1. Introduction

Since the introduction of Section 55a into the German Act on Limited Liability Companies (GmbHG) by the German Act for the Modernisation of the GmbH (MoMIG) in 2008, authorised capital has been explicitly permitted for German limited liability companies (GmbHs). Despite this, authorised capital has remained in the shadows for most GmbHs, which is not entirely surprising in view of the differences between GmbHs and German stock corporations (AGs), where authorised capital has become standard practice. Nevertheless, there are situations, especially in the venture capital and private equity sectors, in which the use of authorised capital also appears to make sense for a GmbH, especially in view of the associated procedural simplifications.

2. Framework conditions for authorised capital in a GmbH

The framework conditions for authorised capital in a GmbH are clearly defined in Section 55a GmbHG. Management, i.e., the managing directors, can be authorised to issue new shares in the company for a maximum period of five years after the authorised capital has been registered with the company’s commercial register. The amount of authorised capital is limited to a maximum of 50% of the company’s existing registered share capital at the time of its creation, but can be subsequently increased to a maximum of 50% of the then-existing share capital by a new shareholders’ resolution if the authorised capital is used up.

By way of a shareholders’ resolution, the shareholders can also impose further requirements/restrictions on management regarding the use of the authorised capital, in line with the relevant provisions in the articles of association of the GmbH (e.g., with regard to any conditions, additional payment obligations and/or exclusions of subscription rights). Alternatively, management can be given instructions by means of simple resolutions passed at the shareholders’ meeting, provided that these do not conflict with existing provisions in the articles of association.

3. Appropriate areas of application for authorised capital in the GmbH

Authorised capital can be used in the GmbH primarily (a) in the venture capital sector, for start-ups (e.g., in connection with convertible loans), (b) in the private equity sector, for buy-and-build structures and for planned employee participation programmes on an equity basis and (c) generally in structures with several small minority shareholders and a significant majority shareholder/investor, provided that certain capital measures are planned in the medium term.

In all of these scenarios, multiple capital increases are to be expected within a certain period of time. While further financing rounds are often required in the VC sector in order to obtain fresh capital for the further development of start-ups or to convert any convertible loans into equity, buy-and-build struc-tures are primarily affected in the PE sector. These are characterised by various smaller investments during the investment phase, using a platform in order to develop a larger overall structure (and therefore a higher overall valuation) for an exit. The sellers of these individual acquisitions, as well as key employees or managing directors, are often given the opportunity to co-invest alongside the PE investor.

4. Potential challenges from the perspective of a majority investor

In these cases, individual capital increases would normally require all shareholders to meet locally to pass a notarised shareholder resolution. In this respect, the shareholders are dependent on mutual cooperation. However, if a significant majority shareholder/investor is involved, they will want to avoid delays and obstructions from individual minority shareholders at these shareholders’ meetings and will therefore want to take advantage of procedural simplifications.

In terms of content, all framework conditions are usually already agreed or defined in advance as part of a shareholders’ agreement. In such cases, it is not unusual for a majority investor to obtain powers of attorney from the minority shareholders or conclude voting agreements. In some cases, however, these agreements only contain contractual obligations for individual shareholders in accordance with the majority shareholder’s specifications.

From the investor’s perspective, however, these agreements usually do not entirely eliminate the risk of obstruction by minority shareholders. In addition, proxy solutions are associated with a certain amount of administrative effort and can always be revoked for good cause or expire, or the original powers of attorney may be lost.

Moreover, any waiver of the usual notice periods for a capital increase required at short notice also requires the presence (or representation) and consent of all shareholders, which may be delayed considerably by a single minority shareholder. Finally, each capital increase incurs notarisation costs for the required shareholder resolutions based on the current value of the company.

5. Procedural simplifications through authorised capital

In these scenarios, authorised capital offers the following procedural simplifications from the perspective of a potential (VC/PE) majority investor: (a) no requirement for powers of attorney or voting agreements with existing or new shareholders, (b) elimination of waiting periods or compliance with other formalities typically required for a capital increase and (c) cost savings due to the absence of notarisation requirements for shareholder resolutions.

