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The Consequences of Brexit on Company Law and Merger Control since January 1, 2021

A. Company Law

Since  January 1, 2021, Brexit has been fully implemented. While transitional arrangements had still regulated the relations between the EU and the UK last year, the uniform EU law nowadays no longer applies to the United Kingdom. Company law and merger control law were not regulated in the Trade and Cooperation Agreement (EU-UK Trade and Cooperation Agreement, "TCA") that the EU and the UK agreed on on December 24, 2020. Therefore, the UK must be treated like any other third country in these areas.

1. Consequences of Brexit

a. Loss of legal capacity and limitation of liability of UK corporations.

Before Brexit, UK companies with administrative headquarters in Germany were fully recognized based on the freedom of establishment under Articles 49, 54 Treaty on the Functioning of the European Union (“TFEU”). Since January 1,  2021, the legal capacity and limitation of liability of the shareholders of a British company are determined according to German law, provided that the administrative seat, i.e. the place of activity of the management, is located in Germany (so-called Real Seat Theory).

UK corporations with administrative headquarters in Germany are not recognized as having legal capacity if they are not registered in the (German) Commercial Register. According to Sections 13d et seq. of the German Commercial Code (“HGB”), the mere registration of a German branch is not sufficient since it is not the company as such that is registered but solely the branch office. Accordingly, UK corporations that have no relevant activity in the UK will automatically have lost their legal capacity as of  January 1, 2021. In the case of a single-member company, this means that the sole shareholder is personally entitled and obligated as an entrepreneur or merchant arising from the transactions, and his liability is unlimited in terms of amount. Multi-person companies are qualified either as a partnership under civil law (Gesellschaft bürgerlichen Rechts, "GbR") or, in the case of the operation of a commercial business, as a general partnership (offene Handelsgesellschaft, "OHG"). The partners are then liable for the company's liabilities pursuant to Section 128 sentence 1 HGB (analogously) personally and without limitation. The personal liability applies not only to future corporate liabilities but also to those that arose when the British company had legal capacity in Germany.

b. Personal liability of the general partner of a Ltd./plc & Co. KG (Limited Partnership)

In Germany, UK corporations registered in the form of the Ltd. & Co. KG and the plc & Co. KG are frequently encountered. The choice of a foreign corporation as the sole general partner of a German limited partnership (Kommanditgesellschaft, “KG”) is a popular way of circumventing employee participation that would otherwise be required in Germany. This German limited partnership is recognized without restriction as a KG under German law. The situation is problematic for the general partner if the corporation has its administrative headquarters in Germany, for example, because it was founded for the sole purpose of acting as the general partner of a German KG. In this case, the administrative seat of the limited partnership is usually located in Germany - with the consequence that the limited or plc does not have legal capacity, and its partners are not exempt from personal liability. This means that the partners behind the general limited or plc are fully liable with their personal assets for the liabilities of the limited partnership.

2. Options for UK Corporations

a. Avoidance of the personal liability of the partners

To avoid the personal liability of the partners, the following options are available:

  • Transferring the effective place of management to the UK

Theoretically, it is conceivable to transfer the effective administrative seat to the United Kingdom in order to be recognized as a company with legal capacity and limited liability in Germany as well. However, this requires generating real business activity in the UK. For this, it is not sufficient to simply rent mailboxes or offices that are located in the UK. Rather, the place of management activity, i.e. the place where board meetings are held and regular business transactions are concluded, must be moved to the UK. This alone represents a considerable effort in practical terms. Also, a relocation of the registered office triggers exit taxation under Sections12 (1), (3) German Corporation Tax Act (KStG), 4g Income Tax Act (EStG). For most companies, this is therefore unlikely to be a practicable option.

  • Transferring the business operations of the UK corporation

Alternatively, the business operations of the UK corporation could be transferred to a German limited liability company (Gesellschaft mit beschränkter Haftung, “GmbH”) or entrepreneurship (Unternehmergesellschaft, “UG”) with limited liability. In the case of a sole proprietorship, after the loss of legal capacity, only the sale by way of an asset deal is possible. However, the shareholders of the UK corporation continue to be personally liable for the old liabilities. Since January 1, 2021, multi-person companies have been regarded as either GbRs or OHGs under German law. By transferring the shares in the German partnership, the old liabilities are transferred to the acquiring company. However, the former shareholders are subject to a five-year personal subsequent liability according to Section 160 (1) HGB. The transfer of the business operations to a new company therefore in no case excludes the personal liability of the partners for old liabilities.

  • Merger of the company into a legal entity with limited liability

It is also conceivable to convert the German partnership into a German corporation by way of a merger by absorption or by new formation. The rights and obligations of the partnership would be assumed by the absorbing legal entity together with the old liabilities. However, Section 45 (1) Transformation Act (Umwandlungsgesetz, "UmwG") provides for a five-year period of personal subsequent liability for the existing shareholders if the shareholders of the new legal entity are limited in their liability. As in the case of a share deal, the liability of the shareholders of a UK corporation for old liabilities can no longer be excluded in the case of a conversion. 

b. Replacement of the general partner

Anyone who has used a limited or a plc as the general partner of a KG to circumvent employee participation should replace the UK company with another corporation which - like the limited or plc - originates from a country of incorporation that does not have its own co-determination regulations. For example, the Austrian GmbH or the Dutch B.V. are suitable for this purpose. As companies from an EU member state, they enjoy full freedom of establishment and are recognized in Germany - with limited liability and no obligation for employee participation.

B. Merger control

The TCA does not contain any provisions for mergers of companies with Union-wide significance. Accordingly, there is no uniform European merger control concerning the UK. This has the advantage that the decision of the European Commission supersedes and replaces national antitrust proceedings (so-called One-Stop-Shop principle).

Mergers with Union-wide significance involving the UK, which are entered into after January 1, 2021, now require two notifications: one to the UK's national control authority, the Competition and Markets Authority (CMA), and one to the EU Commission. This not only leads to additional work for the companies concerned but also to considerable uncertainty: conflicting decisions and requirements are conceivable.

Conclusion

With Brexit, the legal form of the limited company as an alternative to the GmbH or UG  has ceased to exist, at least if it has its administrative headquarters in Germany. From now on, its shareholders are liable with their personal assets without limitation. Furthermore, personal liability for old commitments cannot be eliminated by property transfers or by transformations and mergers.

In the case of a Ltd & Co. KG or a plc & Co. KG, the status under co-determination law can be maintained by replacing the Ltd./plc as general partner with a corporation from an EU member state which is also not subject to employee participation in its home country, e.g. the Austrian GmbH or the Dutch B.V.

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