Founding Limited Companies (Ltds.) in Germany - Perspectives and Risks

Table of Contents

Table of Figures

Index of Abbreviations

Table of Annexes

Explanations on Vocabulary Issues

1. Introduction

2. History of Companies in Britain

3. Overview of English Types of Companies

4. Developments in EU Legislature
4.1. Background
4.1.1 Freedom of Establishment
4.1.2 Real Seat Theory
4.1.3 Incorporation Theory
4.2 Daily Mail
4.3 Centros
4.4 Überseering
4.5 Inspire Art
4.6 Intermediate Results

5. Establishment of a Limited
5.1 The Required Persons
5.2 The Process of Establishment
5.3 Management Bodies of the Limited
5.3.1 The Director or the Board of the Directors, respectively
5.3.2 The General Meeting
5.3.3 Company Secretary
5.4 Registered Office
5.5 Regulations on Capital
5.5.1 Raising the Limited`s Capital
5.5.2 Maintenance of the Limited`s Capital
5.5.2.1 Capital Reduction
5.5.2.2 Repurchase of Own Shares
5.5.2.3 Distributions to Shareholders
5.5.2.4 Governmental Supervision
5.6 Liability of Shareholders and Managing Directors
5.7 Transfer of Shares
5.8 Accounting, Audit and Disclosure in England
5.8.1 Accounting
5.8.2 Audit
5.8.3 Regulations on Disclosure
5.9 Taxation and Insolvency in England
5.9.1 Taxation in England
5.9.2 Insolvency in England

6. The German Branch Office as the Company`s Administrative Seat
6.1 The German Branch Office
6.2 Registration of the Branch Office
6.3 Permanent Representative
6.4 Liability in the Branch Office
6.4.1 “Kapitalerhaltungshaftung”
6.4.2 “Existenzvernichtungshaftung”
6.4.3 “Insolvenzantragspflicht” and “Insolvenzverschleppungshaftung“
6.5 “Mitbestimmung“
6.6 Transfer of Shares in the Branch Office
6.7 Accounting, Audit and Disclosure in the Branch Office
6.8 Taxation of the Branch Office in Germany
6.8.1 Taxation on the Limited`s Level
6.8.2 Taxation on the Shareholder`s Level
6.8.2.1 The Limited`s Distribution of Profits to Shareholders
6.8.2.2 Sale of Shares in the Limited
6.9 Insolvency of the Branch Office in Germany

7. Perspectives and Risks of Establishing a Limited in Germany
7.1 Advantages of the Limited Compared to the GmbH
7.2 Disadvantages and Risks of the Limited Compared to the GmbH
7.2.1 Current Costs
7.2.2 Legal Uncertainty
7.2.3 Creditworthiness
7.2.4 The German Register of Companies
7.2.5 Acceptancy
7.3 Chances and Perspectives of the Limited

8. Conclusion

Annex 1

Annex 2

Bibliography

Table of Figures

Fig. 1: Overview of English Company Types

Fig. 2: Flexibility of Capital Raising

Index of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Table of Annexes

Annex 1 Form 10 – First Directors and Secretary and Intended Situation of Registered Office

Annex 2 Form 12 – Declaration on Application for Registration

Explanations on Vocabulary Issues

In English company law, there are two general types of companies: partnerships and companies.

Actually, there are several meanings of the term ‘company’: the first one, generally speaking denotes the entire spectrum of associations that may be set up to do business. Thus, this comes closest to the German ”Gesellschaft”.

The second ‘company’ is most like the “Kapitalgesellschaft”. Its definition is narrower and therefore more clear. This points to those types of companies in English company law in which liability is limited to the investment made by the shareholder. In fact this is the main distinction of partnerships. Such businesses are called ‘limited liability companies’ in British English. The Companies Act 1985 regards the public limited company and the private limited company as two different variants, which have the same basic legal structure, as well as the same statutory requirements. There are just a few differences, the most prominent being the circle of shareholders. While this circle is restricted in the private company, this is not the case in the public company.

The German business forms of “GmbH” and “AG” are two distinctive legal forms in German company law. However, in their function and economic importance, the “GmbH” is practically the equivalent of the private company, while the “Aktiengesellschaft” (AG) is very similar to the public company (Güthoff 1993, 4).

In order to avoid misunderstandings in connection to the technical terms of this paper, I will briefly discuss a few key terms:

Company – in the broader sense [» Gesellschaft]

joint-stock company – historic, British English term for companies in which shareholders could invest, but did not yet have limited liability

Limited liability company – British English term for stock companies with limited liability [» Kapitalgesellschaft]

Public company, PLC – public limited company [» AG]; “AG” is used when the German “Aktiengesellschaft” is discussed

Limited, Ltd., LTD – private company limited by shares or private limited company, [» GmbH]; “GmbH” is used when the German “Gesellschaft mit beschränkter Haftung” is discussed

Several German technical terms have no English equivalent, mainly because these matters are not common in English law. The terms are explained in the text. The German term will then be used in the text to avoid inexact or misleading translations. The following terms provided as translations are merely constructs that, in my opinion, are pretty close to the overall meaning of the German term:

Existenzvernichtungshaftung » liability in case of destruction of existence

Insolvenzantragspflicht » duty to file for insolvency

Insolvenzverschleppungshaftung » liability due to obstruction of insolvency

Kapitalerhaltungshaftung » capital conservation liability

Mitbestimmung » workers’ co-determination

Eigenkapitalersatzregeln » concept of equitable subordination

kapitalersetzende Gesellschafterdarlehen » shareholder loans that replace equity capital

Kapitalersatzrecht » law on equitable subordination

1. Introduction

In a globalized Europe in which everything is merging together, especially the economies, and keeping pace with the rapid development of the Internet, one can ill afford not to take a look at the Limited company.

