresponding devices in the meeting room was also not covered by the disciplinary power of the chair of the meeting, but rather constituted an inadmissible restriction of the shareholders' rights to participate in the general meeting. This right did not apply without restraint but found its limits in the authority of the chair of the meeting to properly conduct the general meeting. The chair of the meeting had to respect the principle of proportionality when exercising his disciplinary powers. The ban on bringing certain devices, however, was not proportionate.

In its proportionality assessment, the Higher Regional Court first established that the ban on bringing certain devices pursued a legitimate purpose, namely the enforcement of the (basically admissible) prohibition of making image or sound recordings. The ban on bringing certain devices was also suited to achieve this goal. Secret recordings could not be fully excluded by the ban. However, the measure was still suitable because the means chosen here at least served the purpose.

Yet, the Higher Regional Court already expressed serious doubts as to the necessity of the ban on bringing certain devices. A more lenient means for preventing audio or video recordings would be to allow bringing such devices only when using camera and microphone blockers (as software or hardware). Cost-effective solutions were already available.

The Court argued that the necessity of the ban on bringing certain devices could, however, be irrelevant, as this ban was generally not appropriate. For the shareholders' participation right resulting from the property right of Art. 14 of the Basic Law of the Federal Republic of Germany (Grundgesetz, GG) outweighed the general personality right of the attendees in its manifestation as the right to one's own image and the right to one's own word, protecting them against unauthorised image and sound recordings.

The Court stated that the weighting of the attendees' personality right would have to consider that the feared encroachment on the attendees' personality right through unauthorised image or sound recordings would not have affected their privacy, but only their social sphere, as the general meeting was an event public to the members of a specific group. Secondly, there was only an abstract danger of a violation of the general personality right through unauthorised recordings. However, it was not the task of the chair of the meeting to enforce the law per se, and to prevent any legal violations preemptively. Rather, the chair’s task was limited to ensuring the proper conduct of the general meeting. In addition, the attendees were not left unprotected in the event of a violation of the prohibition on making recordings. The general personality right was provided with a reactive protection by allowing legal protection for those affected before the courts and by punishing violations in the form of claims for damages and under criminal law.

With regard to the shareholders' participation right, however, the Court was of the opinion that the weighting would have to take into account that the ban on bringing certain devices significantly affected the legitimate shareholders' membership rights. For instance, shareholder representatives would not have been able to consult with the shareholders represented by them without leaving the meeting room. In addition, the shareholders' ability to work was restricted significantly, as an effective participation in a general meeting nowadays was not meaningfully possible without using notebooks, mobile phones or tablets.

The Court did not deem the provision of the emergency number and of PCs in the meeting room suitable to sufficiently mitigate the severity of the encroachment on the participation right. The Higher Regional Court stated with regard to the emergency number that it was not sufficient that shareholders could be reached by third parties, but it was also about their ability to send information. The Higher Regional Court emphasised regarding the PCs provided that the access to the shareholder's own documents was not necessarily allowed by a web-enabled PC and, therefore, this PC was no adequate replacement of their own device.

According to the Higher Regional Cort, the Regional Court had therefore been right to uphold the action for annulment and to declare the contested resolutions of the general meeting null and void. The judgment of the Higher Regional Court is not final, proceedings are currently pending before the German Federal Court of Justice.

Comments and practical advice

In its decision, the Berlin Higher Regional Court has emphasised the high significance of the shareholders' right to participate in the general meeting. This right is not limited to the mere attendance, but also includes the right to remain able to work and communicate during the meeting. The Court recognises that nowadays this is practically not meaningfully possible without using one's own (mobile communication) devices.

Any regulation with regard to the participation in the general meeting must therefore be covered by the articles of association or the disciplinary power of the chair of the meeting. The Court has rightly stated in this regard that the disciplinary power is not intended to enforce the legal order per se or to protect attendees against violations of the law, but only comprises measures for ensuring the proper conduct of the general meeting. If the chair of the meeting exceeds their disciplinary power, this may result in the contestability of all resolutions adopted at the general meeting. To avoid this, any restriction of the participation right should be carefully examined in advance and, in case of doubt, regulations to this end should be used only with caution.

The Berlin Higher Regional Court could leave it open whether the regulation of a ban on bringing certain devices would be admissible in the articles of association. The reasoning of the Court may, however, be transferable to a corresponding regulation in the articles of association, making such regulation potentially inadmissible, because also the articles of association cannot restrict the statutory participation rights. Only provisions in the articles of association that make the attendance at the general meeting dependent on a prior registration or stipulate how the right to participate in the meeting is to be proven are admissible.

Dr Moritz Jenne
Simon Schuler

This post also appears in the Haufe Wirtschaftsrechtsnewsletter.

1. Introduction

Since 18 June 2024, the "inadmissible representation of interests" by mandate holders has been a criminal offence.

The newly-added section 108f of the German Criminal Code (Strafgesetzbuch, StGB) is to close a loophole regarding criminal liability which became particularly apparent in the aftermath of the Mask deal decision by the German Federal Court of Justice (BGH)¹. Politicians of the Bundestag (German Parliament) and of several German state parliaments received six-figure commissions in exchange for helping companies make lucrative mask deals during the Covid crisis. This, however, went unpunished because section 108e StGB merely criminalises activities in the bodies of the parliament or parliamentary parties, i.e. activities performed during parliamentary work in a plenary session, in the German Parliamentary Committees and in the working groups of the parliamentary parties.²

The goal of the new section 108f StGB is to penalise the ability of mandate holders to exert their influence when they use it for the benefit of third parties in exchange for payment. The explanatory memorandum states in this context:³

"Based on their position, mandate holders regularly have special relationships and privileged access to ministries, authorities and other bodies which are subject to their parliamentary checks. This goes hand in hand with the risk of commercialising the corresponding opportunities to exert influence for the benefit of third parties in return for payment and thus the risk of blurring lines between monetary interests and the mandate. Mandate holders using their roles entrusted to them in the interest of public welfare for their own benefit by trading their influence may undermine the trust in parliamentary democracy and its elected representatives."

Section 108f StGB aims to mitigate this risk.

2. New legal framework - section 108f StGB

Under section 108f (1) StGB, it now is a criminal offence for mandate holders to demand, allow themselves to be promised or accept an undue material benefit for themselves or a third party in return for performing or refraining from performing an act during their mandate to represent interests of a provider of benefits or a third party. Sentence 1 only applies [...] if such representation of interests in return for payment violated the relevant provisions relating to the legal status of the mandate holder.

Examples of "relevant provisions" for members of the Bundestagin section 108f (1) sent. 2 StGB are the provisions of sections 44a et seq of the Members of the Bundestag Act (Abgeordnetengesetz, AbgG).

Section 108f (2) StGB, in turn, penalises the party granting a material benefit.

From now on, both accepting (section 108f (1) StGB) and granting (section 108f (2) StGB) a material benefit "during a mandate" are covered by law, meaning that − unlike in section 108e StGB − no immediate connection with the parliamentary decision-making process is required for criminal liability.

2.1 Section 108f as a pre-emptive measure to fight corruption

Unlike the other criminal law provisions against corruption (sections 331 et seq, 299 et seq and 108e StGB), section 108f StGB constitutes what is called a"pre-emptive anti-corruption delict" (Korruptionsvorfeldbekämpfungsdelikt)⁴. This means that mandate holders make themselves liable to prosecution as soon as they confirm that they may influence the decision of a competent official in favour of a benefit provider in exchange for an undue material benefit. The major difference to the definition of corruption-related criminal offences applied so far is that the service in return must be a material benefit, i.e. not just any advantage at all.

2.2 Reference to the Members of the Bundestag Act

Criminal liability under section 108f StGB requires that the representation of interests in return for payment "would violate the relevant provisions relating to the legal status of the mandate holder" (section 108f (1) sent. 2 StGB). It does not matter whether relevant provisions were actually violated. Neither is an additional connection to the mandate and "taking advantage" of the mandate required because a connection to the mandate already exists due to the fact that such representation of interests is subject to parliamentary law provisions and would violate them.⁵

As a result, mandate holders may now also be subject to criminal sanctions (e.g. section 44a AbgG) for a (potential) violation against relevant provisions, in particular of the Members of the Bundestag Act and the Members of Parliament Acts of the various states. At the same time, the corresponding provisions also become relevant for the provider of benefits because also section 108f (2) sent. 2 StGB requires such violation.

3. Outlook

Companies should use this new risk of criminal liability as a reminder to update their corruption prevention provisions and, in particular, to revise their business partner due diligence. 

Dr Oliver Ofosu-Ayeh
Dr Jochen Pörtge
Franziska Rentel

¹ BGH, decision of 5 July 2022 – StB 7–9/22.
² BT-Drs. 18/476, page 8.
³ BT-Drs. 20/10376, page 1.
⁴ Statement no. 23 of the German Federal Bar regarding the draft law to change the German Criminal Code – criminal liability of the inadmissible representation of interests (BT-Drs. 20/10376), page 4.
⁵ BT-Drs. 20/10376, page 8.

Commission President

Ursula von der Leyen was re-elected Commission President with 401 votes, more than expected given the result of the elections to the European Parliament in June which changed the composition of the Parliament in many respects.

The newly elected members of the European Parliament met for the first time this week in Strasbourg and among their first tasks was the election of the Commission President. The European Council had already met before and designated the Estonian Prime Minister Kaja Kallas to become the next High Representative for Foreign Affairs and Security Policy and the elected former Portuguese head of government Antonio Costa as President of the European Council.

European Parliament

The European Parliament kicked things off with the election of its own president. With a large majority (562 out of 623 valid votes), MEPs elected the Christian Democrat Roberta Metsola from Malta. The 45-year-old has held the highest office in the EU in terms of protocol since 2022 and has herself been a member of the European Parliament since 2013. The President of the European Parliament presides over all activities of the plenary, gives the floor to speakers, represents the Parliament externally and signs laws. Metsola wants to campaign for a "strong Parliament" and eliminate the "imbalances between the institutions". Metsola is considered a great supporter of Ukraine and during her first term of office, campaigned for a fair distribution of migrants within the EU, which led to the adoption of the Asylum and Migration Pact in 2024.

The European Parliament moreover elected its 14 Vice-Presidents which together with its president drafts Parliament's budget and sets the agenda. Of the 14 positions, six went to the Social Democrats, three to the EPP, two to the ECR and one each to the liberal Renew Group, the Greens and the Left. The more "right-wing" parties, which had hoped for more seats on the Bureau, were disappointed with the outcome.

Future European Commission

On 18 July the eagerly awaited election of the Commission President took place. The European Council nominates the Commission President by qualified majority, whereby, according to the EU Treaty, this must take into account the result of the European elections. In the 2014 European elections, the "Spitzenkandidat principle" was informally agreed between the European parties for the first time, which states that the European Council may only nominate the candidate whose party achieved the best result in the European elections. At that time, the principle was not followed and Ursula von der Leyen was instead elected. She was up for re-election this time.

Not only did Ursula von Leyen have to face the new majority situation in Parliament, but a court ruling on 17 July 2024 also challenged the Commission's decision not to disclose detailed information about the purchase of coronavirus vaccines. The German left-wing lead candidate Fabio di Masi then demanded that Ursula von der Leyen renounce her candidacy. Nevertheless, Ursula von der Leyen was the clear winner in the end. She received 401 votes out of a possible 719. This meant that she not only achieved a better result than in 2019, but also surprised many critics with a clear victory in the first round of voting. In her speech before the election, she pugnaciously emphasized that she wanted to stand by the Ukraine for "as long as necessary" and that her goal is "to build a real European defence". To the surprise of many observers, von der Leyen also spoke out in favour of the approval of e-fuels within the EU for the first time. In her opinion, the political guidelines of the transport regulation should be re-examined. In doing so, she gave way to the conservative parties, who have been calling for this technology for some time now. EPP leader Weber briefly commented on this with the words: "This is the end of the ban on combustion engines after 2035".

As part of her organizational powers, the Commission President directs the work of the Commission and convenes the meetings of the College of Commissioners. The President decides on the areas of responsibility of the Commissioners, which she can also reassign during her term of office. Certain restrictions apply to the High Representative of the Union for Foreign Affairs and Security Policy.

The other members of the European Commission will be selected within the next weeks by its President and needs to be confirmed by the Parliament and accepted by the 27 Member States. The Commission President’s discretion in the selection of the Commissioners and their portfolios is somehow limited by the influence of the Member States. The number of Commissioners is generally set at one Commissioner per country. The High Representative for Foreign Affairs and Security Policy is nominated by the European Council, while the other Commissioners are proposed by the national governments of the Member States and nominated by the Council of the European Union by qualified majority. Although the President of the Commission can object to the appointment of a Commissioner, the proposals of the governments are normally discussed beforehand with the country concerned. The Commissioners usually come from the parties that form the governments in their respective countries. The European Parliament questions the candidates individually and issues an opinion in which it can approve or reject the Commission as a whole. After approval by the Parliament, the Commission is appointed by the European Council by qualified majority.

The next few days will show how the positions within the Commission will be distributed. As mentioned, the Estonian Prime Minister Kaia Kallas, who was nominated by the European Council on 28 June 2024, is set to become the EU's foreign policy chief. She is a member of the liberal ReNew Europe group and represents a tough foreign policy stance towards Russia. Virginijus Sinkevicius (Greens/EFA), Janusz Wojciechowski (ERK) and Adina Valean (EPP) will definitely no longer be part of the Commission, as they are all leaving their positions for various reasons. In the course of the new composition of the Parliament, the areas of agriculture, transport and the environment in particular will receive new Commissioners.

Another top EU position was already awarded to the former Portuguese head of government and Social Democrat Antonio Costa. His term of office is two and a half years, but it is customary for a second term to follow.

The defining issues of the next legislative period will be migration, European defense, Ukraine and the Green Deal. The progressive Green Deal program in particular will face major challenges due to the Greens' loss of votes and the strengthening of right-wing parties. It remains to be seen how the future Commission will react to this.

Prof Dr Rainer Bierwagen
Dr Dietmar Reich
Christian Hipp
Gábor Bàthory

Therefore, the European Commission's first overhaul of its Notice on the definition of the relevant market in over twenty-five years had been eagerly awaited among competition law practitioners and beyond. The Commission finally published it on 22 February 2024. In the following, we present both the Commission's revised Notice and its very first applications by the French Competition Authority, the European Court of Justice and the Commission itself.

The Bible of Market Definition

While the revised Market Definition Notice may convey the impression of being a modest administrative document by the European Commission, it is in fact the bible of market definition across Europe. The original Notice had been a point of reference for authorities and courts both at the EU and at the national level since its publication in 1997. The revised Notice is the result of a close cooperation between the Commission and national competition authorities in the EU, and reflects input received from further stakeholders.

Evolution, not Revolution

It is therefore no surprise that the French Competition Authority used the revised Market Definition Notice less than three months after its publication when issuing a cartel fine decision against eleven companies on 21 May 2024. Regarding the pre-cast concrete products at stake, the Authority recalls that the relevant product market comprises all those products that customers regard as interchangeable or substitutable, and that the relevant geographic market comprises the geographic area in which, inter alia, the conditions of competition are sufficiently homogeneous. These basic principles remain largely unchanged in the revised Notice compared to the previous Notice.

Price Isn't Everything

However, there are also significant changes compared to the previous version. Such a change is the recognition by the Commission of “extra-economic" competition parameters when defining the relevant product market. This is a real innovation as compared to the previous Notice which focused on price to define the market. Under the revised Market Definition Notice, the Commission considers non-price parameters such as the degree of innovation of the product, its quality, the image it conveys or even its sustainability are relevant parameters to define the market. Far from simply clarifying the concepts covered by the previous Notice, the revised Notice also provides additional guidance relating to specific types of markets:

New Tools for New Markets: Pipeline Products

The Commission notes that innovation and related R&D investment have become a key parameter in many sectors, such as high-tech and pharmaceuticals. To capture new product markets ahead of the marketing stage, the Commission now reserves the right to include “pipeline products” in its competition assessment among a new product market or a pre-existing one. This perception has major consequences, particularly for merger control, where merging companies will have to increasingly consider ongoing development projects as potential substitutes of existing products.

New Tools for New Markets: Multi-Sided Platforms

The revised Market Definition Notice also addresses multi-sided platforms (such as online marketplaces and social media), where demand from one group of users can affect demand from one or more other groups (buyers, advertisers, for example), so-called “indirect network effects”. The revised Notice provides new guidance by explicitly stating that multi-sided markets can be defined either as a whole, thus encompassing the different groups of users concerned, or as separate markets, depending on the facts of the case.
These principles of the revised Notice were used by Advocate General Collins in its opinion of 6 June 2024 when defining the market on which Booking.com is active. In his opinion, he views Booking.com as a provider of online intermediation services to hotels, thereby assuming separate markets for the two sides of the market.

New Tools for New Markets: Ecosystems

The Commission also recognizes the specificities of after-markets, bundles and digital ecosystems, where the consumption of a primary product leads to the consumption of a secondary product. According to the revised Market Definition Notice, it is appropriate to define these markets either as a single market encompassing primary and secondary products, or as separate markets (multiple markets or dual markets).

The Commission applied these rules when authorizing the establishment of a joint venture for smart farming products on 25 March 2024. The Commission's investigation revealed significant substitutability between the individual products (displays, receivers etc.) on the one hand and guidance systems on the other hand. Namely, the individual components can be easily assembled to create a combined system, and several integrators are actively engaged in such bundling. The Commission hence assumed a single system market.

New Market Share Metrics

Another key contribution of the revised Market Definition Notice is the possibility explicitly offered by the European Commission to calculate companies' market shares based on metrics other than their sales revenues or sales volumes. From now on, the Commission may also use benchmarks such as the number of suppliers, the number of visits/views/downloads or even R&D expenditures to measure companies' market shares. This additional flexibility is particularly relevant for the digital sector, the pharma sector and nascent markets in general.

Conclusion

The revised Notice embraces the societal transformations induced by digitization and the increasing importance of sustainability factors. Furthermore, we can only welcome with satisfaction the Commission's advice on delineating the relevant market in settings such as two-sided markets or product bundles. The first use cases of the revised Notice already show that its innovations are very relevant for the decision-making practice of competition authorities.

However, one point raises concerns for legal certainty: The Commission emphasizes in its revised Notice that it will not be bound by its precedents. This statement raises fears that the Commission may overrule previous market definitions depending on alleged market developments or on the specific competition parameter concerned. As a result, the additional legal certainty that should be provided by a definition of relevant markets becomes dangerously fragile.

Still, the revised Market Definition Notice promises to be a milestone in the evolution of EU competition law over the coming years. It therefore deserves to be reviewed carefully.

Christoph Heinrich
Lucie Giret (ADVANT Altana)
Francesco Mazzocchi (ADVANT Nctm)

From 1.1.2027 at the latest, an entrepreneur is obliged to issue e-invoices to other entrepreneurs, otherwise this is no proper invoice for VAT purposes. Companies with turnover of less than EUR 800 thousand within the meaning of the small business regulation (Section 19 UStG) are only obliged to issue e-invoices from January 1, 2028. For VAT groups, the turnover of the VAT group applies. This means that after the transition period 1.1.2027 or 1.1.2028, only e-invoices will allow input VAT deduction.

The mandatory information on an invoice (Section 14 (4) of the German Value Added Tax Act - UStG) has not changed.

Exempt from the obligation to issue an e-invoice are VAT-exempt services in accordance with § 4 no. 8-29 UStG, invoices for small amounts up to a gross amount of EUR 250 and tickets (§ 34 UStDV). This also affects VAT-exempt property sales (Section 4 no. 9 UStG) and VAT-exempt rents (Section 4 no. 12 UStG). Previously, the entrepreneur was not obliged to issue an invoice in this respect either. This did not and still does not apply if VAT is opted for for VAT-exempt services in accordance with Section 9 UStG. In this case, the obligation to issue e-invoices will apply from 1.1.2027 or 1.1.2028 at the latest.

In future, an e-invoice will only exist if the invoice is issued, transmitted and received in a structured electronic format and enables electronic processing. In future. e-invoices according to German VAT law will therefore no longer be PDF invoices or invoices as text in an email.

For the meaning of structured electronic format and further technical details, please refer to points 4 and 21-30 of the BMF draft letter.

The e-invoice must be machine-readable. Human readability is not required but is optional and recommended.

E-invoices can be sent by email or as a download via a (customer) portal. An e-invoice can be sent multiple times as long as it is the same invoice and the transmission only takes place as a multiple copy with identical content (see Section 14c 1 (4) of the VAT Application Decree - UStAE). Transmission via external memory (e.g. USB-stick) is not possible.

The obligation to issue e-invoices applies to entrepreneurs established in Germany, i.e. companies with their registered office, management or a permanent establishment for VAT purposes in Germany that is involved in the turnover. It should be noted that a permanent establishment for VAT purposes is not necessarily identical to a permanent establishment in accordance with Section 12 of the German General Fiscal Code. According to Section 18.10 (1) sentence 4 UStAE, entrepreneurs who own and rent out property located in Germany are deemed to be established in Germany.¹

The obligation to use e-invoices also applies to invoices for which the recipient is liable for tax (Reverse Charge Mechanism) and for small business invoices (Section 19 UStG). The obligation also applies if the service recipient is a small business or only carries out tax-free transactions. This means that pure residential landlords with VAT-free rental turnover, for example, must also be able to receive e-invoices.

An e-invoice to non-entrepreneurs can only be issued for taxable supplies of work or other services in connection with a property if the recipient of the service agrees. Consent can be given implicitly by acceptance without objection.² However, a paper invoice (in future other invoices) can still be issued in this respect.

Contracts can be regarded as e-invoices if they contain the required information in accordance with § 14 (4) UStG.

E-invoices must also be issued for continuing obligations (long-term rental invoices). For existing rental agreements, electronic long-term rental invoices must be issued by the end of the transition phase from 1.1.2027 or 1.1.2028 at the latest, even if the rental payments have not changed.

The BMF draft letter does not comment on which documents are required if an invoice consists of several documents in accordance with Section 31 (1) of the German VAT Implementation Ordinance (UStDV). The following can be found in paragraph 38:

"If there is an obligation to issue an e-invoice for a continuing obligation (e.g. tenancy), it is sufficient if an e-invoice is issued for the first partial performance period, to which the underlying contract is attached as an annex, or (...)".

It can therefore be assumed that if an invoice document refers to other documents in the text (e.g. real estate purchase agreements or rental agreements), these must also be provided electronically, otherwise there is no complete, proper invoice. Simplification rules are recommended here in future, as a real estate purchase agreement with all attachments, for example, may exceed the electronic reception capacity.

The correction or completion of an e-invoice must also be made in the electronic form prescribed for this (using the corresponding document type). It is not sufficient to transmit the missing or incorrect information in another form. Subject to the other requirements, an effective completion has retroactive effect to the date on which the original e-invoice was issued.

Recommendations

The introduction of e-invoices should mean huge changes in your organization and its proper implementation should be planned at an early stage.

It is recommended that the introduction of e-invoices be seen as an opportunity to increase the efficiency of automated processing in accounting processes.

The ADVANT Beiten tax teams at our 6 locations in Frankfurt, Düsseldorf, Munich, Hamburg, Berlin and Freiburg will be happy to answer your tax-related questions and assist you with the technical implementation of e-invoices.

Jens Müller

^{1 Please refer to the author's blog post from July 20, 2021 for information on the conflict with EU case law: Link}

^{2 An e-invoice with a human-readable attachment is therefore recommended.}

Developments like the revision of the UNICITRAL Model Law on International Commercial Arbitration in 2006, as well as various reforms of national arbitration laws and arbitration rules of arbitral institutions, plus the constantly advancing digitalisation of procedural law, were considered for the draft bill as well.

The key objective of the proposed draft bill is (i) to make German arbitration law more efficient, (ii) to adapt it to modern needs and (iii) to promote Germany's attractiveness as a place for arbitration. The last comprehensive reform of the German arbitration law dates back to 1998. With the draft bill, the Federal Government of Germany does not want to regulate German arbitration law anew, but to (i) eliminate some ambiguities that have emerged over time and (ii) adapt it to the realities of today's world. Therefore, the Federal Government of Germany has included only very few completely new regulations and only slightly adapted others to adjust or clarify their scope of application:

1. The New Commercial Courts, Sec. 1062 (5), 1063a, 1065 (3) ZPO-Draft

The biggest innovation in German arbitration law is the introduction of commercial courts which was already introduced in the "Justizstandorts-Stärkungsgesetz" [see our blog: Federal Government of Germany approved on the establishment of Commercial Courts | Advant Beiten (advant-beiten.com)]. The German arbitration law delegates the competence to introduce commercial courts to the Federal States (which are referred to as "Land", or plural "Länder" in the draft). The idea is to establish special divisions at a particular Higher Regional Court or a Supreme Court in the "Länder". Those divisions will be the commercial courts with special expertise in trade and commerce. "Länder" may also create a joint commercial court. Over time the commercial courts will acquire special experience in the deciding of arbitration matters.

What makes a commercial court special is not merely the expertise but that the proceedings can be conducted in English. If such proceedings are appealed to the Federal Court of Justice, the Federal Court of Justice may also on application of a party conduct the proceedings in English. The commercial courts shall promote Germany as a place for arbitration and establish a useful basis of case law.

This regulation depends very much on whether the Federal Court of Justice agrees to the proceedings being conducted in English. It could nullify the advantages of the commercial courts if the Federal Court of Justice does not play along.

2. Loosening of the Form Requirement for an Arbitration Agreement, Sec. 1031 ZPO-Draft

Generally, the arbitration agreement must be in writing. This form requirement shall be abandoned for all-party commercial transactions. The form requirement was entered into the German arbitration law in the changes as to 1 January 1998. Since 2006 the UNCITRAL Model Law foresees the possibility to agree on arbitration without any form requirement, Article 7 Option II. This approach was introduced to the working group by Mexico. It is notable that Art. 1416 (1) sentence 2 Mexican Commercial Code now stipulates that arbitration agreements must be included into a contract or an independent agreement while in Belgium, Luxembourg, Ireland, Scotland and Sweden there is no form requirement. However, most countries still require some form of writing, especially to ensure proof (e.g. Austria, Spain, Italy and the US).

