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Digitalization of Company Law - The EU's Company Law Package will cause wide-ranging changes

Client Briefing Corporate Law Mergers & Acquisitions - 

In recent the weeks, the European legislator has launched a directive amendment for the use of digital tools and processes in company law. After the European Council and the European Parliament reached an agreement on 5 February 2019, the European Parliament adopted a respective directive on 18 April 2019. The Council's approval is pending, but is a mere formality. Implementation into German law is expected in the next two years.

The changes are part of the so-called “Company Law Package”. Already in April 2018, the European Commission presented a proposal for the directive (COM (2018) 239 final). Extensive preparatory work was performed by the so-called Informal Company Law Experts Group, a group of reknown experts in corporate law.

The legislative act will amend and supplement the company law provisions set out in Directive 2017/1132.  

The core of the legislation is its Article 13g, according to which the EU Member States must create the possibility of an online formation of companies. The registration of companies must be carried out completely online, without the necessity for the applicants to appear in person before any authority or person or body. Only in exceptional cases, an actual presence can be required.

Such an exemption exists if physical presence is justified by the public interest in preventing identity misuse (Article 13b para.4). However, Member States must ensure that physical presence can only be required on a case-by-case basis when there are reasons to suspect identity falsification. In addition, the requirement of physical presence must be limited to those procedural steps, in which presence is required for reasons of preventing such identity falsification. All other procedural steps can still be completed online.

A further exception exists if a physical presence is needed to ensure compliance with the rules on legal capacity and on the authority of applicants to represent a company (Art. 13g para. 8). However, a physical presence can only be required on case-by-case basis where there is evidence to suspect such non-compliance. Only single measures providing for physical presence to ensure legal capacity and authority are permissible the Member States. All other steps shall be completed online.

Further, Member States shall ensure that all documents and information may be submitted in electronic form. To this effect, the directive requires Member States to lay down detailed rules, setting minimum standards. For example, the directive requires that precise rules on identification and verification of legal personality and capacity must exist. If, as in many cases in German company law, the incorporation of the company concerned requires the payment of a share capital, the Member States must ensure that this payment can be made online to an account of a bank operating in the EU and that proof of payment can be provided online.

Affected by the new legislation under German law is foremost the laws on a limited liability company (GmbH). Furthermore, the new procedure also applies to the online registration of branches (Art. 28a ff.). In principle, also the formation of a stock corporation (AG) is, covered by the directive. However, the directive provides that Germany may refrain from implementing the new directive in respect to the laws stock corporations.

Article 13g (4c) of the Directive provides for the possibility for the Member States to require the participation of notaries, for example in verifying the identity of the acting person. However, any procedure before a notary must also provide for the possibility that the formation of the company can take place completely online, without personal presence. It can be expected that the German lawmaker will make use of the option to require the participation of a notary in the formation process, while implementing the directive.

Article 13f of the directive provides that concise and user-friendly information as described in detail in the directive shall be made available to assist in the formation of companies and the registration of branches. This should be done at least in an official language of the EU “broadly understood by the largest possible number of cross-border users”. In substance, this means that the information must be made available in English.

Article 13h of the directive provides, correspondingly, for the provision of templates for the formation of a company. If this template is used, any requirement for certification of these documents is automatically deemed to have been fulfilled. These templates, too, must be made available in an official language of the EU “broadly understood by the largest possible number of cross-border users”, so in English.

Another important aspect of the new legislation is that Member States must ensure that online formation is completed within 5 working days after (electronic) access of the required documents by the competent authority and payment of a possible fee or a share capital if the model documentation is used by natural persons. In all other cases, registration must take place within 10 working days.

In addition, the directive provides for regulations to improve register publicity and to extend the free access to registers.

The effects on legal practice of the directive and its implementation in company law and M&A can hardly be overstated. Although the incorporation of a company is at the forefront of the directive, the directive causes nothing less than the digitization of numerous measures under company law. If, for example, it is possible to appoint a managing director of a limited liability company (GmbH) without the personal presence of the applicant or a representative or a shareholder, there is no reason why it should not be possible to appoint a managing director of a GmbH online outside an formation process. It is precisely this, which then finds its expression in Article 13j of the directive. This article states that the Member States must ensure that a large number of corporate documents, such as amendments to the articles of incorporation, transfers of registered offices, filings in respect to the appointment of executive bodies, changes to the share capital and the dissolution of the company can be submitted completely online. Apart from narrow exceptions, there shall not be a necessity for an applicant to appear in person before any authority or person or body.

Once the directive has been fully adopted, implementation by the Member States must take place within two years. It can then be expected that numerous processes and procedures for M&A transactions and intra-group reorganizations will then be considerably simplified. In particular, the time limit of five or ten working days for the formation a company should create considerable certainty in planning a transaction. Further, the often burdensome and time-consuming requirement of the physical presence of representatives and the procurement of respective powers of attorney would be eliminated. Another possible effect is that the use of shelf companies could be considerably reduced. In particular, the provision of template documents can play a major role and bring considerable relief. Overall, in the light of the existing technical possibilities, this directive appears to be a long overdue step.

Digitalization of Company Law - The EU's Company Law Package will cause wide-ranging changes

Dr. Christoph Allmendinger LL.M. (LSE)