The English Limited seems to be an alternative to the German GmbH. In the course of groundbreaking decisions, made by the European Court of Justice, a new legal platform for economic activity is made available in Germany. So far, it seems to be an attractive one.

The fast and uncomplicated establishment of the company, as well as the rather liberal rules of capitalization, are typically perceived as advantages of the Limited compared to the German GmbH.

However, the limited – being a foreign type of company – is, first of all, an alien element in the German legal system (Just 2005, Preface).

There are many questions to be answered and there is, additionally, a certain amount of legal uncertainty to be reasoned with concerning the decision of whether or not to choose the limited over the German GmbH.

Also, the peculiarities, perspectives and risks of the limited are widely unknown to the general public.

The purpose of my work is to provide an analysis of how an English private company limited by shares based in Germany may offer an alternative to German forms of business organization for entrepreneurs. The perspectives and risks that come hand in hand with such an establishment will also be interpreted.

To begin with, I will shortly explain the history of British companies.

This is then followed, firstly, by an overview of the types of companies in England, and, secondly, the two types of businesses known to British company law in which liability may be limited to the paid-in company assets. A discussion of the new rulings of the European Court of Justice (ECJ), followed by the topics of freedom of establishment, incorporation theory and real seat theory are also presented. The next chapter explicitly examines establishment and management of the limited according to English company law. In general, a branch office of the foreign company is established to engage in business in Germany. This process, as well as the taxation and the applicability of German law on this branch office are discussed in the following section. The subsequent chapter focuses on the perspectives and risks, as well as the advantages and disadvantages of a limited operating in Germany, before a final conclusion is drawn.

2. History of Companies in Britain

The earliest ‘companies’ in British history were the medieval guilds and the livery companies of London. Essentially, they were trade associations that regulated the relevant issues in their respective professions, e.g. the wages of apprentices or quality standards for their products and merchandise.

Later on, the ages of Mercantilism and trade imperialism saw the emergence of the modern company’s precursors, at a time when risky but promising ventures needed extensive funding. It was, for instance, the search for a north-east passage to Asia that prompted the foundation of the first major English joint-stock trading company. This was the Muscovy (or Russia) Company, which was given a monopoly on the Russian trade (www.encyclopedia.com (a)). In 1568, the first inland joint-stock companies in England were founded. These were the Mines Royal and the Mineral and Battery (www.ex.ac.uk). As a financing model, the joint-stock company allowed companies to raise large amounts of capital and to lower the risk by spreading the capital over several ventures (http://en.wikipedia.org (a)).

Joint-Stock companies, as a type of business, flourished in Great Britain until the early 18th century when the country experienced a huge setback through the collapse of the South Sea Bubble. The South Sea Company set up a scheme to take over the country’s national debt in exchange for its own stocks, expecting to make a considerable profit in the transaction. The government’s approval resulted in a wave of speculation, and many dishonest, speculative ventures sprang up. When the bubble burst in 1720 thousands were ruined, among them members of the government (www.encyclopedia.com (b)). Consequently, Parliament passed the Bubble Act. It banned all joint-stock companies not authorized by royal charter, and prohibited the creation of any new joint-stock companies that did not have Parliament's expressive approval. The ban remained on the books for 105 years (http://en.wikipedia.org (b)).

As it was lifted in 1825, the concept of limited liability was introduced into legislation. However, this applied only to chartered companies.

The various types of modern companies in Britain today have their origins in the nineteenth century. William Gladstone is considered the true father of the modern company. As President of the Board of Trade, he introduced the Joint Stock Companies Act of 1844.

The acquisition of corporate personality was extremely difficult and expensive up to that time, since it could be achieved only by Royal Charter or under the provisions of a special Act of Parliament. The Joint Stock Companies Act now provided for the giving of corporate identity (incorporation) by registration.

The Act also clearly distinguished between companies and partnerships. However, it did not yet include the limitation of liability (www.hmrc.gov.uk (a)).

This was introduced by the Limited Liability Act of 1855, which allowed companies to limit the liability of their individual investors to the value of their shares. Beforehand, they stood to lose all their wealth in case the company was driven out of business. The curtailing of risk that was made possible by the act is evidently the basis for the increased investment in trade and industry in the second half of the 19th century (www.bbc.co.uk).

The full implications of the legislation on limited liability were recognised as late as 1897, in the decision of the House of Lords in Salomon v Salomon & Co Ltd. As a result of the Companies Act, ‘One-man’ companies became common for the first time, although the public regarded the founders of such companies to be hiding behind the façade of corporate identity, especially in the case of failure. The House of Lords reversed former decisions by the Court of first instance and the Court of Appeal stated that the business was the business of the company, and not of Salomon. This implied a clear legal distinction of the company and its subscribers. In other words, the company is not the agent of its members (www.hmrc.gov.uk (b)).

In 1862, the ‘modern’ company law was codified in the Companies Act of 1862, which is the forerunner of today’s Companies Act. It consolidated the important developments in legislation at that time (www.hmrc.gov.uk (c)).

Partnerships, besides joint-stock companies, constitute the second main group of company types. The Partnership Act of 1890 laid a cornerstone, providing the basis for the liability of the general partner, much like in German law. In 1907, the Limited Partnership Act followed, defining the rights and obligations of the limited partner (Scamell 1962, 799).