In the event of an all-party commercial transaction the parties do not require the special protection given by the form requirement. The free form of the conclusion of arbitration agreements shall live up to the complex supply chains and framework agreements. If it is unclear which parties may be involved and has obligations to fulfil, the parties may not include an arbitration agreement at first even though they in general agree on arbitration as mechanism for dispute resolution.

Nevertheless, each party is entitled to demand that the other party provides a confirmation of the arbitration agreement's substance in text form. This serves the interest of the parties in documenting their transactions and clarifying the substance of the agreement. Whether such documentation exists, however, has no effect on the existence of the arbitration agreement. Being one of the most criticized changes for its potential to raise conflicts about the existence of an arbitration agreement it remains to be seen whether this change will make it to the final draft. This provision will cause further uncertainties for the parties whether arbitration is the agreed forum for dispute resolution or not. The risks of the provision outweigh in our view the benefits by far.

3. English language, Sec. 1063a/b ZPO-Draft

The introduction of commercial courts and the possibility to conduct proceedings in English is accompanied by the new regulation that any document in English that had been prepared or submitted in arbitral proceedings may be submitted without a translation in a proceeding that is conducted in German. This should help to save time and most importantly costs for the parties as English is the lingua franca in arbitration. A translation must only be submitted if there is a special need. The Federal Government of Germany explains that such a special need may exist if the court does not have sufficient command of the English language. However, the court has the discretion to decide when the threshold of a special need is met.

This proposal follows the needs of arbitration practice. It also follows the practice of many judges at the German courts not asking for translations of English language documents.

4. Electronic documents and video hearing, Sec. 1054 (2), (5), 1064 (1), 1047 (2), (3) ZPO-Draft

The Federal Government of Germany tries to keep up with the constantly advancing digitalisation with the following two innovations. For one, the arbitral award may be issued as an electronic document, if the parties have not agreed otherwise. In any event, it remains possible to request a traditional hard-copy of the arbitral award signed by all arbitrators as an electronic document may not be recognized in other jurisdictions as an arbitral award for enforcement. However, in Germany an arbitral award in the form of an electronic document may be declared enforceable even if only the electronical form is transmitted to the state court.

The other innovation is the recognition of video hearings. The German arbitration law thereby follows the increasing practice of the last years. The arbitral tribunal may hold an oral hearing via video conference. The parties do not have a right to be heard in person. The arbitral tribunal has the procedural discretion to order a video hearing. In deciding this, the arbitral tribunal must weigh the right to be heard of the opposing party with the other party's right to access to justice. Additionally, factors such as climate neutrality, the substance of the arbitration, and the obligation to conduct arbitral proceedings in an efficient manner may also be taken into consideration.

Those steps are welcomed to help German arbitration law to keep up with digitalization. Especially the introduction of video hearings eliminated uncertainties in practice where they are already widely used and accepted.

5. Publication of Awards, Sec. 1054b ZPO-Draft

Generally, arbitral awards are confidential and do not get published like judgments from state courts. This is a source for criticism for years: the confidentiality leads to a lack of development regarding those disputes which are almost exclusively heard by tribunals like post M&A disputes. Following this critique, the Federal Government of Germany has included a provision on the publication of arbitral awards. With the consent of the parties, the award and any concurring or dissenting opinion may be published, as a whole or in part, in anonymised or pseudonymised form. The balance between the interest to further develop law on one hand and the interest of the parties in confidential proceedings on the other hand is held by the fact that the parties must agree to the publication which will be anonymous or pseudonymised. However, the agreement of the parties is assumed if they don't object to publication within one month of being requested to do so by the arbitral tribunal. It is doubtful whether the suggested change will lead to more transparency. The users value the confidentiality of arbitration highly. In many cases no matter what is undertaken competitors will be able to identify the parties of the dispute. And the "German way" may lead to unpleasant surprises if the parties do not pay attention at a time when the arbitration is already closed.

6. Request for retrial, Sec. 1059a ZPO-Draft

The draft bill introduces a novel possibility that allows an arbitral award to be set aside by a state court even though the deadline for set aside proceedings has expired. The arbitral award may be set aside by a state court if the party filing the request shows sufficient cause that the prerequisites for an action for retrial of the case are given. A request for retrial is only admissible if the party filing the request was unable, through no fault of its own, to assert the cause for retrial in earlier proceedings. The request must be filed within a statutory period of one month following the detection of the grounds for retrial. As grounds for a retrial are in general quite rare, the number of successful applications for a retrial are expected to be low.

Grounds for a retrial may exist if (i) a document on which the award is based was falsely drawn up or falsified, (ii) in a testimony or expert opinion on which the arbitral award is based, the witness or expert is guilty of a punishable breach of the duty to tell the truth, (iii) the arbitral award was influenced by an offence committed by a party's representative or by the opposing party or its representative in relation to the dispute, (iv) an arbitrator who is guilty of a criminal offence in relation to the dispute has participated in the making of the arbitral award, (v) the judgment of a court or another award on which the award is based has been set aside by another final judgment or a final order, (vi) the party finds or is enabled to use a judgment or arbitral award rendered in the same case which has previously become final and binding or (vii) the party discovers or is enabled to use another document which would have resulted in a more favourable decision.

7. Clarifications

There are several points the Federal Government of Germany has now clarified with the draft bill by slightly adapting already existing regulations.

7.1 Appointment of arbitrators in Multi-party arbitration, Sec. 1035 (4) ZPO-Darft

Regarding the appointment of arbitrators, a paragraph has been added to clarify the appointment of an arbitrator in multi-party arbitrations. This will only apply to arbitral proceedings with more than one arbitrator. Unless otherwise agreed, joined parties must jointly make the appointment of an arbitrator. If an arbitrator is not appointed within one month following receipt of a corresponding request to do so from the other party, then the state court is to appoint the arbitrator upon request of the other party. However, the court may also appoint an arbitrator for the other party as well. The mandate of the arbitrator already appointed ends upon such an appointment. Therefore, the regulation grants judicial discretion to the state court as to appoint an arbitrator only for one side or to appoint arbitrators for both sides.

​​​​​​​7.2 Enforcement of foreign arbitral awards on interim measures, Sec 1025 (2), 1041 (2) ZPO-Draft

The question of whether foreign arbitral awards on interim measures can be enforced by German state courts are a matter of dispute under the current German arbitration law. Sec. 1025 (2) ZPO-Draft now clarifies that interim measures issued by foreign arbitral tribunals may be enforced in Germany by way of a state court order.

The Federal Government of Germany has also clarified the wording of Sec. 1041 (2) ZPO. This provision governs the procedure for the state court order permitting enforcement. The new Sec. 1041 (2) ZPO-Draft contains in particular a statement of reasons as to when an application for enforcement is to be dismissed, such as (i) if one of the grounds for setting aside the arbitral award is given, (ii) if an application for a corresponding interim measure already has been filed with a state court, (iii) if the arbitral tribunal's requirement as to the provision of security has not been complied with or (iv) if the interim measure has been terminated or suspended by the arbitral tribunal.

This regulation is welcomed in order to reduce the existing uncertainties. It facilitates the enforcement of foreign arbitral awards on interim measures. However, it is unclear whether this section also applies to foreign arbitral awards on interim measures by emergency arbitrators.

​​​​​​​​​​​​​​7.3 Court Review, Sec. 1040 ZPO-Draft

The state courts already have the jurisdiction to review a decision by an arbitral tribunal in which it declares itself to have jurisdiction. The state courts' jurisdiction has now been extended to review also negative decisions, i.e. when an arbitral tribunal holds that it does not have jurisdiction to decide the dispute. This possibility had been repeatedly called for by German legal scholars to strengthen a valid arbitration agreement.

​​​​​​​​​​​​​​7.4 Concurring or dissenting opinion, Sec. 1054a ZPO-Draft

With the draft bill it has now been clarified that, in arbitration proceedings seated in Germany with more than one arbitrator, it is possible to submit a concurring or dissenting opinion. This is to eliminate the concern that arbitral awards which contain a concurring or dissenting opinion do not comply with procedural public policy (ordre public) in Germany. This concerns date back to an internationally and nationally badly received obiter dictum by the Higher Regional Court of Frankfurt (OLG Frankfurt, decision dated 16. January 2020 – 26 Sch 14/18, BeckRS 2020, 4606). The Federal Government of Germany clarifies that such opinions do not violate the principle of secrecy of deliberations. A violation of the principle would only occur if insights into the deliberation process were to be provided. Thus, the draft achieves legal clarity and internationally accepted standards.

8. Summary

The draft bill includes various provisions which may increase efficiency or adapt to the needs of today's world. The DIS has provided a markup version of the relevant provisions of the ZPO comparing the current ZPO with the draft bill (Deutsches_Schiedsverfahrensrecht_mit_den_vom_RegE_vorgesehenen_Aenderungen.pdf (disarb.org)). As the Federal Government of Germany follows the suggestion of the draft bill of the Federal Ministry of Justice, it will be interesting to see which ideas will survive the debates of the Bundestag (Federal Parliament) and whether the comments from the arbitration scene will have any influence on the draft.

Dr Ralf Hafner
Dr Tobias Pörnbacher

This right to report such violations is protected, inter alia, by Section 39 of the HinSchG, which provides that "Agreements that restrict the rights of whistleblowers or other persons protected by this Act are invalid".

Agreements that are likely to prohibit the reporting of violations are typically confidentiality agreements, also known as non-disclosure agreements (NDAs). They are often found in employment contracts, collective bargaining agreements or works agreements. However, they are also frequently included in contracts with other companies or persons who do not have an employment relationship with the person who is to benefit from the confidentiality. However, the HinSchG not only protects the employees of a company, but also those persons who may obtain information about breaches in connection with their professional activity or in the run-up to a professional activity (see Section 1 (1) HinSchG). The scope of protection is therefore very broad, so that initially all confidentiality and non-disclosure agreements are likely to be affected.

Such agreements typically require that information obtained during or prior to a contractual relationship be used only for its intended purpose, or generally prohibit such information from being disclosed to third parties. It depends, of course, on the precise structure of the agreement. For example, if the wording of the agreement allows reports to be made to internal bodies, the right to report a breach internally will not be affected, but external reports are likely to be affected. The general restriction on disclosure of information, including internally, therefore inevitably restricts the right under the HinSchG to report breaches that occur during the contractual relationship. Nothing remains of the right to report violations if such an agreement generally prohibits the disclosure of internal information to others.

Section 6(2) HinSchG makes it clear that information which is subject to a contractual obligation of confidentiality may nevertheless be passed on or disclosed to the competent authority under the conditions of the HinSchG. In addition, Section 39 HinSchG allows the entire confidentiality obligation to be annulled.

Non-disclosure agreements that do not take into account the rights arising from the new HinSchG are ineffective pursuant to Section 39 HinSchG and are therefore null and void (Section 134 BGB). In most cases, there will also be no room for reinterpretation or extend-ed contractual interpretation in order to save the remaining content of the agreement. This is because confidentiality agreements are regularly pre-formulated for a large number of contracts (Section 305 (1) BGB). They are therefore subject to the control of the general terms and conditions, which excludes a reduction of the confidentiality agreements in order to preserve their validity (Section 306 (2) BGB). They cannot therefore simply continue to exist with the proviso that the person obliged to maintain confidentiality may disclose everything permitted by the HinSchG, but must keep everything else confidential. On the contrary, the new HinSchG carries the risk that confidentiality agreements which do not take into account the protection of the person making the disclosure will be null and void. This in turn means that the person who has promised confidentiality under such an agreement is no longer bound by it and can theoretically disclose information freely, unless this is prohibited by other provisions (such as Section 4 of the German Trade Secrets Act or Section 201 of the German Criminal Code).

There appears to be no impact on contracts concluded before the new law came into force. As the law does not expressly provide for retroactive effect, it cannot be assumed, also for constitutional reasons, that the legislator intended to apply retroactively to older contracts, so that these should not be affected. However, it should be checked whether future confidenti-ality agreements, or the templates or models on which they are based, take sufficient account of the rights arising from the HinSchG, i.e. whether they comply with the require-ments of Section 6 of the HinSchG. At present, we assume that minor amendments will be sufficient to avoid the threat of Section 39 of the HinSchG and the associated ineffectiveness of the confidentiality agreement as a whole.

Fabian Eckstein

Schleswig Higher Regional Court (OLG), judgment of 07 February 2024 – 9 U 41/23

The right of shareholders to attend the annual general meeting (AGM) of a stock corporation is a fundamental and generally absolute membership right. It may only be restricted where this is necessary to ensure the proper conduct of the AGM.

Background

Shareholders do not have to exercise their attendance right personally, but may be represented by a proxy at the AGM. In its decision, the Schleswig Higher Regional Court had to deal with the question of the conditions under which the representative of a shareholder may be denied attendance at the AGM. Specifically, it had to decide whether the representative’s attendance at the AGM may be made dependent on the presentation of a written proxy.

Facts

In the case ruled upon by the Schleswig Higher Regional Court, the defendant, an unlisted stock corporation, and the plaintiff, a shareholder of the defendant holding 10% of the share capital, disputed the validity of various AGM resolutions that had been passed in the absence of a representative of the plaintiff.

The defendant had issued an invitation to the AGM, enclosing the agenda. On the day of the general meeting, Mr B, a lawyer, who wanted to attend the AGM as the plaintiff's representative, appeared at the entrance door to the defendant's business premises, where the AGM was to take place, shortly before the start of the meeting.

The defendant's statutes did not stipulate any special requirements for attendance of the AGM; specifically, no written proof of authorisation was required. Rather, the statutes merely stated requirements with regard to the persons who may act as agents of shareholders. Under those requirements, especially lawyers qualified. Whether the lawyer Mr B had a written proxy with him was a matter of dispute between the parties.

The defendant's board member P denied B access to the business premises. Accordingly, neither the plaintiff herself nor a proxy of hers took part in the AGM.

The lawyer Mr B had already represented the plaintiff at the previous AGM. In this context, the defendant claimed that Mr B had ‘behaved improperly’ at that AGM, in particular that he had started shouting several times and could not be calmed down by the chair of the meeting.

The Regional Court upheld the action for annulment and declared the contested resolutions null and void. The defendant appealed this judgment.

Decision of the Schleswig Higher Regional Court

The Schleswig Higher Regional Court dismissed the defendant's appeal.

The court reasoned that the plaintiff's right to attend the meeting had been infringed by unjustly denying her representative access to the AGM.

The defendant's statutes did not make attendance at the AGM dependent on registration, nor did they stipulate how the authorisation to attend the meeting or to exercise voting rights was to be proven. The statutes merely stated that all company shareholders entered in the share register on the day of the AGM or their authorised representatives were entitled to take part and vote. Mr B therefore had not been obliged to prove his authorisation to attend the meeting by submitting a written proxy. There had been no doubts about his identity as the plaintiff's authorised representative, especially since the board member P had known Mr B as the plaintiff's representative from the previous AGM. It was therefore irrelevant whether or not B had a written proxy with him. The right to attend a general meeting is the standard case under s 118 (1) of the German Stock Corporation Act (AktG) and existed irrespective of voting rights. Pursuant to s 134 (3) sentences 1 and 3 AktG, B would only have required a written proxy to exercise voting rights.

The Higher Regional Court also stated that there was no other reason that could have justified the denial of access. Insofar as the defendant referred to the alleged ‘improper behaviour’ of Mr B at the previous AGM, the purely verbal behaviour described (‘shouting’), if true, was not sufficient reason for restricting the fundamental right of a shareholder to attend and vote at the AGM. Firstly, the previous behaviour did not necessarily mean that it would be repeated at the upcoming AGM. Secondly, an AGM was not a ‘feel-good event’; it may also ‘get loud’, as long as it stays outside the scope of criminal law.

The infringement of the plaintiff's right to attend the meeting as a shareholder constituted an autonomous and definitely relevant ground for challenge within the meaning of s 243 (1) AktG. The Regional Court had therefore been right to uphold the action for avoidance and declare the contested AGM resolutions null and void.

Comments and Practical Advice

The decision of the Schleswig Higher Regional Court makes it clear that the right of shareholders to attend or be represented at the AGM can only be limited under strict conditions. Attendance may be made dependent on prior registration or special proof of authorisation to attend only if the statutes contain corresponding regulations. This also holds true for the attendance by shareholder representatives.

Disruptions by shareholders or shareholder representatives can only justify exclusion from attendance where this is necessary to ensure the proper conduct of the AGM. The fact that a shareholder or their representative has been vocal at an AGM in the past is generally not sufficient for denying attendance – as the Higher Regional Court correctly stated. The chair of the meeting must first take milder measures in the event of an actual disruption of the AGM. This includes in particular the withdrawal of the right to speak after prior warning. Only if the withdrawal of the right to speak is unsuccessful, the chair of the meeting may resort to the most extreme means and exclude the disrupting person from further attendance. Also in this case, the person must be warned first.

The unjustified exclusion of a shareholder leads to the voidability of all resolutions passed at the AGM. Extreme caution should be used when it comes to excluding shareholders during the meeting in order not to jeopardise the effectiveness of the resolutions adopted. AGM chairs must take a phased course of action against disrupters and, in particular, first withdraw their right to speak. Exclusion may only be considered if none of the previous measures has been sufficient to ensure a normal progress of the AGM. Given the above, shareholders or their representatives may eventually be denied access to the meeting right from the start only in extreme cases (unless there are formal criteria set out in the articles of association, such as proof of authorisation to represent a shareholder).

Dr. Moritz Jenne
Simon Schuler

This blog post also appears in the Haufe Wirtschaftsrechtsnewsletter.

Today, the European Council gave its final green light for the so-called EU Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) which is the European sister of the German Supply Chain Act. EU member states will have to transpose the CSDDD into national laws within two years after its entry into force (probably already in June 2024).

Which companies will be affected?

The EU CSDDD will apply to companies both from the EU and third countries and holding companies that have more than 1000 employees and a turnover of more than 450 million euro, as well as to companies that have entered a franchising agreement and have a turnover of more than 80 million euro, where royalties account for at least 22.5 million euro of this turnover.

The CSDDD foresees generous transition periods. Thus, irrespective of the transposition into national laws within the next two years, the new obligations may have the following staggered application:

• For companies with more than 5,000 employees and 1.5 billion in turnover: three years after the entry into force of the CSDDD (i.e. in summer 2027)
• For companies with more than 3,000 employees and 900 million in turnover: four years after the entry into force of the CSDDD (i.e. in summer 2028)
• For companies with more than 1,000 employees and 450 million in turnover: five years after the entry into force of the CSDDD (i.e. in summer 2029).

But even if your company does not meet the above criteria, it will be indirectly affected by the CSDDD if it is part of the relevant supply chain of the above mentioned companies (the CSDDD uses the term "chain of activities" which mainly refers to the upstream part of the supply chain). This is because the CSDDD will require companies to reach out to their business partners in their chain of activities with regard to human rights and certain environmental prohibitions.

And in terms of time, direct and indirect effects of supply chain legislation are already apparent today due to national laws that have already come into force independently of the CSDDD – such as the German Supply Chain Due Diligence Act which applies to companies domiciled in Germany with more than 1,000 employees in Germany (turnover is not a criterion insofar).

Further information

For more information on the CSDDD, reference is made to the today's press release of the European Council Corporate sustainability due diligence: Council gives its final approval - Consilium (europa.eu) as well as our previous blog post on the CSDDD EU Corporate Sustainability Due Diligence Directive - Agreement and Text | Advant Beiten (advant-beiten.com).

The final text of the resolved CSDDD can be found here: pdf (europa.eu)

German Supply Chain Act as a blue print

Irrespective of the differences between the EU and the German Supply Chain Act, the implementation of the latter can serve as a blue print for the implementation of the former. German companies that have already implemented the German Supply Chain Act will therefore definitely have a head start in terms of knowledge and processes. For more information on the German Act, please refer to our respective flyer: The German Act on Corporate Due Diligence Obligations in Suppy Chains | Advant Beiten (advant-beiten.com)

Dr. André Depping
Dr. Daniel Walden
 

Brandenburg Higher Regional Court, judgment of 24 January 2024 – 7 U 2/23

A managing director is personally liable to the company if the director negligently or wilfully violates their responsibilities, resulting in damage to the company. The criterion for determining a breach of duty always is what a prudent businessman would do. Liability is excluded once the past actions of the managing director have been formally approved by a shareholder resolution. If actions have been formally approved, the company can no longer make any claims against the managing director to the extent such approval has been granted (known as the preclusion effect). The scope of the managing director's liability is therefore determined by the scope of the approval.

In terms of time, formal approval is granted for actions in the period set forth in the approval resolution and for which the managing director has submitted accounts. This generally covers transactions of the past fiscal year if no further details are provided. Such formal approval, however, does not release the managing director from such director's existing present and future obligations towards the company. Notably, these obligations also exist if there is the danger of new disadvantages resulting from a past event covered by the approval.

In terms of content, the formal approval covers all facts that the shareholders were aware of from the reports by the managing director or from the documents submitted or that the shareholders could have recognised on careful examination. The key criterion for recognisability is whether the managing director's reports or the documents provide specific evidence for doubts or questions that the shareholders could have clarified by recalculating, making enquiries or exercising their right to information. Recognisability can be ruled out, however, if the managing director has not given the shareholders sufficient opportunity to exercise their rights of inspection, information and disclosure, be it on purpose or not. If the managing director prevents the shareholders from making enquiries, conceals facts or disguises them, the managing director does not need protection. For the formal approval of the managing director's past actions is obtained by using fraudulent measures. Such fraudulent approval does generally not lead to any exclusion of the managing director's liability.

The Brandenburg Higher Regional Court recently dealt with questions relating to liability and formal approval.

Background (simplified)

In the case on which the decision was based, the shareholder / managing director of a German GmbH had made various payments to himself over the years in addition to his salary and bonus in order to increase his salary as managing director. The shareholders' meeting approved the annual financial statements for all years and formally approved the managing director's actions, except those of the last two years of his term of office. Whether the payments were identifiable in the balance sheets of the annual financial statements remained a matter of dispute between the parties.

The shareholders' meeting decided to claim repayment from the (former) shareholder / managing director after his dismissal and immediate termination of his contract. He argued that the salary agreed in his employment contract had been unreasonably low and therefore void. As a result of the additional payments, he had received a total salary that corresponded to the value of his services. Therefore, the company had not suffered any damage. Furthermore, his liability was excluded due to the formal approval of his actions. The same applied to the last two years of his position as managing director due to the acceptance and/or approval of the annual financial statements, in each of which the payments were recognisable.

The Brandenburg Higher Regional Court partially ruled in favour of the shareholder / managing director:
The unauthorised initiation of the payments must be considered a breach of duty by the shareholder / managing director because the salary of a managing director is the sole decision of the shareholders' meeting. The shareholder / managing director is not entitled to adjust his remuneration unilaterally, even if his salary is objectively considered to be unreasonably low.

However, the company is no longer entitled to repayment for the years for which the shareholder / managing director's actions have been formally approved. This is because the approval covers all business transactions that were recognisable to the shareholders upon careful examination of the documents submitted to them. This was the case: the unauthorised payments were identifiable in the balance sheets and the shareholder / managing director's actions were approved regardless of this.

On the other hand, the approval of the annual financial statements does not lead to a 'formal approval of actions' and thus to an exclusion of the shareholder's / managing director's liability for the last two years of his term as managing director. These payments were visible in the balance sheets of the approved annual financial statements for the last two years. However, in the case at hand the approval of the annual financial statements does not have an exonerating effect in such a way that the unauthorised payments had been approved by all shareholders and cannot be reclaimed. This is because by approving the annual financial statements with regard to third-party liabilities, the shareholders are merely making a declaration as to which expenses have actually been incurred. The annual financial statements generally do not contain any information as to whether the amount of the third-party liabilities was appropriate and whether the company may have claims for repayment due to any overpayment.

It is true that, in the relationship between the shareholders and the company and among the shareholders themselves, the approval of the annual financial statements generally means to declare the balance sheet binding, i.e. the shareholders recognise its correctness. The disputed unauthorised raising of the managing director's salary, however, is a third-party liability that does not originate from the internal relationship between the company and the shareholders. In the case of third-party liabilities, it cannot automatically be assumed that the amount of the third-party liability shown in the balance sheet has been reviewed by the shareholders and considered to be appropriate. Such authorisation effect through the approval of the annual financial statements with regard to third-party liabilities is only possible in exceptional cases, for example if the parties agree on it or if all parties involved are aware that there is disagreement with regard to certain liabilities. In the absence of any discussion, however, only the making of payments is approved, but not a corresponding ‘discharge’ of the shareholder from a repayment of overpayments made.

Comments and Practical Advice

Neither the approval of the annual financial statements nor the formal approval of the actions of the managing directors of a GmbH are mere formalities to be made without thought. In both cases, questions, doubts and discrepancies should be clarified and resolved in advance − where necessary with the help of experts.

This is because the formal approval of the managing director's actions generally excludes the assertion of any claims by the company against the managing director to the extent such approval has been granted. In terms of content, the exclusion of liability relates to all business transactions that could have been recognised by the shareholders upon careful examination of the reports by the managing director or from the documents submitted. This means that not only the circumstances that were known to the shareholders when the resolution was passed are covered, but also all circumstances that the shareholders could have detected through recalculation or enquiry. If the shareholders refrain from further clarification despite clear evidence and in case of doubt, this regularly leads to the preclusion of any claims by the company against the managing director. In case of doubt, the shareholders should therefore actively enquire or try to clarify the facts in another way.

The same applies to the approval of the annual financial statements. This is because the company's internal receivables and liabilities are bindingly confirmed when the annual financial statements are approved. This means that claims may normally not be asserted at some later date. As explained above, this also applies to third-party liabilities in exceptional cases. Caution is therefore required in order not to lose any (repayment) claims of the company against the managing director. If there are any open questions, the resolution on the adoption of the annual financial statements and the formal approval of the managing directors' past actions should be postponed.

