March 29, 2019 is fast approaching. Unless the EU and the UK reach an agreement of some sort by then, even if it is the EU’s recent initiative to postpone the withdrawal, the consequences – which are still not foreseeable in their entirety – that all parties actually intend to avoid will be felt in full as of that day. In this context, the present article deals with the legal fate that is expected for the legal form of the Ltd., which, at the latest after the groundbreaking “Centros judgment” of the European Court of Justice (9 March 1999; C-212/97), enjoyed great popularity in Germany as well (at least until the Act for Modernizing the German Limited Liability Law entered into force, introducing the legal form of an “UG” [entrepreneurial company]), due to the impending hard Brexit – and what countermeasures may be taken in consideration of new statutory situations.
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1. Current problem status
UK companies with administrative headquarters in Germany are faced with the problem that the principles of freedom of establishment according to Articles 49, 54 TFEU, which also form the basis for mutual recognition of the respective Member State corporate law, will cease to apply in the course of Brexit and are not being replaced. In the future, Ltd. companies with German administrative headquarters specifically will have to be assessed in accordance with the domicile theory under German corporate law. As a consequence, depending upon company purpose, these companies will be considered to have the forms of GbR [partnership organized under the Civil Code] or oHG [general partnership]. The fact that Ltd. companies are limited in liability under UK law is thus irrelevant. From then on, shareholders will therefore be personally liable for liabilities without restrictions – all in all, a sobering result that should be avoided to the extent possible.
2. How to solve the problem
The following options are generally, but not conclusively, available as a solution to this problem. The first option to consider is for the company to transfer individual or all assets to a German company so as to be liquidated subsequently. Where liquidation is not desired, however, cross-border transformation of legal form and cross-border merger may be considered. Cross-border transformation of legal form into a German legal form poses problems to the extent that there is a lack of statutory provisions while the necessary coordination with the respective commercial registers may also cause difficulties.
Given the existing legal framework, the only option with “legal certainty” for the relevant companies is a cross-border merger. This has also been recognized by lawmakers who have attempted to provide additional remedy with the introduction of the 4th Transformation Act Amendment Act. This in no way reinvented cross-border mergers, though, since Sections 122a et seqq. Transformation Act had been introduced in 2007 to transpose EU Directive 2017/1132 (Articles 118 et seqq.). According to the explanatory memorandum to the government draft, the amendments are intended to make much greater contributions to extending existing statutory provisions by offering additional options, since the special requirements of a Ltd. have not always been met (Printed Matter No.: 505/18).
3. Specific amendments introduced by the 4th Transformation Act Amendment Act
In addition to the previously possible cross-border merger into a corporation, a new option was created to perform such a merger into a partnership as well (cf. Sections 122a(2) sentence 2, 122b(1)(1) Transformation Act). This is intended in particular to enable the Ltd. companies cross-border mergers into a KG [limited partnership], because the KG may then also be designed as GmbH & Co. KG [limited partnership with a limited liability company as general partner] or UG & Co. KG [limited partnership with an entrepreneurial company as general partner] (cf. Printed Matter. loc. cit., p. 2). In addition, the newly created Section 122m Transformation Act introduced a two-year grace period for cross-border mergers that have already commenced. Accordingly, a merger will still be possible if its terms have been notarized prior to Brexit or prior to expiry of a possible transitional period within the meaning of Section 122c(4) Transformation Act and the merger is entered in the register without delay, but no later than two years after that date. This does not protect the Ltd. as such, however, since the provision is not intended to provide legitimate expectation in the sense of continued recognition.
It appears questionable, though, whether the newly drafted provisions, in particular the option highlighted by the legislator to enable mergers into partnerships, will actually meet the needs of the relevant companies. In most cases, the Ltd. was specifically selected as the legal form to benefit from a limitation of liability in spite of the lack of capital. In order to keep this limitation, a KG would have to be chosen as the target company – a fact that is also emphasized in the explanatory memorandum of the law – which would specifically have to be designed as GmbH & Co. KG / UG & Co. KG. There is no need to discuss even how practicable such a solution would be.
Finally, the 4th Transformation Act Amendment Act fails to eliminate the existing problem with the UK register court (Companies House), which regularly refuses to register cross-border transformations of legal form. If Companies House refuses to register such transformations of legal form, the question arises why this should be different for cross-border mergers – in particular, in the event of a hard Brexit.
The term “legal certainty” in item 2 above was not emphasized without reason, because the new 4th Transformation Act Amendment Act does not eliminate the Ltd.’s Brexit-caused problems, either. It therefore appears that the option of establishing an UG with relatively little effort and continuing the business previously conducted in the Ltd. there is providing legal certainty. This article is also unable to assess what Brexit will legally and actually entail, which will only become fully apparent as of March 29, 2019. One thing is certain, however: whatever path will eventually be chosen, there is an acute need for action among the approximately 8,000 - 10,000 Ltd. companies still existing in Germany (Printed Matter. loc. cit., p. 1).