Draft law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal law proceedings

Regulations under corporate law

Protective measures to prevent the spread of the COVID-19 pandemic, in particular the restriction on the possibility of holding a meeting, increasingly present companies, associations and foundations with great challenges in ensuring their own ability to act by means of required meeting resolutions. This applies both to annual general meetings, for example to pass resolutions on the appropriation of profits or the appointment of board members, and to necessary extraordinary meetings. The latter can be of particular importance in times such as those we currently find ourselves in. The draft law prepared by the German federal government therefore wishes to facilitate the holding of (general) meetings and thus enable necessary resolutions to be adopted. The modifications apply to all ordinary as well as extraordinary (general) meetings, but – subject to their possible extension – are limited in time to the year 2020.

Regulations concerning stock corporations (Aktiengesellschaft – AG), ­partnerships limited by shares (Kommanditgesellschaft auf Aktien – KGaA) and European stock corporations (Societas Europaea – SE)

Facilitating participation in annual general meetings and the exercise of share­holders‘ rights. The German Stock Corporation Act (Aktiengesetz – AktG) already provides various options for participating in general meetings and exercising shareholders‘ rights without physical presence. However, this always had to be ­authorised in the articles of association. The draft law intends to change this: the management board with approval of the supervisory board will be able to order the following measures even if the articles of association do not contain a corresponding provision:

  • participation of shareholders in the general meeting and the exercise of shareholders‘ rights by means of electronic communication (electronic participation), whereby the management board may determine the scope of the exercise of rights;
  • voting by means of electronic communication („postal vote“);
  • participation of members of the supervisory board by means of video and audio transmission; and authorisation of video and audio transmissions of the meeting.

Virtual general meeting. The legislator goes a big step further by enabling a virtual general meeting. With the approval of the supervisory board, the management board can order the holding of a virtual general meeting if four conditions are met:

  1. There must be video and audio transmission of the entire meeting, i.e. including the general debate and voting. A technically undisturbed transmission and the possibility of reception by each shareholder is, however, not required.
  2. Shareholders must be able to exercise their voting rights by means of electronic communication (electronic participation and/or postal vote) as well as by issuing a proxy. If the company does not enable electronic participation, shareholders are not entitled to submit motions in the general meeting. They will then be unable to submit motions of fact or procedure.
  3. Shareholders must be able to ask questions electronically. A right to information will not be associated with this. Rather, the management board will decide on the admission and the answering of questions asked electronically – in deviation from section 131 AktG – in its best judgement and at its discretion. The management board may therefore select certain questions in the interests of shareholders, whereby it may also give preference to questions from shareholders‘ associations and institutional investors with significant voting interests. In addition, it is explicitly made possible to provide a summary answer. To ensure practicability, the management board may also decide that questions must be sent electronically to a designated e-mail address at least two days prior to the meeting.
  4. Shareholders who exercise their voting rights in accordance with the procedure described above (under no. 2) must be given the opportunity to object to a resolution of the general meeting without having to appear in person and without having to submit a statement for the minutes. For this purpose, it will in particular be sufficient if the shareholders send an objection by e-mail to the notary public recording the proceedings.

Restriction of shareholders‘ right to challenge. On implementation of this easing of restrictions, companies will be breaking new ground on a regular basis. In particular this will involve technical implementation risks which could deter companies from taking advantage of the facilitation. The legislator wants to guard against this and there­fore largely restricts the right of shareholders to challenge. As a matter of principle, an action for annulment cannot be based on violations relating to participation in the general meeting or the exercise of shareholders‘ rights by electronic means or the fact that a general meeting is exclusively held on a virtual basis. An action for annulment in connection with the administration‘s limited duty to provide information will also be excluded in principle. This does not apply to intentional breaches of duty by the company. The point of reference for intent in fulfilling the limited duty to provide information under the draft law is probably not the circumstance that individual questions are not answered; this is inherent in the statutory limitation of the right to information. Rather, the point of reference can only be that the management board deliberately violates its best judgement when deciding on admission and answering questions. Due to the wording („unless it can be proven that the company acted with intent“), the burden of proof for the intent lies with the shareholder bringing the action.

Shortening the period of notice for convocation. Companies may convene general meetings with a shortened notice period of 21 days (instead of at least 30 days) before the day of the general meeting. In deviation of section 123 para. 2 sentence 5 AktG, the notice period is not extended by the days of the period for registration of shareholders. If the company makes use of this option, the other relevant deadlines before the general meeting are also postponed as a result:

  • Requests for additions to the agenda must be received by the company at least 14 days (instead of 24 for non-listed companies or 30 for listed companies) before the meeting.
  • Proof of share ownership will be evidenced at the beginning of the 12th day (instead of the 21st day) before the meeting. In case of bearer shares of the company, such proof must be received no later than the 4th day (instead of the 7th day) before the meeting, unless a shorter period is provided for in the invitation to the general meeting. It is irrelevant if provisions of the articles of association deviate from this. Unfortunately, the draft law does not contain a shortening of the time period for receipt by the company of registration of shareholders. The registration is regularly a prerequisite for participation and must be received by the company at least six days before the general meeting. The draft law does not provide for a shortening of this period – unlike for the receipt of proof of share ownership. In the case of companies whose articles of association do not permit a reduction of the registration period, the registration period of at least six days would thus be mandatory. This does not lead to a corresponding extension of the notice period for the calling of the meeting (see above), but to different periods for the proof of share ownership and for the registration by shareholders.
  • When bearer shares are issued, notifications to intermediaries and shareholders pursuant to section 125 para. 1 sentence 1 AktG are made at least 12 days (instead of at least 21 days) before the meeting.
  • Notifications in accordance with section 125 para. 2 AktG must be made when registered shares are issued to those entered in the share register at the beginning of the 12th day (instead of at the beginning of the 21st day) before the meeting.