Dr Barbara Mayer
Lisa Werle

This blog post also appears in the Haufe Wirtschaftsrechtsnewsletter.

The German Federal Court of Justice (BGH) takes the stance that a supervisory board member boycotting the board by repeatedly being absent does not give rise to the right to have an additional member appointed to the supervisory board by a court, even if that means that the supervisory board therefore permanently lacks quorum. By decision of 9 January 2024 (case no. II ZB 20/22), the BGH upheld the judgment of a registration court. The BGH argues that it is indeed possible to pass a valid resolution on filing a petition for a court to remove a boycotting supervisory board member from office pursuant to s 103 (3) German Stock Corporation Act (AktG) with the votes of the two remaining supervisory board members even when the permanently boycotting board member is not present. It seems highly questionable whether this measure is enough to stop a supervisory board member passively stalling the process in practice.

Background

If one member of a three-person supervisory board is absent for a meeting, the supervisory board does not have a quorum. This may render the supervisory board unable to operate. While the shareholders have the right to remove such supervisory board member - even without good cause - at any time, this mostly requires qualified majorities as prescribed by law or by-laws in this context. When there is good cause relating to this supervisory board member (the member permanently being absent should constitute good cause), the supervisory board itself may file the petition for removal from office by court if the board has a quorum and the required majorities are reached. The appointment of an additional supervisory board member by a court, however, is only possible if the supervisory board has been understaffed for a certain period of time due to not having the required number of members.

As a result of this decision, the BGH put an end to a discussion in legal literature whether and to which extent a supervisory board member boycotting the work of the board by being absent may be equated to a resigned supervisory board member and an additional board member may be appointed by court. As much as a clarification on this matter may seem welcome, it may also pose immense difficulties in practice and render the affected corporation permanently incapable of taking action.

Background

A stock corporation with a three-person supervisory board had two shareholders (two companies), each holding a 50% interest. One supervisory board member was the mother of one of the shareholders' partners and therefore a related person. These partners and the supervisory board member formed a community of heirs (Erbengemeinschaft). When the stock corporation meant to assert claims against this community of heirs for which the management board required the approval of the supervisory board, the supervisory board member failed to attend the board meetings. As a consequence, the supervisory board lacked quorum and the corporation was unable to take action.

Quorum

According to s 108 (2) 2nd sentence AktG, the supervisory board has a quorum only if at least one half of the members of which it must be comprised, according to the law or the by-laws, participates in the adoption of the resolution, where no quorum has been stipulated by law or in the by-laws. At first glance, two members would therefore suffice to reach a resolution. However, sentence 3 of said provision prescribes that in any case at least three members must participate in adopting the resolution. In other words: a single member may stall any resolution of the supervisory board by not taking part in the adoption of the resolution, in particular by failing to attend board meetings.

Even when it comes to larger boards, supervisory board members who are permanently absent may boycott the adoption of resolutions when by-laws or rules of procedure provide for participation or majority requirements which exceed statutory requirements or are very particular.

Weaknesses of Remedies in Practice

1. REMOVAL BY GENERAL MEETING

A supervisory board member who does not fulfil his or her duties, in particular participating in meetings and adoptions of resolutions, may be removed from office by the general meeting at any time, s 103 (1) AktG. In this context, it does not even depend on the failure to act; the removal does not require a cause. What constitutes an - often insurmountable - obstacle, however, is the fact that while supervisory board members are elected by a simple majority, they may only be removed from office by a majority of three quarters of the votes cast unless the by-laws provide for a different majority or further requirements which hardly ever is the case; this is to prevent an arbitrary "coming and going". While it is true that seats on the supervisory board may be allocated as a shareholder or a group of shareholders sees fit subject to a simple majority, the removal of a member is only possible with the corresponding support of other shareholders. However, it is very rarely the case, especially in small stock corporations, that the supervisory board is appointed only in accordance with the intentions of the majority shareholder holding the simple majority. It is much more common that the shareholders attempt to reflect the proportions of equity interests or family lines or something similar.

When there are two shareholders with equal shares, two representatives of these shareholders are often complemented by a neutral supervisory board member; as an alternative, the two shareholding parties divide the appointment of the supervisory board, on the one hand, and the appointment of the management board, on the other hand, between themselves according to corresponding agreements. Boycotting the supervisory board by not participating in its meetings seriously disturbs this very balance of power and this cannot be resolved (anymore) in the event of disputes by removing such members on the basis of a resolution adopted by the general meeting due to a majority of three quarters of the votes being required by law.

2. SUPERVISORY BOARD FILING FOR A REMOVAL BY COURT

Apart from that, the law merely offers one other remedy. The court may remove a member of the supervisory board from office if grave cause is given in the person of that member pursuant to s 103 (3) AktG. The court removing a member, however, requires the supervisory board itself filing a corresponding petition. This begs the question, from a legal point of view, as to how the supervisory board is to decide on said petition when it does not have a quorum due to one member being absent. Regardless of this matter, the practical question arises as to how a majority within the supervisory board may be obtained in the above scenario when a corresponding part of the supervisory board members are partial to the boycotting member. Therefore, this sword, too, is probably too dull in most cases and does not qualify as an adequate remedy.

3. COURT APPOINTMENT IN CASE OF UNDERSTAFFING

Thus, the pivotal question is now whether and to which extent additional members may be appointed for the supervisory board by a court pursuant to s 104 (1) AktG. After all, a petition for this may be filed by, among others, the management board, a member of the supervisory board or by an individual shareholder. According to this view, it is assumed that the supervisory board does not have the number of members required - at least factually - for a quorum in case of a permanent boycott.

The BGH has now disagreed with this assumption. A member permanently being absent cannot be compared to a member leaving, for example due to death or resignation. Thus, the only options remaining are the removal of the member from office either by the general meeting or - if good cause is presumed and a petition of the supervisory board is reached - by a court. By means of teleological interpretation, the BGH extended the quorum of s 108 (2) 3rd sentence AktG beyond its express wording in its decision by granting the supervisory board the right to make a decision on filing a petition for removal from office by court for good cause even without the participation of the boycotting member, i.e. with just two members. Similarly pragmatic albeit dogmatically quite unconvincing solutions had already been created by the BGH in case of a voting prohibition of a supervisory board member (cf. BGH, decision of 2 April 2007, case no. II ZR 325/05).

Significance of the Decision in Practice

The opinion of the BGH is consistent and corresponds to the wording and the intention of the law. At the same time, it is hardly any help for the corporations affected which cannot simply vote out and replace a boycotting supervisory board member by a new one but are instead dependant on the assistance of a court.

In the end, there is a legal loophole in these cases which the BGH did not rectify with its judgment. It is unclear whether this was a conscious or unconscious decision but the latter cannot be excluded as the BGH expressly points out that the boycott of the supervisory board must be addressed by removing the relevant supervisory board member. According to the BGH, the remaining supervisory board members may file a petition with a court to remove the boycotting supervisory board member for good cause. In many cases, however, this is not an option because the proportions of the votes and interests amongst the shareholders or supervisory board members do not allow for it. To put it differently: the management board and the supervisory board generally only resort to the courts when the shareholders or the supervisory board as a body can indeed not agree on the removal of a boycotting supervisory board member or a petition to court for the removal for good cause. Filing a petition for an additional supervisory board member should usually be the last resort in case of a permanently boycotting supervisory board member. Contrary to what the BGH claims, the solution described by the BGH will in fact not be possible in a multitude of cases.

Very often, the power structures are very carefully balanced and each disturbance to this structure can result in substantial disputes and therefore cause damage. The one suffering from this is, first and foremost, the corporation, in particular the management board; there is a long list of business transactions that require the approval of the supervisory board according to the law, by-laws or rules of procedure. The BGH obviously did not consider the damages that can occur when a supervisory board is unable to take actions or pass important resolutions for a long period of time or when unpopular members of the supervisory board take advantage of the system pushing it to the very limits of legality.

Avoiding Disputes

Therefore and insofar as possible, precautions should be taken in the by-laws or - if this is not possible due to legal certainty - in a shareholders' agreement for the case that a supervisory board member boycotts the activity of the supervisory board by being absent, i.e. it should be possible for specific shareholders, in particular for the 'opposing' party, to remove this member in cases of doubt if good cause is given in the person. It should at least be agreed that the general meeting may remove a member and appoint a new one. It should also be considered to determine a provision deviating from the majority comprising at least three quarters of the votes cast pursuant to s 103 (1) 2nd sentence AktG.

Roland Startz

This blog post also appears in the Haufe Wirtschaftsrechtsnewsletter.

Reliable information on companies is essential in cross-border situations. So far, anyone looking for the name, registered office, legal form or legal representatives of a company has to rely on data from the national business registers. The data provided, however, can vary substantially. Malta, Cyprus and Ireland, for instance, do not provide reliable information on powers of representation. The European legislature wishes to harmonise these diverging standards. In March 2024, the Council of the European Union and the European Parliament agreed on a draft directive to further expand and upgrade the use of digital tools and processes in company law (CLD draft) based on a proposal by the European Commission. At the heart of the directive is the EU Company Certificate (EUCC) meant to serve as an ‘identity document’ for companies and partnerships in cross-border situations in the future. The EUCC is similar to the summary printout of all valid entries as of the printout date in the German commercial register.

Contents of the EUCC

The EUCC will be proof of the existence of limited companies (in Germany: AG, KGaG, GmbH) and commercial partnerships (in Germany: OHG, KG). In addition, the EUCC will in particular include the following information (Art. 16b (2) CLD draft):

• the name of the company;
• the legal form of the company;
• the registered office of the company;
• the contact address of the company, such as postal or email address;
• the date of registration of the company;
• the amount of the capital subscribed (only for limited companies);
• the particulars of any persons authorised to represent the company and the details of such power of representation;
• the object and the duration of the company;
• the status of the company (insolvent, in liquidation, economically active/inactive).

Information on the shareholders of limited companies will not be required. Information on the partners authorised to represent commercial partnerships, on the other hand, will be included. In the case of limited partnerships, the EUCC will provide information on the general partners and the limited partners. The limited partners' contributions will also be shown.

Issuance on application

The EUCC will be issued by the national registers in electronic and paper form once it is applied for. In addition, an electronic EUCC is planned to be also available through the Business Registers Interconnection System (BRIS). Since 2017, the company registers of all EU member states have been interconnected through the BRIS system. Information from BRIS is publicly available via the European Business Register.

It is planned that every company will be able to apply for its own EUCC. The draft directive is unclear as to whether third parties will also have access to the EUCC (on application) and whether a legitimate interest will be required. The draft does not explicitly address this issue. In light of the broad wording of the draft directive, it currently seems appropriate to assume that third parties will have access without having to prove a legitimate interest (see Art. 16b (4) CLD draft). The European legislature should make the situation clear.

Recognition and publicity

The draft directive provides for the mandatory issuance and recognition of the EUCC in all member states (Art. 16b (1) CLD draft). National bodies (e.g. an authority or a court) will normally not be permitted to verify the information contained in the EUCC. Only if there is reasonable doubt about the origin or authenticity of an EUCC, the national bodies can refuse to recognise the EUCC. Before such refusal, however, these national bodies must send a reasoned request for information to the issuing authority. If the authenticity cannot be confirmed, the national bodies can refuse to recognise the EUCC (Art. 16e CLD draft). The same applies in the event of suspected misuse or fraud. In these cases, the issuing register must be contacted (Art. 16e(a) CLD draft).

Whether third parties may rely on the accuracy of the information contained in an EUCC has not been explicitly stated, but is likely to be assumed due to the recitals of the draft directive (see e.g. recital 24, pp 1-3 CLD draft).

How up to date is the information from the EUCC?

The information contained in an EUCC is only reliable if it is updated on a regular basis. Companies must therefore notify the national register, in Germany this is the electronic commercial register, of all changes in relevant information within a maximum of 15 working days (Art. 15(1), 2a) CLD draft). Where companies fail to meet their updating obligation in time or at all, the member states should ensure effective and proportionate penalties (Art. 28 sentence 1(b) CLD draft). The draft directive does not, however, specify what such sanctions would look like.

Language

The Commission will publish a model EUCC in all official languages to ensure consistency. It is not clear whether national authorities must issue the EUCC in all official EU languages. Such details will only be found in the national implementation legislation or possibly in a European implementing regulation.

Costs

Generally, every company should be able to electronically obtain its EUCC free of charge. In exceptional cases, administrative costs may be charged if issuing the EUCC would cause serious financial loss to registers. Yet, at least once a year, the company should receive its certificate free of charge (Art. 16b (5) CLD draft).

Notes on practical aspects

The new EUCC can help to simplify cross-border legal transactions within the EU and could potentially reduce administrative costs. Also, the planned minimum control standards for the collection of company information increase trust in the accuracy of the published data.

From a practical point of view, there remains the risk of insufficient verification of the up-to-dateness of company data. This is particularly true for member states whose register information does not quite meet the requirements of the new EUCC. Once the directive has been transposed into national law, it should be monitored how strictly the member states punish breaches of the updating obligations. It would be desirable to have an explicit provision stating that every business partner may rely on the accuracy of the information in the EUCC.

Dr Barbara Mayer
Damien Heinrich

This blog post also appears in the Haufe Wirtschaftsrechtsnewsletter.

There is no doubt that manufacturers of AI systems will have to comply with the provisions of the AI Act and will therefore certainly be keeping a close eye on this European Regulation. However, companies that "only" use AI should do the same. In the following, we have compiled the ten practical questions that companies should ask themselves if they are using or planning to use AI.

1. Which companies must comply with the provisions of the AI Act?

Most of the provisions of the AI Act deal with prohibited and high-risk AI systems and the resulting obligations for providers, as well as for importers and distributors of such AI systems. However, this does not mean that users of an AI system can now sit back and relax. On the contrary: users (referred to as "deployers" in the AI Act) of AI systems are also covered by the AI Act and must comply with extensive obligations.

The AI Act applies not only to companies based in the EU, but also to providers and deployers based outside the EU, provided that the output generated by the AI systems is used in the EU.

2. Excluded areas of application

First, the AI Act excludes from ist scope the use of AI by natural persons for purely personal, non-professional purposes from the scope of application. AI systems that are developed and used exclusively in the field of scientific research and development are also excluded from the scope of application.

The provision that the AI Act does not apply to certain AI with free and open source licenses (open source) may become significant in the future. The AI Act provides for another significant exception for the use of AI systems in the military, defense and national security sectors. In addition, Member States have the option to provide for further exceptions in specific areas. For example, they can provide for further legal and administrative provisions on the use of AI systems by employers to provide further protection for employees.

3. Prohibited AI systems

AI systems that pose an unacceptable risk are completely prohibited under Art. 5 AI Act. This includes AI systems in the following eight areas:

• Techniques of subliminal influence beyond human consciousness to significantly distorting or harm a person's behaviour
• Targeted exploitation of the vulnerabilities of certain groups of people due to their age or disability
• Social scoring
• The use of profiling systems to assess or predict the risk of an individual committing a criminal offense
• Non-targeted collection (scraping) of facial images from the Internet or from video surveillance systems to create facial recognition databases
• The use of emotion recognition systems in the workplace and in educational institutions
• The use of biometric categorisation systems
• The use of 'real-time' remote biometric identification systems in public spaces for purposes of law enforcement (although this is declared permissible within narrow limits).

4. Which systems are high-risk AI systems?

The core of the AI Act are the regulations on so-called high-risk AI systems. In principle, AI systems are considered high-risk AI systems if they pose a significant threat to fundamental rights.

A high-risk AI system exists if an AI system is used as a safety component for a product that falls under the EU harmonisation legislation listed in Annex I or is itself such a product. This includes, for example, machinery, toys and medical devices.

An AI system is also considered to be a high-risk AI system if it falls into one of the following areas of Annex III:

• Remote biometric identification systems and AI systems for biometric categorisation and emotion recognition
• Critical infrastructure: This includes AI systems that are intended to be uses as safety components in the management and operation of critical digital infrastructure, road traffic or in the supply of water, gas, heating and electricity.
• Education and vocational training: AI systems are covered if they are used to make decisions on the access of natural persons to educational and vocational training institutions.
• Employment, workers management and access to self-employment: AI systems used for analyzing, filtering and evaluating applicants are covered.
• Certain essential private and essential public services and benefits: This includes, for example, AI systems that are used to evaluate the creditworthiness and credit score of natural persons.
• Law enforcement
• Migration, asylum and border control management
• Administration of justice and democratic processes

However, the AI Act provides for an important exception: AI systems from the aforementioned Annex III categories can be exempted from classification as high-risk AI systems under certain conditions. The prerequisite is that there is no significant risk of harm to the health, safety or fundamental rights of natural persons. Examples include AI systems that ae intended to perform a narrow prcedural task. The same applies if the AI system is used to improve an activity previously carried out by humans. The assessment of whether such an exemption applies must be carried out by the company itself as part of a risk evaluation and documented accordingly.

5. What regulations apply to deployers of high-risk AI systems?

Companies that use high-risk AI systems as deployers must fulfill a comprehensive catalog of obligations. These include the following, for example:

• They shall take appropriate technical and organizational measures to ensure that the high-risk AI systems are used in accordance with the instructions for use.
• They transfer human supervision to natural persons.
• They ensure that input data is relevant and sufficiently representative with regard to the purpose of the AI system.
• They monitor the operation of the high-risk AI system on the basis of the instructions for use and, if necessary, inform the suppliers or, in the event of serious incidents, the importer, distributor and the relevant authorities.
• You keep automatically generated logs for at least six months.
• If they are also employers, they must inform the employees concerned and the employee representatives about the use of a high-risk AI system in the workplace.
• They are subject to an obligation to cooperate with the authorities.

The fundamental rights impact assessment for high-risk AI systems, which was originally required for all deployers, is now only foreseen in the current text of the Regulation for state institutions and private companies performing public services, as well as for those high-risk AI systems where public services, credit assessment or risk-based pricing of life and health insurance are affected, Art. 27 AI Act.

Under certain conditions, deployers may also become providers of a high-risk AI system themselves and then be subject to the stricter provider obligations, such as the establishment of a risk management system, the implementation of a conformity assessment procedure and registration in an EU database. Such a change of responsibility comes into effect if a high-risk AI system is placed on the market or put into operation under its own name or brand, or if a significant change is made to a high-risk AI system.

6. What obligations apply to deployers of AI systems that are not high-risk AI systems?

While the comprehensive list of obligations outlined above applies to deployers of high-risk AI systems, deployers of low-risk AI systems are generally only subject to certain transparency obligations, Article 50 AI Act. For example, they must disclose if content such as images, videos or audio content constituting a deep fake has been artificially generated or modified by an AI. The same obligation applies when an AI generates or manipulates text that is published with the purpose of informing the public on matters of public interest.

7. What applies to SMEs?

The declared aim of the AI Act is to create an innovation-friendly regulatory framework. Accordingly, the legislator has introduced regulatory relief for micro, small and medium-sized enterprises (SMEs) - including start-ups - based in the EU. For example, SMEs can benefit from non-material and financial support. Finally, under certain conditions, SMEs are to be given priority and free access to so-called regulatory sandboxes. Finally, fines can be capped.

8. When does the AI Act apply?

Exact dates cannot yet be given, as the final text oft he AI Act needs to be published in the Official Journal of the EU before it can enter into force. The ban on AI systems will take effect six months after the Regulation comes into force. The majority of the provisions of the AI Act will apply 24 months after entry into force. However, the obligations stipulated for high-risk AI systems will only apply after 36 months.

9. How are violations of the AI Act sanctioned?

Non-compliance with the requirements of the AI Act can result in exorbitant fines. These vary depending on the violation and the size of the company. While violations of prohibited AI systems can result in fines of up to EUR 35 million or 7% of global annual turnover, other violations of obligations under the AI Act can result in fines of up to EUR 15 million or 3% of annual global turnover. Fines of up to EUR 7.5 million or 1% of turnover may be imposed for providing of false information.

Several national and EU-wide authorities are involved in enforcement, resulting in a complex structure of responsibilities and coordination procedures. In Germany, it is not yet clear which authority will ensure compliance with the requirements of the AI Act. The Federal Network Agency and the Federal Office for Information Security are being discussed.

10. ToDos for companies

First of all, each company should determine and classify the risk class to which the AI systems used belong. The requirements for their proper use are then derived from this categorisation. Especially for future projects, it is important to involve the departments responsible for AI in the company at an early stage to ensure sufficient testing and compliance with the regulations. This is highly recommended, especially in view of the high fines.

Dr Peggy Müller

Another article on this topic can be found under this link.

More flexible use of battery storage

The German coalition government enacted various amendments to the Renewable Energy Act (EEG) to provide a more flexible option for the use of power stores:

Until now, subsidies have been available for electricity from renewable energy sources (RE electricity) fed into the grid from battery storage, provided that only RE electricity was used to charge the battery for the whole year. The Solar I Package inserts a new § 19 (3a) into the EEG, which allows RE electricity to be subsidised even where the feeding battery was not charged solely with RE electricity for a whole year. The operator of the battery may now switch the operating mode of the battery five times within a year, providing there is at least two months between each switch. For those periods in which the battery is charged solely with RE electricity, the battery will be considered a RE facility and entitled to subsidies under the EEG.

Tenders for larger facilities

The Package increases the maximum tender size for solar installations in the first segment from 20 to 50 MWp. This welcome change allows project developers to receive subsidies for facilities with economies of scale, making them more cost-effective.

Opt-out rule for disadvantaged regions

Electricity from solar power can be subsidised, for example, when the facility is in a so-called “disadvantaged region”. Until now, the German Länder could open up their disadvantaged regions for RE electricity generation but were not required to do so (so-called “opt-in rule”).

This rule has been reversed and is now an opt-out rule: disadvantaged regions are legally considered open (without requiring the approval of the Länder). Each Land must open up at least one per cent of its agricultural areas by the end of 2030. This minimum share will then increase to 1.5%. Once these thresholds are exceeded, the Land can again close certain disadvantaged regions to the production of electricity from renewable energy sources.

In addition, disadvantaged regions are now open to solar farms that cannot participate in tenders. Accordingly, project developers can establish smaller photovoltaic systems (rated output under 750 kWp) in disadvantaged areas.

Tolerance obligation for the expansion of the grid and power lines

The Solar I Package allows developers of photovoltaic systems to demand that the legal users of public properties tolerate the installation of power lines. This is designed to significantly speed up renewable energy projects and the expansion of the grid. The adopted law does not go as far as the draft bill, which subjected all property owners, including private owners, to this tolerance obligation.

Similarly, new § 11b of the EEG provides a right of way over publicly-owned property during the construction and dismantling of wind farms.

New tender procedure for special systems

Special systems (agricultural photovoltaic systems, systems on parking lots, etc.) were previously at a disadvantage when tendering output capacity as the basic costs of such projects were typically higher than those of systems built in open spaces where construction is easier. To counteract this effect, the entry into force of the Solar I Package will make it possible to tender special systems separately in the first segment.

As developers of special systems no longer need to compete against conventional plants built in open spaces, new open spaces will become viable in agricultural areas, on parking lots, in grasslands, and on moors.

Summary

The Solar I Package contains key changes, which will facilitate the construction and expansion of photovoltaic plants.

Again: after the Solar I Package comes Solar II. Various issues still need deregulating and numerous legal incentives are still needed if the full potential of the expansion necessary to reach national and European climate goals is to be achieved.

Dr Christof Aha
Dr Malaika Ahlers
Anton Buro
Leopold Linden

The law (still) focuses on improving tenant electricity supply, the introduction of “shared building supply” as a new model for the supply of electricity from photovoltaic systems (“PV systems”) in buildings, as well as “subsidy-free supply” as a new form of marketing. These changes establish the legal cornerstones for the comprehensive autonomous supply of electricity from PV systems mounted on the rooves of apartment and industrial buildings. This generates new opportunities for decentralised supply models for utility companies, but also for the original partners in the real estate sector. Landlords can tap into the economic potential of their buildings by either establishing and operating PV systems or leasing roof space.

Specifically:

Simplified landlord-to-tenant electricity

Under the current law, landlord-to-tenant electricity supply may only utilise solar panels mounted on residential properties (§ 21 (3) of the Renewable Energy Sources Act (EEG) and § 42 of the Energy Industry Act (EnWG)). In the future, panels may also be mounted on industrial and auxiliary buildings (such as garages). Tenant electricity also no longer needs to be used within residential buildings.

The Solar Package extends the maximum permissible duration of landlord-to-tenant electricity supply contracts to two years.
Additionally, this maximum only applies where the customer is a consumer.

The downside to deregulation is that the operator of the PV system and the end customer may no longer belong to a corporate group (PV system operators must provide a declaration to this end). This is designed to prevent the misuse of subsidies.

Regulatory hurdles often dissuaded operators of landlord-to-tenant electricity systems from claiming subsidies where industrial and residential leases were involved. The low level of subsidies rarely justified the administrative and advisory costs. Liberalisation makes the landlord-to-tenant model more attractive.

Energy sharing

The Solar Package introduces a new supply model: the “shared building supply” model (§ 42b (1) of the EnWG). This model is independent of and parallel to the landlord-to-tenant supply model and releases users of the model from numerous supply obligations to enable the supply of solar energy within a building without the normal level of bureaucracy. In particular, operators of energy-sharing systems (PV systems) are not required to supply the residual electricity that the PV system cannot cover.
Complex questions of implementation arise with respect to the measurement every quarter of an hour (end customer energy reference quantities must be measured every quarter of an hour), the determination of the allocation key, and the assignment of quantities to individual customers.

Landlord-to-tenant electricity model or energy-sharing model?

