Public Limited Company (Aktiengesellschaft-AG)
I. Terminology and essential features
I. A. Terminology
The joint-stock corporation (AG) is a company with its own legal personality. Only the corporate assets are liable to the creditors for its liabilities. It has an authorised capital split up into shares.
The law of stock corporations has been codified in the German Stock Corporations Act (AktG) of 06.09.1965 (with various amendments up to now).
By choosing the AG as its corporate form, an enterprise can procure large amounts of money as needed by a modern large company. As the stockholders do no enter into any further obligations with the purchase, the AG can address a broad public on the general capital market. The easy assignability of the shares is also characteristic, in the case of enterprises quoted on the stock exchange via the latter. The AG is the preferred corporate form for large enterprises.
After an amendment of the German Stock Corporations Act in 1994, some formal directives were simplified for stock corporations with shareholders known by name (e.g. family-run companies). One-man formation is now admissible. In this way, the form of an AG under the designation "small stock corporation" also became attractive for small and medium-sized enterprises.
Legislation tries to limit the risks and disadvantages of the legal form of AG for its creditors, but also for the stockholders, by a legal set-up with stringent form. The formalities, which are quite complex in detail, result in a certain form of sluggishness for an AG.
>specifically on the European AG
I. B. Essential features
A certain authorised capital divided into shares (stocks) is typical for a stock corporation. The shares are freely assignable as a matter of principle. The number and the persons of the members are of no significance. The stock corporation is a purely capital corporation. The minimum authorised capital amounts to 50,000 Euro.
Constitution, executive organs
The AG is organised corporately as a legal entity. It is independent of the number of members and has an independent organisation with hived-off executive organs. Law prescribes three executive organs: Board of Directors, Supervisory Board and General Meeting. The relationship of the executive organs to one another is determined by a distribution of competences which is mandatory to a great extent.
Legal relationship of the stockholders, liability
The stockholders (shareholders) are not merchants. Liability towards creditors is limited to the AG’s corporate assets.
II. Forming an AG
II. A. Most important requirements
After the amendment of the AktG in mid-1994 ("small AG") no minimum number of shareholders is necessary any more, even at formation. Formation of a one-man AG is also possible. Founders of an AG can be natural and legal entities, also foreign ones, as well as partnerships (general partnerships, limited commercial partnerships and EEIGs).
The authorised capital of the AG is at least 50,000 Euro, regardless of whether use is made of the capital market. The capital can be provided in the form of cash contributions or contributions in kind. According to § 27 I German Stock Corporations Act, contributions in kind are to be set in the Articles of Association.
An AG can pursue practically all purposes admissible by law (trades requiring approval). According to the professional law in question, various freelance professions may not be run in the form of an AG, e.g. pharmacies, notaries’ offices and doctors.
By law, an AG is always deemed a trading company, regardless of the purpose actually pursued (formal merchant).
The corporate name (corporate name in general) is the name under which the AG is entered in the Register of Commerce and appears in business dealings.
The corporation designation of the AG can either be based on the company’s activity (factual designation), contain the name(s) of one or more shareholder(s) (designation by name) or only comprise a fantasy name. Combinations of these elements are also possible, and in any case the factual designation must contain an individualising addition. The addition "Joint-Stock Corporation" or the German abbreviation “AG” must be added to the corporate designation in all cases.
On the examination of the admissibility of the corporate name by the Court, the principles of identity of the company are to be considered. The corporate name may not contain any additions suited to causing deceit about the nature and the scope of the business.
Geographical additions are admissible as a matter of principle if the company has a specific relationship to the area stated, e.g. its headquarters.
Geographical designations in front of the name are often regarded as a statement of specific importance in the area. This particularly applies if the geographical designation is followed by a general term. In these cases, the companies ought to prove the matching order of magnitude or, if the requirements cannot be fulfilled, place a further individualising designation (if applicable combination of letters) in front of the name.
Comments by the Chamber of Industry and Commerce:
In cases of doubt, the competent Chamber of Industry and Commerce makes comments to the Local Court on the admissibility of the corporate name. In order to rule out a possible risk of confusion or possible reservations with a view to the identity and clarity of the company at an early stage, contact with the competent CIC is recommended.
