Is this Legal Form Undervalued? The German KGaA.

 The German joint-stock company (Kommanditgesellschaft auf Aktien, KGaA) has been leading a shadowy existence in the German corporate landscape for a long time.

Is this Legal Form Undervalued? The German KGaA, Insight by Dr. Thomas Hausbeck, Lawyer at law firm Buse Heberer Fromm

This has increasingly been changing in the past few years. Meanwhile, well-known DAX companies, such as Fresenius SE & Co. KGaA, Fresenius Medical Care AG & Co. KGaA, Merck KGaA and Henkel AG & Co. KGaA, have changed to this legal form. Other well-known companies operating as KGaA are for example the media group Bertelsmann SE & Co. KGaA and the medical and safety technology company Drägerwerk AG & Co. KGaA. But this legal form is predestined not only for large companies, but also for medium-sized companies, and in particular for family businesses.

But what exactly lies behind this legal form? What are the advantages, and for whom is it suitable and recommendable?

The KGaA is a corporate entity that is a hybrid between a limited partnership (Kommanditgesellschaft, KG) and a stock corporation (Aktiengesellschaft, AG). This means that one or more partners are liable unlimitedly, directly and personally with all their assets as so-called general partners. They are jointly and severally liable towards the shareholder creditors. The remaining shareholders, here referred to as “limited partners”, are only liable with their capital contribution, which is represented by the share. Only the general partners are published in the commercial register.

The KGaA became attractive by a decision of the Federal Court of Justice of 24 February 1997. Since then, the personally liable partner of the KGaA can not only be a natural person, but also a corporation. Consequently, a Limited Liability Company (Gesellschaft mit beschränkter Haftung, GmbH) or a European Public Company (Societas Europaea, SE) may also take the place of the general partner. This results in a GmbH & Co. KGaA or a SE & Co. KGaA being created in which there is no longer a personal general partner.

The management of the KGaA’s businesses lies with the general partners or the management of the partner with unlimited liability. The limited partners are generally excluded from management and representation. Only in the case of extraordinary transactions do they have a right of objection, which is structured as an endorsement obligation within the framework of their resolution body – the general meeting.

Therefore, the general partner of the KGaA has a significantly stronger position than the executive board of an AG. Because as a general rule, no measures – neither basic nor extraordinary transactions – can be concluded without or against the will of the personally liable partners. To put it simply, the KGaA is a large limited partnership whose share capital is divided into shares and freely tradable on the stock market.

The KGaA thus has the character of a corporation with a total capital consisting of the share capital of the limited partners (the so-called limited liability capital) and the asset contributions of the general partners. Just like with the AG, the share capital must amount to at least EUR 50,000.00. The company is a trading company and therefore a merchant by legal form (German Formkaufmann) and can participate in business transactions as a legal entity with legal capacity.

Just like the AG, the KGaA consists of three bodies: the management board, the supervisory board and the general meeting. However, in the case of the KGaA, the management board is composed of the general partners and, irrespective of the significant reference to the law on stock companies, the principle of “Selbstorganschaft” (no separate management) applies. The management and representation of the KGaA are carried out by the general partners or by the management of the partner with unlimited liability of the KGaA. This means that the management is not, as with the foreign organization of corporations, in the hands of an executive board that can also be carried out by non-shareholders.
It is mandatory for the KGaA to have a supervisory board established. It consists of at least three members. But in contrast to the supervisory board of the AG, it has significantly limited competencies. It is the sole task of the supervisory board to monitor the activities of the general partners and to represent the company vis-à-vis the general partners. Other than the supervisory board of the AG, which appoints the management board, the supervisory board of the KGaA can in particular neither appoint, dismiss nor exclude the management of the company. Based on the principle of separation of control and management, these general partners may not be members of the supervisory board at the same time.