Energy sharing (§ 42b EnWG) and landlord-to-tenant electricity (§ 42a EnWG) should form distinct models for the consumption of electricity from PV systems close to where it is generated. ;In contrast to landlord-to-tenant models, suppliers in energy-sharing models do not have to offer full supply. Accordingly, the law removes the obligations on suppliers to conclude a contract to supply residual energy and to use a mixed calculation. The Package does not foresee any additional funding for the quantity of electricity supplied through energy-sharing models – as distinct from landlord-to-tenant systems – because the full supply obligation and certain other supplier obligations have been removed. Compensation will still be available as usual under the EEG for electricity fed into the grid unless the PV system operator has selected to feed electricity into the grid without receiving payment of the EEG subsidy (unentgeltliche Abnahme).

Energy sharing could therefore become an uncomplicated alternative form of supply, especially in residentiary or mixed-use buildings.

Direct marketing and sale of energy without EEG subsidies

Many project developers deliberately kept facilities small to avoid the direct marketing obligation for excess energy. This obligation now only applies to facilities with an installed capacity of 200 kilowatts or more.

Photovoltaic systems with an installed capacity of between 100 and 200 KW can now be earmarked as free-of-subsidy installations. While system operators will not receive any additional payment of EEG subsidies for electricity that is fed into the grid, they also do not need to undertake any direct marketing. Obviously, this form of marketing will only make sense when it is foreseen that solar energy consumption will be highly decentralised.

Summary

The potential of large rooves of industrial properties for mounting PV systems is far from exhausted. The Solar I Package implements important improvements for the decentralisation of energy supply within buildings. It reduces red tape, opens up roof space potential, and facilitates participation by expanding supply options for project developers.

However, this potential can still be utilised more fully: associations involved in the most recent hearing of the Committee for Climate Protection and Energy of 22 April 2024 called for various outstanding guidelines to be provided. These include legal frameworks for energy sharing and measuring the direct marketing limit by the amount of electricity fed into the grid, as well as specific conditions related to the commercial tax privilege.

After the Solar I Package comes Solar II!

Find out more about the improvements introduced for solar power systems here.

Dr Christof Aha
Dr Malaika Ahlers
Anton Buro
Leopold Linden

The Act is a milestone (see our blog post for more details). It is really relevant for providers and deployers of AI systems, especially those with high risks. However, most of the practical and legal issues associated with the use of AI are not regulated or even addressed in the law. They remain to be negotiated between the parties.

1. Internal: Clear rules

Wherever employees have access to the Internet, they use to at least experiment with AI, in particular to see what ChatGPT, Copilot, Claude, Dall-E, Midjourney and others can do. It has also become widely known that there can be risks for the company in using them. This has already cost some people their jobs. It is therefore all the more surprising that many companies still do not have internal guidelines on the correct use of artificial intelligence in the workplace. It is essential to regulate the handling of sensitive information and the use of the results of AI work, but ideally also responsibilities, accountability, and documentation requirements. One thing is certain: these systems will be used. A total ban would be impossible to enforce and would also hamper productivity.

2. Reliable contracts

Many organizations buy AI solutions from third parties or license software that includes AI. This should be governed using contracts that take into account the specific issues associated with the use of AI - not just outdated standard IT terms and conditions that are still silent on the subject of AI. Of course, there is nothing wrong with adapting outdated IT standard terms and conditions to the many new practical and legal requirements.

Some important challenges:

No licensee or user should rely on the legal compliance of generative AI systems (such as Chat GPT, etc.). In particular, it is questionable whether the data used for training has been obtained and used legally, especially with regard to data protection, personal rights and third party copyrights. This does not mean that a company should generally refrain from using such systems. But the distribution of risk must be properly regulated.

Artificial intelligence also sometimes produces undesirable results or exhibits strange behavior. For example, the results of AI generated work can infringe the rights of third parties. Rights clearance can be much more difficult here than with human-generated work, because the AI does not or cannot disclose which authors it has used in the first place (a particular problem: this makes proper disclosure of the use of open source code almost impossible and the use therefore inadmissible). There have also been reports of chatbots used on company websites that have literally fallen flat on their faces - because the chatbot gave customers rights that they would not have had under the contract. Finally, AI also makes mistakes, which can have unexpected consequences: With this in mind, some systems regularly accept a certain level of error tolerance. However, if the settings of an AI system, for example for fraud prevention, are so strict that it only approves a transaction if fraud can be ruled out 100%, it is unlikely to ever approve a transaction. At the same time, however, a more “tolerant” setting means a conscious acceptance of wrong decisions, which can, for example, invalidate the insurance cover that would exist for wrong human decisions.

In general, the point is that AI is effective but often operates in an opaque way and will sooner or later produce errors. It is therefore necessary to regulate contractually how the lack of transparency is dealt with and who bears the risk if it is not possible to determine where the error was made - and also what level of error probability is still acceptable.

The usual standards of intent and gross negligence found in most standard contracts are not useful here: both parties know that errors can occur. It is therefore necessary to regulate which errors are attributable to which party. This can be done, for example, in provisions on data quality, service levels and indemnity clauses. Of course, there is no boilerplate solution for every use of AI. However, it is important that the issue is considered and regulated appropriately.

It is also important to regulate the extent to which the AI can be 'trained' using the licensee's data, and whether other customers can also benefit from what the AI learns in this way. In the worst case, the data used for training could be disclosed to other customers or their end users of the AI, which could constitute a violation of privacy rights, intellectual property rights or trade secrets. If the licensee's dataset includes personal data, it generally must not be used to train the AI for other customers anyway.

In connection with the AI Act, the European Commission has also presented draft standard contractual clauses for the procurement of AI systems by public authorities (AI SCC). The requirements set out in the AI SCCs are intended to ensure that the contract terms comply with the requirements of the AI Act, with one version of the AI SCCs published for high-risk AI systems and one for non-high-risk AI systems.;

The AI SCCs cannot be used as the sole contractual basis for the use of AI, as many issues relevant to contract law (e.g. liability, intellectual property) are not addressed or are inadequately addressed. Nevertheless, the AI SCCs can provide useful points of reference for negotiating contractual terms, even between private companies.

3. HR software

As mentioned above, EU legislation on artificial intelligence will not apply across the board, but will impose specific obligations on providers and deployers of AI systems. However, there is one area of application that deserves special mention: Software in the HR sector is often considered a high-risk system, in particular recruitment tools (for the recruitment and selection of candidates or the placement of targeted job advertisements) and personnel management tools. High risk systems are subject to particularly strict requirements.

Dr Andreas Lober
Lennart Kriebel

The provisions apply exclusively to B2B sales within Germany, including sales by commercial legal entities governed by public law.

A ‘genuine’ e-invoice is an electronic invoice that complies with the requirements of Directive 2014/55/EU – and thus with the CEN 19631 standard (also known as X-invoice) – or that has an e-invoice format agreed on by the issuer and the recipient of the invoice and ensures the correct and complete extraction of the information required under Directive 2014/55/EU or that is interoperable with it.

The active consent of the invoice recipient to receive the e-invoice is no longer necessary. The e-invoicing obligation does not apply to invoices for small amounts (s33 of the German VAT Implementation Regulation (UStDV)) and invoices for travel tickets (s34 UStDV).

As of 1 January 2025, businesses will initially be obliged to just receive e-invoices. A general obligation to issue e-invoices will only apply as from 1 January 2027. Businesses in Germany with a total turnover of EUR 800,000 or less in the previous calendar year will still be exempt from the obligation to issue e-invoices in 2027. In addition, EDI invoices may continue to be issued in 2027 with the consent of the invoice recipient. Beyond that date, EDI invoices may only be used if they are compatible with the CEN standard and both parties have agreed to using them.

Conclusion

Paper invoices, invoices sent electronically and incompatible e-invoice formats will hopefully be a thing of the past soon. The change of processes admittedly costs time and money, and during the transition phase, two invoicing systems will have to be operated in parallel. In the long term, however, businesses will benefit from the e-invoicing obligation. By automating invoice processes, businesses can save time and resources as less manual intervention is required. E-invoicing significantly reduces the cost of printing, sending and managing paper invoices. Electronic transmission means that invoices can be processed more quickly, and payments can be accelerated, which improves companies' liquidity. Most invoice issuers will not be affected by the e-invoicing obligation before 2027. However, German businesses will have to entirely switch to receiving e-invoices as from 2025. The earlier the transition takes place, the longer the testing phase will be until even the last companies will have to swich to the new system at the beginning of 2028. Due to the provisions of the ViDA Directive, especially businesses operating across borders should have in place a well-established e-invoicing system because the central element of the cross-border invoicing system proposed by the EU Commission is an e-invoice structured in a standardised data set, which must be transmitted to the tax authorities within a few days of the service being provided as from 2028.

Teresa Werner

What does the Cyber Resilience Act cover?

The scope of the CRA is very broad, covering all types of hardware and software, from low to high risk. The CRA initially distinguishes between three categories of products:

• "Basic" products with digital elements
• Class I and II important products with digital elements, and
• Critical products with digital elements.

The requirements for the products vary depending on the category.

Class I important products include:

• Identity management systems
• Stand-alone and embedded browsers
• Password managers
• Anti-malware
• Network management systems
• Security information and event management systems
• Boot managers
• Public key infrastructures and digital certificates issuance software
• Physical and virtual network interfaces
• Operating systems
• Routers, modems, and switches
• Microprocessors
• Microcontrollers
• Application-specific integrated circuits and field-programmable gate arrays
• Smart home general purpose virtual assistants
• Smart home products with security features
• Internet connected toys
• Wearables for health monitoring

Class II important products include:

• Hypervisors
• Container runtime systems
• Firewalls
• Intrusion detection and/or prevention systems
• Tamper-resistant microprocessors and microcontrollers

The annex of critical products currently includes hardware devices with security boxes, smart meter gateways in intelligent metering systems, and smartcards or similar devices. Both lists are to be expanded and specified by the EU Commission through delegated acts in the future.

Essential Cybersecurity Requirements:

In order to make a product with digital elements available in the EU, it must meet some essential requirements. First, the manufacturer must assess and document the cybersecurity risks of the product, taking into account the results during planning, production, and the expected lifetime of the product. Based on this assessment, the products must, in particular

• be free of known exploitable vulnerabilities,
• have secure configurations enabled by default, and
• enable free security updates automatically.

They must

• protect against unauthorized access,
• maintain the confidentiality and integrity of data,
• minimize data processing, and
• ensure core functionality even after disruptions.

Product design must minimize attacks, limit impact, and provide transparent security information. This includes an obligation to identify and document exploitable vulnerabilities, regularly review product security, and take precautionary measures, including a coordinated vulnerability disclosure policy. The support period for products with digital elements, during which security updates must be provided and technical documentation must be produced, shall generally be at least five years. The end of the support period shall be clearly and conspicuously disclosed at the time of purchase.

Importers and distributors of products are also required to ensure that the products comply with the requirements of the Regulation.

Conformity Assessment and CE Marking:

For products with digital components, an EU declaration of conformity from the manufacturer is required, ensuring compliance with the requirements set out in the CRA or further regulations. The corresponding CE Marking must be visibly, legibly, and permanently affixed to the product. For software products, the software must be indicated either on the conformity declaration or on the accompanying website.

The intended conformity assessment procedure can be conducted by the manufacturer on their own responsibility for products not classified as important or critical. The involvement of an independent notified body is voluntary for important products of Class I but mandatory for Class II.

Point of Contact:

Manufacturers shall designate a single point of contact where users can report vulnerabilities and obtain information. The single point of contact should not only be automated but also enable contact with a human employee.

Reporting Obligations:

Manufacturers must report security breaches by malicious actors and cybersecurity incidents that pose an increased risk to users or other individuals. The European Union Agency for Cybersecurity (ENISA) will set up a uniform reporting platform for these reports, which must generally be made immediately but can be delayed for a necessary period for security reasons in individual cases. Addressed vulnerabilities will be recorded in a European vulnerability database in agreement with the manufacturer.

Monitoring and Enforcement:

Monitoring and enforcement are primarily carried out by market surveillance authorities, which must now be designated in each Member State. These can also demand access to internal data from manufacturers to assess product conformity.

In case of violations, as with other EU legislation, depending on the nature and severity, substantial fines can be imposed. In the case of the Cyber Resilience Act, they can amount to up to 15 million euros or 2,5% of the company's total worldwide annual turnover in the preceding financial year. The specific rules are left to the EU Member States.

Timeline

The CRA must now be formally adopted by the Council of the European Union. This is expected to take place in April 2024. In line with other EU legislation, the CRA will then enter into force on the twentieth day following its publication in the Official Journal of the European Union. The Regulation will be fully applicable 36 months after its entry into force, although some aspects, including the obligation to report security incidents, will apply earlier.

Products with digital elements placed on the market before the full entry into force of the Regulation will not be subject to the requirements, provided they are not significantly modified after that date. However, this does not apply to the obligation to report security incidents

Assessment

The Cyber Resilience Act obliges economic operators to exercise particular care in the context of cybersecurity. On the one hand, this leads to considerable additional efforts, but on the other hand, it provides a certain degree of legal certainty, as the CRA applies throughout the European Union. Thus, products that comply with the requirements of the Regulation can, in principle, be marketed in any other EU Member State without stricter cybersecurity requirements hindering economic activity. Although the requirements of the Cyber Resilience Act will not be fully applicable for approximately 36 months, they need to be considered early for products with long development cycles and long-term contracts.

From a legal perspective, in addition to compliance with mandatory disclosures, new aspects will play a critical role in the negotiation of IT contracts. For example, manufacturers who obtain components for their products from third parties should require assurances that these components are compliant with the CRA.

Daniel Trunk

The new EU Regulation banning the sale of goods produced using forced labour had just been adopted on 13 March 2024 (see our blog post, EU Regulation banning forced labour products is coming (and the EU Corporate Due Diligence Directive too?)), when the live ticker announced two days later: after much back and forth, sufficient EU Member States voted in favour of the (even more watered down) draft of the EU Corporate Sustainability Due Diligence Directive (Corporate Sustainability Reporting Directive, in short: CSDDD or CS3D).

On 14 December 2023, the chief negotiators from the Parliament and the Council announced that an – informal – agreement had been reached on the content of the EU CSDDD (see our blog post, EU Corporate Sustainability Due Diligence Directive on the home stretch). In Germany, the coalition government was unable to approve the text as the FDP vetoed the results of the trialogue negotiations. Accordingly, Germany abstained in the vote in the Council of the EU. As other Member States were hesitant, the necessary majorities were initially not achieved. Attempts by the Belgian Presidency of the Council to broker an agreement failed. However, following the agreement on the EU Regulation banning forced labour, a new compromise text paved the way for the necessary majorities on the EU CSDDD.

Despite the continued abstention from Germany, the compromise was confirmed at the Meeting of the Permanent Representatives on 15 March 2024. On 19 March 2024, the Committee on Legal Affairs in the European Parliament voted in favour of the modified CSDDD draft - 20 votes in favour and four against. You can find the press release of the European Parliament here. The issue is now on the agenda for the European Parliament meeting on 24 April 2024.

Final adoption will probably take some time, as the so-called corrigendum procedure will apply if the translations are not finalised in time. In this case, the European Parliament will have to vote again on the Directive after the European elections, followed by a final vote in the Council. The agreed text will need to be assessed in detail, subject to the final resolutions. The following cornerstones have been reported.

Personal and material scope

The EU CSDDD will now apply to companies from the EU and third countries and holding companies that have more than 1000 employees and a turnover of more than 450 million euro, as well as to companies that have entered a franchising agreement and have a turnover of more than 80 million euro, where royalties account for at least 22.5 million euro of this turnover. The lower thresholds for high-risk sectors have been deleted.

In addition, the compromise text foresees generous transition periods. The new obligations, which must still be transposed into national law, will have the following staggered application:

• For companies with more than 5,000 employees and 1.5 billion in turnover: three years after the entry into force
• For companies with more than 3,000 employees and 900 million in turnover: four years after the entry into force
• For companies with more than 1,000 employees and 450 million in turnover: five years after the entry into force.

A narrower definition of chain of activities now applies; it was adjusted to be consistent with the term supply chain in the German Act on Due Diligence for the Prevention of Human Rights Abuses in the Supply Chain (LkSG).

Transition plan

The draft also requires companies falling under the scope to adopt and implement a transition plan for bringing their business model into line with the upper limit of 1.5°c for global warming under the Paris Convention. However, the Directive no longer contains financial incentives to encourage companies to implement their plan and comply with their obligations not to exceed such thresholds.

Civil law liability and fines

According to the press release of the European Parliament, companies will still be liable, where they fail to comply with their duties of care and must fully compensate victims. In addition, companies must establish complaint mechanisms and cooperate with individuals and groups adversely affected by their actions. According to the Belgian Presidency, Member States will have greater flexibility when implementing these provisions.

The draft tasks supervisory authorities in each EU Member State with overseeing compliance with the due diligence obligations. Fines of up to 5% of the worldwide net turnover can be imposed on a company which fails to fulfil its obligations. Foreign companies must also name an authorised representative, who has their registered address within an EU Member State in which the company is active, and who can communicate with the relevant supervisory authority in the company’s name about compliance with the due diligence obligations.

Transposition into national law

As explained above, the EU CSDDD will need to be transposed into national law after its adoption at EU level. In Germany, appropriate amendments are expected to be made to the LkSG, which has applied since 1 January 2023. Since 1 January 2024, companies located in Germany with more than 1,000 domestic employees fall under the scope of this Act. German legislators are unlikely to exempt such companies from compliance with the Act until the (maximum) transitional periods for the EU CSDDD have expired. However, it will all become clear in the future.

Dr Daniel Walden
Dr André Depping

However, providers of cloud, SaaS, edge and similar services are also affected. The Data Act dedicates a separate chapter to them. This Chapter VI contains regulations for so-called data processing services and primarily aims to make it easier to switch between different services, i.e. to remove existing barriers to switching.

In particular, if providers work with long term-contracts or the export of customer data is complex, the business model must be reviewed- ideally immediately.

The main reasons for this are as follows:

Long contract terms are obsolete. The customer can initiate a switch to another provider at any time with a notice period of two months. As a rule, the switch should be successfully completed after a further 30 days. After a successful switch, the previous contract is general-ly deemed to be terminated. The previous practice of refinancing providers' initial investments via certain minimum contract terms will therefore no longer work without further ado. Set-up fees, which have become less important in recent years as a result of SaaS services becoming more popular, could be considered as an alternative, as could payments in the event of premature contract termination (e.g., termination fees).

Exit support can be very costly, but must generally be provided free of charge in the future. Since January 11, 2024, only reduced switching fees may be charged; from January 12, 2027, switching must be free of charge. At the same time, however, the Data Act provides for comprehensive support obligations that the source provider cannot evade.

The provider is – to a certain extent – responsible for interoperability with the new provider's system.

These issues should be addressed immediately, as they will force many providers to adapt their business model. As soon as the Data Act will fully come into force on September 12, 2025, a whole range of other obligations will be added, in particular

• Adaptation of contracts (the Data Act specifies mandatory contract clauses)
• Abolition of technical and organizational barriers to change
• Extensive information obligations

In addition to civil litigation with customers, breaches of the Data Act can also result in sanctions being imposed by the regulatory authorities; the maximum amount of fines has not yet been determined. Particularly juicy: The provisions on data processing services are likely classified as market conduct rules and thus subject to competition law. Breaches could be subject to warnings from competitors.

Providers of data processing services must also implement safeguards against unauthorized access from public bodies in third countries.

Our blog post provides an overview of the provisions of the Data Act, including those relating to networked products.

Dr Andreas Lober
Lennart Kriebel

JUDGMENT OF THE HIGHER REGIONAL COURT (OLG) OF NAUMBURG OF 11 JANUARY 2023 IN CASE NO. 5 WX 14/22

Since 1 August 2022, anyone can view the commercial register for free under www.handelsregister.de. The commercial register has always been open to the public, but users previously had to pay a fee to download documents. Now everything is available for free at just a click. This has minimized the hurdles to viewing the register. Free access applies to all entries in the Commercial, Cooperative Society, Partnership and Associations Registers. It covers all documents submitted to the Commercial Register for registration, regardless of whether the documents were provided to fulfil mandatory legal provisions or went beyond these requirements.

Often, such documents contain sensitive information, which was provided by mistake together with the application for registration in the commercial register, without consideration or sufficient (legal) knowledge of the consequences. Typical examples are the private addresses of shareholders or directors, death certificates, or unredacted minutes of shareholder meetings, which provide much more than the mandatory information for notification. Until now, there has been no legal basis for changing a document or deleting or redacting sensitive information once it has been submitted to the commercial register. Documents placed in the register folder could not be changed or substituted to preserve the verity of the register.

Since 23 December 2022, the Commercial Registries Regulation (Handelsregisterverordnung) has contained a new rule, providing a legal basis for the exchange of documents once they have been placed in the register folder. If an original document contains information, which is not mandatory, it is now possible to exchange this document with one that omits the additional, non-mandatory information.

Upon receiving an application from a notary, the register court will act. The court will note the date of the submission of the original document and the fact that the documents have been exchanged on the new document. This ensures it is obvious that the exchanged document replaced an original document.

It remains unclear whether whole documents can be deleted, where they contain only non-mandatory information. However, the new provision does not allow for changes in the form of redaction or deletion to the document.

The OLG Naumburg recently dealt with the issue of deleting or redacting sensitive information from the commercial register.

Background of the case

The founding shareholders and directors sought the redaction of their signatures on the certificate of incorporation, the application for registration in the commercial registry, the list of shareholders, and the minutes of the resolution appoint the directors – without success. The OLG Naumburg rejected the application.
In its reasoning, OLG Naumburg held that the applicants could not base their request for deletion on either data protection provisions or fundamental rights. Correctly: to preserve the truth of the register, documents placed in the commercial register folder generally cannot be changed. It is not the role of the court holding the register to later interfere with documents once they have been released.

The application for redaction of the signatures can also not be based on the newly introduced § 9 (7) of the Commercial Register Regulation. The applicants have not requested the exchange of any documents falling under the provision, but have instead requested changes to the original documents.

Comments and practical tip

It is now possible to exchange documents containing information that is sensitive and does not require disclosure. However, the court holding the register will not act on its own motion. Affected parties must be active. If you wish to see sensitive information deleted from documents that can be viewed in the commercial register, you should check whether the information requires disclosure. Where and to the extent that this is not the case, you can consider an exchange of documents.

It is not yet clear whether the new provision allows whole documents to be removed from the accessible documents in the commercial register where the document does not contain any information necessary for legal transactions. Whether there is an enforceable claim to an exchange of documents based on fundamental rights is also disputed. The courts have not yet decided this issue. The OLG Naumburg refused to answer this question, leaving it open as it was not relevant to its judgment. It therefore remains to be seen how the register courts will position themselves on this issue. In any case, you should contact the relevant register court to discuss the possibility of a document exchange.

Conclusion: forewarned is forearmed. In the future, when you are drafting documents to be submitted to the commercial register for registration, you should check the information in the documents and limit it to that which is strictly necessary. Where mistakes were made in the past, you should contact the commercial register and apply to have any problematic documents exchanged.

Dr Barbara Mayer
Lisa Werle

The AI Act aims to ensure that only AI systems which are both safe and respect the fundamental rights and values of the EU are brought onto the European market and are used in the EU. Still, even though an agreement has been reached, the outcome of the negotiations was announced although there is not yet a consolidated text to present. The political agreement will be put into a final text over the coming months. To this end, a number of technical negotiation meetings have been scheduled until the end of February. As some of the information currently available varies widely , we will have to wait until the final text will be published in the first quarter of 2024. The overview below presents the most significant known regulations.

Definition of an AI System

The new AI Act will include an amended definition of AI systems compared to the European Parliament's last proposals, which is close to the OECD's definition. The OECD's definition is as follows:

“An AI system is a machine-based system that, for explicit or implicit objectives, infers, from the input it receives, how to generate outputs such as predictions, content, recommendations, or decisions that can influence physical or virtual environments. Different AI systems vary in their levels of autonomy and adaptiveness after deployment.”

This definition is particularly criticised because it is extremely broad and therefore even includes simple auto-correction or Excel functions, for example. In this respect, the final wording of the Act including its recitals which, as we know, may often be used to fine-tune certain terms must be awaited.

Risk-based Approach

The Regulation, which is based on a proposal by the EU Commission in April 2021 and is part of the EU's digital strategy, follows a risk-based approach. It categorises AI systems into different groups depending on the risk they pose: from minimal risk to high-risk and even banned AI systems.

According to this approach, six principles apply to all AI systems. AI systems should (1) enable human agency and oversight, (2) be technically robust and safe, (3) comply with privacy and data protection regulations, (4) be transparent, (5) ensure diversity, non-discrimination and fairness and (6) ensure social and environmental well-being.

Banned AI Systems

AI systems involving an unacceptable risk will be banned in the EU. These include, for example, systems using manipulative techniques, systems that exploit weaknesses or vulnerabilities, social scoring and databases based on mass facial recognition.

Until the very end there was an intense debate as to whether AI for facial recognition should be permitted or not. While individual countries, such as France, supported the use of AI for facial recognition, arguing that it could be used to ensure security around major events such as the 2024 Olympic Games, most remained sceptic. Despite a tough battle over several days of negotiations, a complete ban on real-time biometric identification could not be achieved against the massive resistance of the member states. After lengthy discussions, the bans involving the recognition of emotions and remote biometric identification were adjusted.

The ban on AI systems for emotion recognition now only applies in the workplace and in education. It will however still be permissible to use such systems for medical or safety reasons, for example to monitor pilot fatigue.

The regulations on remote biometric identification have also been amended. Both 'real time' and 'post' identification will remain banned. Exceptions are expected for the prosecution of criminal offences in clearly defined cases. The AI Act also includes a catalogue of protective measures to prevent potential misuse.

High-risk Systems

A large part of AI systems will be categorised as high-risk AI systems. These are, for example, AI based medical devices or autonomous vehicles. In general, education, critical infrastructure, migration, asylum, or border controls are considered critical high-risk areas.

