JASPER RECHTSANWAELTE

Law of incorporation is applicable!

The Federal Ministry of Justice is going to remove a source of great legal uncertainty for companies founded according to foreign law (Ltd., BV, SARL, etc.) whose head office, however, is located in Germany. In the present draft of the Federal Ministry of Justice of the "Law on Private International Law of Societies, Associations and Legal Entities” the German company seat principle will be changed and substituted with the incorporation principle.

For quite a while there was a debate regarding which law should would take precedence. For example, the liability of a business leader who owned an English Ltd. with administrative headquarters and the majority of its business conducted in Germany, then one would have to decide if one based this case off of the company seat principle or the incorporation principle This is not purely of academic interest especially if one considers that a manager has unlimited personal liability in the case of the German law not according to the English Company Act of 1985.

The "Law on Private International Law of Societies, Associations and Legal Entities” henceforth be standardized, which was recently decided by the BGH (14.3.2005, II ZR 5 / 03) when they took over the jurisdiction of the European Court of Justice (EuGH). Companies that were founded abroad, even of they have their administrative headquarters in Germany will be judged according to the laws of the country the company was founded in. With this, a German tradition of the company seat principle will end and the German law will adapt to the European law i.e. the incorporation principle which has existed for a long time.

Currently, the company seat principle is implemented and the German courts apply the laws from the countries the companies were founded in. In many cases the German Law was applied even though the company was founded on another countries soil. The European Court of Justice in many cases followed the German law due to the settlement freedom law (right of establishment) (Overseas Ring "(Case C-208/00)), and Inspire Act (C-167/01)).

Based on fundamental freedom it can be concluded that under the law of a Member State where the company was successfully established, the company has to be lawful and have the ability to form parties. A company can’t make itself dependable on any preconditions. These include in particular the rules of minimum capital equipment and the liability of directors and also issues of representation, of conversion and transfer. Other cases can only individually be seen as cases for fraudulent or abusive behavior.