KGaA - An underestimated kind of enterprise!

After decades of disregard, Fresenius SE & Co. KGaA, Fresenius Medical Care AG & Co. KGaA, Merck KGaA and Henkel AG & Co. KGaA, well-known DAX companies have changed to this legal type. Other prominent companies operating as KGaAs include the media group Bertelsmann SE & Co. KGaA and the medical and safety technology company Drägerwerk AG & Co. KGaA. However, this form of company is not only predestined for the big players, but also for medium-sized and, in particular, family-owned companies.

What is a KGaA?

A KGaA is a legal entity in the hybrid form of a limited partnership (KG) and a stock corporation (AG). This means that one or more partners have unlimited, direct and personal liability as so-called general partners with all their assets. Together they are liable to the company's creditors as joint and several debtors. The other partners, referred to here as "limited shareholders", are only liable with their contribution, which is evidenced by the share. Only the partners with unlimited liability are published in the commercial register.

What makes the KGaA special?

The KGaA became attractive as a result of a decision by the German Federal Court of Justice (Bundesgerichtshof) on February 24, 1997. Since then, the personally liable partner of the KGaA cannot only be a natural person but also a corporation. Consequently, a limited liability company (GmbH) or a European Company (SE) can also take the place of the partner with unlimited liability, so that a GmbH & Co. KGaA or SE & Co. KGaA is created in which there is no longer a personal general partner.

The management of the business of the KGaA lies with the general partners or the management of the general partner company. In contrast, the limited liability shareholders are generally excluded from management and representation. They only have a right of objection in the case of extraordinary transactions, which is structured as an approval obligation within the framework of their decision-making body - the General Meeting (Hauptversammlung).

The partner with unlimited liability of the KGaA therefore has a significantly stronger position than the management board of an AG. This is because, in principle, no measures whatsoever - neither fundamental nor extraordinary transactions - can be resolved without or against the will of the general partners. Put simply, the KGaA is therefore a large KG whose capital stock is divided into shares and can be freely traded on the stock exchange.

The KGaA thus has the character of a corporation whose total capital is composed of the share capital of the limited liability shareholders (so-called limited liability capital) and the asset contributions of the general partners. As with the AG, the share capital must amount to at least EUR 50,000.00. The company is a commercial company and therefore a formal merchant and can participate in business transactions as a legal entity with legal capacity.

Like the AG, the KGaA consists of three bodies: the executive board, the supervisory board and the shareholders' meeting. In the case of the KGaA, however, the executive board is made up of the general partners and, despite the fact that it closely resembles stock corporation law, the principle of self-organization applies. Management and representation of the KGaA are therefore in the hands of the general partners or the management of the general partner of the KGaA. The management is thus not - as in the case of the third-party management of corporations - incumbent on a management, which can also be exercised by non-shareholders.

In the case of a KGaA, it is mandatory to establish a supervisory board. It consists of at least three members. However, in contrast to the AG, the supervisory board has significantly limited competences. The supervisory board's task is merely to monitor the activities of the general partners and to represent the company vis-à-vis them. Unlike the AG supervisory board, which appoints the management board, the supervisory board of the KGaA can, in particular, appoint, neither dismiss nor exclude the management board. In accordance with the principle of separation of control and management, these general partners may not be members of the supervisory board at the same time.

In addition, there is the Annual General Meeting as the forum of the limited partners. Among other things, it adopts the annual financial statements, which then require the approval of the general partner. If general partners themselves hold shares in the KGaA, they nevertheless have no right of co-determination at the general meeting.

What specific advantages does the KGaA offer over other legal forms?

In summary, the KGaA differs from the classic KG primarily by:

1. personal commitment of the partners to the company despite high outside capital contributions,
2. strong control competence of the general partners,
3. high security against hostile takeovers, and
4. in comparison to the classic KG, easier capital procurement through the inclusion of additional limited shareholders.

One of the main advantages of the KGaA over an AG, for example, is the statutory power of management and representation of the fully liable partner. Whereas the AG management board must first be appointed by the supervisory board and can be removed from its position at any time by a resolution, the KGaA general partner is a "born management body". He does not require a confirmation of will in the supervisory board to grant him management and representation authority. Nor can he be dismissed. This gives the general partner a very strong management function that is independent from the amount of his contribution or the will of other persons and bodies of the KGaA.

The general partner retains the managerial position of the KGaA even if he only makes a small or even no asset contribution to the company. Therefore, a KGaA is exceptionally resistant to takeovers, which represents a considerable advantage for family businesses. This advantage is particularly evident when family businesses want or need to raise outside capital. The family members, who are also KGaA general partners, retain control even if more than half of the share capital has been sold on the capital market to limited shareholders who are not family members but outside third parties.

At the same time, the KGaA is suitable for companies that are dependent on external financing without losing management and decision-making authority.

In addition, the limited shareholders have no rights of co-determination. Even for extraordinary transactions, the requirement for their approval at the Annual General Meeting can be completely excluded by the Articles of Association.

The KGaA is also privileged with regard to aspects of co-determination law. Although the KGaA is subject to the German Co-Determination Act (Mitbestimmungsgesetzt - MitbestG) and the German One-Third Participation Act (Drittelbeteiligungsgesetz - DrittelbG) in the same way as an AG, this is only to a reduced extent. For example, the KGaA supervisory board lacks personnel competence, which is why it has no right to appoint or dismiss the management. Nor can it impose rules of procedure on the management or stipulate a requirement for approval of certain transactions. Furthermore, it cannot approve the annual financial statements, as this is the responsibility of the Annual General Meeting. The KGaA supervisory board therefore only has the authority to monitor and advise the management.

However, the limited liability shareholders can also be granted a stronger position than the traditional shareholders. This is achieved by explicitly making certain legal transactions subject to approval or by stipulating special rights of instruction and co-determination. However, this arrangement must not result in the general partners no longer being able to perform their management board duties on their own responsibility. Even more so, there is the possibility of setting up a special body in order to be able to influence the management of the KGaA without having to act as managing directors themselves.

This extensive freedom to shape the legal relationship between the general partners and the limited liability shareholders is a positive aspect of the KGaA that should not be neglected. In this way, the company's articles of association can be adapted to the individual needs of the company and internal requirements can be responded to more flexibly. Not least for this reason, the KGaA construct is ideally suited to medium-sized (family) companies. By granting a general partner position, the operationally active entrepreneur can be given the greatest possible scope for decision-making and action. On the other hand, family members who prefer to take a passive position in the company can support the company financially as limited shareholders through their monetary contribution and in return participate in the economic success of the company through the dividend.

The choice of the KGaA legal form also gives the company unhindered access to the capital market. This access can take place with a clear separation of corporate management and financing. The owner family does not have to relinquish its controlling influence over the company in favour of raising capital on the stock exchange. Yet they do not bear the risk of personal liability. In addition, the general partners are largely independent of the limited shareholders, so that the KGaA is almost resistant to takeovers. In this way, a family business can remain in the family for generations to come.

Conclusion

Due to this multitude of advantages, which the KGaA brings with it, this legal form has meanwhile also experienced a strong acceptance in the public. Whether and to what extent this legal form is suitable for you and your company, you will find out in a personal conversation with our specialist Dr. Thomas Hausbeck.