High-risk AI systems will have to comply with a number of requirements and obligations to be approved in the EU. For example, conformity assessments must be carried out and a quality and risk-mitigation system must be integrated. High-risk AI systems will also have to be registered in the corresponding EU database. The requirement to carry out an impact assessment for fundamental rights remains unchanged, although this will now only apply to public organisations and private bodies that provide essential public services, such as hospitals or banks. Further changes have been made to the responsibilities and the roles of the various players.

Further, a filter system has been introduced. An AI system can lose its classification as a high-risk system if it fulfils one of a total of four conditions, for example if it (1) is intended to monitor or improve a human activity or (2) is only used to recognise decision-making patterns or deviations from previous decision-making patterns, (3) is only used to carry out preparatory tasks for a human activity relevant for critical applications or (4) is only intended to carry out procedural tasks.

AI Systems with Limited Risk

Specific transparency obligations will apply to AI systems with limited risk. These will, above all, include the information that a certain content has been generated by AI. The aim is to ensure that users can make informed decisions about further use.

Generative AI

Also in the field of generative AI there will be some changes, unsurprisingly, as these provisions were the most controversial. While the European Parliament ‑ not least in view of ChatGPT - supported a regulation of generative AI systems, the Commission had recently been of the opinion that these AI systems did not require a regulation. It was instead sufficient if manufacturers submit to voluntary commitments.

These AI systems are now called 'general purpose AI' instead of 'foundation models'. The definition of general purpose AI was amended so that it now only includes large generative AI systems.

“‘General purpose AI model’ means an AI model, including when trained with a large amount of data using self-supervision at scale, that is capable to competently perform a wide range of distinct tasks regardless of the way the model is released on the market.”

Developers of general purpose AI models will have to comply with certain minimum requirements, such as creating technical documentation, providing information for downstream providers and providing information about training and testing procedures. They must also comply with copyright regulations and the products generated must be labelled with a watermark.

Large AI systems posing systemic risks, so-called 'systemic risk AI' or top tier models that exceed a certain computing power (1025 FLOPs) during training, must fulfil additional obligations. These include, for example, setting up a risk-mitigation system and maintaining an appropriate level of cyber security. Details of this have not yet been finalised. Still, it is assumed that OpenAI's GPT4 and Google's Gemini will be considered to be systems with systemic risk. Models of the European developers Aleph Alpha and Mistral on the other hand will most likely not be categorised as AI models with systemic risk based on their computing power. Honi soit qui mal y pense.

Linking transparency requirements to computing power is heavily criticised, as the capability alone says little about the risks of an AI system. In order to be able to make adjustments as technology develops, the Commission will be able to adjust the current threshold and also define additional criteria.

Open Source Models

The previous proposal also excluded models based on open source licences from the AI Act. According to the recent agreement, only those open source generative purpose AI systems that are categorised as systemic risk AI systems are to fall within the scope of the AI Act. They are also not exempt from the requirements for high-risk AI systems. This is to be welcomed, as the mere fact that an AI model is based on open source licences or not says little about the risk it poses.

Copyright Requirements

According to the regulation, AI developers will have to disseminate a copyright policy and a detailed summary of the content they have used to train their generative purpose AI models. This transparency requirement is intended to let authors determine whether their work has been used. It has not been specified yet what exactly 'detailed' means. If the information provided so far is to be believed, the text and data mining limitation for generative AI is explicitly recognised. This had been controversial. The background: Interference with copyright exploitation rights is only permitted if the rights are exempted by limitation provisions. The limitations for text and data mining, i.e. the automated analytical technique of works to obtain information about patterns, trends and correlations, are relevant for the multiplication which happens in the training of AI. According to the text and data mining limitation, the reservations of rights holders in particular must be observed.

Penalties

The penalties under the AI Act have been amended again, but remain differentiated in proportion to the seriousness of the irregularity. For example, a breach of the ban on certain systems and non-compliance with data requirements may be penalised with up to 7% of the company's global annual turnover or EUR 35 million.

Enforcement and Authorities

An AI Office is (already) being set up in the European Commission to enforce the regulation of generative purpose AI systems. All other AI systems will be monitored by the competent national authorities. In order to ensure the uniform application of legislation, they will meet regularly in a European Committee on Artificial Intelligence.

Right to Lodge a Complaint

Another new addition is the possibility for natural and legal persons to lodge a complaint with the competent national authority about non-compliance with the requirements of the AI Act.

Entry into Force of the AI Act

In principle, the majority of the AI Act's catalogue of obligations will apply 24 months after its entry into force. However, the current draft of the AI Act provides for certain obligations to apply earlier. For example, the ban on certain systems will take effect just six months after the Act comes into force, which means it is expected to apply as early as over the course of 2024. The requirements for generative purpose AI systems will apply just 12 months after the AI Act comes into force.

It is therefore highly advisable to review the provisions of the AI Act at an early stage, not least in view of the fact that the conversion of any systems may well take some time.

Next Steps

As mentioned at the beginning of this post, the AI Act is not yet final - and it may still be a while. Although the recently announced political agreement on the key points has been reached, the technical aspects of the legal text still have to be negotiated in detail over the next few weeks. It may take a while for the bits and pieces to be divided and negotiated, with a lot of the details being figured out later. Finally, the EU bodies must then approve the final text of the regulation. As it is a regulation, it applies directly in all Member States and does not need to be transposed into national law.

Conclusion

With the AI Act, the EU intends to keep what it calls an 'extremely delicate balance' between boosting innovation and uptake of AI in Europe on the one hand and respecting the fundamental rights of EU citizens on the other. However, the final document which contains more than 250 pages comes across as a bureaucratic nightmare, imposing high documentation requirements on many companies. Due to the vagueness of many regulations, there will be a range of grey areas that could lead to uncertainties and, in the worst case, to considerations as to whether the use of AI should initially be avoided against this background until a uniform application practice of the competent authorities emerges. Nonetheless, the EU's attempt to address this major contemporary issue and to take account of dynamic developments by continuously adapting the provisions, as explicitly envisaged, is to be welcomed in principle.

Dr Peggy Müller

The agreement reached now needs to be formally confirmed by the Parliament and the Council. Only then will there be final certainty about the content of the new directive. Once it comes into force, the CSDDD will then have to be transposed into national law by the EU member states. For Germany, this will in all likelihood take place via corresponding amendments to the German Supply Chain Due Diligence Act, which already came into force on 1 January 2023 (for more details, see our respective flyer The German Act on Corporate Due Diligence Obligations in Supply Chains_ADVANT Beiten.pdf (advant-beiten.com)).

Addressees of the new EU regulation shall be:

(i) EU companies and parent companies over 500 employees and a worldwide turnover higher than 150 million euro.

(ii) EU companies with over 250 employees and with a turnover of more than 40 million euro if at least 20 million are generated in one of the following sectors: manufacture and wholesale trade of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction.

(iii) Non-EU companies and parent companies with equivalent turnover in the EU.

The companies concerned will have to introduce a human rights risk management. In addition, companies, including the financial sector, must adopt a plan to ensure that their business model is consistent with limiting global warming to 1.5°C.

As with the LkSG, fulfilment of the CSDDD requirements will in future be monitored by a national supervisory authority in each EU member state. The supervisory authorities can initiate investigations and impose sanctions on companies that violate the regulations. This includes naming and shaming and the imposition of fines of up to 5% of global net turnover. In addition, compliance with due diligence obligations is to be included as part of the award criteria for public contracts and concessions.

Finally, the CSDDD - in contrast to the LkSG - will apparently also contain explicit provisions on companies being liable for breaches of their due diligence obligations and victims having the right to compensation.

Further details will emerge from the correspondingly revised regulatory drafts.

Dr Daniel Walden
 

Dr André Depping

Transaction structure

Where the target is involved in the manufacture or distribution of medical products, transaction structure will be key. As the existence and issue of product certifications directly affect the value of a company, all certifications must be properly transferred to the acquirer. This raises the question of whether a share or asset deal would better capture these characteristics. The answer to this question is not straightforward and will depend on the case.

Share deal

Generally, a share deal will be less complicated than an asset deal for transactions involving medical products. The inherent rights and obligations will transfer with the shares in the target company. This can be a significant advantage considering regulatory requirements. As the value of a medical product primarily depends on whether it has the relevant legal authorisations – such as a CE label – it is particularly important for acquirers that these authorisations transfer to the new owner. In contrast to an asset deal, the target retains its legal identity in a share deal. The manufacturer does not change, so the CE label and any other approvals and licenses remain unchanged.

The transfer is not without conditions but requires both the company and its internal organisational structure, e.g. the existing quality management system and the distribution of responsibilities with respect to product monitoring within the target company, to remain unchanged after the transfer. If processes or the organisational structure change, recertification will often be required. If the acquirer renames the company, it will necessitate recertification and an amendment to the label as it will change the name of the manufacturer.

Another advantage of a share deal is that all relationships, internal and external, remain unaffected. However, contacts can contain a change of control clause which gives a third party the right to unilaterally terminate the contract in the case of changes to the ownership structure. You should therefore examine contracts with third parties more closely, particularly where subsidies have been granted.

Asset deal

An asset deal will be more complicated than a share deal in many cases involving medical products. It requires individual assets to be carved out of the company and transferred to the acquirer.

As authorisations are tied to the manufacturer as a company, any changes to the organisational structure will make renaming necessary. Only Class I medical products are excluded from this rule; a company can certify such products itself. A time-consuming certification process can only be avoided by transferring individual sites without any changes. As such a transfer will not trigger a need to reassess the existing documents, it will be sufficient to inform the relevant authority. However, the acquirer will also be required to relabel the product accordingly. In exceptional cases, tax aspects will justify the additional costs and effort of an asset deal.

Due diligence

In the preliminary stages of a transaction, the potential acquirer should carefully examine and analyse the target for its economic, legal, tax and financial standing (so-called due diligence). Due diligence is particularly important in highly regulated markets such as medical products.

Due diligence should show the extent to which the target complies with the strict requirements of the medical device regulation and reveal any potential liability risks for the acquirer. This must identify which regulatory provisions apply to the product manufactured or distributed. Marginal differences between medical devices law and similar areas such as pharmaceutical law can make the classification difficult.

If the MDR applies, the classification of the target will play a decisive role. Depending on whether the company is active as a manufacturer, importer, or in some other role, particular legal obligations may be triggered, such as documentation requirements, or monitoring or inspection obligations. For this reason, acquirers must carefully examine whether the regulatory requirements for the certification have been fulfilled and whether they will continue to be fulfilled in the future. The sale and purchase agreement should adequately represent any risks identified during due diligence, such as with guarantees or warranties, waivers, or a reduction in the purchase price. Given the strict requirements of the MDR, it can also be advisable to make certain requirements a condition precedent.

Outlook and comments

Updates to medical devices law have exacerbated the existing difficulties of corporate acquisitions in this field. Manufacturers must consistently ensure that their products fulfil the regulatory requirements. Outside of the EU, it can be even more complicated, costly and time-consuming to transfer authorisations and licences.

If you are considering selling or acquiring a target active in this sector, you should involve specialists in the early stages to advise on the tax aspects of the transaction structure, keep an eye on the regulatory provisions, and reduce the risks of liability.

Benjamin Knorr
Andreas Scheffold

Background

Competition is an indispensable element of the European internal market. Various control instruments help maintain and protect competition in the EU, such as rules on the conduct of undertakings on the market, the merger of undertakings, and the award of public procurement contracts within the EU Member States. Until this year, there was no way to control and prevent the distorting effects of subsidies from third countries (i.e., states that are not members of the EU) on competition in the internal market.

The EU reacted and closed this gap with the adoption of two Regulations. These are Regulation (EU) 2022/2560 on foreign subsidies distorting the internal market (which we will refer to as the FSR) and the related Implementing Regulation (EU) 2023/1441 on detailed arrangements for the conduct of proceedings (Implementing Regulation). The two regulations establish a system designed to prevent the distorting effects of subsidies from third countries on competition in the internal market in all economic activities. These new rules are particularly important for mergers between undertakings and the participation in public procurement proceedings.

The implementing Regulation recently entered into force and establishes detailed procedural rules. This article explains those new procedural rules and what companies must now do.

Overview of the procedures

The new control procedures have multiple phases. Once a merger or participation in a public procurement procedure has been notified to the Commission, the Commission will perform a preliminary investigation. Where it has information on alleged foreign subsidies distorting competition, the Commission can conduct a preliminary investigation ex officio in relation to any economic activity.

When the Commission reaches the preliminary conclusion that there is a subsidy that is distorting the internal market, it will open an in-depth investigation. At the end of this phase, the Commission will adopt its final decision on whether the subsidy distorts competition. The Commission can impose redressive measures on the undertakings involved to prevent the distortion of competition. The undertakings may also offer the Commission commitments appropriate to fully remedy the distortive effects of the subsidy on competition.

What rules apply now to undertakings?

These new controls mean that some undertakings will face new obligations. The notification obligations are especially important for companies because failure to comply can result in fines of up to 10% of the aggregate turnover in the previous financial year. However, requests for information from the Commission, on-site inspections, and the protection of the confidential interests of parties are also relevant.

A) MOST SIGNIFICANT: NOTIFICATION REQUIREMENTS

The new controls introduce notification requirements similar to those for other controls on competition. Given the significant fines for failing to comply with the obligation (up to 10% of the aggregate turnover in the previous financial year) and the significant efforts required to provide information, companies should be aware of the new obligations.

I) NOTIFICATION REQUIREMENT FOR MERGERS
Concentrations must be notified under the new system when
- one of the merging undertakings, the acquired undertaking or the joint venture generates an aggregate turnover in the Union of at least EUR 500 million,
and
- the undertakings concerned were granted combined financial contributions of at least EUR 50 million from third countries in the three years preceding the concentration.

Where these conditions are fulfilled, the concentration must be notified by completing and submitting the form set out in the Implementing Regulation. Various information must be provided, including on the concentration and the parties.

Providing the information about the financial contributions will take the most effort. The FSR identifies three types of contributions or subsidies, each of which requires differing information to be provided to the Commission.

The highest level of information is required where the subsidies granted in the three years before the concentration amount to at least EUR 1 million and, by nature, fall under one of the critical categories listed in the FSR (grant to an ailing undertaking, an unlimited guarantee for debts and liabilities, export credits that do not conform to OECD Arrangements, or contributions that facilitate the concentration). Detailed information and relevant supporting documents must be submitted for every subsidy (e.g. on the amount, origin, an exact description, and the possible conditions), which means increased effort for companies.

The requirements are less strict where the subsidies granted over the previous three years amount to at least EUR 1 million but where the nature of these contributions is not one of the critical types listed in the FSR. Such contributions must be listed in the table in the form, sorted by applicant and country. There are some exceptions even for contributions which fall within this group (e.g. general deferments or tax exemptions, tax deductions to avoid double taxation, or the acquisition of goods or services in the proper course of business).;

Where contributions amount to less than EUR 1 million, they will be exempt from the obligation to provide information. However, the Commission can still demand information on all contributions, including those under EUR 1 million.

II) NOTIFICATION REQUIREMENT WITH RESPECT TO PROCUREMENT PROCEEDINGS
Companies may also have notification obligations where they wish to participate in procurement proceedings fall under EU procurement law in accordance with the 4 Part of the German Competition Act (Gesetz gegen Wettbewerbsbeschränkungen), except for the award of contracts in defence and security. This is because competition in a public procurement proceeding can be affected when a foreign subsidy allows one of the bidders to submit an unduly advantageous tender. In procurement procedures which fulfil the thresholds outlined below, undertakings that have received foreign financial contributions over the three years preceding the participation in the tender will need to notify the Commission of these contributions (so-called “notification”).

Where the estimated value of the public procurement contract exceeds certain thresholds, but the undertaking has not received any notifiable foreign financial contribution in the last three years, the undertaking must provide the Commission with limited information and make a declaration that any foreign contributions received in the last three years are not notifiable (so-called “declaration”). Foreign contributions do not require notification where the aggregate amount received over the past three years is less than EUR 200,000 (so-called “de minimis aid”).

The relevant thresholds are exceeded where:
a) the estimated value of the public procurement agreement is at least EUR 250 million (net), and
b) the undertakings involved in the tender (including the main contractor and main suppliers) were granted aggregate foreign contributions in the three years prior to notification of at least EUR 4 million per third country.

Where the procurement is divided into lots, the foreign subsidy will require notification if the estimated value of the procurement exceeds the threshold of EUR 250 million (net) and the lots for which the tenderer applies have an aggregate value of at least EUR 135 million (net). Here, the foreign contribution must also amount to at least EUR 4 million.

In public procurement procedures, companies submit notifications or declarations of subsidies together with the tender or request to participate to the contracting authority and not to the Commission directly. The contracting authority must state in the contract notice that the obligation to notify or declare foreign subsidies applies and must forward any documents it receives to the Commission.

Companies should use the “FS-PP” (“Public Procurement”) standard form set out in the Implementing Regulation for the notification. This specifies which information must be provided and includes:

a) A short description of the public procurement procedure,
b) Information about the notifiers (undertakings),
c) Information on the foreign financial contributions,
d) Where necessary, an explanation of why the offer is not an unduly advantageous tender,
e) Where necessary, information on the possible positive effect of the foreign subsidies,
f) A list of supporting documentation, and
g) A signed declaration that the information provided is true, correct, and complete.

If the parties are only submitting a declaration and not a notification, they must provide information on the procurement proceedings and the undertaking(s), as well as the signed declaration about the correctness of the information provided.

If an undertaking would need to make unreasonable efforts to obtain some of the information required by the FS-PP, it can ask the Commission to dispense with the obligation to provide that information.

For public procurement procedures, the Commission shall complete its preliminary investigation at the latest 20 working days after it receives a notification, after which it can, where necessary, initiate an in-depth investigation. Upon receipt of a declaration, the Commission can initiate an investigation ex officio. During the preliminary investigation and any in-depth investigation, the public procurement procedure can continue. However, the contracting authority cannot award the procurement contract.

If the Commission concludes during either the preliminary or the in-depth investigation that there is no foreign financial contribution that would distort competition, it shall adopt a no-objection decision for the award of the procurement contract. If, instead, the Commission concludes that there is a contribution that distorts competition, it may adopt a decision with commitments which fully and effectively remedy the distortion, or – where commitments are not considered – a decision prohibiting the award of the public procurement contract to the undertaking in question.

III) NEED FOR ACTION
As explained above, companies may be subject to the obligation to provide information about financial contributions received from third countries. The three-year time limit means that the period covered by this obligation is not negligible.

To avoid the need to make significant efforts to prepare the relevant information in a short time period in the future, as well as the related high costs, companies should identify the necessary information on contributions they have received, keep that information readily available and establish a system that continually records and saves the information on all future contributions, ready to use when needed.

The Commission also has the power to initiate a preliminary investigation ex officio. This can not only affect companies planning a merger or planning to participate in a public procurement procedure. All companies should therefore prepare.

The Commission also encourages companies to contact it in advance to gauge how much work is required in the case. There is also the possibility that the Commission will, upon request, exclude certain information so that the parties need not submit it.

B) OTHER NEW RULES

The Implementing Regulation provides time limits for various actions throughout the procedure. These range from five to 65 days, and, in some cases, the Commission has some flexibility when setting time limits.

In some instances, marking information as confidential will avoid dissemination. However, companies may have to justify the claim of confidentiality. If the Commission deems such information not to be confidential, it will inform the parties and may make the information public.

After the conclusion of an in-depth investigation, the undertakings may be required to report to the Commission on compliance with the commitments, contributions received, and participation in other public procurement procedures for a period.

Summary

The Implementing Regulation introduces new obligations and challenges for companies. Perhaps the most important of these is the obligation to notify concentrations and the participation in public procurement procedures. This is because of the possible fines for failure to comply and the significant amount of effort involved in meeting these obligations.

We therefore recommend that you identify any relevant information about past contributions and keep it handy, and establish a system for recording such information for the future.

Tassilo Klesen
Christopher Theis

On 27 November 2023, the EU Council adopted the Data Act, which was the final requirement after the the text had been adopted by the European Parliament on 9 November 2023. Following the formal adoption by the Council, the new regulation will be published in the EU’s official journal in the coming weeks and will enter into force 20 days after this publication.

The Data Act - an EU regulation and as such directly applicable in all EU member states - provides for harmonized rules for "fair access to and use of data". Unlike the GDPR it is not limited to personal data. The aim is to make this data commercially usable.

It is clear already that the Act will go well beyond regulating the „Internet of Things“ (IoT). It relates in particular to "connected products" and cloud services.

Below we provide an initial overview.

Data Sharing: Far-reaching obligations are imposed on data holders, in particular provision and access obligations in relation to user data.

Data from connected products or related services may have to be shared with the user or a third party (data recipient). This is intended to strengthen the rights of users in relation to the data holder. It is also intended to encourage new players to invest in the data economy.

Connected products and related services must be designed in accordance with the requirements of the Data Act ("access by design"). Moreover, the Act requires data holders to make data from connected products or related services accessible free of charge and, where applicable, continuously in realtime.
To date, many connected products and related services have not been designed with this in mind, which is why the Data Act and its obligations must be considered from the very beginning of product development in future.

Vice versa, data holders are no longer allowed to freely share non-personal data with other players - for advertising purposes, for instance. In this respect, the right to share data is generally restricted to the extent necessary to fulfil the user contract. Any further sharing of non-personal data may in future require a data licence agreement. This is also likely to affect existing data records.

With a few exceptions , small and certain medium-sized enterprises are exempt from the obligation to share data (less than 50 employees or EUR 10 million annual turnover).

UNFAIR CONTRACTUAL CLAUSES: The provisions on unfair contractual terms (Chapter IV) are meant to prevent the abuse of contractual imbalances. The law introduces a ban on unilaterally imposed unfair terms in B2B contracts and is based on the law on general terms and conditions. In addition to a general clause, the Data Act also contains (non-exhaustive) examples of unfair terms. These include, for instance, provisions that limit liability for the quality of the data provided. Furthermore, exclusive rights of use to data that are imposed unilaterally can be problematic. To support this, the European Commission is to publish model contract clauses that companies can use use for orientation.

DATA FOR THE PUBLIC SECTOR: In emergencies, such as natural catastrophes, public sector bodies must be provided with data that is required to deal with the emergency.

REGULATING DATA PROCESSING SERVICES, ESPECIALLY CLOUD SERVICES: The Data Act is intended to facilitate switching between similar "data processing services" (Chapter VI). The generic term "data processing services" includes, inter alia, Software as a Service (SaaS), Infrastructure as a Service (IaaS), and Platform as a Service (PaaS). These provisions are intended to break up the EU cloud market and facilitate the portability of data between cloud providers. The regulations are very detailed and primarily cover technical and organisational measures, but also contractual details. For instance, a maximum limit for cancellation periods is provided for. Furthermore, interfaces must be created for data transfer when exporting data between different cloud service providers. In addition to these very detailed requirements in individual cases, however, there is also a seemingly endless ban on obstacles to switching ("In particular, providers of data processing services may not impose any pre-commercial, commercial, technical, contractual or organizational obstacles and must remove such obstacles"). Exceptions apply to "custom-built“ data processing services.

INTERNATIONAL DATA TRANSFER AND INTEROPERABILITY: International data transfer is also specifically regulated to prevent unlawful access to non-personal data by foreign state authorities (Chapter VII). However, the requirements are not identical to the provisions of the GDPR on data transfers to third countries. Additionally, regulations on interoperability are provided for (Chapter VIII).

Late Changes to Definitions

The law-making process for the Act started in early 2022. There were still significant changes in the legislative process, even in provisions such as the definitions of "connected product" and "related services". These are, however, fundamental to the area of application of the Act, specifically for determining who is considered a "data holder" and is thus affected by numerous obligations. The European Commission’s initial draft still excluded devices such as PCs, Smartphones, and game consoles. In the text which has been adopted now, they are no longer excluded.
The definition of the term "connected product" now reads as follows:
‘connected product’ means an item that obtains, generates or collects data concerning its use or environment and that is able to communicate product data via an electronic communications service, physical connection or on-device access, and whose primary function is not the storing, processing or transmission of data on behalf of any party other than the user;

‘related service’ means a digital service, other than an electronic communications service, including software, which is connected with the product at the time of the purchase, rent or lease in such a way that its absence would prevent the connected product from performing one or more of its functions, or which is subsequently connected to the product by the manufacturer or a third party to add to, update or adapt the functions of the connected product;

Trade Secrets still little protected

The obligation to share data may even extend to trade secrets, although there have also been some changes in the course of the legislative process. It is striking to see that the protection of trade secrets appears to be weaker than under the GDPR. In principle, the protection of trade secrets comprises a multi-level mechanism: the relevant data must first be identified as a trade secret by the data holder or trade secret holder. The parties involved in the data transfer must then agree on contractual, technical and organizational measures to ensure the confidentiality of the trade secrets to be transferred. Model contractual terms will also be available for this purpose in future. Once protective measures have been agreed, trade secrets must also be disclosed. It remains unclear how a data holder should enforce these protective measures in practice vis-à-vis the recipients of the data, i.e. typically their own users or authorized third parties. Basically, the disclosure of trade secrets can only be suspended if no agreement can be reached on the protective measures to be taken or if these are insufficiently implemented by the recipient of the data. However, the latter will often be accompanied by the compromising of trade secrets. Any decision to suspend the transfer of data must be justified by the data holder and reported to the competent authority.

The data holder may also refuse to disclose trade secrets ex ante in individual cases under exceptional circumstances if he can prove that the disclosure of the trade secret is very likely to cause him serious harm - in this case, too, the data holder must inform not only the user of the refusal, but also the competent national authority. The threshold for the right to refuse ("highly likely to suffer serious economic damage") has been somewhat weakened as of late, but is still very high. This is regrettable from the perspective of the data holder or trade secret holder, as this ex ante right could in many cases be the most effective way of preventing the disclosure of trade secrets from the outset.

What about the GDPR?