Extension of the period for holding annual general meetings. Further flexibility will be given to companies when setting the date of the annual general meeting in 2020. The annual general meeting does not have to take place within eight months of the end of the financial year, it is sufficient if it is held within the financial year. This also applies if the annual general meeting has already been convened at the time of coming into force of the law: in this case, a postponement to a later date within the financial year is possible. Any liability of the management board pursuant to section 93 para. 2 AktG is excluded in these cases. However, due to European requirements, this flexibility does not apply to an SE – here, the six-month period remains applicable. If companies have a financial year which differs from the calendar year, the extension of the time limit for the entire financial year may not, however, be extended beyond 31 December 2020. In this respect the draft law is limited – subject to a possible extension – to annual general meetings in 2020.

Advance payments on the balance sheet profit without authorisation in the ­articles of association. One of the reasons why individual companies want to and must hold their annual general meetings as soon as possible, even in the current situ­ation, is that shareholders have to resolve on the appropriation of profits before a dividend can be paid out. For this reason, the draft law intends to relax the requirements for advance payments on the balance sheet profit without a shareholder resolution. To this end, the requirement for a provision in the articles of association authorizing the management board to make such advance payments is to be waived. However, other requirements for advance payments contained in section 59 AktG remain unaffected. Accordingly, the (provisional) annual financial statements for the past financial year must show a net income for the year and the advance payment may not exceed 50% of the net income for the past financial year or 50% of the previous year‘s net income, even if audited annual financial statements are already available. Payments on the balance sheet profit for the current financial year, i.e. a genuine interim dividend, are not and will not be possible.

Decision on using the facilitating options. The decision as to whether a company will make use of the new facilitating options is taken by the management board with the approval of the supervisory board. Irrespective of existing provisions in the articles of association or rules of procedure, the supervisory board may also give its approval in writing, by telephone or in a comparable manner without the physical presence of its members. For a German one-tier SE which does not have a supervisory board, decisions will be made by the administrative board.
Applicability to listed and non-listed companies. The regulations apply to AG, KGaA and SE regardless of whether their shares are admitted to trading on the regulated market or not.

Regulation of transformation law

Extension of the registration period with the German Commercial Register to twelve months.
In addition to the extension of the deadline for holding annual general meetings, the draft law provides that for mergers and demergers according to the German Transformation Act (Umwandlungsgesetz – UmwG), an extension of the maximum period for registration in the German Commercial Register from eight to twelve months (section 17 para. 4 sentence 2 UmwG), in relation to the preceding closing date of the closing balance sheet of the transferring legal entity, shall be possible. This applies to all applications in 2020. The draft does not contain a corresponding extension of the related transformation tax periods for contributions in kind within the meaning of the German Transformation Tax Act (Umwandlungssteuergesetz – UmwStG) (see section 20 para. 6 sentences 1 and 2 UmwStG). This is likely due to the fact that tax regulations in connection with the COVID-19 pandemic will probably be regulated in a separate law, where the deadlines for transformation tax purposes are also likely to be extended, since otherwise the extension of the deadline in section 17 para. 4 sentence 2 UmwG with regard to mergers and demergers under which the shareholders of the transferring entity receive shares of the acquiring entity that are created by way of a capital increase as consideration would have no effect.

Regulation of other types of corporate entities

GmbH – shareholders‘ resolutions in text form without the consent of all shareholders. Contrary to section 48 para. 2 of the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung – GmbHG), resolutions in text form or by written vote will no longer require the consent of all shareholders.

Mutual insurance association (Versicherungsverein auf Gegenseitigkeit – VVaG). The above-mentioned facilitating options for AGs also apply to VVaGs (as defined in section 171 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG)) to the extent that the provisions of stock corporation law to which the exemptions relate apply to a VVaG.

Cooperatives, associations, foundations. The draft law also provides for facilitating options for cooperatives, associations and foundations during meetings and decision-­making processes, e.g. by enabling electronic communication even without an authorisation in the articles of association. In addition, a member of the board should temporarily remain in ­office after the expiry of his term until a successor can be appointed. In this way, ­emergency appointments by courts are to be avoided and the ability to act is to be maintained if a successor cannot be appointed in time due to restrictions imposed by COVID-19.

Extension of the facilitating options

Regulation authorization. The draft bill contains an authorization of the German Federal Ministry of Justice and Consumer Protection to extend the above-mentioned facilitating options by statutory regulation up to 31 December 2021 at the latest, if this appears necessary due to the continuing effects of infections with the SARS-CoV-2 virus in Germany.