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Corporate Law: A Fresh Look at German and American Company Law

by | Jul 29, 2017 | Business, Business and Commercial Law, Firm News |

Corporate Law: A Fresh Look at US and German Company Law

What US and German Companies should understand about Business Law

Corporate law is also called company law or corporations law.

An Overview of the Laws and Regulations that Define Corporate Structures Domestically and Abroad

Corporate law can be defined as the sector of the legal realm that deals with the formation and operations of corporations.

Another corporate law definition defines it as the study of how stakeholders interact with one another. Stakeholders can be shareholders, directors, employees, creditors, consumers, the community, and the environment.

OVERVIEW from a German Legal Perspective:

Corporations are legal persons or entities. As such, they can sue and be sued, enter into contracts, and function in all ways required to maintain a business.

Individual states under which corporations are created have their own unique laws that govern and regulate the lives of corporations—from their creation to their organization to their dissolution.

Corporations are taxable entities. Individual owners and shareholders are shielded from personal liability for the debts of the corporation (with a few exceptions).

Corporations have their own lives and structures that are not impacted by whether or not officials or stockholders are living or dead.  They must be formally dissolved before their lives and structures are terminated.

Corporate Lawyers | Company Compliance and Regulation

Corporate lawyers who have attended corporate law schools receive education and training in the area of legal formation of corporations. They conduct the legal formation of joint ventures, licensing arrangements, mergers, acquisitions, and other transactions. Corporate law falls under companies law or law of business associations. There are different forms of business associations. Germany, for example, has public companies, private companies with limited liability, limited partnerships, and general trading partnerships, to name a few. The United States has Limited Liability Companies (LLCs), Corporations, Partnerships, and Sole Proprietorships.

Several types of law, or practice fields, fall under the umbrella of corporate law. These include corporate governance law, business formation, securities law, contract law, tax law, bankruptcy, zoning laws, venture capital financing, business agreements, corporate finance, internal forms, and business tax consultants.

Distinctions Between Business Associations

As mentioned above, there are different forms of business associations governed by corporate law. Forms vary by country. Germany has public companies, private companies with limited liability, limited partnerships, professional partnerships, general trading partnerships, and non-trading partnerships. German public companies have shareholders with specific rights, a board of directors, a supervisory board, and shareholder meetings. (More on German business forms and German corporate law later in this article.)

Contrasting Corporate Structures

In the United States, there are the four business forms just mentioned: corporations, LLCs, partnerships, and sole proprietorships.

Sole proprietorships are the simplest form of business. One individual can start a business as a sole proprietorship. (A business with employees can’t be structured as a sole proprietorship.) The tax implications in this form of business are simple because the owner doesn’t have to pay corporate taxes. He or she just reports their profits on their own personal tax return as personal income. The downside of a sole proprietorship is that the owner is personally liable for lawsuits filed against his or her business. In other words, it is possible to lose all personal assets in the case of a lawsuit against the business.

A sole proprietorship can be upgraded to a Limited Liability Corporation (LLC).Doing this is easier and less expensive than forming an official corporation. The advantage of forming an LLC is that personal assets are protected. If the business gets sued or ends up with debt, only the company’s assets are liable, not the assets of the LLC’s owner.

An LLC can have an unlimited number of owners. It is not required to hold annual meetings or to record minutes. It is governed by operating agreements.

There are two kinds of corporations: C corps and S corps. A C corporation gets double taxation, that is, both the company and the individual shareholders have to pay taxes. In contrast, in an S corp, the company’s shareholders pay all of the business’s taxes and expenses. S corps can only have up to 100 shareholders, and they must be U.S. citizens or residents; a C corp can have an unlimited number of shareholders. As with an LLC, corporation owners and shareholders aren’t personally liable for company debts or lawsuits. Both S and C corporations have to hold annual meetings and record minutes.

Partnerships exist in two forms: general partnerships and limited liability partnerships. In the first form, business owners are personally liable for business lawsuits and debt. In the second form, they are not.

It is pretty easy and inexpensive to form a partnership. Partners combine their resources and operate out of that pool. They share both the financial burdens and the managing rights of the business, and income is reported on each partner’s personal income tax return.

What Corporate Lawyers Do

Corporate lawyers construct joint ventures, licensing arrangements, mergers, acquisitions, and other transactions. Their role is to make sure of the legality of commercial transactions. They advise corporations and officers on their rights, duties, and responsibilities. They structure transactions, draft documents, look over agreements, work out deals, and attend meetings.

Corporate law does not have the same underlay of combativeness as trial law. In corporate law there are not people who have been wronged or treated inequitably; there are just parties who need a transaction facilitated in a way that all will be protected and that all accomplish what they intended to business-wise. The types of projects a corporate lawyer works on depends on the firm that he or she works with, how big it is, and where it’s located. A small firm in a small town may need its corporate lawyers to draft wills, divorce settlements, and real estate transactions.

A large firm in a big city may assign its corporate lawyers to single cases that take months to complete because of the magnitude of the transactions.