In 1908, the Companies Acts from 1862 to 1908 were consolidated and in 1929, a new Companies Act then consolidated the amendments of the 1908 legislation. Further amendments, but also new provisions were passed in 1948 and in 1967. In the 1970s and 1980s many reformations in company law were made in order to compete with the requirements of the European Community legislation (www.hmrc.gov.uk (d)).

Today, the applicable company law is the Companies Act 1985 and the updating legislation contained in the Companies Act 1989 (www.companieshouse.gov.uk (a)). In 2000, the Limited Liability Partnership Act introduced a further company type. The next chapter will provide an overview of the various forms.

3. Overview of English Types of Companies

There are a number of types of companies in English company law, such as, for example the partnership, the private limited company, the public limited company, the European Economic Interest Grouping, and the European public limited company, as well as companies by law or by concession to the crown (Just 2005, 2). The English company law divides its types of companies into sole proprietorships (single or sole Trader), partnerships, companies and special forms of organisation for certain lines of business (Güthoff 1993, 1 et seq.). The following figure offers an overview of English company types.

Fig.1: Overview of English Company Types

Abbildung in dieser Leseprobe nicht enthalten

Source: Triebel, Volker: Warum englische LTD oder PLC statt deutscher GmbH oder AG?, p.4

Partnerships and companies will now be the focus of attention.

There are two types of partnerships in English law, namely the general partnership and the limited partnership, which differ in the liability of their respective entrepreneurs. In the general partnership every partner is personally and unlimitedly liable. In the limited partnership on the contrary, the liability of one or more partner(s) - but not all - is restricted to the amount they have invested at the time of its establishment (Güthoff 1993, 1 et seq.).

The general partnership is an association of at least two persons that have the intention to realise profits through engaging in business activities. It is often compared to the German “Offene Handelsgesellschaft”, but is, in fact, not equal to it, since an engagement in business is not an explicit requirement of the general partnership (Güthoff 1993, 1 et seq.).

Due to the existence of general partners and limited partners, the limited partnership is, instead, regarded as equal to the German “Kommanditgesellschaft” (Güthoff 1993, 1 et seq.).

The limited partnerships in England have very little significance, for, in contrast to Germany, the legal requirements for the establishment of a limited liability company are relatively minimal. Therefore, even the smallest companies prefer limited liability companies as a type of business (Güthoff 1993, 1 et seq.).

The limited partnership is most often taken into account when individual partners merely want to invest their capital without having to assume the full liability for debts and liabilities of the company (Güthoff 1993, 52).

Among the types of companies known to British company law there are two types in which the liability can be restricted to the paid-in company assets (Dierksmeier 1997, 83). They are called “Private Company Limited by Shares“ and “Public Company Limited by Shares“. There are also “unlimited companies”, in which a partner’s liability is not limited and thus includes his private fortune.

The following abbreviations have gained acceptance in referring to the types of companies in which liability may be limited to paid-in business assets:

Abbildung in dieser Leseprobe nicht enthalten

The company capital is divided into shares in both company types. Therefore, they are both corporations.

The distinction lies in their respective shareholder circles, usually understood because of the labels “private“ and “public“. The Private Limited Company has a restricted circle of shareholders, whereas the shares of the Public Limited Company are free to be distributed to a broader public.

The British company law is regulated in the “Companies Act“. It applies to the LTD and the PLC. Special laws on forms of business organizations, such as the German “GmbH-Gesetz” [German Limited Liability Company Law] or the “Aktiengesetz” [German Stock Companies Act] are unknown. If one uses the shareholder number as a comparison criterion, the British and German companies may be characterized as follows:

Abbildung in dieser Leseprobe nicht enthalten

Essentially, the British PLC corresponds to a German “Aktiengesellschaft”. In economic terms, it is the most important company type in Great Britain (Güthoff 1993, 52). Public companies are obliged to fix a minimum share capital of £50,000. A quarter of its par value with premium is also supposed to be paid in immediately. However, working with this type of company outside of Great Britain makes sense only in individual terms. The implementation of the British LTD, on the other hand, closes a gap that has been left open in German company law. It offers a complete limitation of liability even to small businesses and entrepreneurs. A private Company is not subject to the regulations of the minimum share capital. Yet, it is illegal to sell its shares or debentures to the public. The company’s capital is provided privately, same as it is in a German GmbH (Triebel, Hodgson, Kellenter 1995, 216). A conversion of a private company into a public company, or vice versa, is possible at all times in Great Britain. As it is not mandatory to posses a minimum share capital and the legal requirements concerning its establishment are rather small, the LTD represents the prevalent type of company in Great Britain (Güthoff 1993, 52).

The Companies Act 1985^[1] has introduced the type of limitation of liability as an additional distinctive feature. Liability is, first of all, either limited by shares (as mentioned above) or, secondly, through a sum of guarantee.

In the case of a possible termination, the partners of a „Company Limited by Guarantee“ are only partly liable for the company’s debts. The amount is fixed in the Memorandum of Association^[2]. „Companies Limited by Guarantee“ are especially useful for activities in which profit-making is not directly intended, e.g. in non-profit organisations. (Just 2005, 3).

