Economic Re-Formation of Dormant GmbHs and UGs.

The process of forming a Gesellschaft mit beschränkter Haftung (GmbH) or an entrepreneurial company with limited liability (Unternehmergesellschaft (haftungsbeschränkt) – UG) is often seen as cumbersome: notary and court fees arise, the share capital must be raised, and registration in the commercial register can take time. The obvious idea, then, is to reactivate an old company that is no longer being used for a new venture. The problem: the German Federal Court of Justice (Bundesgerichtshof – BGH) treats this as an economic (factual) re-formation, with the result that the rules on formation apply once again – meaning that capital coverage must be ensured at the relevant point in time.

This article explains when the reactivation of an old GmbH amounts to an economic re-formation and what disclosure requirements and liability consequences follow.

When does an economic re-formation exist?

If a GmbH discontinues its business, it continues to exist as a legal entity, but becomes an “empty shell” (also referred to as a Mantelgesellschaft). Typically, at this stage the company no longer has any assets, or it may have nothing but unsatisfied liabilities. When the company is revived, it will often receive a new name, new managing directors and shareholders, as well as a new corporate purpose. To third parties, this creates the impression that they are dealing with a new company that has, at least initially, been equipped with share capital for the business purpose now being pursued. In reality, however, the original share capital has long since been consumed by the previous business, which has in the meantime been discontinued. Case law is designed to prevent exactly this.

The changes just described to the articles of association, management and shareholder base are not, however, mandatory prerequisites for an economic re-formation (they are merely strong indicators that will prompt questions from the notary and the commercial register). Nor does the company actually have to be without assets. The only decisive question is whether the original business was discontinued before the new business was started. If there is no economically meaningful link to the former business operations, case law treats the matter as an economic re-formation (BGH, order dated 7 July 2003 – II ZB 4/02).

Practical example

A vivid example can be found in a decision of the Berlin Higher Regional Court (Kammergericht – KG) (order dated 12 October 2022, 22 W 48/22): a GmbH based in Rostock whose corporate purpose was the design and installation of conservatory systems was acquired by a new sole shareholder, who also assumed management. The registered office was moved to Berlin, the company name was changed, and the corporate purpose was altered to “other management and administration of companies”. The register court refused to register these changes because the economic re-formation had not been disclosed. The KG confirmed that decision: in the case of a business that was primarily trade-based and location-specific, it was “rather unlikely” that a customer base had been transferred to the new location, and the complete change in business direction all but ruled out any transfer of staff and operating assets.

Even without far-reaching changes at the company level, caution is required: a prolonged interruption of business operations may already amount to a sufficient break to require the transaction to be treated as an economic re-formation – even if the former business is resumed by the same parties. There is no rigid monthly threshold; what matters is whether there is still an economic continuation of the old business.

When is the register court likely to ask questions?

Notaries and register courts typically become alert where several of the following points come together:

• The company name, registered office or corporate purpose is changed fundamentally.
• Shareholders and managing directors change at the same time or in close sequence.
• The company had no recognisable business operations for a longer period.
• The accounting records show no ongoing revenues, no employees, no customer base or only minimal assets.
• The new venture has no economically meaningful link to the previous business.
• The documents submitted do not show, as of a sufficiently current date, that assets at least equal to the share capital are available.

The more of these indicators coincide, the more carefully economic re-formation should be assessed, documented and, where necessary, disclosed.

Consequences

If there is an economic re-formation, this must be disclosed to the register court. The managing directors must, in line with Section 8(2) GmbHG, declare that the contributions to the share capital have been made and that the contribution asset is at their free disposal; at the time of disclosure, the company must have assets at least equal to the stated share capital.

Where there are corresponding indications, the register court will regularly request meaningful documentation on the company’s financial position. Depending on the case, annual financial statements may help; decisive, however, is an up-to-date presentation of the assets as of the relevant date (not necessarily the end of the last financial year). A mere trial balance is not enough – quite the opposite: if the accounting submitted shows no material entrepreneurial activity, the register court will see this as confirming that the company is an empty shell (KG, order dated 12 October 2022, 22 W 48/22).

To the extent there is a shortfall in net assets (Unterbilanz) at the time of the economic re-formation, the shareholders must make good that shortfall. A contribution of assets up to the amount of the subscribed share capital is therefore required only to that extent. If they fail to do so, there is continuing liability for the shortfall in net assets by reference to that date, even if the company later accumulates equivalent assets through other means (for example, through revenue). This liability is directed against the shareholders and is an internal liability owed to the company.

This must be distinguished from the liability of persons acting on behalf of the company (Handelndenhaftung) under an analogy to Section 11(2) GmbHG: if the managing directors commence business operations without disclosing the economic re-formation and without the consent of all shareholders, personal liability to the company’s creditors may arise. That is external liability. At the latest in insolvency proceedings, the insolvency administrator will therefore pursue the shareholders and managing directors for payment. If, at the time the new business was “implanted”, the company was already indebted, these liability claims can be correspondingly substantial.

A pragmatist may now ask: why disclose the economic re-formation at all if, in the worst case, the same consequence may arise years later – and there is at least a chance that the economic re-formation will go unnoticed?

There are several reasons for that. If the managing directors are not also the shareholders, it will hardly be in the interests of these third-party managing directors to expose themselves to liability for the shortfall in net assets together with the shareholders. Moreover, disclosure affects the burden of proof. If the economic re-formation is disclosed, the ordinary allocation of the burden of proof applies: it is for the company (or, in practice, the insolvency administrator) to prove the under-balance at the time of the economic re-formation. Where disclosure is omitted, by contrast, case law reverses the burden of proof against the shareholders – they must then prove that there was no shortfall, which will hardly succeed without interim financial statements prepared and retained as of the date of the re-formation. The amount of the liability risk then becomes hard to assess.

And finally, any well-advised future new shareholder or business acquirer will come across the issue of economic re-formation when reviewing the company’s legal position. If it becomes apparent that the matter was not handled properly, this reflects badly on the former shareholders and may derail the entire transaction if the resulting liability risks appear too high for the acquirer.