Joint ventures are business agreements in which two or more people or businesses start a new business entity together. Often it is with the idea that the venture will be a short-term enterprise with a limited scope of work. Usually the joint venturers contribute their own finances and then share both the expenses and the profits. Usually joint ventures are small-scale projects, but sometimes major corporations will launch a joint venture for the purposes of diversification. Joint ventures are most often entered into for a limited purpose and duration. They can also last indefinitely, though. Dow Corning, Sony Ericsson, and Owens-Corning are examples of ongoing joint ventures.

Joint ventures can become complicated and challenging, and because of this, almost 50% of all joint ventures don’t make it to four years and end up in legal battles between the venturers. Joint ventures are a great way for two or more people to get a project off the ground by pooling their resources. However, if one of the parties comes up with a great idea that exponentially increases the profits of the joint venture, the question can arise if that party should get a greater percentage of the profit. This kind of question can cause strife between parties and ultimately end the venture.

Mergers and acquisitions have to do with one company purchasing another company (the acquisition) or two companies joining together (the merger). In a merger, two organizations or businesses combine and become a new business, usually with a new name. In a merger the two companies are usually about the same size, so sometimes the term merger of equals is used. In an acquisition, one business buys another business. Usually the second business is a small company. After the acquisition, it will either get absorbed and disappear into the buying company, or it will be run as a distinct subsidiary.

Corporate lawyers do all the legal work to make mergers and acquisitions happen. Typically, this includes thorough due diligence, which can be thought of as fact finding, although in the context of mergers and acquisitions, it’s more related to reviewing and summarizing contracts. This process is intended to reveal any issues that should be ironed out for the merger or acquisition to be successful.

Fields of Practice That Fall Under Corporate Law

Corporate governance is all about the systems that govern how a corporation is managed by its shareholders, directors, and officers. The systems delineate rights and responsibilities of all parties in the company, both as they relate to each other, in-house, and as they relate to the outside world. These parties are usually boards of directors, managers, shareholders, creditors, etc.

A solid governance system ensures that a company has in place effective strategies for pursuing and reaching its objectives.  It also ensures that the actions and decisions of its directors, managers, and stakeholders are monitored and controlled. The collapse of several major corporations in 2001-2002, mostly due to accounting fraud, led to a resurgence of public interest in corporate governance. These corporations included Enron and MCI (formerly WorldCom). The Sarbanes-Oxley Act of 2002 came about in part to restore public confidence in publically-traded companies.

Securities law is the field of law that has to do with transactions and securities dealings (securities being tradable financial assets such as equities and stocks and bonds and their derivatives, such as futures contracts, options and mutual funds).

Securities laws and regulations are in place to ensure that investors get accurate information regarding the securities they intend to buy. State securities laws are often called Blue Sky Laws. They cover a range of provisions, from prohibitions against fraud in the sale of securities to broker and dealer registration requirements, securities-sale requirements, sanctions, and civil liability.

The Uniform Securities Act has been adopted by most states.

Contract Law

Contracts are legally enforceable agreements between two or more parties that establish expectations and commitments—who is going to do what, and when and where. Usually contracts are entered into by parties who are competent—that is, they have all of their mental faculties intact—and put into writing. Although it varies from state to state, to be legally binding, usually a contract has to be put into writing when it involves real estate, goods valued at over $500, or an agreement that will take a year or more to complete.

A breach of contract occurs when one of the parties doesn’t uphold their commitment in the agreement. The other party can sue and ask the court to enforce the contract. Contract law is the field of practice under corporate law that pertains to creating contracts between parties. Even simple and honest mistakes in a contract can wreak havoc later, and this is what a corporate lawyer working in this field seeks to avoid.

Zoning Law is the area of corporate law that pertains to use of land and buildings or structures on the land. Land, especially in urban or suburban areas, is zoned for permitted usage as a tool of urban planning. The intent of zoning is to regulate how land is used so that it is compatible with everyone living on it or in possession of it.

Corporate lawyers often draw on their knowledge of zoning law when forging or negotiating transactions between business parties. It is important to be aware of restrictions or designations in an area where a party desires to establish a business.

Corporate finance law includes:

  • Debt and equity
  • Legal capital
  • Contractual protection for creditors
  • Proprietary protection for creditors
  • Transferred debt
  • Public offers of shares
  • Debt regulation
  • Takeovers

Difficulties, risks and tensions exist in this area of law, and a good corporate lawyer is able to navigate them and create intelligent and protective contracts and transactions for his or her clients. Other fields of law that fall under the corporate law umbrella include business formation, tax law, bankruptcy, venture capital financing, and business agreements.

On Becoming a Corporate Lawyer . . .

Got questions about becoming a corporate lawyer? What they actually do? What a typical corporate law salary lands at? Finding corporate law jobs?

In 2005 there were 67,000 corporate lawyers in the US. The average starting salary was $64,000, increasing to almost $94,000 after five years and $139,000 after ten or 15 years.