4. Developments in EU Legislature

4.1. Background

4.1.1 Freedom of Establishment

Articles 43 to 48 of the EC – Treaty regulate the freedom of establishment throughout the European Union. Freedom of establishment allows legal entities or companies to establish in a Member State of the EU, as long as a stable and permanent integration into the economy of the said state can be ensured. A legal entity is subject to this law if it has been established under the national law of a Member State, and if its head office is also situated in a Member State (http://de.wikipedia.org).

Hence, companies are allowed to carry out key economic activities in other Member States of the European Union.

Due to the considerable differences between the national company laws of different Member States concerning the provision and conservation of capital, the establishment, organisation and control of companies as well as the internal and external liability of the shareholders and the managing directors, and additionally the protective rules for creditors, investors and the market, one cannot speak of a common European company law (Horn 2004, 893). Through respective jurisdictions, the single EU member states have developed their own theories for the interpretation of the European Community Law. Especially those national company law arrangements, that are consistent with the Community Law have resulted in contradictory opinions, that currently are being discussed as real seat theory and incorporation theory.

4.1.2 Real Seat Theory

In Germany, the Articles of Association of a foreign company, which define its internal and external relations, were derived from the company law of the Member State in which the administrative seat (or real seat) of the company was located (Korts 2004, 26).

This approach was known under the term real seat theory and was applied by German jurisdiction until well into 2002. Companies that had been established under foreign law, but had their actual administrative seat in Germany, would not be registered and were thus not acknowledged as a legal entity in Germany. Besides Germany, France, Belgium, Luxembourg, Portugal and Greece also applied the real seat theory (Korts 2004, 27). The focus of the real seat theory lies in protective interests (Bayer 2003, 2358).

4.1.3 Incorporation Theory

The matter is somewhat different with the incorporation theory. The choice of which company law is to be applied is left up to the founders. This is possible by the nomination of a formal company domicile. The applicable law then depends on the location stated in the Articles of Association, or the location of registration (Vogel 2005, 212).

The headquarter’s location (real seat) is irrelevant in this context, meaning that it does not have to be the same location as the formal company domicile.

Nevertheless, certain connections to the law of the (host) state are being integrated, through which the state is granted minimum control, much like in the real seat theory. In Great Britain, for example, all companies are subject to rigid control rights in order to ensure the protection of creditors (Korts 2004, 27).

The incorporation theory has the advantage of a clear legal position and thus leads to stability and unlimited legal acknowledgement of the established company in all legal systems that follow this theory (Bayer 2003, 2358).

Advocates of the incorporation theory are Great Britain, Denmark, the Netherlands, Switzerland and Spain (Korts 2004, 27).

The European Court of Justice has reached several ground-breaking decisions concerning the incompatible views of the application of the common law. These decisions are further examined in detail.

4.2. Daily Mail

The “Daily Mail” act, called for by the ECJ on September 27, 1988 (ECJ 9.27.1988 – Case 81/87), tread the case of the Investment company “Daily Mail and General Trust PLC”, which had been established under English law, and – out of tax-related reasons – moved its formal seat to the Netherlands, while the actual administrative office and the statutory seat remained in Great Britain (Bayer 2003, 2359).

The investment company attempted to avoid the taxation of undisclosed reserves, which, according to British law, would have occurred in the subsequent selling of considerable parts of its assets, supposed to yield substantial capital gains (Bayer 2003, 2359). The English treasury denied the company the permission to relocate. This was later acknowledged by the ECJ.

This confirmed the opinion of the German jurisdiction that proclaimed that the real seat theory was to be applied with companies that had been established in other EU Member States as well (Bayer 2003, 2360).

Literally, the ECJ stated:

[...] unlike natural persons, companies are creatures of the law and, in the present state of Community law, creatures of national law. They exist only by virtue of the varying national legislation which determines their incorporation and functioning. (ECJ, 9.27.1988 – Case 81/87)

“Articles 52 and 58 of the Treaty [now Arts. 43, 48 EC], properly construed, confer no right on a company incorporated under the legislation of a Member State and having its registered office there to transfer its central management and control to another Member State.“ (ECJ, 9.27.1988 – Case 81/87)

“Daily Mail“ was a case of relocation from one state which applied the incorporation theory (Great Britain) to another state (the Netherlands). This meant that the question of consistency of the real seat theory with the Common European Law was not even at issue. This fact had been noticed in Germany, but was not considered to be of much importance (Bayer 2003, 2360).

4.3 Centros

As a result of the outcome of the March 9th, 1999 “Centros” case (ECJ, 3.9.1999 – Case C- 212/97), the ECJ considered the registration denial of an English company’s branch office in Denmark to be an unjustified restriction of the freedom of establishment as provided by the Community Law (Korts 2004, 28).

As a matter of reference, it is the following that led to this decision: A Danish couple established and registered a private limited company in Great Britain, naming it “Centros Ltd.”. However, the company’s subscribed capital of £100 was not paid in, as the English law does not require this (Korts 2004, 28).

The plan was to not get involved in any business in Great Britain, but rather to do business exclusively in Denmark (Bayer 2003, 2360). By establishing a Limited in Great Britain, the Danish company law would be avoided, since it required a minimum share capital of DKK 200,000 when founding a company with limited liability (Korts 2004, 28).

However, the Danish authorities were “not amused” and denied registration of the business as a branch office, claiming that it was, in fact, not a branch, but a main office. Therefore, the business had to meet the requirements of the Danish company law and, in particular, those concerning the minimum share capital (Bayer 2003, 2360).

According to the freedom of establishment, Articles 43 and 48 of the EC - Treaty, the ECJ then forbade the Danish authorities the denial of registration (Vogel 2005, 212).

