The Limited Liability Company under German Law (the GmbH). Dr Alexander Schröder-Frerkes
companies. Additional obligations may only be established for several or all shareholders. These may be of a financial nature, but may also comprise the provision of services to supply goods or intellectual property rights or to acquire goods from the company.
64. Duty of loyalty
Aside from any particular obligations based on statutory law and the articles, the shareholders of a GmbH (and any other corporation or partnership) are subject to a general duty of loyalty. This duty of loyalty requires the shareholders to act loyally towards the company, meaning that they must actively support its purpose and prevent it from being exposed to harm. The duty serves to resolve conflicts within the company which cannot be resolved by statutory or case law, or by the articles of association. It applies in the first place to the relationship between the shareholders and the company, and secondly to the relationship between the shareholders themselves. The duty of loyalty requires a shareholder to duly take into account the interests of the other shareholders and of the company when exercising a membership right. The duty does not prevent shareholders from exercising their rights in a manner most favourable to them. Its aim is merely to avoid unacceptable outcomes when the justified interests of other shareholders or of the GmbH are not sufficiently taken into account and shareholders pursue their own interests in an inappropriate way. The duty of loyalty provides the courts with an instrument to balance the contradicting interests of the shareholders and the company in order to find appropriate solutions on a case-by-case basis.
However, a duty of loyalty does not exist in a single shareholder company. In such a company, there are no conflicts of interest between the company and the shareholder.54
C. Liability of shareholders towards third parties (piercing the corporate veil)
65. General
According to statutory law, a GmbH’s liability vis-à-vis its creditors is solely limited to its assets, that is, the shareholders of the GmbH are not personally liable towards third parties.55 Nevertheless, aside from the establishment of a personal liability of a shareholder in a GmbH by way of an individual agreement with a creditor of the company (eg, guarantee, suretyship, lien, pledge, etc), German case law recognises that, under certain circumstances, the shareholders in a GmbH may be held personally liable for the liabilities of the GmbH. These cases are, however, highly exceptional and shall be outlined in the following.
66. Confusion of goods (Vermögensvermischung)
A confusion of goods typically arises in single shareholder companies, but can also occur within a multi-shareholder GmbH. In the event of a confusion of goods, the assets of the GmbH and the private assets of the shareholders are not, or not sufficiently, separated from each other. The confusion of goods must be so extreme that it is no longer possible to separate the two types of assets, making it in turn impossible for the creditors to distinguish which assets are available to satisfy their claims. Separation usually becomes impossible as a result of a non-transparent, or incomprehensive accounting system or a substantial lack of such a system, resulting in the situation that it cannot be determined whether or not the stipulations regarding the maintenance of the share capital have been observed (a so-called Waschkorblage – ‘laundry basket situation’).56 Such a situation gives rise to the personal liability of the shareholders, who are responsible for this kind of negligence in connection with the accounting and bookkeeping of the company, vis-à-vis the creditors of the GmbH. Typically, this would be the majority shareholder in the company, but it may also be any other shareholder who has sufficient influence on the company to be able to control or manipulate the way in which the books and records are kept.
67. Confusion of spheres (Sphärenvermischung)
The situation of a confusion of spheres is very closely related to the situation of the confusion of goods. A confusion of spheres occurs when, in dealings with third parties, shareholders fail to sufficiently distinguish whether they are representing themselves or the company. It thus becomes difficult for the third party to distinguish who is the actual contract partner. In cases such as these, many legal scholars argue that if the corporation assumes responsibility for all liabilities the shareholder gives rise to, this would constitute an unacceptable misuse of the said corporation. The shareholder must therefore be personally liable for the liabilities he or she gives rise to on behalf of the company.
68. Undercapitalisation
One highly disputed situation in connection with which a piercing of the corporate veil is discussed is the undercapitalisation of the GmbH. A distinction is often drawn between two different kinds of undercapitalisation. A ‘material’ undercapitalisation is present if the share capital of the company does not reach an adequate level in comparison with the scope of its business, that is, the (anticipated) business activities of the company far exceed the stated capital (often when only the minimum required share capital of €25,000 was raised). The other kind of undercapitalisation, so-called ‘formal’ or nominal undercapitalisation, is present if the company actually dispose of the necessary share capital in a manner commensurate to the range of its activities. However, this kind of share capital is only (or to a large extent) provided by means of shareholder loans rather than equity. This creates problem in particular if the company should become insolvent later on. Whether and on which legal ground a direct liability on the part of the shareholders may be established in these situations is a matter of dispute amongst legal scholars. The lower courts, too, are undecided on this matter. In one case, the Federal Supreme Court applied section 826 of the German Civil Code (Bürgerliches Gesetzbuch – BGB), which grants damages in the event of deliberate immoral damage being caused to a third party. In its decision of 28 April 2008,57 the Federal Supreme Court ruled that at least occurrences of ‘material’ undercapitalisation do not constitute a case of destructive intervention (see immediately below under Section 69) and thus do not give rise to an internal liability on the part of the shareholders vis-à-vis the GmbH itself. The court ruled that the failure to furnish a GmbH with the necessary share capital may not be equated with a shareholder actively intervening and taking away equity from the company to the detriment of its creditors. The legal provisions regarding the maintenance of the share capital58 are considered sufficient and the Federal Supreme Court saw no reason to establish further rules in this regard. The specific function of a GmbH, namely to limit the liability of the shareholders to the stated share capital, would otherwise be endangered. In its decision, however, the Federal Supreme Court also clearly stated that the potential direct liability of a shareholder towards third parties on the basis of tort law (in particular based on section 826 of the German Civil Code) remains unaffected.
69. Destructive intervention (Existenzvernichtender Eingriff)
A destructive intervention occurs if a shareholder intervenes in the financial situation of the company (in particular the stated share capital) such that it is no longer able to satisfy its obligations towards its creditors. Prior to July 2007, intervention of this nature resulted in personal liability on the part of the intervening shareholder towards the creditors of the GmbH. In its decision of 16 July 2007,59 however, the Federal Supreme Court ruled that in the event of a destructive intervention, the shareholders would no longer be personally and directly liable towards the creditors. Only the company itself has a claim towards the respective shareholder based on section 826 of the German Civil Code (Bürgerliches Gesetzbuch) (deliberate immoral damage). These rules also apply during the liquidation process if the GmbH goes into liquidation.60 In other words, a direct liability