Law passed to prepare UK limited companies in Germany for possible Hard Brexit

German lawmakers have prepared a corporate environment that could help UK limited companies stay in Germany in the event of Brexit.

This German action comes in response to recent events in the UK surrounding Brexit: namely, the postponement of the vote by the UK parliament on Prime Minister Theresa May's proposed withdrawal agreement from the EU – widely known as the Chequers plan. Parliament will not vote on her plan until 21 January 2019 at the latest, due to a lack of support among MPs in her ruling Conservative party and the opposition.

If May does not manage to win enough supporters for the plan when this vote takes place, an unregulated Brexit (a No-Deal Scenario) may occur on the official deadline of 29 March 2019. Furthermore, a No-Deal means there will be no transition phase for Britain's departure from the EU, and the hardest of Hard Brexits will take place.

With an eye on this possibility, the German Bundesrat passed the Fourth Act to Amend the Transformation Act on 14 December 2018, which attempts to prepare the German legal environment for a disorderly Brexit. As a result of this law, UK limited companies should be allowed to remain in operation in Germany by becoming legal German entities.

Why is this law necessary? In the event of Hard Brexit, British companies with administrative headquarters in Germany will lose their freedom of establishment under EU law. Limited liability companies will then be treated as partnerships and shareholders will lose the privilege of limited liability.

This applies in particular to UK private companies limited by shares with administrative headquarters in Germany, of which an estimated 8,000 to 10,000 exist. They are a remnant of the limited boom prior to the introduction of the "Unternehmergesellschaft" ("UG" - limited liability company).

German lawmakers now offer these British companies a chance for cross-border mergers into commercial partnerships (i.e. into a GmbH & Co. KG). Until now, the corresponding rules (found in the EU mandated law §§ 122a et seq. of the Transformation Act or UmwG) have been limited to corporations. But with the new law, German lawmakers have exempted small companies from the strict capital-raising requirements applied to corporations. In certain cases, eliminating merger reports and merger audits will also make the procedure easier.

Finally, Germany will grant a transitional period for merger proceedings involving a British company if the draft terms of the merger (Verschmelzungsvertrag) have been notarised before the UK leaves the EU or before the expiry of the transitional period resulting from a withdrawal agreement (i.e. Soft Brexit).

Even though this is being done to make it easier for UK limited companies to remain in operation in Germany, the German legislator has no influence over obstacles on the British side, such as potentially high professional fees and court costs and a cumbersome procedure.

The new German law is also welcome because although the ECJ ruled last year that a company registered in one EU member state should be permitted to “migrate” to another EU member state, British law does not currently permit a British company to migrate out to another EU member state.

For more information on this law or how Brexit could affect British companies operating in Germany, feel free to contact Dr. Gerd Leutner.