The “Steward-owned Company” – from idea to draft-bill

The authors of the draft bill that has now been presented to the public have opted for implementing the idea of steward-ownership by introducing a new variety of the legal form of limited liability company under German law (GmbH). They have pointed out that due to the close connection to GmbH law, many corporate law issues of a general nature will be able to be resolved using proven instruments. Consequently, in their opinion, steward-ownership can be introduced with only a minimum of legal provisions within the existing system of GmbH law.

The newly presented steward-owned limited liability company(GmbH in Verantwortungseigentum – “VE-GmbH”) is characterised by two principles:

• Firstly, the company’s assets and all the business profits generated should be permanently locked within the company (“asset lock”). This has to be ensured by means of suitable governance rules. It is not intended that a commitment to a sustainable purpose that promotes the common good to a particular extent will be required.
• Secondly, it should be possible to pass on the stewardship, i.e. the responsibility for the business, from shareholder to shareholder regardless of genetic family ties and wealth within a close circle of shareholders (the so-called skill- and value-based family) who make a practical contribution to the undertaking as “trustees”.

According to the draft bill, Sections 77a to 77o are to be inserted as a new Part into the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung - “GmbHG”). A central rule is to permanently bind the company’s assets by way of the irrevocable asset lock, which means that the shareholders are not entitled to the company’s profits or assets throughout the life cycle of the business. To this end, adjustments have been made to the provisions governing the financial constitution, with a particular focus on the provisions aimed at preventing hidden distributions of profits. Other provisions that are just as important relate to the characteristics and selection of the shareholders as a “skill- and value-based family”. The draft bill limits the circle of potential shareholders, restricts the transferability of shares and allows the shareholders to exclude the transferability of shares by succession.

The following quote from the fundamental Section 77a GmbHG Draft Bill may illustrate these points:

“Section 77a

Steward-owned Company

1. A company whose assets are permanently locked in accordance with the provisions set out in this Part must, unlike as set out in Section 4, include the addition “in Verantwortungseigentum” (i.e. “steward-owned”) in its company name, or an abbreviation of this addition that is generally understood.
2. The permanent asset lock can be agreed either when incorporating the company or by a resolution passed by all of the shareholders and officially recorded by a notary in accordance with the provisions set out in Part 3. Such an asset lock cannot be cancelled or amended.
3. Only natural persons, other steward-owned companies or legal entities whose assets are permanently locked by law in the same manner can be shareholders.  The articles of association may additionally provide that also partnerships with only natural persons as partners can be shareholders of the company. If a shareholder does not meet the requirements set out in sentences 1 and 2 despite the setting of a reasonable deadline, such shareholder’s shares shall revert to the company upon expiry of the deadline. (…).”

As the mandatory asset lock leads to a structural change in the incentives for the parties involved, a suitable governance structure is required which must especially ensure that if any shareholders develop an interest in monetary incentives, they cannot secretly circumvent the asset lock. The draft bill gives the owners the liberty to develop governance solutions that are appropriate to their situation; these solutions must, however, be made transparent by being published on the internet!

The shareholders are, however, not obliged to commit to a purpose that promotes the common good, as the steward-owned company is “not a hallmark of especially valuable entrepreneurship”.

The “package” is completed by adjustments to the applicable transformation law and law relating to groups of companies. These adjustments are intended to ensure that the permanent asset lock cannot be circumvented through transformations or intercompany agreements.

Finally, the draft bill contains a few short provisions regarding adjustments to tax laws and regulations, which all follow the approach that the steward-owned limited liability company and related transactions should be taxed in the same manner as a “normal” limited liability company under German law. This means that there are no plans to grant steward-owned limited liability companies any tax privileges.

The above-discussed draft bill is based on a socio-political initiative and discussion that is very interesting and reasonable, in the opinion of the author of this post, even if it is still relatively new. It comes as no surprise then that some of the statements that have been contributed to this debate up until now tend towards idealistically exaggerating this topic – which does, however, seem to be a legitimate thing to do when it comes to promoting an idea. The initiators have thus been able to win the support of a number of well-known businesspeople and important political figures for their project within a short period of time.

As could be expected, the authors of the draft bill have taken a sober, professional and academic approach to legally implementing the initiative. Hopefully their draft will now be discussed and critically assessed by a community of legal experts, as such an academic legal debate is essential for ensuring that the German parliament will, in the end (but probably not very quickly), adopt a “good law”.