An overview of the German law governing limited partnership companies with shares (Kommanditgesellschaft auf Aktien). The author outlines: the historical background, applicable rules of law, formation, structure, organisation and financial provisions of a KGaA

Wooldridge, Frank

English

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The GermanKommanditgesellschaft aufAktien (limited partnershipwith shares)by Frank WooldridgeHISTORICAL BACKGROUNDAlthough the German limited partnership with shares isno longer of much economic significance, it has aninteresting history and is subject to a rather complex legalregime. There are apparently about 100-200 such limitedpartnerships in Germany at present. A similar entity wasused in France during the eighteenth century tocircumvent the requirement then imposed under Frenchlaw of government consent for the formation of a company,and it is now possible to limit the liability of all themembers of a rather similar one, the Société en commandite àresponsabilité limitée which now exists in that country.Limited partnerships with shares came to be used inGermany in the nineteenth century, before they becameregulated by the Allgemeines Deutsches Handelgesetzbuch(General German Commercial Code) of 1861. TheKommanditgesellschaft auf Aktien (KGaA) became recognisedas a kind of public company in an early version of theGerman Commercial Code, and it was treated as havinglegal personality in accordance with the GermanAktiengesetze (statutes governing public companies) of 1937and that of 1965, where it is dealt with in Book 2 of thestatute.The KGaA has been defined in paragraph 178(1) AktG asa company which constitutes a separate legal entity, and inwhich at least one partner has unlimited liability to itscreditors, and which also has shareholders who are notpersonally liable for the obligations of the company(Kommanditaktionäre), but who participate in the sharecapital. Until recently it was a matter of controversywhether other companies such as the private limitedliability company or private limited liability companypartnership (GmbH and GmbH & Co KG) could be unlimitedpartners in a KGaA. This was held to be possible in adecision of the Supreme Court of 1997 (BGHZ 134, 392)even where there was no other unlimited partner.Furthermore, the Handelrechtsreformgesetz of 1998provided that the unlimited partner could be a privatecompany limited partnership (GmbH & Co KG). The resultof the above decision and legislation has been tosignificantly increase the number of KGaA, which at onetime appear to have fallen to as little as 20. The decline inthe use of this entity may have resulted from thecomplexity of the relevant legal regime and from thepersonal liability of the limited partner(s), which werefound unattractive by persons desiring to form a businessor engage in some other activity. The use of entities suchas the GmbH & Co KG, in which the GmbH & Co KG is apersonally liable partner and perhaps the only such partner,helps to escape from the disadvantages of unlimitedliability; the GmbH & Co KG is itself an entity which doesnot involve such liability. It is a limited partnership, inwhich the “unlimited” partner is a GmbH which has limitedliability.THE ROLE OF THE TWO TYPES OFMEMBER OF A KGaAThe personally liable members or Komplementäre in aKGaA have a role similar to that of the Komplementäre in alimited partnership (Kommanditsgesellschaft). The foundersof the KGaA may avoid personal liability by making use ofthe GmbH & Co KGaA mentioned in a previous paragraph.If they fail to do so, the unlimited partner will incurunlimited iability in accordance with paragraphs 161(2)and 128(2) of the Commercial Code. The Komplementäreare responsible for the management of the KGaA and itsrepresentation. Paragraph 283 of the German Aktiengesetzsets out a number of matters in respect of which the rulescontained in that law governing the management board(board of directors) of the public company shall apply byway of analogy to the general partners (personally liablepartners) in a KGaA. The position of theKommanditaktionäre (limited partner) in a KGaA is similar tothat of shareholders in a public company. Paragraph278(3) AktG thus provides that the provisions of Book 1 ofthe Aktiengesetz, paragraph 277 relating to the publiccompany shall apply by way of analogy to the partnershipAmicus Curiae Issue 83 Autumn 201025limited by shares, unless the provisions which follow it(governing the KGaA or the absence of a managementboard) otherwise dictate.APPLICABLE RULES OF LAWAccording to paragraph 278(2) AktG, the legalrelationships of the general (unlimited) partners betweenthemselves and with respect to the limited partners andthird parties, and in particular the authority of the generalpartners to manage the business and to represent thecompany, shall be governed by the provisions of theCommercial Code relating to limited partnerships. Thelatter rules are contained in paragraphs 161-78 of theCommercial Code. Paragraph 278(3) AktG provides thatthe provisions of paragraphs 1-277 AktG shall also apply byway of analogy to the KGaA, except where such applicationis excluded as a result of the rules contained in paragraphs279-90 AktG or by reason of the absence of a managementboard.The legal position of the limited partners is notregulated very clearly in the complex provisions ofparagraph 278(2) and paragraph 278(3) AktG. However, itfollows from paragraph 278(2) AktG that the relationshipbetween the body of limited partners (or shareholders) andthe unlimited partners is governed by the provisions of theCommercial Code governing limited partnership. Itappears that the administrative and property rights ofindividual unlimited partners are governed by Book 1(paragraph 1-277) of the Aktiengesetz, but where the rightsof such partners may only be exercised collectively they aregoverned