But in the course of the entry into the Register of Commerce, only the risk of confusion with companies entered at the same location is checked. But as corporate names entered elsewhere and trademarks grant the entitled parties a claim to omission against new founders, it is recommended that corporate and trademark names entered nationwide are also included in the examination.
II. B. Formal and publication directives
Simple formation is to be distinguished from qualified formation. The latter exists if agreements connected with specific financial risks are made (e.g. provision of contributions in kind). In qualified formation, additional directives are to be included in the Articles of Association.
Formation of the AG (simple formation) is done in the following steps:
Approval of the Articles of Association (Shareholders’ Agreement)
Provision of the authorised capital
Appointment of the executive organs
Payment of a part of the capital
Production of the formation report
Application to and entry into the Register of Commerce
Approval of the Articles of Association
The approval of the Articles of Association is a legal act by which the founders agree on the contents of the contract. They must be certified by a Notary Public. From the notarial certification until the entry of the AG, a preliminary stock corporation not capable of legal action exists. It only originates as an individual legal subject upon entry.
The Articles of Association must contain the following information:
Corporate name, headquarters, object of the enterprise, amount of authorised capital, par values of the shares, quantity of shares and nature of shares (common shares or preferential shares), nature of their use (bearer or registered shares), number of members of the board and form of publication of notices.
In a qualified formation, directives on the following problems are additionally to be included in the Articles of Association:
Special benefits for individual shareholders or third parties, formation expenditure, contributions in kind, acquisition of assets.
Founders not known to the Notary Public must prove their identity by valid identity papers. In the event of a person appearing not acting on his own, but on a third party’s behalf: written power of attorney or a subsequent approval in a notarially certified form is necessary. If the signature under a power of attorney is certified by a foreign Notary Public, a legalisation (or apostille) is necessary, depending on the country of origin. The former can be granted by a Consul of the Federal Republic of Germany.
If a legal entity is one of the founders, its existence must be proven by a certified extract from the Register of Commerce (for foreign enterprises: corresponding official registration documents).
The formation deed is also to state the founders, the par value and the issue amount and nature of the shares assumed by each founder and the amount of authorised capital paid in.
As the headquarters of the AG, the place at which the company has operations or where the management or administration can be found is to be stated.
Object of the enterprise
In the Articles of Association, the nature of transactions to be undertaken (object) is to be stated. In particular, the nature of the products and goods manufactured and traded is to be stated in more detail.
A figure is to be put on the amount of the authorised capital. It is at least 50,000 Euro.
In addition, the Articles of Association must state the par values of the shares and the number of shares of each par value and, if a number of kinds (common or preferential) of stock exist, the kind of shares and the number of shares in each kind.
The shares can be substantiated as par value shares or as no-par shares.
The minimum par value of the par value shares is 1.-- EURO. Higher share par values are admissible without limitation as long as they are in EURO.
No-par shares do not have a par value. They participate in the authorised capital to the same extent. The pro rata amount accruing to each share may not fall below 1.-- EURO.
Normally, share certificates are produced for the shares. These are securities which securitize the membership right to the AG.
The Articles of Association must state whether the shares are issued as bearer or registered shares. In practice, bearer shares dominate and can be assigned like mobile objects by agreement and transfer. Registered shares can be assigned by endorsement. Common shares (= normal shares) and preferential shares can be issued. Preferential shares are shares equipped with a priority in the distribution of the profits. Preferential shares with or without voting rights can be issued.
Take-over of shares by the founders must be notarially certified. The company is set up when all the shares have been taken over by the founders.
Provision of the contributions
The payments on the shares taken on are to be done for the free disposal of the Board of Directors. For cash contributions, the required amount must make up no less than ¼ of the par value.
Contributions in kind are to be made completely.
Appointment of the executive organs
To start with, the founders must appoint the first Supervisory Board as well as the auditors for the first fiscal year. This must be certified notarially.
The Supervisory Board appoints the first Board of Directors (simple written form suffices). Members of the Board of Directors and the Supervisory Board need not be stockholders.
Fulfilment of publication directives
Application to and entry in the Register of Commerce
The AG must be entered in the Register of Commerce. It only originates as an independent legal entity upon entry.