Unlike the GDPR, the Data Act applies to both non-personal data and personal data. The GDPR primarily serves to protect natural persons and creates a legal basis for the processing of personal data. The Data Act, in contrast, primarily aims to realize the free movement of data. The Data Act does not affect the GDPR, i.e. in cases where a connected product or a related service is used and personal data is also generated, both laws apply in parallel.
In particular, the Data Act is not intended to reduce the protection offered by the GDPR for personal data and therefore cannot serve as a legal basis for data processing under the GDPR. In practice, this will probably cause more difficulties than it seems at first glance, especially if a connected product or a related service collects personal and non-personal data - in this case, the latter may have to be passed on, but the former may not (as far as persons other than the user are concerned) or not easily: In any case, the question then arises as to whether a legal basis within the meaning of the GDPR would allow a transfer. This may create difficult situations for data holders in the future. They must now decide more conclusively than before which data is actually personal data: Disclosure may not be mandatory for this data, but it is for data without a personal reference. This is not made any easier by the fact that data from connected products will often have a "relative" personal reference - and the question of relative personal reference is currently before the ECJ.
There may also be discussions on the question of whether owners of trade secrets can rely on the fact that the GDPR appears to weigh their interests more heavily than the Data Act.

Timeline

Following the adoption by the Council and the publication in the official journal, the Data Act will be directly applicable in all EU member states after a transitional period of 20 months, without the need for member state implementation of the regulations. The so-called "access by design" obligation, i.e. the requirement to design (new) connected products and related services, only applies after a further 12 months. Apart from this "access by design" obligation, however, the Data Act not only affects new connected products and related services, but also - at least in principle - those already on the market. This means that owners of existing data records or existing data silos could potentially also be subject to the new rules, in particular the data provision obligations and the restrictions on data use (such as the requirement of a data licence agreement). For such potential data holders in particular, the period of 20 months could be quite short to adequately prepare for the obligations of the Data Act.

Dr Andreas Lober
Lennart Kriebel

Importers of products listed in Annex I of the CBAM Regulation will be required,

• during the transitional period from October 2023, to determine and calculate the direct and indirect emissions generated during the production of the imported goods,
• to report quarterly on direct and indirect CO₂ emissions in the country of origin and the carbon price paid in the third country (CBAM report),
• to register as a so-called CBAM declarant, being authorised to import products subject to CBAM from January 2026 and to acquire the necessary CBAM certificates.

The companies must submit their first reports by the end of January 2024.

In detail:

CBAM and the European Green Deal

Four years ago, in 2019, the European Union as a pioneer in the fight against the climate crisis, set itself the goal of achieving CO₂ neutrality by 2050, delivering on the commitments under the Paris Agreement. The European Green Deal is the overarching strategy implemented by more than fifteen new laws or changes to existing legislation, the so-called 'Fit for 55' package. The goal is to reduce net greenhouse gas emissions by at least 55 % by 2030, compared to 1990 levels.

The 'Fit for 55' package² establishes the CBAM together with changes to the current EU Emissions Trading System (ETS). The CBAM should equalize the carbon price between domestic and foreign products.

In accordance with the applicable legislative procedure, the European Commission put forward a draft which was discussed by the European Parliament (EP) and the 27 Member States in the Council. The draft was welcomed by the EP's Environment, Public Health and Food Safety Committee (ENVI) but the EP rejected the proposal as not ambitious enough. It took several months to find a compromise.

Historical and legal context

The EU has an Emissions Trading System (ETS)³ for more than fifteen years and CBAM is designed to function in parallel with this system, complementing it for imported goods.

The ETS puts a cap on the amount of greenhouse gases companies are allowed to emit. Within the cap it is possible to buy emission allowances that can be traded with. Some of the allowances are auctioned, however, the rest of the allowances are given for free by the European Commission to certain sectors at risk of carbon leakage.

Carbon leakage refers to the problem of companies relocating their production offshore, to countries with fewer environmental protection. CBAM addresses this issue, so that EU efforts to reduce greenhouse gas emissions are not undermined by production shifts causing increased emissions in non-European countries or by importing more CO₂-intensive products.

Even without counting the emissions caused by imports, the EU accounts for around 8 % of global carbon dioxide emissions. It would be counterproductive and against the objective of the Paris Agreement to decrease emissions in the EU while importing more carbon-intensive products from non-EU countries.

How the CBAM works

Under the CBAM, carbon pricing is done through the instrument of CBAM certificates, similar to ETS allowances. "CBAM certificate" means a certificate in elec-tronic format corresponding to one ton of embedded emissions in goods. Importers of certain energy-intensive goods must buy CBAM certificates to be allowed to import those goods into the EU. The required number of CBAM certificates corresponds to the total embedded emissions of the imported goods.

If a company has already paid a CO₂ price for its emissions in the country of origin, Article 9 of the Regulation provides for the possibility of offsetting against the number of CBAM certificates to be surrendered.

According to Art. 2 of the Regulation, third countries can also apply for an exemption from the CBAM if they have an equivalent carbon pricing mechanism or if there is a link with EU emissions trading system. Imports of goods from these third countries are then outside the scope of the Regulation. This already applies to goods originating in Iceland, Liechtenstein, Norway and Switzerland.

Such a linkage could also be considered in the future between the EU and the UK. Following the UK's withdrawal from the European Union, the UK has introduced its own emissions trading scheme. Currently, the UK and the EU are thinking about linking their emission trading schemes. Indeed, a final decision has not yet been made.

Under the ETS free emission allowances are to be phased out for some EU producers and the product scope of the ETS and CBAM shall converge. First, the allocation of free ETS allowances will be phased out from 2026 and completely discontinued from 2034. In addition, the scope of the ETS will also be extended to aviation and shipping from 2024, and to road transport and buildings from 2027. For the aviation sector, no more free certificates will be made available from 2026. Moreover, a shortage of allowances is planned to increase the prices for emission allowances according to the principles of the market mechanism.

CBAM transition phase

The CBAM Regulation is applicable since 1 October 2023. Articles 32 et seq. of Regulation (EU) 2023/956 provide for a gradual introduction. Under EU law, the legal basis of the CBAM is Article 192 para. 1 of the Treaty on the Functioning of the EU (TFEU), which allows the Union to act to achieve the environmental and climate objectives specified in Article 191 para. 1 TFEU.

CBAM started with importer reporting obligations in October 2023. Companies must now request access to the CBAM Transition Registry to submit quarterly reports. Under a European implementing regulation adopted in August⁴, companies must report for the first time by the end of January 2024. Failure to do so will result in penalties between €10 and €50 for each ton of unreported emissions. The actual penalty will be determined pursuant to Art. 16 para. 3 of the Implementing Regulation and can increase if the duration of non-reporting exceeds six months.

The information required in the report includes, in particular, the quantity of goods imported in tons, the total amount of direct and indirect CO₂ emissions per ton of each type of goods, and the CO₂ price paid for the imported goods in the country of origin, if any.

The submitted report can be modified until two months after the end of the relevant reporting quarter. For the first two reporting periods, a modification is possible until 31 July 2024.

In principle, the reporting obligation rests on the importer within the EU of the CBAM goods. However, the importer can transfer the reporting obligation to an indirect customs representative (e.g., the transport company) with consent. Furthermore, the reporting obligation applies directly to the indirect customs representative when the importer is located outside the EU.

CBAM fully effective starting 2026

Once CBAM is fully effective starting 1 January 2026, both EU and non-EU companies importing goods into the EU subject to CBAM will be required to apply for the status of authorised CBAM declarant and purchase CBAM certificates. The price of CBAM certificates is calculated based on the weekly average auction price of EU-ETS allowances, expressed in €/ton of carbon dioxide emitted. If an EU importer can prove that it has already been paid a carbon price during the production of the imported good, the importer will only have to pay the difference between the amount paid and the price of a CBAM-certificate.

Economic consequences and legal issues

As regards the economic consequences in the EU, the emissions-intensive industry considers that the lack of relief of the ETS burden for exports with the simultaneous expiry of the free allocation of certificates leads to imbalance and the increased risk of relocation of industries. While EU-based manufacturers of emission-intensive raw materials would be protected from imports originating in countries with lower carbon dioxide prices, the export of emission-intensive raw materials from the Union would hardly be economically viable, as the production costs would no longer be competitive in international comparison without free allocation of allowances. The U.S. Inflation Reduction Act (IRA) of August 2022 has raised additional concerns about a new subsidy race as well as a debate about the competitiveness of the European Union.

With respect to political considerations, several countries have already voiced their concerns, ranging from CBAM violating trade agreements to decrying it as blatant protectionism. Brazil, South Africa, India and China have stressed the negative implications for developing countries.

In particular, many concerns have been voiced about the compatibility of CBAM with international law. However, a CBAM compatible with the General Agreement on Tariffs and Trade (GATT) is not per se impossible and could be justified on environmental grounds. It could qualify as a border adjustable internal measure under GATT Article III or, if found to be discriminatory, could be justified under the general exceptions of GATT Article XX, relating to the conservation of ex-haustible natural resources (GATT Article XX(g)) or necessity to protect human, animal or plant life or health (GATT Article XX (b)).

Upcoming steps

To fulfil the reporting obligations, companies must first check and identify whether and which imported goods are subject to CBAM. Decisive are the CN codes of the respective goods listed in Annex I of the Regulation, and further guidance is given with sectoral factsheets.⁵

In a second step, importers must obtain all CBAM-related information from their suppliers. The Taxation and Customs Union Directorate-General (TAXUD) published guidance documents for importers in the EU and their suppliers outside the EU, together with templates.⁶

The contractual transfer of the reporting obligation to an indirect customs representative and the related contractual hedging of risks (e.g., in relation to late or inaccurate reporting) must be considered.

If there is an own reporting obligation, access to the CBAM Transitional Registry must be requested.
The quarterly reports must then be completed and submitted no later than one month after the end of the quarter in question, first time at the end of January 2024. If the required information is not yet available, the respective importer may use default values made available and published by European Commission for the transitional period until 31 July 2024.

Prof. Dr Rainer Bierwagen
Gábor Báthory

¹ Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism, http://data.europa.eu/eli/reg/2023/956/oj and Commission Implementing Regulation (EU) 2023/1773 of 17 August 2023 laying down the rules for the application of Regulation (EU) 2023/956 of the European Parliament and of the Council as regards reporting obligations for the purposes of the carbon border adjustment mechanism during the transitional period, http://data.europa.eu/eli/reg_impl/2023/1773/oj
² See European Commission, COM/2021/550, 14 July 2021
³ See https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets_en
⁴ Commission Implementing Regulation (EU) 2023/1773, http://data.europa.eu/eli/reg_impl/2023/1773/oj
⁵ See https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism/cbam-sectoral-factsheets_en
⁶ See https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en

The decision is likely to have relevance beyond the individual case for the question of the extent to which documents which are placed in a virtual data room at short notice as part of an asset or share deal in M&A or other transactions are suitable for satisfying any disclosure obligations on the part of the seller.

Facts of the case

The plaintiff buyer withdrew from a purchase contract for several commercial real estate properties and demanded damages from the defendant seller because the latter had concealed certain facts in the course of the contract negotiations in disregard of its duty to inform the buyer. At the time the contract was concluded, the properties were subject to a considerable financial risk regarding impending special cost allocations. During the contract negotiations, the seller had granted the buyer access to a virtual data room in which it had placed documents relating to the purchase object. However, it was not until the last working day before the day of notarization that it posted a collection of further documents that allowed conclusions to be drawn as to the aforementioned risk.

The Regional Court had dismissed the action in the first instance. The appeal was unsuccessful. In response to the plaintiff's appeal, the Federal Court of Justice has now essentially reversed the judgment and referred the case back to the Court of Appeal for a new decision.

The Federal Court of Justice states in this regard, among other things:

According to the established case law of the FCJ, in contract negotiations each contracting party has the duty to inform the other party of circumstances that could frustrate the purpose of the contract and are therefore of material importance to the other party's decision, provided that the other party may reasonably expect the information in good faith, considering the prevailing public perception.

This also applies to the financial risks mentioned here, whereas the seller's duty to provide information had not been fulfilled or had ceased to apply despite the buyer's performance of due diligence by the fact that it had placed the aforementioned documents in the virtual data room shortly before the day of the notarisation without further reference.

The question as to whether a seller, by setting up a physical or virtual data room, satisfies its duty to give information to the subsequent buyer about a circumstance which is subject to disclosure and which is available as information in the data room cannot be answered in general terms and regardless of the circumstances of the individual case. The mere fact that the seller sets up a data room and allows the prospective buyer to access the data does not always allow the conclusion that the buyer will also take note of a circumstance that had to be disclosed, given the diversity of processes in practice. Only if the expectation was justified in the individual case that the buyer will perceive certain information provided by the seller in the data room and consider it in his purchase decision, separate disclosure by the seller was dispensable.

Whether the seller may have this expectation depends on the circumstances of the individual case, for example, on how the data room and access to it is structured and organized, as well as on the nature of the information to be disclosed and the document in which it is contained. If, for instance, a circumstance is involved which - recognisable to the seller - is of very considerable importance to the buyer, maybe because it could frustrate the purpose of the contract or cause very considerable economic damage to the buyer, and if the circumstance is not instantly recognisable from the data provided, but is known to the seller and can be easily disclosed, then the buyer can regularly expect a separate indication. In this case, the seller may not wait knowingly to see whether the buyer determines the information that is difficult to recognize from the data provided but must communicate this despite the Due Diligence. Whether the circumstance was instantly recognisable from the data provided or not could also depend on the type of document and in which position within the document the information was available. In addition, it is also relevant whether the seller may expect the buyer to look through the documents specifically for this information or rather with a view to general information.

In the specific case, the seller could not have had the legitimate expectation that the buyer would take note of the information contained in the most recently posted documents before the contract was concluded.

It can be gathered from the grounds of the judgment that the BGH bases this primarily on the fact that the documents were only posted so shortly before the date of notarization. Apart from that, the BGH also seems to consider how easy or difficult it was to find the critical information in the posted documents. However, it is not clear from the judgement whether these two aspects correlate, for instance, in the sense that early posting cures lack of clarity or clarity cures short-term posting, cannot be inferred from the judgment.

Sellers should thus ensure that information which is of particular relevance to the buyer's decision is sufficiently accessible and included in the data room in good time before the contract is concluded. In case of doubt, a separate explicit (and documented) reference is recommended.

Dr Christoph Schmitt

What are non-compete clauses?

There are different types of contractual non-compete arrangements. Non-compete clauses prohibit directors, board members, and employees from working for a direct competitor while employed or from competing with the company/employer in another form without the company’s consent. In cooperative agreements, non-compete clauses prohibit the parties from using the other party’s know-how or customer information to compete with them. Non-solicitation agreements ensure that neither party poaches employees from the other party. In certain circumstances, such contractual non-compete clauses can form collateral agreements to supply or cooperation agreements, contracts for the sale and purchase of a company, and outsourcing agreements.

Statutory non-compete provisions also exist. Section 88 of the Stock Corporation Act (AktG) prevents members of the management board from competing with the company without the consent of the supervisory board. For directors of limited liability companies, this rule is not enshrined in statute but derives from their fiduciary duty, i.e., their obligation of loyalty towards the company due to their position on the management board of the company. This principle also applies with some differences to certain shareholders (e.g., personally liable partners of a general partnership (OHG) and limited partnership (KG), or majority shareholders of a limited liability company (GmbH)). However, such statutory non-compete provisions end with the termination of the board or shareholder position.

Once their activities for the company cease, managers, members of the board, and employees are generally free to change companies, compete against the company, and even poach customers or employees. Companies may therefore wish to prevent managers and strategically important employees from working for the competition or competing with the company after the end of their employment (so-called post-contractual non-compete clause). Such contractual clauses may be broader in scope for directors than employees.

Conditions for effective contractual non-compete clauses

Non-compete clauses must be clear and self-evident. The object and scope must be clearly defined.

The primary object and purpose of a non-compete clause should be the protection of the legitimate interests of the benefitting company. Such clauses are permissible provided the freedom to carry out professional activities and the freedom to compete are not unduly impaired. In addition, the non-compete clause must be limited in object, duration, and geographic scope.

The case law has developed guidelines for the objective and geographical limits of post-contractual, non-compete clauses. Geographically, a non-compete clause must be limited to the company’s field of activity. Where a company is only active in a region, the non-compete clause may only apply to this region. Where the company is active throughout Germany or Europe-wide, the geographic scope will be correspondingly broader. On duration: any non-compete clause may only apply for two years after the end of the employment relationship.

If agreements with employees exceed these limits, the objective and/or geographic application and/or duration will be reduced to preserve validity, i.e., the maximum permissible scope will be considered valid. However, post-contractual non-compete clauses for directors and managers and non-compete clauses between companies will be invalid where they exceed the objective or geographical limits. Where a non-compete clause only exceeds the permissible duration, it may be reduced to the maximum permissible duration to preserve validity.

The limits of post-contractual non-compete clauses

While activity-based, non-compete clauses prevent managers or employees from performing certain activities, company-based non-compete clauses prevent them from working for (certain) competing companies, suppliers or customers. The limits of activity and company-based non-compete clauses are fluid. However, a prohibition against working for a competitor in all respects is probably invalid because, in most cases, it would result in an inadmissible occupational ban.

When managing directors leave a company, there is a danger that they will entice customers away from the company. Therefore, instead of prohibiting the director from performing certain activities, they will be prohibited from using the company’s customer base. Such agreements are permissible when they are limited to customers with whom the company had business relations within the last three years.

Companies may not issue a blanket prohibition preventing an outgoing director from investing capital in a competitor. However, a company may agree on a non-compete clause with majority shareholders, who can exercise influence over the management and operative business of the company.

Is compensation necessary?

To compensate an (ex-)employee for the limitations imposed by a post-contractual non-compete clause, the law provides that the company shall pay the employee financial compensation (see § 74 (2) of the Commercial Code (HGB)). Compensation should be equivalent to at least 50% of the most recent contractual remuneration per month. If the employment agreement contains a two-year, post-contractual non-compete clause and the employee earned EUR 5,000/month in the month before their employment was terminated, the employer must pay the employee compensation of at least EUR 2,500 per month for two years.

Different rules apply to directors. Where a post-contractual clause only prevents customer poaching, the company will not need to pay the (ex-)director compensation. For further reaching post-contractual restraints, compensation will need to be paid as, without it, the non-compete clause will be invalid.

Possible courses of action in the case of a breach of the non-compete clause

If a director breaches the non-compete obligation arising from their fiduciary duty, the company will have several courses of action. First, the company can demand that the director cease and desist the actions in breach. In addition, the company can choose whether to seek damages from the director or the restitution of proceeds (skimmed profits). The latter has the advantage that the company does not need to prove that it would have achieved the same profits.

Securing contractual non-compete clauses with contractual penalties has proven useful in practice. This has the advantage for the company that the amount of the damages and income made by the director as a result of the breach are not in dispute. If a breach of the non-compete clause is shown, the contractual penalty will be due for payment. In addition, contractual penalties – in contrast to damages claims – are payable regardless of fault, as a rule, which means there is no need to provide proof of a culpable breach of the non-compete provision.

Non-compete clauses between companies in cooperation and supply agreements and sale and purchase agreements

Non-compete clauses between companies restrict competition and are subject to antitrust law. However, they are still permissible under certain conditions.

Non-compete clauses are permissible and valid as collateral agreements when and to the extent they are necessary, for example, to protect a contractual partner from the other partner’s disloyal use of know-how or customer information. The decisive question is whether the non-compete obligation is so intrinsic that the cooperation stands and falls with the non-compete clause, i.e., would the parties have agreed to cooperate without the contractually agreed protections against poaching customers and engaging in mutual competition?

If the non-compete clause forbids all competing activities, it will be invalid. It is possible, for example, to prevent the contractual partners from using the other partner’s know-how or customer data to engage in competition, providing the prohibition is limited objectively and geographically, and by duration.

Contracts for the sale and purchase of companies often prohibit the seller from competing with the target business. Non-compete clauses must be limited to those goods (including improved versions and successor models) and services, which form the target’s business purpose.

When drafting non-compete clauses, parties can refer to the definition of competitor in § 4 (1) No. 4 of the Act Against Unfair Competition (UWG), i.e., the direct competitor, to clarify which activities are considered direct competition and are prohibited. Geographically, non-compete clauses should be limited to the area in which the target offered its goods or services for sale and/or to the region in which the target invested before the sale.

The agreement should also include a contractual penalty to penalise breaches of the non-compete clause. The deterrent effect of the penalty will encourage compliance.

What applies to non-solicitation clauses for employees?

Agreements between companies which prevent solicitation or hiring of employees who work for the other party can only be effective when:

1. the conduct of the poaching company is unethical under the Act Against Unfair Competition (UWG). This includes soliciting employees to deliberately hinder or damage competitors.
2. the prohibition against solicitation is not the main purpose of the agreement but merely a collateral clause, which meets the needs of a special relationship of trust between the parties or one party’s need for protection. This will be the case for the sale of a company: the purchaser will have a legitimate interest in preventing the seller from poaching skilled workers immediately after the transaction, reducing the company’s value.

Generally, a non-solicitation provision may have a maximum post-contractual duration of two years. In practice, however, non-solicitation clauses offer only limited protection because it is difficult to prove whether an employee was poached or changed employers of their own volition.

Conclusion

The assessment of whether and to what extent non-compete clauses are permissible always involves a complex balancing of interests. The company’s (legitimate) interests in a non-compete clause must be weighed against the personal interests of the other party in the free exercise of their profession and the general interest in the freedom of competition. The case law provides key principles and guidelines for practice. It is particularly important to note that the object and the scope of any non-compete clause must be clearly defined, and the objective and geographic reach and duration of the prohibition must fall within certain limits. What this means in a specific case will depend on various factors. You should therefore take caution when formulating and drafting contractual non-compete clauses and seek legal advice on this issue.

Dr Birgit Münchbach

Digitalisation

The amendments make it possible for administrative acts under the Foreign Trade and Payments Regulation (Außenwritschaftsverordnung, AWV) to be issued in electronic form. Applications, notifications, information, files, reports, and other documents will also be able to be submitted via an administrative portal.

The amendments bring the AWV into line with the Act to Promote Electronic Administration and Improve Online Access to Administrative Services (Gesetze zur Förderung der elektronischen Verwaltung und zur Verbesserung des Onlinezugangs zu Verwaltungsdienstleistungen).

All documents required for the investment review under §§ 14a, 15 and 23 of the AWV (including documents on the acquisition of a domestic company and information for the Central Customs Office, the German Federal Bank, or the Federal Office of Economics and Export Control (BAFA)) should be submitted via the administrative portal. While the electronic procedure is preferred, in limited cases it will still be possible to submit documents in conventional paper form.

Remember the pitfalls: uploading information or an application into the administrative portal will not trigger the prescribed periods (initiation) under § 14a of the AWG; instead, the point of time specified in § 3 (4) of the AWV (new version) will apply.

Accordingly, information or an application submitted via the administrative portal will only be considered submitted once the Federal Ministry for Economic Affairs and Climate Action (BMWK) has imported the submitted documents in entirety and without any issues from the administrative portal to the Ministry’s IT system. Once this has occurred, the Ministry will confirm the submission of the documents and inform the purchaser if the documents are incomplete or corrupted, where possible.

The suspension of time periods under § 14a (6) of the Foreign Trade and Payments Act (AWG) is also tied to the import of the relevant documents.

Arms control

The Amendment also introduces new restrictive measures against states like Russia, Somalia and Haiti, bringing the AWV into line with various resolutions of the Council of the European Union (CFSP).

The amended Regulation also included the agreed 2022 amendments to the Wassenaar Arrangement for Conventional Arms. The list of military goods of the European Union previously included these changes.

New authorisation requirements for PMI rigid foam technologies

A further amendment introduces an authorisation requirement for the export of development and production technologies for polymethacrylimide (PMI) rigid foam. This introduction supplements Annex I of the Dual Use Regulation. The characteristics of the PMI rigid foam mean it can be used in modern military applications, particularly in the aerospace industry, which justifies the authorisation requirement. According to the draft bill, the Federal Government is going to work to ensure that these technologies are included in the Wassenaar Arrangement for Conventional Arms in order to create a level playing field for all companies affected.

Summary and outlook

The new 20th Regulation Amending the Foreign Trade and Payments Regulation simplifies the administrative procedures in foreign trade through digital procedures. In the future, a new administrative portal will allow all documents to be submitted online. The amendments also introduce the possibility for administrative acts to be enacted electronically in the future.

Dr Christian von Wistinghausen
Prof. Dr Rainer Bierwagen

Overview of the most relevant features:

• Qualified consumer organizations can bring similar claims of consumers against a company by means of an action for redress.
• Qualified entities from EU member states can also bring cross-border actions for redress before German courts.
• Companies with less than ten employees and an annual turnover below EUR 2 million may join an action for redress in the same way as consumers.
• In order to bring an action for redress at least 50 consumers have to be potentially affected. Consumers must register their claims in a register. With the action for redress consumer organizations can directly sue for payment to consumers.
• The court can furthermore determine a collective total amount for all claims raised. Within the framework of an implementation procedure, a court-appointed trustee fulfils the claims of the concerned consumers out of this amount.

The new action for redress can significantly relieve the courts' workload in the coming years. This is to be welcomed. It will also make it easier for consumers to pursue their claims. Whether organizations and consumers will accept the action for redress as a new option for legal protection will be seen in the course of the next few years.

Dr. Ralf Hafner
Tobias Pörnbacher

Facts of the case

At a meeting of shareholders, to which the majority shareholder concerned was not properly invited, the remaining shareholders adopted a resolution to withdraw the shares of the majority shareholder. In a subsequent shareholder meeting, it was decided the remaining shareholdings should be increased. Following these shareholder meetings, the company submitted a new list of shareholders to the register court: it only listed the remaining shareholders.

According to § 16 (1) of the Act on Limited Liability Companies (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG), the entry of the new shareholder list in the commercial register effectively executes the resolution of shareholders because only the shareholder list in the commercial register acts as a (de facto) appointment of shareholders who can exercise certain rights (legitimisation effect).

The District Court of Berlin (Landgericht) granted the requested interim relief and required the respondent company to continue to treat the (excluded) majority shareholder as a shareholder. Further, the company was required to generate a shareholder list which showed the status quo without the withdrawal of shares and to submit this list to the register court.