by partnership law (See Kübler and Assmann,Gesellschaftsrecht, 6th ed, pub Müller, Heidelberg 2006,p255 in the present sense).THE FORMATION OF A KGaAParagraphs 23 and 280-282 AktG govern the formationof a KGaA. The relevant rules are similar to those whichconcern the formation of an AktG. The articles must beestablished by no less than five persons and take the formof a notarial deed. The latter must specify the par value ofshares which have such a par value, and the number ofshares in the case of an issue of no par value shares. Thedeed must also specify the usual price of the shares. Theremust be at least five founders on formation: however aKGaA is deemed still to exist if the membership falls belowfive, even if there is only one member. It will be necessaryto appoint members of the entity’s supervisory andmanagement boards as well as its auditors and to make thenecessary contributions in cash or in kind to it inaccordance with paragraphs 36a and 54(3) AktG.The limited partnership with shares (KGaA) comes intoexistence upon registration. According to paragraphs 214and 191(2) UmwG (Umwandlungesetz) it is possible totransform a personalistic company into a KGAa. Byparagraphs 226 and 245 UmwG, it is also possible totransform an AG or GmbH into a KGaA (see Kübler andAssmon, op cit p25).STRUCTURE AND ORGANISATIONThe structure of a KGaA is somewhat different from thatof a German public company. The partners who haveunlimited liability are (unlike the management board ofsuch a public company) not appointed by the supervisoryboard of the KGaA, but in accordance with its articles,which will require amendment when a new member of themanagement board is to be appointed or dismissed. Thearticles of the limited partnership with shares must containparticulars of each unlimited or general partner (paras23(3) and (4) AktG and 281(1) AktG).As the supervisory board does not appoint the unlimitedpartners who are responsible for the management of thecompany, its powers are reduced to those of an organwhich carries out the resolutions of the limited partnersunless the articles otherwise provide, and which representsthose partners in litigation (paras 287(1) and (2) AktG).The unlimited partners may not be members of thesupervisory board (para 287(3) AktG). The reduced role ofthe supervisory board also means that codetermination isof less significance in the KGaA which may be an incentiveto some entrepreneurs to make use of that entity.If the articles so provide, it is possible for the partnerswho have unlimited liability to participate in thedeliberations of the general meeting if they also hold shareswhich involve limited liability. According to paragraph285(2) AktG, the resolutions of the shareholders’ meetingshall require the consent of the general partners insofar asthey relate to matters which, in the case of a limitedpartnership, require the agreement of such generalpartners and the limited partners. Such consent may berequired by statute as is the case with the approval of theannual financial statements (para 286(1) AktG). Paragraph285(2) AktG also provides that the consent of the generalpartners shall not be required for the exercise of theauthority of the shareholders’ meeting or of a minority oflimited shareholders to appoint auditors or assert claims ofthe KGaA arising from its formation or management.By paragraph 284 AktG, a general partner may not,without the express consent of the other general partnersand the supervisory board, enter into transactions on hisor her own behalf or on behalf of another person in thecompany’s fields of business. The general partners arejointly and severally liable to creditors for partnershipobligations, in accordance with paragraphs 128 and 161(2)of the Commercial Code. Any agreement to the contraryhas no effect. Limitation periods for claims against generalpartners are set out in paragraphs 159 and 160 of theCommercial Code, and are made applicable to the KGaA byparagraph 161(2). The limited partners are not made liablefor obligations incurred by the partnership. However,paragraph 164 of the Code indicates that although theAmicus Curiae Issue 83 Autumn 201026limited partners are excluded from the management of theKGaA, they may object to an action by the general partnersif it is outside the scope of ordinary business.The general partners are bound by a duty of good faithtowards one another and towards the limited ones. Thelimited partners also owe a duty of good faith towards eachother, but this duty appears of less significance than thecorresponding duty owed by the general partners to oneanother. As already indicated, juristic persons may be generalpartners in a KGaA. Such persons would seem to include anypersonalistic company, such as a GmbH (private limitedliability company) or a GmbH & Co KG (private companylimited partnership). Such an entity may be the only generalpartner, or there may be other such general partners.A KGaA has three organs – the general partners, thegeneral meeting and the supervisory board. The generalpartners are responsible for the management andrepresentation of the KGaA; each one of them has thesepowers, as follows, from paragraph 278(2) AktG, togetherwith paragraphs 161(2), 113(1) and 125(1) of theCommercial Code. It is noteworthy that paragraph 283AktG stipulates that the provisions governing themanagement board of an AG (Aktiengesellschaft) with regardto 14 different matters shall apply by way of analogy to thegeneral partners. It is possible for the partnershipagreement of a KGaA to stipulate that the limitedpartnership with shares shall be represented by more thanone unlimited partner, or that a particular individual shallbe excluded from such representation. Such exclusionmay also indicate exclusion from the management. Thelimited partners are required to give their consent totransactions which are not associated