If you’re a law student looking for a corporate law job, consider these tips:

  • Network while you’re in school and after you graduate. Use the Internet. Check out LinkedIn, Facebook, blogs, Google+, and Twitter.
  • If you don’t know how to network through the Internet, ask for help.
  • Attend alumni events to meet lawyers; read lawyers’ blogs; connect with and follow lawyers on social media.
  • Be willing to work for free in those lean months after graduation.
  • Go meet with partners of law firms, even if you don’t have an appointment, even if they say they’re not hiring, even if you have to wait for 2 hours.
  • Keep going back to re-visit, even if they keep saying they’re not hiring.

Once a law student is hired by a law firm, typically, he or she starts out as a junior lawyer. In corporate practice, a junior lawyer will be given common tasks that support senior lawyers regardless of the area of practice they’re working in.

A junior will be assigned tasks to help facilitate general closing preparations. Juniors handle paperwork, which usually involves keeping track of all the documents that pertain to the transaction and the closing. Juniors are also usually in charge of preparing signature pages for clients to sign, and then, after the closing, compiling all the documents and putting them into a closing book. There are usually large amounts of documents involved in a closing and keeping track of all of them can be a herculean task. Junior lawyers will be pressed into service doing due diligence. In corporate practice, due diligence is basically fact finding. In mergers and acquisitions, junior lawyers will review contracts to review and summarize. The job there is to look for potential issues for the merger or acquisition transaction. In corporate finance, due diligence usually means scouring a prospectus or past filings and disclosure documents for proof of statements.

Lastly, junior lawyers often do basic drafting of documents. These documents can include certificates, resolutions, receipts, or consents. Typically, a junior lawyer doesn’t create documents from scratch. There are templates or existing documents with language in place that a junior lawyer can draw on to create a unique piece.

German Corporate Law

German corporate law, or German company law, is the legal realm under which German companies and businesses operate.

Corporate law Germany is its own unique jurisdiction, i.e. separate and distinct from, for example, French corporate law or Swiss corporate law.

Two primary company forms exist in Germany: partnerships and corporate bodies. Corporate bodies include the Aktiengesellschaft, or AG (the public company) and the Gesellschaft mit beschränkter Haftung, or GmbH (private company with limited liability). Partnerships include the Kommanditgesellschaft, or KG (limited partnership); the professional partnership (PartG); the Offene Handelgesellschaftk, or OHG (general trading partnership); and the Gesellschaft bürgerlichen Rechts, or GbR (non-trading partnership).

Corporate bodies are considered legal entities. Partnerships are only partial legal personalities. Corporate bodies are subject to legal rights and duties but partnerships are only subject to legal rights and duties under certain circumstances. A partnership can not have only one shareholder by virtue of the fact that there are two or more owners. This is possible, though, in the case of a corporate body.

In the public company—the Aktiengesellschaft, or AG—the owners are shareholders and are governed by a board of directors, a supervisory board, and shareholder meetings.

Shareholders have specific rights, including:

  • The right to vote (one share, one vote)
  • The right to call a meeting with 20% of the votes
  • The right to a non-binding say on pay
  • The right to change the constitution with a three-quarters majority
  • The right to vote or veto substantial property transactions
  • The right to use profits from account
  • The right to appoint auditors
  • The right to raise or reduce capital

Directors of public companies in Germany bear the duty of loyalty and the duty to exercise competent judgment. An executive director can only be removed by a second-tier supervisory board and not directly by company members.

In the private company with limited liability (GmbH), the important distinction is that owners are not personally responsible for the debts of the company. The company itself is considered a legal person. GmbH companies reach full legal status through a three-step formation process. The first step is the founding association; second is the founded company; and third is the fully registered GmbH. The GmbH attains full legal status only when it is registered in the Commercial Register.

Partnerships can be limited partnerships or general partnerships, and general partnerships are either trading or non-trading (OHG or GbR).

In the OHG partnership, partners are liable for the debts of the partnership. In the KG partnership, there are both general partners and limited partners. The limited partners’ liability is fixed at their contributions to the partnership. Partnerships are not legal entities. However, they can acquire rights and title to real estate. They also can sue or be sued, and can incur liabilities.

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German corporate law is a separate realm from German criminal lawfamily law,contract lawsecurities law, and civil law.

Germany has many law schools. Here is a partial list of law schools, Germany, in alphabetical order by city:

  • Augsburg: Augsburg Universität – Law School
  • Bayreuth: Bayreuth Universität – Fachbereich Rechtswissenschaft
  • Berlin: Humboldt-Universität zu Berlin – juristischen Fakultät
  • Bonn: Rheinische Friedrich-Wilhelms Universität
  • Cologne: Universität zu Köln – Rechtswissenschaftliche Fakultät
  • Dusseldorf: Heinrich-Heine-Universität – Faculty of Law
  • Frankfurt: Johann-Wolfgang-Goethe Universität – Fachbereich Rechtswissenschaft
  • Hamburg: Bucerius Law School
  • Hannover: Gottfried Wilhelm Leibniz Universität – Faculty of Law
  • Mannheim: Universität Mannheim – Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
  • Munich: Munich Intellectual Property Law Center
  • Saarbrücken: Universität des Saarlandes – Faculty of Law and Economics
  • Trier: Trier Universität – Rechtswissenschaft
  • Würzburg: Julium Maximilian University of Würzburg – Juristische Fakultät