The District Court of Berlin (judgment of 21 December 2022 in Case No. 96 O 30/22) and the Court of Appeal (Kammergericht, KG, judgment of 17 May 2023 in Case No. 23 U 14/23) confirmed the interim measures.

Background

Considering the duration of proceedings for an action for annulment or positive declarative, interim measures can have enormous significance, especially for defective resolutions. Without the option of granting an interim injunction, particularly after the adoption of a resolution (such as on a dismissal), the challenged resolution would have to be treated as effective, at least for a preliminary period. On average, many years pass before a judgment on the organisation will be effective. Nevertheless, the interim injunction will not mean that the resolution is declared void, it will just suspend the implementation of the resolution.

Fundamentally, the interim injunction should only preliminarily review the shareholder list. To the extent that the company attempts to deliberately undermine the shareholder’s possible legal protections by immediately submitting a new shareholder list to the responsible register court, there will be, in exceptional cases, a claim for the register of the corrected shareholder list, which shows the status quo without the (suspected unlawful) resolution, in addition to the ban on the submission of a changed shareholder list. This claim for abatement or removal is the extension of preventative injunctive relief against the registration of a newly configured shareholder list.

In this respect, the interim relief is more wide-reaching than the registration of an appeal. An appeal against registration in the commercial register will only protect against the bona fide acquisition of shares under § 16 (3) of the GmbHG, but not against the treatment as a non-shareholder. If the respondent is ordered to continue to treat the applicant as a shareholder and to submit a corrected shareholder list, the former shareholder list will effectively continue to apply until the final judgment of the Court.

According to the judgment of the Court of Appeal, the registration of the shareholder list with the ousted shareholder will constitute the necessary grounds for the grant of an interim injunction under §§ 935 and 940 of the Code of Civil Procedure (Zivilprozessordnung, ZPO). The fact that the shareholder can no longer exercise their shareholder rights due to the deletion constitutes a significant disadvantage that must be averted, within the meaning of § 940 of the ZPO. The remaining shareholders could otherwise use the duration of the main proceedings to generate advantages for themselves due to the legitimation effect of § 16 (1) of the GmbHG and to restructure the company as they see fit. All resolutions adopted while the judgment in the main proceeding is pending would remain effective even if the shareholder wins. Resolutions amending the articles of association or the corporate structure, adopted under the changed power structures, can either no longer be reversed or can only be reversed with disproportionate effort from the majority shareholder.

Where the requirements are met, the shareholder may be entitled to damages from their fellow shareholders. In the case of unlawful removal from the company and the immediate submission of a new shareholder list to the register court, such a claim could arise under § 826 of the Civil Code (BGB). Use of a formal legal position conveyed by the newly registered shareholder list should be viewed as damage inflicted in a manner offending common decency (see Judgment of the Federal Court of Justice (Bürgerliches Gesetzbuch, BGH) of 6 December 2022 in Case No. II ZR 187/21).

Comments

The judgment of the Court of Appeal represents a change to the jurisprudence of the higher courts on the question of interim protection against shareholder resolutions.

A shareholder, who fears that they might be removed from the company, can apply for an interim injunction in the run-up to the shareholder meeting. Where a shareholder meeting already took place, resulting in the (unlawful) removal of the shareholder, the shareholder can seek an interim injunction against the entry of the new shareholder list in the commercial register. Moreover, under the new case law of the Court of Appeal, the company may be ordered to submit a corrected shareholder list to the register court for registration in the commercial register.

Tassilo Klesen
Silke Ricken

1. Disputes in the area of intellectual property, copyright and under the Act against unfair competition (Gesetz gegen unlauteren Wettbewerb) shall not be brought before a commercial court (Sec. 119b (1) s. 2 GVG (new)).
2. If a third party is involved in the legal dispute, it shall no longer be possible to change the language of the proceedings from English to German. The third party may request for an interpreter (Sec. 184a (4) GVG (new)).
3. A third party may also be included in the proceedings by means of a legal document in English. The third party may object the service of this document within two weeks only if he or she does not understand English (Sec. 616 (1) ZPO (new)).
4. In addition to enforceable court decisions, it shall now be possible to translate settlement agreements pursuant to Sec. 794 (1) No. 1 ZPO into German. A translation shall only be made upon the request of a party (Sec. 617 (1), (2) ZPO (new)).
5. It should also be possible to refer a legal dispute to a commercial court if the jurisdiction of a commercial court is only established by a counterclaim or an extension of the statement of claim (Sec. 620 (2) ZPO (new)).
6. The commercial court at first instance shall agree with the parties as early as possible in an organisation meeting on the organisation and conduct of the proceedings. These agreements are to gain in greater significance through the application of Sec. 224, 296 and 356 ZPO (Sec. 621 sentence 2 ZPO (new)).

Among other things, the limit of EUR 1 million for the amount in dispute, which was already provided in the draft bill, and the possibility for the Federal Court of Justice to continue the proceedings in German at its own discretion have been retained. Thus, the Federal Government's draft retains two provisions that could reduce the attractiveness of the commercial courts. It remains to be seen whether further proposed amendments will be incorporated into the bill in the upcoming parliamentary process in the German Federal Parliament (Bundestag) and Federal Council (Bundesrat).

Tobias Pörnbacher
 

Christina Weinzierl

Damages from cartel fines and cartel damages claims

If hardcore cartel infringements lead to fining procedures, companies can face significant fines of up to ten percent of the worldwide group turnover. Fines in the hundreds of millions or even billions are therefore almost commonplace. Once fining procedures conclude, further danger looms. Companies that have suffered damage as a result of the infringement can claim compensation for that damage. Cartel damages claims do not have any upper limit, the participants in the cartel are joint and severally liable, and interest applies from the time the damage first occurred. In practice, cartel damages claims often significantly exceed the fines imposed.

Recourse from board members and managing directors who participated in the cartel?

In such cases, companies regularly face the question of whether they can – or even must - seek recourse personally from board members or managing directors that participated in the cartel infringement or breached their supervisory duties for the damages caused by the fines against the company or even for cartel damages claims. In line with the “ARAG Garmenbeck” case, the supervisory board of a stock corporation must independently examine whether cartel damages claims against the company can be enforced against directors. If the supervisory board concludes that the company has enforceable damages claims, the board must pursue these claims unless there are strong reasons in the interests of the company not to do so. Indeed, the personal assets of board members will often not be sufficient to offset the damages caused. However, D&O insurance and the D&O insurer can reduce any liability gap.

For a claim against managing directors and board members and, indirectly, against their D&O insurers to be successful, the board must be personally liable for any antitrust fines imposed on and cartel damages claims awarded against their company. This is a matter of some debate in Germany, and the highest courts have not yet decided the issue. The courts of first instance have had differing views on this issue: the District Courts in Düsseldorf (railway track cartel), Saarbrucken (sanitary cartel) and Düsseldorf (stainless steel) objected to directors being personally liable for antitrust fines against companies. Meanwhile, in an indicative ruling (Hinweisbeschluss), the District Court in Dortmund (railway track cartel) took a different view.

Judgment of the Higher Regional Court in Düsseldorf of 27 July 2023

In its judgment of 27 July 2023, the Higher Regional Court (Oberlandesgericht, OLG) in Düsseldorf confirmed the lower court judgment and – like the District Court in Düsseldorf – held that recourse could not be sought for antitrust fines against companies. Essentially, a company must pay any fine against it to fulfil the fine's preventative purpose. If companies could pass fines on to managing directors and board members, companies could escape their legal responsibility for cartel infringements in the form of fines. The OLG Düsseldorf also rejected the possibility for companies to seek recourse for their fact-finding and defence costs due to the close practical link these costs had to the fines on the company. In contrast, the Court confirmed that managing directors and board members could be found personally liable for damages caused to the company by compensation payments to parties injured by the cartel.

The OLG Düsseldorf has allowed the appeal, paving the way for the German Federal Court of Justice (Bundesgerichtshof, BGH) to clarify this controversial issue of law.

Comments and practical tip

The judgment of the OLG Düsseldorf is persuasive only in certain aspects. If members of company organs were to be found personal liable, it would contradict the preventative purpose of fining companies under antitrust law and is therefore ruled out. In contrast, the position of the OLG Düsseldorf on the ability to seek recourse from directors and board members for damages suffered by a company for compensation paid for cartel damages is not convincing. The Court overlooks the special nature of cartel damages claims law - influenced by EU law. In enacting § 33a of the Act Against Restraints of Competition (GWB), German legislators created an “effective system of civil law sanctions” with “significant deterrent effect,” also to implement EU antitrust law. Subsequently, the BGH recognised the preventative purpose of cartel damages claims and even held that this purpose takes priority over compensation considerations (rail train cartel IV). Accordingly, cartel damages claims and antitrust fines must have the same treatment: both serve preventative purposes. This preventative purpose would not be served if the fine and/or settlement could be shifted to a managing director or board member.

The practical importance of this legal question is significant. Directly at stake is the obligation to assess whether recourse can be sought from board members and, where the chances of success are favourable, to pursue these claims. Indirectly, it affects not “only” whether such risks can be insured, but also the possibility to grant amnesty to board members in order to ensure their cooperation within the framework of the leniency programme. This is particularly important under antitrust law and in practice. It also affects the possible binding effect of the fining decision in regress litigation and the relationship between recourse claims and direct claims against board members for fines under administrative law (§§ 9 and 130 of the Act on Regulatory Offences, OWiG) or compensation (§ 826 Civil Code, BGB).

Moreover, the question of whether recourse can be sought from board members for fines against companies arises not only in antitrust law but also, for example, under data protection law, the Act on Due Diligence in the Supply Chain and capital markets law.

Regardless of how the BGH finally answers this question: managing directors and board members will avoid liability risks if they comply with their compliance obligations and can provide evidence of this – often years later – through careful documentation. If a director or officer has not breached their duties, the company will have no grounds to seek recourse from them, even if the BGH affirms that companies can generally seek recourse for fines and compensation payments.

Dr Christian Heinichen
Dr Moritz Jenne

Facts of the case

In the case before the OLG Karlsruhe, the supervisory board of a large SE requested that the court remove one of its members for good cause. The supervisory board member in question was also an employee of the company and had served as the union representative on the supervisory board since 2019. At the same time, he was chairman of the works council.

A whistleblower report contained a suspicion that a colleague of the supervisory board member, who was also a member of the works council, often cut work without applying for leave over several years. As part of the internal investigation into these suspicions, the supervisory board member manipulated emails and documents in which the accused colleague (supposedly) sent his apology for not being at works council meetings because he was on “leave”. The supervisory board member later admitted this conduct to the supervisory board and justified his manipulation with the argument that he wanted to help his colleague.

The company terminated the employment relationship of the supervisory board member extraordinarily. In addition, the supervisory board applied to the registry court to have the supervisory board member removed from office for good cause under Art. 9 (1) (c) ii) of the SE Regulation (SE-Verordnung) and § 103 (3) first sentence of the Stock Corporation Act (AktG). The register court granted the application and removed the supervisory board member from office for good cause. The supervisory board member appealed to the OLG Karlsruhe.

The judgment

The Higher Regional Court in Karlsruhe confirmed the judgment of the register court and affirmed that there was good cause on the part of the supervisory board member.

There will be good cause on the part of the supervisory board member when, based on the circumstances of the case and upon the carrying out of a balancing of interests, it would be unreasonable for the supervisory board member to remain on the board until the end of his term of office. This will be the case especially when the functioning of the supervisory board would be considerably impaired, or it could be expected to cause other damage to the company. Above all, the question is what significance the reasons used in this specific case for the dismissal have for the interests of the company in a functioning supervisory board. It should be noted that the supervisory board exercises its mandate in the interests of the company, and the interests of supervisory board members must, therefore, take a back seat to company interests.

In addition, there will not only be good cause when the supervisory board member breaches his duties on the board. It is sufficient for dismissal for good cause – regardless of whether the conduct was in the exercise of his board duties or otherwise – if and to the extent that the conduct of the supervisory board member has specific adverse effects

(i) for the course of business or
(ii) on the reputation of the company or
(iii) that would jeopardise the trust and cooperation within the supervisory board.

This would also apply to purely private misconduct. For good cause based on conduct, there must only be an apparent connection to the work of the supervisory board. The connection between the work of the supervisory board and the conduct constituting good cause will suffice if the conduct affects the company. This will be the case, for example, when the conduct threatens to damage the reputation of the company. It is also sufficient if one could conclude from the misconduct that the supervisory board member is not suited to serve on the board and/or there is at least an actual connection between the misconduct and the activities of the supervisory board.

Even a conflict of duties (the supervisory board member was also the chairman of the works council) neither eliminates the breach of duty as such nor means the conduct is less serious and no longer constitutes good cause. It is not possible to split the conduct of a person.

Measured against this standard, the supervisory board member destroyed the company's trust in his personal integrity and reliability and proved that he is unsuited to exercise the company’s interests in the functioning supervision of the board as a supervisory board member. Consequently, there was good cause in this case.

Comments

In its judgment, the OLG Karlsruhe provided clear standards for the dismissal from office as a supervisory board member for good cause by the register court. The judgment provides an important guide for practice. In particular, the Court determined with welcome clarity that misconduct outside of the actions of the board and even purely private misconduct can constitute good cause for the dismissal of a supervisory board member. At the same time, the OLG Karlsruhe made it clear that not just any misstep outside of the activities of the board would suffice for good cause. Misconduct must affect the company, which can hold true in particular where the misconduct would damage the reputation of the company. This includes the interests of the company in the personal integrity of the members of the supervisory board.

Supervisory board members should be aware that, in their exposed position, they primarily serve the interests of the company. In this respect, there is no clear split between the sphere of their activities for the supervisory board and other activities for the company (such as a member of the works council) and, in some cases, even conduct in the private sphere. Accordingly, misconduct outside of the activities of the supervisory board can constitute good cause for dismissal.
Dr Moritz Jenne
Jennifer Wulf

Background

The judgment of the German Federal Court of Justice (Bundesgerichtshof, BGH) of 26 November 2020 on whether and to what extent the UN Convention on the International Sale of Goods (CISG) applied to arbitration agreements caused significant legal uncertainty. The Court looked closely at the formal requirements for the effective agreement of an arbitration clause and the conditions for integrating the General Terms and Conditions (CTGs) into the contract under the CISG. In this respect, the BGH confirmed its previous jurisprudence that, under the CISG, the CTGs must be sent or otherwise made available to the other party for them to be considered a component of the contract. In contrast to German law, the mere possibility to obtain the CTGs, such as by clicking on a link on the seller’s homepage, is insufficient. This is particularly important when the CTGs contain an arbitration clause. The BGH leaves the question of whether and to what extent the governing law selected by the parties in a contract also determines the law applicable to the arbitration clause (so-called arbitration statute). The French Cour de cassation answered this question in its judgment of 28 September 2022 and assessed the effectiveness of the arbitration clause – contrary to the English court that was also involved in the same case – based on French substantive law.

1. The German perspective: Judgment of the BGH of 26 November 2020 in Case No. I ZR 245/19

Brief facts of the case

The BGH was asked to decide on an objection to the application of an arbitration agreement under § 1032 (1) of the Civil Process Code (Zivilprozessordnung, ZPO). Under this provision, the defendant has until the start of the oral proceedings before the state court to file a plea that the claim is inadmissible and the court does not have jurisdiction because an arbitration agreement determines that the dispute must be decided by a court of arbitration.

Two companies located in Germany and the Netherlands had a dispute about compensation claims arising with respect to a sale and purchase agreement for goods. The contract was formed from orders from the purchaser and a document entitled “Contract of Sale” (Verkaufskontrakt), in which the seller, a spice trader located in the Netherlands, confirmed the order. The confirmation letter noted that all sales and contracts were subject to the General Terms and Conditions of Sale and Delivery. However, the purchaser was not sent these GTCs. The terms of the Dutch Association of Spice Trade (“NVS-Bedingungen”) were also not enclosed. The NVS Bedingungen contained a choice of law clause that subjected the contract to Dutch law, without application of the UN CISG, as well as an arbitration clause in favour of an arbitration court of the Dutch association in Amsterdam.

The District Court (Landgericht) issued a default judgment in written pre-trial proceedings, which the defendant appealed. In the appeal, the defendant raised the arbitration agreement. The Court dismissed the claim as inadmissible because it held arbitration clause in the NVS Bedingungen effectively formed part of the contract. The claimant appealed. The Court of Appeal held that the plea that an arbitration agreement existed was groundless so that the claim before the District Court was admissible. It referred the case back to the District Court. On further appeal to the BGH, admitted by the Appeal Court, the defendant sought to preserve the judgment of the District Court dismissing the claim.

The BGH confirmed the judgment of the Court of Appeal. The defendant’s second appeal was unsuccessful.

The judgement of the BGH of 26 November 2020 in case no. I ZR 245/19

The BGH held that the action before the District Court was admissible. In accordance with § 1032 (1) of the ZPO, the defendant could not rely on the arbitration agreement because the arbitration agreement was not effectively agreed. Under § 1025 (2) of the ZPO, § 1032 of the ZPO is also applicable where the place of arbitration is in another country, in this case, the Netherlands.

Raising the plea that an arbitration provision applied before the start of the oral hearing

The plea that the court did not have jurisdiction because of an arbitration agreement was raised before the start of the oral hearing. Through the objection to the default judgment, the proceedings reverted to the status before the defendant’s default. The plea that an arbitration agreement applied, first raised in the statement of opposition (Einspruchsschrift), was thus not delayed under § 1032 (1) of the ZPO and not precluded. The objection does not have to be raised within the deadline for the statement of defence.

Form requirements for an arbitration agreement

Under Art. II (1) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Arbitration Convention), any arbitration agreement must be in writing. In accordance with Art. II (2) of the New York Arbitration Convention, this includes an arbitration clause in a contract signed by both parties or an exchange of letters between the parties. A unilateral declaration, such as the confirmation letter signed by just one party in this case, is not sufficient.

Under the most-favoured-nation principle (see Art. VII (1) of the New York Arbitration Convention), an arbitration agreement can also be effective when the national or substantive law selected by national conflict of law rules applies fewer demands and is, therefore, more favourable. This was not the case here.

The form requirements for an arbitration agreement under § 1031 of the ZPO are also not fulfilled. Under § 1031 (2) and (3) of the ZPO, a reference to a document containing an arbitration clause shall suffice (here: the NVS-Bedingungen). This does not apply here because the arbitration clause was not effectively included in the contract.

The conditions for effectively making an arbitration clause in the GTCs part of the contract

The BGH held that the question of whether the arbitration clause was effectively part of the contract must be assessed under the UN CISG. As both Germany and the Netherlands are signatories to the CISG, the parties to the contract for the supply of goods have their registered office in a contracting state. Therefore, the UN CISG applies pursuant to Art. 1 (1) (a) of the CISG. Accordingly, for GTCs – here the arbitration clause – to effectively form part of a contract they must be provided to the other party or otherwise made accessible. This was not the case here. The arbitration clause, therefore, was not an integral part of the contract.

2. The French perspective: the judgment of the Cour de cassation of 28 September 2022 in Case No. 20-20.260

Brief facts of the case

In 2001, a Lebanese company, Kabab-Ji concluded a Master Franchise Agreement with a Kuwaiti company, Al-Homaizi Foodstuff Co (AHFC). The agreement licenced the use of the “Kabab-Ji” brand in Kuwait and provided for the agreement of individual contracts for each point of sale over ten years. The agreement expired in 2011 and the parties did not extend it. During the term of the agreement, AHFC was restructured and a holding company, Kout Food Group (KFG) was established. The franchisor, Kabab-Ji approved the restructuring in 2004, expressly agreeing that the restructuring would not otherwise affect the conditions agreed in the contracts between the parties. The Master Franchise Agreement contained a governing law clause selecting English law, as well as an arbitration clause selecting the rules of arbitration of the International Chamber of Commerce (ICC), located in Paris. However, the agreement did not contain a clear choice of law provision concerning the law applicable to the arbitration agreement.
 
In 2015, the franchisor commenced arbitration proceedings against KFG, the successor of the original contracting party. It alleged that the Kuwaiti master franchisee had not performed its contractual obligations and used the acquired know-how without authorisation to develop its own restaurants. An arbitration award from 2017 sentenced KFG to pay compensation to the franchisor, Kabab-Ji.  While Kabab-Ji (unsuccessfully) commenced proceedings before the English courts to enforce the arbitration award, KFG filed an action for annulment of the arbitration award in France. KFG appealed the judgment of the Paris appeal court (Cour d’appel de Paris), which confirmed the arbitration award, to the Cour de cassation. In particular, KFG accused the Appellate Court court of not using English law to assess the effectiveness and applicability of the arbitration clause, despite the governing law clause in the contract between Kabab-Ji and AHFC.

Judgement of the cour de cassation of 28 September 2022 in case no. 20-20.260

The Cour de cassation confirmed its jurisprudence on the law applicable to arbitration clauses. Accordingly, an arbitration clause should be considered independently from the rest of the agreement. The effectiveness of such a clause primarily depends on the common will of the parties. The governing law clause contained in the agreement does not offer any cause to also apply the governing law clause to the arbitration clause. If the parties do not agree on a specific choice of law clause, under French international private law, any conflict of law connection is not considered; instead the material provisions developed under international arbitration law apply.

These material provisions grant the arbitration courts broad powers. This includes the possibility to extend the arbitration clause (extension d’une convention d’arbitrage). Accordingly, an arbitration agreement can apply to a legal dispute between parties, which have not signed the agreement. This requires the parties to have taken part in the contractual negotiations, to have influenced them, or for there to be some other way that their agreement to the arbitration agreement can be determined. The arbitration court, therefore, had the right – based on this material provision – to assume jurisdiction.

3. Comment

Arbitration awards are internationally recognised and enforceable under the New York Arbitration Convention. Arbitration clauses are therefore often used in international supply agreements to avoid the hurdles of recognition and the enforcement of awards before state courts in countries outside the European Union, where the rules are not uniform. For the arbitration clause to be effective and fulfil its function in the case of a dispute, a few things must be kept in mind when using GTCs. Where the UN CISG applies, strict requirements apply to the inclusion of GTCs in agreements: the GTCs must actually be sent to the foreign contracting partner. A reference to the ability to view the CTGs online via a link on the homepage of the vendor may be sufficient under German law but is not sufficient under the CISG. In addition, the CTGs must either be in the common language of the contract and negotiations between the parties, or they must be in the native language of the recipient. If a German purchaser corresponds with a French vendor in French, for example, CTGs in English will not fulfil these requirements. English is not recognised as the universal contract language everyone must master. Neither the CTGs nor any arbitration clause they contain has effectively been made part of the contract.

The law applicable to the arbitration clause requires a separate connection, i.e., it will be determined separately. The law applicable to the rest of the contract does not necessarily apply. In the past, the BGH also applied the law selected in the governing law clause to the arbitration agreement; the BGH expressly left this decision open in the current case. In the Kabab-Ji case, the Court de cassation held that the arbitration agreement is generally not covered by the law applicable to the rest of the agreement in line with the governing law clause. The English court took a different view and refused to enforce the French arbitration award. In cases of doubt, therefore, international agreements should contain an arbitration agreement that expressly states which law applies to the arbitration agreement. 

Dr Birgit Münchbach
Etienne Sprösser

What to do if you want to prevent your counterparty from starting or continuing legal proceedings in a foreign country? There might be good use for an anti-suit injunction. These injunctions could become even more relevant after Brexit. In the following we will briefly explain the fundamentals of these injunctions and show what is happening in the UK after Brexit. Recent developments in France and Germany show that there could be also some new measures against these injunctions. In any event, an anti-suit injunction should always be considered in a cross-border dispute: On the one hand as a measure to prevent proceedings outside the chosen jurisdiction for proceedings and on the other hand regarding the consequences and defence against a potential anti-suit injunction.

Anti-suit injunctions are by no means new. The concept of anti-suit injunctions has a long history, dating back to the period from the Norman Conquest (1066) to the reign of Henry III (1261-1272), which witnessed the inception and growth of the common law administered by the King's Justices. Inter alia, the Court of Chancery granted commonly injunctions to refrain proceedings before the Courts of Common Law. Injunctions have been issued to both, parties and counsels.

What is an anti-suit injunction?

In a nutshell, an anti-suit injunction is a judicial order that restrains one party from initiating or continuing a lawsuit in another court or jurisdiction. This action is typically taken against the applicant in an ongoing lawsuit and the primary aim of it is to prevent the party from initiating parallel or continuing concurrent proceedings in one or several different jurisdiction(s). In the common law countries, in particular, anti-suit injunctions are widespread. They are often used to prevent so-called ‘forum shopping’, where a party deliberately chooses a jurisdiction that seems more favourable to its position.

Considering pre-Brexit, the recast Brussels I Regulation prohibited intra-EU anti-suit injunctions. Specifically, English courts were unable to grant such injunctions if another EU Member State had jurisdiction over the dispute. However, Brexit has revived the issue of anti-suit injunctions in English courts concerning disputes already before EU Member State courts.

Anti-suit injunctions can be particularly helpful in situations where a party is attempting to initiate or continue proceedings in a foreign court that could potentially affect the jurisdiction and sovereignty of other courts. This could jeopardize the right to effective legal protection. For instance, a party might seek an anti-suit injunction to prevent the other party from disregarding an arbitration agreement by turning to a state court in a foreign country. In such cases an English court could also order an anti-suit injunction. In general, anti-suit injunctions are used to protect the choice of arbitration or choice of jurisdiction clauses.