Application to the Register of Commerce:
Entry in the Register of Commerce is to be applied for at the locally competent Local Court by all founders, members of the Board of Directors and the Supervisory Board. The signature and the signing of the corporate name must be certified by a Notary Public. It may only be done if the required amount has properly been paid in for each share and is finally at the free disposal of the Board of Directors. The Notary Public submits the application to the competent register court in an electronic form.
Contents of the application and enclosures:
Signature of the names of the members of the Board of Directors
Declaration and proof of payment of the capital (contribution in kind: presentation of the relevant contracts)
Calculation of the formation costs
Formation record and Articles of Association
Record of the appointment of the Board of Directors and Supervisory Board
Formation report and audit reports of Board of Directors and Supervisory Board as well as the formation auditors
Approval deed (if state approval is necessary)
Examination by the Local Court and entry in the Register of Commerce:
The court examines whether the corporation has been set up and registered properly. The entries in the Register of Commerce are made known by publication in the electronic Federal Gazette.
Formation report and formation examination
The founders must report in writing on the course of the formation. The course of the formation is then examined by the members of the Board of Directors and the Supervisory Board. If a member of the Board of Directors or the Supervisory Board is one of the founders and shares have been taken over in the formation for the account of a member of the Board of Directors or the Supervisory Board or if a member of the Board of Directors or the Supervisory Board has claimed a specific benefit or a qualified formation (with contributions in kind or acquisition of assets) exists, an external formation auditor is to be involved. Primarily, auditors can be considered as formation auditors. The Chamber of Industry and Commerce makes comments on the person of the formation auditor suggested.
The formation report can be inspected at the Court by all and sundry.
The directives on subsequent foundation are intended to prevent the specific protective directives for qualified formation being circumvented. Each contract which the company concludes in the first two years following its entry into the Register of Commerce which has the acquisition of assets as its content and in which the remuneration to be paid by the company exceeds 10 per cent of the authorised capital is to be regarded as a subsequent formation. The Supervisory Board must examine it and produce a written subsequent formation report. In addition, a formation auditor is also to be involved following consultation of the CIC.
The following information is to be given on the letterheads: corporate name, legal form, company headquarters, Local Court of the Register of Commerce, number in the Register of Commerce, members of the Board of Directors and the Chairman of the Board of Directors and the Supervisory Board (with at least one complete first name).
III. Mode of function of the AG
III. A. Management of the AG
Board of Directors
The members of the Board of Directors need not be shareholders (outside organisation). The composition of the Board of Directors is based on the Articles of Association. It can comprise one or more person(s). Appointment is done by the Supervisory Board for a maximum of five years. Repeated appointment is admissible.
Position of the Board of Directors
The contract with the members of the Board of Directors of the AG is a service contract of a freelance worker as a rule (not a work contract). Normally, freelance workers in Germany are not subject to social insurance (pension insurance, health insurance and unemployment insurance). Voluntary further insurance in statutory health insurance is possible for former salaried employees. There is also the possibility of applying for compulsory insurance or voluntary insurance in statutory pension insurance schemes. Voluntary insurance of the members of the Board of Directors in statutory accident insurance (employers’ accident insurance scheme) is also possible.
For residence of a foreign member of the Board of Directors in Germany, specific directives of foreigners’ law are to be observed.
Management to the inside
The actual management is with the Board of Directors alone. They act under their own responsibility. The management power is unlimited as a matter of principle (to the extent that approval from the Supervisory Board has not been provided for).
Representation to the outside
The Board of Directors represents the AG to the outside. The representation power is unlimited as a matter of principle.
Liability of the members of the Board of Directors
The members of the Board of Directors of the AG manage business for the company. They are not entrepreneurs themselves. They are therefore not liable towards third parties for the company’s liabilities, nor must they reimburse losses to the company incurred during the time of their management. The corporation alone bears the entrepreneurial risk. The members of the Board of Directors are however obliged by law to manage the business with the due care of a prudent businessman. If a member of the Board of Directors breaches this duty in the relationship to the company, claims to damages can result for the company from this. He is not liable to the members of the Board of Directors and also not towards third parties. Liability towards third parties can only be considered if the members of the Board of Directors have committed an illicit action in their own person (e.g. breach of the pertinent directives of the German Civil Code (BGB)).