According to the ECJ, the freedom of establishment was restricted because a company that has supposedly transferred to another Member State would then become subject to the state’s company law, which was unknown and perhaps even stricter. The Company would, consequently, have to be newly established following the regulations of the host Member State.

Through this ruling, the freedom of establishment was expanded. From this time onward, it also included dummy foreign companies (Horn 2004, 895). Furthermore, it stated that the assessment of possible abuse has to be carried out with loyalty to the Common law, rather than to the respective national law.

The ECJ also took a stand as to how far restrictions of the freedom of establishment are justifiable. The following four cumulative requirements were, however, not fulfilled in this particular case. The requirements are as follows: measures “are to be applied in a non-discriminating manner, […] be justified by mandatory reasons of public interest, […and] be suitable for reaching the pursued aim. […Furthermore,] they should not exceed what is necessary in reaching this aim” (Probst, Kleinert 2003, 1268). This “four-criteria-test” has gained recognition under the name of “Gebhardt-Formula”.

By virtue of the “Centros-ruling”, the ECJ has withdrawn the basis for the real seat theory that had been applied in German jurisdiction, even if only for cases of a company transfer to a country, and not for cases of transfers from a country (Vogel 2005, 212).

4.4 Überseering

With the “Überseering”– decision of November 5th, 2002 (ECJ, 11.5.2002 – Case C-208/00), the ECJ granted full legal capacities and suability after home law to a Dutch company whose main administrative office was located in Germany (Triebel, von Hase 2003, 2409).

The said case concerned a company that was registered in the Netherlands as “Besloten Vennootschap” (BV) (Überseering B.V.), which carried out business from Düsseldorf. When the company raised claims of guarantee against a building contractor, it was told that it did not have legal capacity or suability. The courts’ rationale was that the company’s substantial seat was in Germany and thus it was subject to German company law. However, it had failed to meet the applicable German regulations of establishment and, therefore, did not exist in legal terms (Vogel 2005, 212). Restrictions of transfers away from a country did not play a role in this decision, since the Netherlands do not recognize such restrictions. The only restrictions that were examined by the ECJ were transfer restrictions to a country. The decision, then, was that it is a violation of the freedom of establishment, as guaranteed by articles 43 and 48 of the EC - Treaty, for another Member State to not acknowledge the legal capacity and suability of a company it is entitled to by law of establishment (Triebel, von Hase 2003, 2409).

The ECJ’s decision made it clear that all legal systems of the European Union are fundamentally respectable and of equal value (Korts 2004, 35).

The ECJ made up for the delimitation to “Daily Mail”. The explanations in “Daily Mail” concerning possible restrictions to transfers from a country were delimitated from restrictions to transfers to a country (Bayer 2003, 2361).

4.5 Inspire Art

A further step that opened the way for freedom of establishment in Europe was undertaken by the ECJ’s ruling in the case „Inspire Art“ of September 30th, 2003 (ECJ, 9.30.2003 – Case C-167/01).

Following the verdicts in the “Centros” and “Überseering” cases, the ECJ ruled in favour of companies’ freedom of establishment for the third time in five years. As a result, the ECJ allowed for unrestricted competition between the different types of companies in Europe Wachter 2004, 89 (a)). Therefore, every European company is free to do business in its state of domicile, and that unaltered, according to the law of its State of establishment, which is based upon the freedom of establishment provided by the Treaty. This also accounts for any case in which there may be stricter requirements to capital resource in the State of domicile than in the State of establishment (Riedemann 2004, 345).

The “Inspire Art” case is about a limited established in Great Britain that sold art pieces and supplies. A few days after incorporation, it took up business in the Netherlands - the same place as the sole director’s domicile, who registered the firm’s branch office with the Amsterdam Chamber of Commerce (Kersting, Schindler 2003, 621). However, the branch office was registered without the rider that it was formally a foreign company. This rider would have been necessary, according to the “Wet op de formeel buitenlandse vennootschappen” (WFBV, Law about formally foreign companys and dummy foreign companies, respectively) as of December 17th, 1997 (Staatsblad 1997 Nr. 697).

In spite of repeated requests by the Chamber of Commerce, the company failed to register this adjunct. Thus, the ECJ had to decide whether the Dutch law on dummy foreign companies was compatible with the European freedom of establishment.

Though the Netherlands was fundamentally clinging to the incorporation theory, they enacted the WFBV in order to avoid the passing-by of mandatory regulations of the Dutch company law by the establishment of foreign companies (Wachter 2004, 89 (a)).

Accordingly, all foreign companies are deemed dummy foreign companies if they run their entire, or biggest part of, the business in the Netherlands, without being in possession of any substantial connections to the State that they were established in (Wachter 2004, 89 (a)).

According to law, registration should depend on the following criteria:

1. Registration as a “formally foreign company”,

2. Mention of the date of the first registration and information on the sole shareholder in the register,

3. The characteristic of being a formally foreign company is to be mentioned on all documents,

4. The subscribed capital has to be at least the same amount as the minimum capital that is mandatory for Dutch limited companies, which is €18,000, and

5. Personal liability of the managing director for the debt of the company as soon as the company does not dispose of the required capital either at the time of establishment or at a later date (Maul, Schmidt 2003, 2297).

Finally, the ECJ ruled that it was irrelevant to the application of the freedom of establishment why someone would found a company in another Member State, or where it conducts its business (Korts 2004, 40).

Moreover, the required additional registration and the adjunct on the business letters and documents of the company were more than what was necessary (Wachter 2004, 90 (a)).

