Brexit: Need for Action for UK Limited Companies in Germany?

The freedom of establishment in the European Union is also known to have led to a competition of corporate laws in Europe (for more details see Kruchen, European Freedom of Establishment and "domestic" Companies within the meaning of Article 19 para. 3 German Basic Law (GG), 2009, p. 145 et seqq.). Due to this fact, numerous UK limited companies and some UK plcs have been set up that mainly operate in Germany (regarding their fundamental rights in Germany see Kruchen, NZG 2012, 377 ff.). The reasons for the choice of this legal form are manifold. Some founding individuals are barred from establishing a German GmbH due to German law barriers regarding previous convictions, others use the legal form of a foreign company to avoid – at the price of a more or less complex structure – German co-determination. At least in the past many of them were set up because incorporation costs (including those stemming from minimum capital requirements) were lower. Whatever the historical root for choosing a UK limited company or UK plc was, given the results of the Brexit referendum there is every reason for such companies to rethink their legal form. As has already been pointed out by Christian Kersting, should the UK withdraw from the EU (and fail to obtain EEA status), such companies, in the light of the German Federal Court of Justice’s case law, will likely be treated as a German partnership, with the consequence that, inter alia, shareholders will have unlimited liability for the company’s debts.

In order to avoid this, one option would be a cross-border change of legal form (without winding-up or liquidation of a the company) into a company governed by the law of another Member State than the UK, possibly also based on the ECJ Judgments Cartesio (Case C-210/06, see recitals 111-112) and Vale (Case C-378/10, with a comment by Mutter/Kruchen, EWiR 2012, 541). Another option would be a cross-border merger with a company governed by the law of another Member State than the UK. Furthermore, the foundation of a supranational company, Societas Europea (SE), may also be an option. Both latter options might be particularly easy within an international group, if companies from different Member States belong to the group.

Lawyers in the UK and Germany are being called upon to sort out the details of the options mentioned above even before the effect of the Brexit referendum on the UK’s status is settled. The time frame within which these decisions will need to be taken remains uncertain at present.

Dr. Carsten Kruchen (M.Jur. (Oxon)) is a Partner at MUTTER & KRUCHEN Partnerschaft von Rechtsanwälten mbB.