Is notarisation a myth?
The Promises of shares in a GmbH/UG is to have notarised – otherwise the grant of shares would be void. Is that right? No! It depends – as one might expect – on the Type of share allocation and the exact wording.
Initial case:
Mr Inhaber sends an email to Mr Mustermann: „Congratulations, Mr Mustermann. As you have worked so hard, you are to be granted a 10% stake in my (as yet to be established or already existing) GmbH next year.“ Mr Mustermann replies: „I’d be happy to. Thank you.“
Such wording constitutes an agreement to grant shares in a GmbH. Whether Mr Mustermann is required to pay consideration is, for the time being, irrelevant. Can Mr Mustermann actually demand the shares from Mr Inhaber next year?
This wording of the promise to grant a shareholding leaves many questions unanswered and is open to interpretation. There is a risk that the agreement is invalid on procedural grounds. Whether this agreement would have required notarisation depends on the nature of the grant of the shareholding and on whether Mr Mustermann is to be obliged or merely entitled to acquire a shareholding in the GmbH.
Ways of allocating shares
In order to grant Mr Mustermann a stake in the company, there are three possible ways of allocating shares:
Involvement in the company’s formation
If the GmbH has not yet been incorporated, Mr Mustermann’s shareholding can be arranged by including him as a co-founder at the time of incorporation. A prior commitment to acquire a shareholding would need to be notarised if Mr Mustermann obliged would be to co-found the GmbH. The commitment to invest would then constitute what is known as a genuine preliminary agreement to form a company. Such contracts are subject to the formal requirement set out in Section 2(1) of the German Limited Liability Companies Act (GmbHG), which stipulates that the formation of a GmbH must be notarised. This is because, in accordance with the legislature’s intention, anyone acquiring a stake in a GmbH or UG should be protected from making a hasty decision (warning function).
Conversely, the promise to acquire a stake would not need to be notarised if Mr Mustermann merely entitled would be to become a co-shareholder in the event of the limited liability company (GmbH) being incorporated. The fact that Mr Inhaber is obliged, by virtue of the promise of a shareholding (which is enforceable in court if necessary), to allow Mr Mustermann to become a shareholder upon incorporation does not mean that the promise of a shareholding is subject to any formal requirements.
The actual incorporation of the GmbH/UG must, of course, be certified by a notary.
Tip: The investment commitment should clearly stipulate whether Mr Mustermann is obliged to invest or merely entitled to do so.
Tip: As the GmbH does not yet exist, the GmbH/UG should be described as clearly as possible in the letter of intent, specifying the company in which the right to acquire a stake is to be held.
Allocation of shares through a capital increase
Mr Mustermann may also acquire a stake in the GmbH/UG through a capital increase.
The share subscription undertaking then effectively acts as a voting agreement, under which Mr Inhaber undertakes to exercise his shareholder rights in such a way that a capital increase is carried out, in which Mr Mustermann is authorised to acquire the newly issued shares accordingly.
Whether the promise to subscribe requires notarisation depends, in this case too, on whether Mr Mustermann is obliged to take up the shares newly created by the capital increase or whether he is merely entitled to do so.
With a Commitment As regards the acquisition of the new shares under the commitment to invest, this would constitute an advance on the declaration of acquisition, which, pursuant to section 55(1) of the German Limited Liability Companies Act (GmbHG), would have to be at least notarised.
The commitment to subscribe for shares could be made informally if Mr Mustermann is merely entitled to acquire the shares. This is because, according to prevailing opinion, a voting agreement may also be made informally in the case of capital increases.
The capital increase itself must, of course, be recorded in a notarial deed.
Tip: The investment commitment should clearly stipulate whether Mr Mustermann is obliged to invest or merely entitled to do so.
Allocation of shares by way of transfer
Mr Mustermann’s participation could, after all, take the form of a transfer of some of Mr Inhaber’s shares.
A commitment to acquire a stake, which provides for the transfer of shares, would be must always be notarised, as an obligation to transfer shares pursuant to section 15(4) of the German Limited Liability Companies Act (GmbHG) must take this form. This is because, unlike in the case of the formation of a company or a capital increase, the purpose of the application for the transfer of shares is, above all, to protect the transferring shareholder – in this case, Mr Inhaber – from acting rashly.
The only way to achieve freedom from formal requirements would be for Mr Inhaber not to commit himself to granting Mr Mustermann a stake, but merely to reserve the right to do so. However, such a mere declaration of intent would not be particularly helpful to Mr Mustermann, as he would not be able to enforce it in court if necessary.
Tip: Where possible, avoid using the phrase „transfer shares“ or similar wording in the share subscription agreement.
BUT it may still require a specific form if…
Regardless of the nature of the share grant and the wording used, a promise to grant a shareholding may nevertheless require notarisation if the agreement contains provisions which, in turn, must be notarised. This could, for example, be an obligation to transfer the shares received to co-shareholder Z upon the occurrence of event XY. This would constitute an obligation to transfer GmbH shares, which, pursuant to Section 15(4) of the German Limited Liability Companies Act (GmbHG), must be notarised.
Pro tip:
When drafting a commitment to acquire a shareholding, one should always bear in mind how it interacts with other (future) contracts under company law (e.g. shareholders’ agreements or investment agreements). It would be highly unfortunate if Mr Mustermann were able to claim his shareholding in the GmbH but were not obliged to accede to any existing shareholders’ agreement that imposes certain obligations.
Check for tax purposes
Although a promise to grant a shareholding is well-intentioned from a financial point of view, the granting of GmbH shares can lead to unpleasant tax surprises for the beneficiary.
Conclusion:
- Promises to invest should be made with care.
- Promises to invest made orally or in writing may also be valid.
- To ensure proper documentation and legal clarity, set out investment commitments in writing at the very least (e.g. through exchanged emails).
- Please take care with the wording.
- Take care to ensure consistency with other contracts governed by company law.
- Check the tax implications.