Additionally, the regulations of the WFBV are an impediment to the freedom of establishment, since they result in the imperative application of Dutch company law, concerning the minimum capital and liability of the managing directors, to foreign companies, such as Inspire Art Ltd (Korts 2004, 40).

Justifications for the limitations of the freedom of establishment were not recognized by the ECJ, as national law may impose limitations only in the following cases:

1. For the protection of creditors,
2. for the integrity of commerce,
3. in the prevention of an abuse of the freedom of establishment,
4. in the fight of fraud,
5. for the effectiveness of tax controls,
6. in the protection of public law and order (Wachter 2004, 90 (a)).

4.6 Intermediate Results

Correctly already since the Überseering ruling, but at the latest since Inspire Art, the ECJ has refused each and every limitation of possibilities to move into a country for companies that have been established inside the EU. Therefore, the real seat theory has become obsolete, while the ECJ took a fundamental stand in favour of the incorporation theory in the cases of company transfers to other Member States (Bayer 2003, 2363).

In this context, Probst und Kleinert advocate protective mechanisms which EU-lawmakers should implement for all states, in order to prevent abuse, passing-by and dummy firms (Probst, Kleinert 2003, 1268).

The previous German custom of considering foreign companies as “offene Handelsgesellschaften”, or “Gesellschaften bürgerlichen Rechts”, respectively, has become obsolete due to the ECJ’s decision. Foreign limited liability companies are to be acknowledged as such in Germany (Just 2005, 5).

However, the influence of the law of incorporation can only be considered from the scope of the EC - Treaty and the EEA - Agreement. Meanwhile, in relation to third-party states, the common law tie of the actual administrative seat of the company remains as long as there are no intergovernmental treaties to the contrary (von Bernstorff 2004, 500).

It must be mentioned that the ECJ, because of its ruling in the case “de Lasteyrie du Saillant” of March 11th, 2004 (ECJ, 3.11.2004 – Case C-9/02), also considers restrictions of transfers from a State to be inadmissible, at least if connected to a change of residence.

In determining admissibility tests of transfer restrictions from a country, the same criteria are used as those that were authorized by the ECJ in the test for justifications of restrictions of transfers to a country. Tax-related, or other restrictions of transfers from a country, are therefore admissible only in very few circumstances (Probst, Kleinert 2004, 2425).

5. Establishment of a Limited

The establishment of a Limited can occur in two distinct ways: by establishing a new company or through the acquisition of a shelf company.

The latter option is preferred if a certain company is to be acquired as fast as possible. Many providers of services for Limiteds offer shelf companies or assume the establishment (Just 2005, 7). This is the usual procedure for German founders. Some of these offers include the provision of a secretary (cp. item 5.3.3) and a registered office (cp. item 5.4).

5.1 The Required Persons

When establishing a new limited in Great Britain the following persons are needed:

- One shareholder,
- one director, and
- one company secretary.

Since the shareholder may additionally hold the post of director or secretary, the establishment of a limited requires at least two persons. Usually, only the positions of shareholder and director may be held by one and the same person. If secretarial services are externally bought, a „Single Member Company“ is possible (www.companieshouse.gov.uk, (b)).

5.2 The Process of Establishment

Four documents must be submitted to the responsible register, namely the Companies House in Cardiff:

- Memorandum of association,
- Articles of association,
- Form 10 – First directors and secretary and intended situation of registered office (cp. annex 1), and
- Form 12 - Declaration on application for registration (Just 2005, 7). (cp. annex 2).

Together, the “Memorandum of Association” and the “Articles of Association” constitute the articles of incorporation.

Under the Companies Act 1985, the two documents have to comply with the forms specified by the Secretary of State (Ebert, Levedag 2003, 1337).

The “Memorandum of Association” covers the company’s external relations to third parties. It defines legal minimum standards, amongst them, the following:

- Name and seat of the company, along with the adjunct “Limited”,
- the company’s object,
- type of liability of the shareholders,
- division of the share capital into shares and nominal value, and
- count of shares acquired by each founder (Vogel 2005, 213).

The “Articles of Association” constitute the second part of the articles of incorporation. According to these articles, the internal relations of the company and its shareholders and management may be regulated on a voluntary basis (Vogel 2005, 213).

If the articles are not submitted to the register, the regulations, which are stated in the annex to the Companies Act 1985 as Table A, automatically replace them as the articles of the company (Werner 2005, 288). Table A models articles for public or private companies limited by shares (Ebert, Levedag 2003, 1337).

The articles cover everything from the rights of the directors to the constitution and authority of the board of directors and the procedure of general meetings, to the rights and prohibitions of voting (Güthoff 1993, 20).

“Form 10 – First directors and secretary and intended situation of registered office” (cp. annex 1) represents a standardized form containing information to be submitted to the register: name and address of the company, of its directors and secretary with their names, dates of birth, addresses, nationalities and professions (Just 2005, 8).

“Form 12 – Declaration on application for registration“ (cp. annex 2) requires a statutory declaration stating that the company is to be established under the regulations of the Companies Act 1985 and that legal regulations have been met (Just 2005, 8).

According to the Declaration of Compliance, either a solicitor, director or company secretary must state that all legal requirements concerning registration have been met (Werner 2005, 289).

The registrar of the Companies House then makes sure that the company’s name – which must end in “Ltd.” or “Limited” to denote the legal form – is already in use by another company or not. It must also be confirmed that the company’s statutory object does not violate any laws.

