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 a dormant old company 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.

When an old GmbH is reactivated, the question arises when an economic re-formation exists and which disclosure 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 of 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 of 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 fixed minimum number of months; 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 trial balance was not sufficient in the case decided: where the accounts filed show no relevant business activity, the register court sees this as confirming the status as an empty shell (KG, order of 12 October 2022 – 22 W 48/22).

To the extent there is a capital shortfall (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 capital shortfall liability 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, which the individual creditors assert themselves. In insolvency proceedings, by contrast, the insolvency administrator pursues the shareholders under the capital shortfall liability and the managing directors under Section 43(2) GmbHG. 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, these third-party managing directors have their own interest in disclosure: the capital shortfall liability falls on the shareholders, but the managing directors are liable to the company under Section 43(2) GmbHG if they omit the disclosure and the declaration of capital coverage, and under the principles of liability for acting on behalf of the company (Section 11(2) GmbHG) if they act in the company’s name before disclosure. 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 capital shortfall at the relevant date; with disclosure that is the date of the filing, without disclosure the date on which the re-formation becomes apparent externally through the start of business activity (BGH, judgment of 6 March 2012 – II ZR 56/10). 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.