with the operation ofthe business of the KGaA by paragraph 116i(2) of theCommercial Code, but this requirement may be excludedor modified by the partnership agreement.The partnership agreement may stipulate that thegeneral or managing partners may only act jointly. If it doesso, each business transaction requires the consent of all thegeneral partners, unless there is a risk of delay. Thisprovision, which is contained in paragraph 115(2) of theCommercial Code, may be modified by the partnershipagreement.The general meeting may be attended by all the limitedpartners (Kommanditaktionäre). If the general partnershold shares in the KGaA they may also attend such ameeting, but their voting rights will be restricted inaccordance with paragraph 285(1) AktG. They will not beable to exercise voting rights on behalf of themselves orother persons in relation to resolutions governing certainprescribed matters. The limited partners have, onrequest, the right to be informed by the general partnerson the affairs of the KGaA at a general meeting inaccordance with paragraph 131(1) AktG. The generalmeeting is also made responsible by paragraph 286(1)AktG for the establishment of the partnership’s accounts.Furthermore unless the partnership agreement providesotherwise, it follows from paragraph 278(2) AktG andparagraph 164 of the Commercial Code that it has to giveits consent to extraordinary transactions. In addition,paragraph 285(2) AktG stipulates that resolutions of thegeneral meeting shall require the consent of the generalpartners to the extent that they relate to matters which inthe case of a limited partnership require the agreement ofthe general and the limited partners.The supervisory board of a KGaA may be regarded as acontrolling and executive organ, which checks on thecarrying out of transactions and the implementation ofresolutions by the KGaA. It is evident that the supervisoryboard has a less significant role than that of an AG. Itcannot issue subordinate legal rules for the conduct ofbusiness management by the board, unless it is permittedto do so by the partnership agreement (see Kübler andAssmann, op cit, p 258 in this sense).It is unclear whether paragraph 111(4) AktG, whichprovides that the partnership agreement or the supervisoryboard may determine that specific kinds of transactionsmay be entered into only with the consent of thesupervisory board is applicable to the KGaA as well as tothe AG.PROVISIONS OF A FINANCIAL NATUREA KGaA is not only financed by the contributions of thelimited partners or shareholders, but also by contributionsmade by the unlimited or general partners: the latter arenot specifically required to make contributions, but may doso (paragraph 281(2) AktG). The capital provided by thelimited partners (Grundkapital) must amount to at least€10,000 (paras 278(3) and 7 AktG). Their shares may beissued as par value shares or no par value shares.Contributions made by the general partners are notgoverned by the rules contained in the Aktiengesetzconcerning the provision and maintenance of capital.Furthermore, the rules contained in paragraph 27(2) AktGconcerning contributions in kind are inapplicable to thegeneral partners: thus their contributions may consist ofthe obligation to provide services. The distribution ofprofits and losses between the general and limited partnersis governed by paragraph 121 of the Commercial Code,unless the partnership agreement provides otherwise,which is usually the case (see Kübler and Assmann, opcit,6th edition, p 259 in this sense). Paragraph 121 placesemphasis on the partners’ share in the capital.A KGaA may issue bonds or grant options to purchase itsshares, or have recourse to loans from its limited partners.If the latter persons are in a position to exercise influenceon the business of the KGaA, and thus to have responsibilityfor financing , they may incur liability in the event of therepayment of a loan made by them which has to beregarded as a substitute for capital. A KGaA may also obtainloans from its unlimited partners, who may become liableAmicus Curiae Issue 83 Autumn 20102728Amicus Curiae Issue 83 Autumn 2010in the same way. Such liability will be unlimited if therelevant partner is a natural person, but such liability maybe limited if the “unlimited” partner is an artificial personsuch as a GmbH.CODETERMINATIONThe KGaA is subject to the rules contained in theCodetermination Act of 1976, and those in the One-ThirdParticipation Act (Drittelbeteiligungsgesetz) of 2004. It is notsubject to the Codetermination Acts governing the coal,iron and steel industries because the legislature tookaccount of the fact that there were no KGaA in theseindustries. The Act of 1976 applies to KGaA whichregularly employ more than 2,000 persons, and requiresone half of the members of the Aufsichtsräten of such entitiesto consist of representatives of the employees. The Act of2004 applies to KGoA which employ at lest 500 persons,and requires one-third of the supervisory boards of suchentities to consist of representatives of the employees. Thepowers of the supervisory board are somewhat limited,and it is not empowered to appoint the members of theboard of management of a KGaA.Dr Frank WooldridgeClarification from author’s previous articleIn the author’s article “Duty of care and responsibilities ofthe management board of a German public company,”published in the Summer 2010 issue of Amicus Curiae, theauthor referred (at p 31) to section 172 of the CompaniesAct 2006. He would like to make it clear that theprovisions of section 172 do not involve a pluralisticapproach as they treat the members’ interests asparamount (see Gower and Davies, Principles of ModernCompany Law, 8th ed, Sweet & Maxwell, pp 508-10).

The German Kommanditgesellschaft auf Aktien (limited partnership with shares)

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