If both prerequisites are met, the firm is enlisted in the index of firms and is assigned a registration number. The Memorandum of Association is then issued (Ebert, Levedag 2003, 1338).

It usually takes three days to set up a limited. However, paying an extra charge allows for an establishment within 24 hours (Bauhoff 2004, 827).

Additionally, a company’s name may easily and quickly be changed.

5.3 Management Bodies of the Limited

5.3.1 The Director or the Board of Directors, respectively

The English limited as a legal entity requires representative bodies that act on behalf of the company in legal relations. The directors, who make the decisions in business affairs and conclude contracts for the company, assume this function.

The Companies Act 1985 obliges every Limited to nominate at least one director (Section 282 CA 1985). The Articles of Association specimen even calls for at least two directors (Table A, article 64). If Table A has been adopted at the time of establishment, but only one director is nominated, an amendment of the statutes is imperative (Just 2005, 29).

The Articles of Association regularly oblige the director to simultaneously hold a share of the business.

Normally, the directors of a Limited hold at least the majority, if not all of the shares of the company. In many cases, the articles either appoint the directors for life, or for at least a three-year period. There is no limitation of age (Güthoff 1993, 46).

In principle, the directors are entitled only to a joint management and representation. However, if the articles provide for it, the “board of directors” may present single directors with certain authorities (Triebel, Hodgson, Kellenter 1995, 268).

The distinction between executive and non-executive directors among board members is an English peculiarity. Contrary to German law, which allows for no combined administration and control authority, both functions are united in the English board. The non-executive directors’ task is to guarantee the company’s interests. However, non-executive directors are frequently found in public companies (Just 2005, 30).

The (executive) director’s obligations to the company include:

- Fiduciary duties: loyalty towards the company, acting “in good faith for the best interests of the company”,
- disclosure of one’s own interest in a contract or in holding a share of the company,
- obligation to act in due care when acting in the company’s interest, and
- timely notification in case of insolvency (Maul, Schmidt 2003, 2298).

Furthermore, the director is also responsible to the Companies House for the orderly and punctual submission of the following documents to the English register:

- Accounts,
- tax return,
- annual return, and
- annual balance sheet (Go Ahead Limited, 15).

A director might as well be forbidden per verdict to further function as managing director. Reasons leading to such a disqualification are:

- Abuse of company fortune,
- disregard of company interests resulting in damage to creditors,
- repeated violations of statutory public disclosure regulations,
- fraudulous actions connected to an insolvency, and
- criminal offences (Maul, Schmidt 2003, 2299).

Minors, foreigners and legal entities may occupy the position of a director (Heinz 2004, 15).

5.3.2 The General Meeting

The most important body of an English limited is the general meeting, which is composed of the individual shareholders, and holds the company’s entire power of decision. It is comparable to the general meeting of a German GmbH, which also represents the supreme body of the company (Dierksmeier 1997, 40).

The director, or the board of directors, respectively, may convene a general meeting at any time and for any purpose. In this meeting, every shareholder, even the director, or the directors respectively, are allowed to participate and to exercise their right to speak. However, the directors are allowed to vote only if they are shareholders at the same time (Just 2005, 20).

The annual general meeting allows shareholders to question the directors on matters of business development and to discuss the annual financial statement (Just 2005, 20).

According to Table A, the general meeting also allows for the determination of the dividend and the election of directors and auditors. Agenda items, such as the re-election or voting out of directors, the payment of a dividend, the explanation of the balance sheet and the discussion of company strategies, are passed by a simple majority.

All English companies are required to hold at least one annual general meeting (AGM). However, according to sec. 366 A CA 1985 a private company is not obligated to hold such a meeting (Güthoff 1993, 46), as this represents an unnecessary formality, since shareholders and directors are oftentimes a single person in private companies.

Besides the annual general meetings, extraordinary general meetings (EGM) may also be held. EGM is the term for every other general meeting, which is usually convened by a director. In certain rare cases a shareholder can also convene them (Just 2005, 21). In an EGM, the necessary shareholder’s decisions are carried through. Among other things, this includes decisions on increase of capital, decisions on amendments or changes to the Articles of Association or the company’s name (Goldstein, Wulferding 2004, 43).

5.3.3 Company Secretary

Every company is obliged to nominate a secretary, who is not required to possess special professional qualification (Güthoff 1993, 63).

The secretary ensures the compliance of the business’ formalities and checks up on the correspondence with the register. A secretary’s main responsibilities are administrative. If the tasks he has to fulfil demand it, he is also authorized to represent the company. The secretary’s duties are monitored by a managing director or, in the case of a sole managing director, by an external third party (Sec. 283 CA 1985) (Werner 2005, 288).

The secretary has to implement the management’s instructions. He, or she, is further responsible for the preparation of agendas and the maintenance of all meeting records, both extraordinary and general meetings (Just 2005, 44).

The secretary must keep track of management decisions and refer back to them on a regular basis.

Additionally, the secretary has to keep the following statutory books up to date:

- Register of members,
- directors and secretaries register,
- directors’ interest (List of shares and loans of the managing directors with the company),
- register of charges, and
- register of minutes (protocol of managing directors’ decisions) (Goldstein, Wulferding 2004, 49).

Much like the post of director, the post of secretary may be held by a foreigner or a legal entity (Heinz 2004, 16).

Smaller companies tend to consider the legal requirement of nominating a secretary a burden, rather than a facilitation.