Apart from that, there is the general meeting as a form of limited partners. Among other things, it determines the annual financial statement, which then requires the approval of the general partner. If general partners hold shares in KGaA themselves, they still do not have a right of co-determination at the general meeting.

Concrete Advantages of the KGaA in Comparison to Other Legal Forms

In summary, the KGaA differs mainly by:

  1. personal commitment of the shareholders to the company despite high debt capital contributions,
  2. strong control competencies of the general partners,
  3. high security against hostile takeovers and
  4. in relation to the classical KG, easier capital procurement by taking on further limited partners.

One of the key advantages of a KGaA over an AG, for example, is the legally mandated management and representation authority of the fully liable shareholder. While the AG executive board first has to be appointed by the supervisory board and can be dismissed from its position at any time by resolution, the KGaA general partner is a “born management body”. It is not necessary for the supervisory board to give consent in order to grant management and representation authority to it. Nor can it be dismissed. This gives the general partner a very strong management function which is independent of the amount of their capital contribution or the interests of other persons and bodies of the KGaA.

The general partner retains his executive position in the KGaA even if he makes only a small or even no capital contribution to the company. Therefore, a KGaA is exceptionally resistant against takeovers, which is a considerable advantage for family businesses. This is particularly evident when family businesses want or need to raise outside capital. The family members, who are at the same time KGaA complementary members, still keep things firmly in hand even if more than half of the share capital has been sold on the capital market to limited partners, who are not family members but outside third parties.

At the same time, the KGaA is suitable for companies that are dependent on external financing, without their management and decision-making authority being lost. Because it is not intended for the limited partners to have any rights to a say or rights of co-determination. Even in the case of extraordinary transactions, the requirement for their consent within the general meeting may be completely excluded by the articles of association.The

KGaA is also privileged with regard to aspects of co-determination rights. It is also subject to the German Law on Co-Determination (Mitbestimmungsgesetz, MitbestG) and the One-Third Participation Act (Drittbeteiligungsgesetz, DrittbG) like a stock corporation (Aktiengesellschaft, AG), but to a reduced extent. Thus, the KGaA supervisory board lacks personnel competence, which means that it has no right to appoint or dismiss the management. Nor can it impose rules of operation on the management or determine a requirement for consent to certain transactions. Furthermore, it cannot approve the annual accounts itself as this is the responsibility of the general meeting. The KGaA supervisory board only has the competence to supervise and consult the management.

The limited partners can be granted a stronger position than the classic shareholders. This is realized by making certain legal transactions explicitly subject to consent or by defining special rights of direction and rights of co-determination. However, this provision must not result in the general partners no longer being able to perform their duties as members of the management board on their own responsibility. On top of that: A special body can be set up to influence the management of the KGaA without being active as a managing director.

This extensive freedom of legal arrangement of the legal relationship between the general partners and the limited partners among themselves is a positive aspect of the KGaA that should not be overlooked. In this way, the articles of association of the company can be adapted to the individual needs of the company, and internal needs can be reacted to more flexibly. Not least because of this, the KGaA construct is ideally suited for medium-sized (family-owned) companies. The operatively active entrepreneur can be given the greatest possible scope for decision-making and action by granting him a position as general partner. Family members, however, who would rather take a passive position in the company, can financially support the company through their cash contribution as limited partners and in return participate in the economic success of the company through the dividend.

Conclusion

By choosing the legal form of the German KGaA, a company is given unhindered access to the capital market. This access can be granted with a clear separation of management and financing. The owning family does not have to waive its dominant influence in the company in favor of raising capital on the stock exchange. Nevertheless, it does not bear the risk of personal liability. The general partners are also largely independent from the limited partners, so that the KGaA is almost resistant to takeovers. In this way, a family business can remain in the family for future generations.

Due to the multitude of advantages the KGaA comes with, this legal form is now also strongly accepted by the public.
If and to what extent this legal form is suitable for you and your company, you can find out in a personal meeting with our specialist Dr. Thomas Hausbeck.