Instead, the desired capital increase is carried out via a simple private resolution of the company’s management. Only the subscription of new shares is carried out similarly to a normal capital increase, by means of a notarised subscription declaration by the shareholder subscribing for the newly issued shares. According to prevailing German legal opinion, the necessary amendment of the articles of association required for the capital increase can also be decided and carried out by the management without notarisation (alternatively, this can be done by the notary involved). The only prerequisite for this is a corresponding authorisation in favour of the management within the framework of the provisions on authorised capital in the company’s articles of association. Such authorisation can be justified either through an analogous application of Section 179(1), sentence 2 of the German Act on Stock Corporation (AktG) or through a corresponding annex authority for the authorised capital. Without this shift in formal authority, all the advantages of authorised capital would be nullified, which would undermine its intended purpose.

From a cost perspective, there are no notarisation fees for the capital increase resolutions. Only the granting of the authorisation for the authorised capital requires a notarised shareholder resolution, which typically incurs lower notarisation fees than those for individual capital increases.

6. Management as an executive body – the right to issue instructions

Subject to (a) conditions/specifications in the articles of association and (b) shareholder resolutions to issue instructions, the management is the sole executive body for the formal exercise of authorised capital.

Instruction resolutions offer majority shareholders in particular additional comfort and control over the issue of new shares by the management. Contrary to certain legal opinions suggesting that the shareholders lose their right to issue instructions when provisions on authorised capital are included in the articles of association, shareholders retain the general right to issue instructions even in the case of authorised capital. Section 37(1) GmbHG, which establishes shareholders’ right to issue instructions to management, does not restrict this right in this respect. While conditions/specifications in the articles of association require a statutory voting majority of at least 75%, resolutions to issue instructions can be passed with a simple majority (unless a higher threshold is agreed in the articles of association). This is particularly beneficial for majority shareholders who do not hold the 75% majority needed to amend the articles of association. The general corporate duty of loyalty under company law (gesellschaftsrechtliche Treuepflicht) and the principle of equal treatment (Gleichbehandlungsgrundsatz) provide sufficient protection for minority shareholders in this respect.

Shareholders are free to decide whether and, if so, to what extent they stipulate any additional conditions/requirements for the utilisation of authorised capital in the articles of association. However, an authorisation for the exclusion of subscription rights must be included in the articles of association in any case, and an authorisation of the management for the amendment of the articles of association in the context of authorised capital is at least advisable. Moreover, a majority shareholder cannot disregard or circumvent the conditions/requirements set out in the articles of association by means of a simple instruction resolution. This is the only significant restriction on the general right to issue instructions with regard to authorised capital. As a purely precautionary measure, a provision could also be included in the articles of association, and publicised accordingly, to exclude or expressly reserve further instruction resolutions regarding authorised capital.

However, the highest courts have not yet provided any case law on the shareholder’s right to issue instructions, so it remains to be seen whether the courts will follow the prevailing opinion.

7. Conclusion

In summary, authorised capital offers considerable procedural simplifications that should definitely be considered by majority investors in the situations described. From the shareholders’ perspective, it is important to carefully consider whether and to what extent conditions/requirements should already be included in the articles of association. It is also advisable to include clarifying provisions (e.g., waiver of a preliminary report with regard to any exclusion of subscription rights) in order to avoid ambiguity in view of the more detailed and stricter requirements for AGs.

A well thought-out implementation of authorised capital can enable multiple capital measures to be carried out efficiently and pragmatically without the further involvement of minority shareholders. If, in addition, appropriate mechanisms for the admission of new shareholders have been created in any existing shareholder agreement, such as those that the majority shareholder can execute alone, entire financing rounds or further acquisitions can be completed on buy-and-build platforms cost-effectively without involving other existing shareholders. It therefore remains to be seen whether authorised capital will emerge from its shadowy existence in the GmbH. The potential is certainly there.