III. B. Control of the AG and annual financial statements
The General Meeting is the executive organ of the shareholders in which they exercise their rights in the relationship to the AG. Convening of the General Meeting is a matter for the Board of Directors. In the convening and holding of the General Meeting, a series of formalities are to be observed. The General Meeting can only decide in matters of the management if the Board of Directors so demands. It cannot give it instructions. The General Meeting only has an influence on the management to the extent that it elects the shareholders’ representatives for the Supervisory Board. In addition, the General Meeting elects the auditor and passes resolution on the allocation of the profits as shown on the balance sheet. It grants the Board of Directors and Supervisory Board approval for their actions.
The main task of the Supervisory Board is the appointment, recall and monitoring of the Board of Directors in management (control function). It is responsible for convening of the General Meeting if the company’s well-being so demands, auditing of the annual financial statements, the management report and the proposal for the allocation of the profits.
The Supervisory Board comprises no less than three members. The Articles of Association can provide for more members, but the number must be divisible by three. As a matter of principle, any natural entity is eligible. The members of the Supervisory Board are published in the Register of Commerce.
The Supervisory Board cannot undertake any managerial actions itself or give instructions to the Board of Directors.
Position of the Supervisory Board
The contract with a member of the Supervisory Board is a service contract with an agency as its contents. It can be at a charge or free of charge. A member of the Supervisory Board is not subject to social insurance.
The Co-determination Act of 04.05.1976 applies to all AG’s which employ more than 2,000 people as a rule and for which co-determination in the coal and steel industry does not apply. The Co-determination Act prescribes equal participation in the Supervisory Board. Half of the members are stock representatives, half are employees’ representatives. The Coal and Steel Industry Co-determination Act of 21.05.1951, which applies to companies in mining and iron and steel production, also prescribes equal participation in the Supervisory Board. If the specific prerequisites of these acts are not fulfilled, co-determination is subject to the Company Constitution Act of 1952, according to which the Supervisory Board must have one third of its members as employees’ representatives. This does not apply if the AG employs less than 500 people and was registered after 10.08.1994 or is a family-run corporation (= small AG).
Auditing and annual financial statements
The duration of the fiscal year results from the Shareholders’ Agreement. However, it may not exceed 12 months. The first fiscal year may be shortened (curtailed fiscal year).
As a trading company, the AG is obliged to keep trading books. It is obliged to produce a balance sheet (annual balance sheet) and a profit and loss account in the German language at the close of each and every fiscal year. According to § 27 I German Stock Corporations Act, contributions in kind are to be set in the Articles of Association. In addition, the annual financial statements are to be extended by notes with explanations.
Auditing of the annual financial statements is mandatory for large and medium-sized AG’s.
Small AG’s are obliged to submit summarised balance sheets (§ 266 sub-section 1 HGB) with curtailed notes (§ 288 HGB) to the Register of Commerce (disclosure of balance sheets). Medium-sized companies must submit a summarised balance sheet, a summarised profit and loss account (§ 276 HGB), curtailed notes (§ 288 HGB) and a management report as well as the audit certificate and the report by the Supervisory Board to the Register of Commerce. Large companies are obliged to submit the complete annual financial statements without curtailment as well as the audit certificate and the report by the Supervisory Board to the Register of Commerce and to publish them in the Electronic Federal Gazette.
Auditors and auditing companies are responsible for auditing the statements and chartered accountants and chartered accounts’ companies for the annual financial statements and management reports of medium-sized companies.
With his audit certificate, the auditor gives his overall assessment of accountancy and annual financial statements of the company to the company and the shareholders and also with an effect to the outside. He certifies the correspondence of the accountancy with the statutory directives.
The auditors have an extensive right to information and insight into books, cash in hand, stocks of securities and goods etc.. They are obliged to unconditional confidentiality. They are to make a neutral written audit report on their auditing. If no objections are to be raised, the auditors are to give an audit certificate.
In particular, corporation tax, capital gains tax, trade tax, solidarity surcharge and turnover tax are due for payment. Further information can be found in our brochure Accounting and Taxes – Information for People Setting Up a Business.