Anti-suit injunctions in the EU - before Brexit

Before Brexit it was quite clear that - even regarding the UK - an anti-suit injunction regarding another EU-member state was not admissible. The legal basis for an anti-suit injunction in the UK was and is Sec. 37 (1) Supreme Court Act 1981. This provision remained unchanged since its introduction. The competence to issue injunctions in general and anti-suit injunctions, in particular, is also acknowledged for arbitral tribunals under Sec. 44 (1), (2) (e) Arbitration Act 1996. Under the Brussels Regime both, an anti-suit injunction to support a jurisdiction or an arbitration clause was not admissible. The European Court of Justice decided in 2004 (C-159/02 Turner v Grovit [2004] ECR I-3565) that " the Convention is to be interpreted as precluding the grant of an injunction whereby a court of a Contracting State prohibits a party to proceedings pending before it from commencing or continuing legal proceedings before a court of another Contracting State, even where that party is acting in bad faith with a view to frustrating the existing proceedings." This consequence was based on the principle of mutual trust between the courts of EU-members states laid down in the Brussels I Regulation.

The European Court of Justice, furthermore, outlined in 2009 (Case 185/07 Allianz v West Tankers [2009] ECR I-00663) that the same rationale applies regarding anti-suit injunctions which were directed to support arbitration clauses. Such an anti-suit injunction undermines the effectiveness of the general regime in the Brussels I Regulation. Since 31 December 2020 this rationale does not apply anymore.

The return of the anti-suit injunction? - First decision after Brexit

For the post Brexit times the opinions diverged as to whether the UK will revert again to the anti-suit injunctions. Two recent judgments show what will be the standard now. The decision of the UK not to implement the Brussels I Regulation recast and the respective EU case law into domestic law gave already an indication. In general, the EU legislation in the form of the English language version was brought under certain premises into domestic law pursuant Sec. 3 of the European Union (Withdrawal) Act 2018. Even EU case law could be included in the transfer into domestic law. However, the UK decided to exclude the Regulation (EU) No 1215/2012, i.e. the (recast) Brussels Regulation in Regulation 89 of the Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019. Hence, the mutual trust between EU-Member states regarding courts and jurisdiction could no longer be applied to the UK decisions. The UK decided to bring the courts of EU-Member states down to the same level of trust like any other foreign court.

The consequence of this decision can be illustrated with the judgments Ebury Partners Belgium SA/NV v Technical Touch BV & Anor [2022] EWHC 2927 (Comm) of 18 November 2022 and QBE Europe SA/NV and another v Generali España de Seguros y Reaseguros [2022] EWHC 2062 (Comm) of 1 August 2022. While Ebury v Technical Touch concerns jurisdiction agreements in (i) the terms and conditions and (ii) a personal guarantee and indemnity in favour of the English courts between two Belgian companies, QBE v. Generali relates to a dispute resolution clause with reference to arbitration in London.

The initial proceedings in Ebury v Technical Touch started in Belgium concerning the validity of the agreements between the parties. The respondent of the Belgium proceedings brought the issue to England and asked for an anti-suit injunction. In essence the reasoning for the request was a potential breach of the jurisdiction agreement in favour of the English courts. The court considered, inter alia, the probability of the incorporation of an agreement on jurisdiction in the contract.

The legal situation concerning QBE v. Generali was a little more complicated as the anti-suit injunction related to an insurance contract. The proceedings in Spain were directed between the insurance company of harmed and the at-fault party. Under Spanish law a decision in such proceedings may be directly enforced against the insurer. As the insurance contract included the arbitration clause and the proceedings in Spain concerned a quasi-contractual relationship, since the respondent's insurer was not actually a party to the underlying policy that contained the arbitration agreement. Nevertheless, the court granted an anti-suit injunction in favour of the arbitration clause.

Both judgments referred to the key principles for granting anti-suit injunctions (QBE v. Generali, para 10; Ebury v Technical Touch, para 20). Following these principles, "the injunction applicant must establish with a "high degree of probability" that there is an arbitration or jurisdiction agreement which governs the dispute in question". The injunction will be granted if the defendant has not presented "strong reasons to refuse the relief". The defendant bears the burden of proof for these strong reasons.

Regarding the "high degree of probability" component, in the case Ebury v Technical Touch it was enough "to demonstrate that the jurisdiction clause contained in standard terms was incorporated into the agreement between the parties" (Ebury v Technical Touch, para 23). Meanwhile, in the case QBE v. Generali, there was direct arbitration agreement between parties, however according to English law, the court follows a similar approach as it would in a regular contractual arbitration agreement. Thus, in the second case, abovementioned component was satisfied, because defendant was seeking to advance claims, that essentially amounted to an attempt to enforce contractual rights within the insurance policy (QBE v. Generali, para 16).

These two judgments set out what can be expected in future regarding anti-suit injunctions concerning proceedings in EU-Member states. Moreover, parties based in EU Member States should consider the potential consequences of initiating legal proceedings in EU Member State courts when they have entered into contracts that include an exclusive jurisdiction clause favouring the courts of England and Wales, or an English law arbitration clause.

How to defend against anti-suit injunctions? - The era of anti-suit injunctions?

Anti-suit injunctions from the UK or any other country outside the EU can be an impediment for proceedings in courts of EU-Member states. A new and competitive approach could be anti-anti-suit injunctions. These injunctions are directed against the party that requests for an anti-suit injunction in another jurisdiction. An anti-anti-suit injunction orders the applicant of the anti-suit injunction to refrain from commencing anti-suit injunction proceedings. Anti-anti suit injunctions have been granted in France and Germany in specific circumstances. A judgment of March 2020 by the Court of Appeal of Paris granted an anti-anti-suit injunction concerning the application for an anti-suit injunction in the US.

Two recent German decisions had also relations to US proceedings for anti-suit injunctions. The anti-anti-suit injunctions were awarded by the Higher Regional Court of Hamm on 2 May 2023 and by the Higher Regional Court of Munich on 12 December 2019. The Higher Regional Court of Munich decided in a overall patent related dispute between Continental and Nokia (judgment of 12 December 2019 – 6 U 5042/19; English summary here). The Higher Regional Court of Hamm decided in relation to enforcement proceedings of an investment arbitration award (judgment of 2 May 2023 – 9 W 15/23). The party seeking for an anti-suit injunction in the US tried to prevent the other party from claiming before the Regional Court of Essen. The proceedings in Essen were directed at prohibiting an enforcement of the arbitration award outside Europe. The legal basis for the authority to render anti-anti-suit injunctions derives from substantive law and not, as in the UK, from a procedural principle. The right that might be violated by the party seeking for an anti-suit injunction is the entitlement to justice (Justizgewährleistungsanspruch). This fundamental right is laid down in Art. 19 (4) of the German Constitution. Even though the German courts are not capable to render anti-suit injunctions concerning proceedings in EU-Member states, the substantive law gives the parties the opportunity to prevent anti-suit injunctions in non-EU jurisdictions with requests for anti-anti-suit injunctions.

What's next? - Case by case decision

The essence of the German judgments is that it is possible to successfully apply for anti-anti-suit injunctions in Germany. An anti-anti-suit injunction can be a direct answer to the opposing party's attempt to obtain an anti-suit injunction abroad. Whether this approach will be successful or what other measures could also be used, has to be determined on a case by case basis. Brexit and the recent decisions of UK courts make it likely that anti-suit injunctions and the question of how to respond will be more relevant in the future. This highly complicated assessment of the right measures has to be done by the parties in short notice. The breach of an anti-suit injunction or anti-anti-suit injunction could be quite expensive due to potential orders for a fine against the party. The breach of an injunction in Germany can be fined with up to EUR 250,000.00 for each breach. Other countries might have even higher fines.

Christina Weinzierl
Dr. Tobias Pörnbacher
Alexander Braun

The ECJ ruling of July 16, 2020 and its impact

The European Court of Justice (ECJ) had ruled in the so-called "Schrems II" judgment in July 2020 that the so-called EU-US Privacy Shield, which until then had served in practice as the most important mechanism for data transfers to the U.S., was ineffective (we reported in our Privacy Ticker July 2020). Since then, there has been major uncertainty as to whether and under what conditions data transfers to the U.S. were still legally possible. The ruling thus had significant implications for transatlantic data exchange. This applied above all, but not only, to the use of popular online services such as Google and Facebook. The ECJ had argued that data privacy standards in the U.S. were inadequate, in particular due to the excessive powers of the U.S. intelligence services, and that European citizens were not adequately protected against government surveillance and misuse of data. The ECJ also criticized the lack of effective legal protection for EU citizens in the U.S. with regard to their data protection rights.

Alternative safeguards for data transfers, such as the conclusion of standard contractual clauses ("SCCs") or even obtaining consent for data transfers to third countries, especially the U.S., remained highly controversial and always carried a certain risk of not being able to hold up under judicial review or of incurring a substantial fine from a data protection authority.

The EU-US Data Privacy Framework as a solution

After the EU Commission and the U.S. government announced in March 2022 that they had agreed in principle on a legal framework for transatlantic data transfers, the EU Commission has finally issued the long-awaited adequacy decision for the EU-US Data Privacy Framework ("Data Privacy Framework"). In doing so, it is responding to the ECJ's objections in the "Schrems II" ruling and once again certifies that the U.S. has an adequate level of data protection within the meaning of the GDPR, but this time under certain conditions.

Similar to the former "Privacy Shield", the Data Privacy Framework is based on a system of certification. US organizations and companies can commit to compliance with the so-called EU-US Data Privacy Framework Principles, which are based on the principles of the GDPR, as well as other principles issued by the US Department of Commerce. The U.S. Department of Commerce will also publish a list on the Internet, similar to the former "Privacy Shield", listing the organizations and companies certified under the Data Privacy Framework.

In order to certify (or recertify on an annual basis) under the Data Privacy Framework, organizations and companies must publicly commit to compliance with the above principles, make their privacy policies available, and fully implement them. As part of their certification application, they must submit various other information to the U.S. Department of Com-merce. These include their organization, a description of the purposes for which personal data is processed, the personal data covered by the certification, and the chosen method of review, the relevant independent complaint mechanism, and finally the relevant enforcement authority. Organizations and businesses can only receive and process personal data based on the Data Privacy Framework from the time they are added to the U.S. Department of Commerce's Data Privacy Framework list. To ensure legal certainty and to avoid organiza-tions or companies falsely claiming to be certified, when they first become certified, they may not publicly reference their compliance with the Principles or their certification until the U.S. Department of Commerce has determined that the relevant certification application is complete and the organization or company has been added to the list. To continue to rely on the Data Privacy Framework as a transfer mechanism, annual recertification must be conducted.

What do companies in the EU need to be aware of?

Unfortunately, the mere existence of the adequacy decision or the Data Privacy Framework does not yet mean that companies located in the EU or the EEA can now directly base their data transfers on it. This is because the respective US company to which the data is to be transferred must first be certified and published in the Data Privacy Framework list. This is likely to take some time, as the US companies must first implement the principles and comply with the requirements described above.
When the time comes, the privacy policies of the companies transferring data may have to be adapted, as they are likely to rely on mechanisms other than the adequacy decision with regard to data transfers to the U.S. so far. However, the privacy policy must always mention the existence or absence of an adequacy decision by the Commission in the case of data transfers to third countries (Art. 13 (1) (f) GDPR).

Conclusion and prospects

The EU Commission's adequacy decision for the time being ends a long period of legal uncertainty for the transfer of personal data to the US. Provided that the conditions de-scribed above are met, the decision is likely to lead to significant simplifications in the legal assessment and implementation of lawful U.S. data transfers in practice. However, the Data Privacy Framework has also immediately received harsh criticism because it allegedly deviates too little from the Privacy Shield, which has already failed before the ECJ, and therefore does not offer any real protection for the personal data of EU citizens in the US. So, it remains to be seen how long this agreement will last this time. For the time being, however, many companies based in the EU or EEA that regularly want or need to transfer data to the U.S. can breathe a sigh of relief until the next ECJ ruling on this topic.

Fabian Eckstein

On 25th of June 2023, the deadline for implementation of the EU Directive on representative actions for the protection of the collective interests of consumers expired. On 7th of July 2023, the last session day before the summer recess, the German Bundestag adopted the draft law on Consumer Rights Enforcement Act with the votes of the government factions, against the votes of the CDU/CSU and AFD, while the faction Die Linke abstained from voting.

In our blog, we have already reported on the preliminary draft (blog post of February 17, 2023), the government's draft (blog post of March 31, 2023), and the hearing in the Legal Affairs Committee (blog post of May 11, 2023).

The Consumer Rights Enforcement Act introduces a new form of collective action, the action for redress by qualified entities, and incorporates the provisions of the model declaratory action from the Code of Civil Procedure. The Federal Government expects that the action for redress will provide relief to citizens, the economy, and particularly the courts. The aim is to replace 22,500 individual actions by 15 actions for redress.

"Who Can Sue and How?" - Qualified Entities and Actions for Redress

An action for redress is a lawsuit filed by qualified entities on behalf of a multitude of consumers against companies in civil law disputes. Small companies with fewer than ten employees and an annual turnover or balance sheet total below EUR 2 million shall be considered to be consumers under the scope of this act. Qualified consumer organizations and entities registered in the corresponding European Union register shall have the right to initiate actions for redress. Qualified consumer organizations must (i) not derive more than 5% of their funding from companies and (ii) be listed in the register pursuant to Sec. 4 of the Act on Injunctive Relief (Unterlassungsklagegesetz). The qualified entities, along with the register for representative actions, must publish about actions for redress and inform consumers about how they can participate. An injunctive measure shall only be admissible if it is comprehensibly demonstrated that claims from at least 50 consumers may be affected.

The Consumer Rights Enforcement Act restricts the financing of an action for redress by third parties. The financing must be independent of the success of the action and the company sued. It must be disclosed to the court at the time of filing, along with the agreements made.

An action for redress can be directed either towards providing payment or performance to the affected consumers or towards the payment of a collective sum. The claims asserted by the consumers must be substantially similar. Substantially similar facts and issues of fact and law that are relevant to the decision are decisive. Consumers must register their claims in the register for representative actions. Registration is even possible up to three weeks after the conclusion of the oral hearing.

The Higher Regional Court at the registered seat of the company concerned is competent for any action for redress. An appeal on points of law is provided for by law without the need for admission in the judgment.

"What does a litigation procedure end with?" - Judgment, Redress Judgment on Liability, Settlement and Final Redress Judgment

As a rule, an action for redress shall end with a judgment, settlement or final redress judgment. Prior to a final redress judgment, a redress judgment on liability is issued. A redress judgment on liability shall be issued if an action for redress is substantiated on the merits and not directed towards providing payment to a consumer. A redress judgment on liability shall contain specific requirements for consumer eligibility and the proof of eligibility to be provided for this purpose.

If a collective sum is awarded, the judgment must include either the amount per eligible consumer or the method for determining the individual amounts due.

If a redress judgment on liability is initially rendered, the parties may be requested by the court to submit written settlement proposals.

If no settlement is reached, the procedure concludes with a final redress judgment.

"How do consumers obtain their money?" - The Implementation Procedure

The action for redress is followed by the implementation procedure. If the collective total amount determined is insufficient, it can be increased on request. The competent court for the action for redress shall remain competent for the implementation proceedings. A trustee is appointed to implement the judgment. In the process, an implementation fund is set up into which the determined amounts are to be paid. The trustee fulfills legitimate consumer claims from this implementation fund. Only consumers who have validly registered their claims with the register for representative actions may participate in the implementation procedure.

The trustee examines the claims of participating consumers and determines their eligibility based on the specific requirements and evidence established in the judgment. Consumers or companies can file an objection against the trustee's decision. The final decision on the objection is made by the court. The implementation procedure concludes with the trustee's final report, which is reviewed by the court. The termination of the implementation procedure is determined by a court decision. In individual cases where a consumer's claim has not been positively considered in the implementation procedure, the option of subsequent individual litigation against the company remains available.

"Unnecessary or innovative?" - Outlook into the Future

The German government hopes that the action for redress and the Consumer Rights Enforcement Act will make it easier for consumers to assert their claims. This is expected to significantly alleviate the burden on the judiciary. The jurisdiction of the Higher Regional Courts, applying the rules for firstinstance proceedings before the Regional Courts, effectively limits the admissible legal remedies to appeals on point of law. In all cases, at the very least, appeals are permitted. However, there is no further legal remedy for decisions by the Higher Regional Court on objection in the implementation procedure.

In particular, the latest amendments in the Committee on Legal Affairs will influence the dynamic picture of the action for redress in the future. Qualified entities need only to demonstrate that 50 consumers may be affected and need not to elaborate on actual affectedness. Small companies, like consumers, can participate as affected parties in representative actions and actions for redress. The ability to register for the representative action even after the oral hearing will influence consumer behavior.

The coming years will show whether the new representative action will be accepted by practitioners and whether the Consumer Rights Enforcement Act will achieve the anticipated effects.

Dr Ralf Hafner
Tobias Pörnbacher

According to the Regional Court of Berlin, a corporation in the UK, for instance. a private company limited by shares (Ltd.) or a public company limited by shares (PLC), which still has its administrative seat in Germany, is subject to the German "seat theory". Its substantive legal consequence is the classification as a private partnership company / sole trader and thus the personal liability of the shareholders. Therefore, the shareholders of the UK corporation may be sued directly or a judicial title (like a judgment) already obtained against the UK corporation can be transferred to the shareholder(s) of the UK cooperation without the need for further evidence to enforce the judicial title against the shareholder(s).

Application of the Seat Theory to UK companies

Under German international company law, the so-called "seat theory" applies: the applicable company law is determined by the actual administrative seat of a company. In Germany, an exception is made to the "seat theory" for reasons of European law. The European Court of Justice had ruled in several cases that the application of the seat theory to companies from EU member states that follow the incorporation theory violates the freedom of establishment. In the UK, the incorporation theory applies: Following the incorporation theory the applicable company law is solely determined by the law in which the company was incorporated. Therefore, during the UK's membership in the EU, the Limited and PLC were recognised in Germany as a corporation with the corresponding English law limitation of liability even if it had its registered office in Germany.

After the end of the transitional period on 31 December 2020, the legal form of the Limited. and PLC as such no longer exists in Germany. However, these company forms are not a legal nullity in Germany. Rather, they will be treated as a legally responsible company - depending on its form under German company law, for instance as a OHG, GbR (variants of private partnership companies with direct liability) or sole trader (if there is only one shareholder). The Limited or PLC therefore will carry on a "double life" as under UK law registered company and as a private partnership company or sole trader under German Law. In the case decided by the Regional Court of Berlin, the Limited consisted of only one shareholder, thus, from a German law perspective, it continued to exist as a sole trader company. This also results in the personal liability of the shareholder.

The Regional Court of Berlin came to this conclusion by applying and confirming the "seat theory". The aforementioned case law of the European Court of Justice on the application of the incorporation theory does not apply to third countries, which – post Brexit – also affects now the United Kingdom. The application of the incorporation theory is also not regulated under any state treaty. In particular, the Trade and Cooperation Agreement between the EU and the UK does not establish a freedom of establishment as granted in the EU. The protection of legitimate expectations does not hinder the application of the seat theory either, since a conversion of the Limited into a recognised legal form was possible during the transition period and since no confidence in the perpetual existence could arise anyway due to the withdrawal clause of Art. 50 TEU. Although there are isolated dissenting opinions in the literature on this issue, at present the aforementioned application of the seat theory in relation to UK corporations should be still applicable.

Material Legal Consequence of the Seat Theory

Consequently, a UK corporation that still holds its administrative seat in Germany, will now be treated as a sole trader or private partnership company (GbR or OHG) in Germany.

Therefore, a direct liability of the shareholders is possible in Germany.

There may be a considerable liability risk here that one may not have in mind. It is highly recommended to deal with this if the constellation of a UK corporation and an actual administrative seat in Germany exists. This is clearly illustrated by the example of the insolvency administrator of Air Berlin PLC who is suing Clearstream Banking AG as registered shareholder of Air Berlin PLC in the shareholders' register for approximately EUR 500 million in front of the Regional Court of Frankfurt. A decision in this matter has not yet been made, but this again clearly shows the explosive nature of this complex of issues.

Procedural Implications

Since the shareholders could be personally liable for the company's debts in Germany, they can also be sued directly before a German court for fulfilment of the respective debt.

If a title has already been obtained before the end of the transitional period, i.e. before 31 December 2020, as in the case of the Regional Court of Berlin, the conversion into a private partnership company/sole trader is not seen as a genuine legal succession pursuant to sec. 727 of the German Code of Civil Procedure. The foreign company is converted ex lege according to the modified "seat theory". As a consequence, a legal succession clause is issued for the enforcement order without further proof, which can then be enforced against the shareholder. The non-application of sec. 727 of the German Code of Civil Procedure thus simplifies the enforcement procedure against the shareholder, making the whole topic even more important.

Christina Weinzierl
Dr. Tobias Pörnbacher
Alexander Braun

1. What are the risks under the Product Liability Directive?

1.1 Draft Product Liability Directive

On 28 September 2022, the European Commission published a proposal for a new product liability directive (Product Liability Directive). The proposal foresees stricter rules for manufacturers, quasi-manufacturers, importers, authorised representatives, fulfilment providers, retailers, and operators of online marketplaces in the EEA. You can find a detailed introduction to the Directive in a post by André Depping and Katharina Pöhls.

1.2 Wider scope

The new Directive will extend the personal and material scope of the current Directive and apply the thumbscrews much more tightly for entrepreneurs.

Under the current Directive, only manufacturers, quasi-manufacturers, and importers active in the EEA are strictly liable for defective products. The new draft extends the potential defendants to include authorised representatives of the manufacturer, fulfilment providers, retailers, and, under certain conditions, even operators of online marketplaces. Companies that substantially modify a product will also be liable when the modified product is defective and causes damage. In this case, the statute of limitations will restart. 
The proposal expands the scope of products covered by the Directive to include software and digital production files, such as data for 3D printers. It will also include products integrated into another product (such as navigation systems).

1.3 Defectiveness and digital components

In addition, products will be considered defective when they fall short of the safety standards the public expects. That is why product safety law standards will be taken into account when determining whether a product is defective. Increasingly, the focus is on cybersecurity. As a result, software may need updating where possible. 

1.4 Start of the Statue of Limitations

The proposal also changes the start of the statute of limitations under product liability law. In the future, placing the product on the market will not alone be decisive; the possibility to control the product after it is placed on the market will also be considered. This meshes with the relevant monitoring and maintenance obligations. The M&A process must give special consideration to this change to the statute of limitations particularly when performing due diligence.

1.5 Relaxing the burden of proof and discovery

Further, the burden of proof is extended to help claimants with presumptions when there is an obvious defect in the product under normal use. In addition, there is an obligation to provide any evidence the claimant needs to assert their claims, such as construction documents or documentation about the monitoring of the product placed on the market.

1.6 Extension of the type of compensatable damage

Further, an important aspect of the draft is the expanded definition of damage, which now includes the loss and corruption of data and removes the thresholds for maximum liability and excess. Liability for digital products will continue to apply where the software was defective when it was placed on the market and can later be remedied by a software update.

2. Which protective instruments are there?

Product liability can play a significant role, especially in the automotive, food, and consumer goods industries due to the high level of damages and the effect on the company’s reputation. The risk is extremely industry-specific and depends on both product and location. The increasing impact of the Product Liability Directive on the digital sector should not be underestimated either.

The following outlines the options available in M&A transactions to protect against claims under product liability law.

2.1 Provisions in the sale and purchase agreement (or share purchase agreement)

The vendor’s representations and warranties (“guarantees”) are a central element of the sale and purchase agreement and are often the focus of negotiations. The interests here are essentially clear: while the vendor would prefer to provide as few guarantees as possible, the purchaser has an interest in obtaining as many guarantees for as many aspects as possible from the vendor so that the purchaser can turn to the vendor for any undisclosed risks.

As product liability can present a significant risk for companies – depending on the sector –vendors normally provide guarantees for claims under product liability law in the contract. However, guarantees usually protect against unknown risks, while specific indemnities distribute known risks. Any circumstances relevant to the guarantees the vendor discloses to the purchaser prior to the conclusion of the contract are typically excluded from the warranty.

A far-reaching product liability guarantee, which ensures the economic risks for all products produced and distributed up to closing remain with the vendor, would protect the vendor against such risks under product liability law.

Variations are also conceivable, where the vendor only guarantees that there are no further product liability cases other than those known and disclosed. In so doing, the risk of dormant product liability claims would transfer to the purchaser. This is then a variation of a limited product liability guarantee.

To the extent that the parties negotiate a product liability guarantee, it is advisable to agree to a longer limitation period for product liability because such cases generally only arise after a delay.

The target company’s reserves for product liability cases must also be considered. The amount of any reserves influences more than the purchase price; where the built-up reserves are appropriate, the vendor may not assume a guarantee in product liability cases.

Where specific indemnities are provided, the question is to what extent they cover product liability claims. Specific indemnities generally only release the vendor where the parties are aware of all the risks of the target company, but there are uncertainties concerning the claims arising and the amount of any claims. Normally, the vendor will indemnify the purchaser against all tax claims and environmental damage. In contrast, such indemnification rarely – in fact, almost never – applies to product liability.

Finally, a due diligence assessment of the target company can help identify existing or imminent product liability risks. The results of the assessment form the basis of product liability representations and warranties and/or indemnities in the sale and purchase agreement. While it is not always possible to predict the extent of product liability from the technical assessment of the products produced or placed on the market, legal due diligence of customer agreements can help better assess the product liability risks. Primarily, the assessor identifies the contracts with the most important customers and analyses the relevant contractual clauses. The following aspects are of particular importance:

• Is the description of the product or service sufficiently specific to avoid uncertainty in cases of breach of contract?
• Do customer contracts contain a limitation of liability?
• Have any clauses limiting liability been effectively agreed and would they withstand judicial scrutiny in the case of dispute?
• Has the target company assumed strict liability product guarantees and, if so, for what period?
• Does the contract cover serial damage?
• Special attention should be paid to the general terms and conditions of the target company, as their effectiveness is subject to strict legal requirements. If the target company has concluded numerous consumer contracts, the hurdles for any limitations of liability in the general terms and conditions to be effective are particularly high. 
• With respect to the extension of the scope of personal use, the Product Liability Directive will also need to be assessed to see whether any significant adverse differences between the risks of liability borne by the target company and possible third-party claims exist.