Therefore, the Company Law Review^[3] suggested to eliminate this requirement. It also suggested that, although the tasks should be considered an obligation, it should not be imperative that they be performed by an appointed secretary (Just 2005, 45).

5.4 Registered Office

In establishing a limited an address must be nominated as the “registered office” in order to enable the post office to deliver important documents and possible legal actions (Maul, Schmidt 2003, 2298).

At this address, the entrepreneur additionally has to keep ready certain documents for inspection by anyone and at any time during business hours. These documents include those that have been submitted to the Companies House, as well as a register containing all directors, shareholders and all further (required) information. The address is required to be in England. A company carrying out most of its business in Germany is, nevertheless, required to maintain this office, even if it is merely a post box. Maintaining the registered office results in current costs, as does the forwarding of mail to Germany, which also incurs risks of delay and loss (Happ, Holler 2004, 735).

As previously mentioned in item 5, many service providers take over the mandatory storage and forwarding of mail.

The registered office must be included on every invoice and business paper; the German branch office may be mentioned additionally (Go Ahead Limited, 15).

5.5 Regulations on Capital

5.5.1 Raising the Limited’s Capital

This subsection begins with a graphic that shows the flexibility of raising the limited’s capital.

Fig.2: Flexibility of Capital - Raising

Abbildung in dieser Leseprobe nicht enthalten

Source: Triebel, Volker: Warum englische LTD oder PLC statt deutscher GmbH oder AG?, p.10

One of the reasons most frequently mentioned for choosing a limited is the extremely flexible regulations concerning the raising of capital. According to the English Companies Act 1985, one may to establish a limited without a minimum share capital, but the limited would then be subject to severe public-law rules of surveillance and disclosure (Ebert, Levedag 2003, 1343). In theory, a limited may be equipped with a subscribed capital of £1. Practically however, a subscribed capital of at least £100 is paid in to one of the company’s accounts (Bauhoff 2004, 826). The “nominal capital” mentioned in the memorandum cannot be compared to the subscribed capital of a German GmbH, but rather to the authorized capital of a German “Aktiengesellschaft” (Schumann 2004, 743). It merely represents a forecasted figure with the total amount of shares the company is allowed to issue (Triebel, Hodgson, Kellenter 1995, 235). The portion of the capital that has, in fact, been issued and is therefore very similar to the subscribed capital of a German GmbH, is described as the “issued capital” (Schumann 2004, 743). The issued capital denotes the sum of the shareholders’ deposit liabilities and thus represents the company’s liability coverage (Triebel, Hodgson, Kellenter 1995, 238). Shareholders are liable up to the nominal value of their subscribed shares (Triebel, Hodgson, Kellenter 1995, 238). If the nominal capital amounts to £100, but only two shares of £1 each have been issued, the shareholder incurs a loss of only £2. The gap between the nominal capital and the subscribed capital is the so-called unissued capital (Just 2005, 46), while the capital that is actually paid in is called the paid-up capital. The eventual difference between the paid-up capital and the subscribed capital is described as unpaid or uncalled capital, respectively (Just 2005, 46). All in all, the term “uncalled” refers to the call of the company that is put down in the Articles of Association on a regular basis (Just 2005, 46). A shareholder can produce any capital-forming benefit as a deposit (Schumann 2004, 743). According to Sec.99, 106 CA 1985 the subscribed capital may be provided in cash or kind at the establishment.

Sec.98 CA 1985 also allows for services to be considered as a type of cash deposit. The deposits are to be announced to the Companies House’s registrator. However, a check of value is not conducted (Kallmeyer 2004, 637), unless the value seems illusory (Triebel, Hodgson, Kellenter 1995, 238). Deposits may be legally challenged only in the case of law abuse. Thus, there is no comprehensive value control with the English limited as there is with the German law on GmbHs. The assessment is instead left to the shareholders themselves (Just 2005, 46).

5.5.2 Maintenance of the Limited’s Capital

The maintenance of capital is given greater consideration by British legislature than the raising of the capital. Maintenance of capital is also not handled as liberally as it is done in Germany.

The English law assigns the following regulations that govern the maintenance of capital:

1. Capital reduction,
2. repurchase of own shares,
3. distribution of dividends to shareholders, and
4. Governmental supervision (Schumann 2004, 744).

5.5.2.1 Capital Reduction

If an English limited possesses a share capital, then a confirmation by a court is required for reducing this share capital, according to Sec. 135 CA 1985. In the court’s decision the creditor’s interests are also covered, according to Sec. 136, 137 CA 1985. Under certain circumstances, creditors may successfully object to a reduction of capital (Schumann 2004, 744).

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^[1] Registration is the most common form in order to set up a company in England. This can take place either on the basis of European regulations, or based upon national laws with different governmental authorities. The most important law is the 1985 Companies Act. Other laws are the Building Societies Act 1986, the Charities Act 1993, the Friendly Societies Act 1992, the Industrial and Provident Societies Act 1965, the Limited Liability Partnerships Act 2000, and the Open-Ended Investment Companies Regulations 1996.

^[2] The Memorandum, being the most important document in the foundation of a company, has to include, besides the name and the seat of the firm, the limitation of liability and the amount and partitioning of the nominal share capital, as well as a declaration as to the purpose of the company.

^[3] The Company Law Review was brought into being with the aim of rendering the English company law more competitive and fit for the 21st century by creating a simpler, cheaper and up-to-date framework for economic activity. Among its contents is a deregulation for small and medium-sized firms, which regularly choose the private company limited by shares as their form of business organization.