A group of entrepreneurs, law professors and economists have proposed that a limited liability company with steward ownership (GmbH in Verantwortungseigentum) be introduced in Germany. In such a company, the shareholders irrevocably waive their entitlement to profits and the option of selling their shares. The idea is that the undertaking will be preserved for future generations. Whether the legislative initiative will be successful is unclear at the current time. There are disputes as to whether the new legal form is needed, because foundation models permit similar – and more flexible – solutions to be found.
The legislative initiative
The basic principle of the limited liability company with steward ownership is that the power to direct the company (typically taking the form of voting rights) is decoupled from economic ownership. Stewards exercise the power to direct the company but have no recourse to corporate profits or the company’s assets. The company’s profits remain in the company or benefit charitable purposes. The stewards hold their interests “in trust” for a limited period, passing them on to persons linked to the company and who share its values.
Rather than being pinned down to charitable purposes, the limited liability company with steward ownership would generally be profit-oriented in its market activity. Shareholders would only be able to pass on their shares to other natural persons, other companies under steward ownership, or similar legal entities. They would also be managing directors and as such be permitted to receive reasonable remuneration for their work. But they would not be permitted to receive payments beyond this, either as shareholders, managing directors, or based on third-party transactions with the company. The idea is for these defining elements of the limited liability company with steward ownership to be mandatory and irreversible; transformation back to an ordinary limited liability company would be explicitly ruled out.
Opponents of the initiative see the limited liability company with steward ownership as a threat to the market economy and fundamental mechanisms with regard to incentives. Future generations, they argue, would not necessarily share the founding generation’s idealistic motives but would be bound to continue the company, whose economic value would have been lost. The model could also be used to circumvent death duty.
The prospects of the legislative initiative being realised are currently uncertain. Implementation within the current legislative period looks to be ruled out.
But there are already legal ways to structure the realisation of “steward ownership”, in particular solutions through foundations, including in succession planning.
Steward ownership and applicable law
The difference between foundation models and the new legislative initiative is that in the former, the entrepreneur exercises his or her power to direct the company but is not forced to give up some or all of his or her rights to company assets. In standard foundation models, the actual company’s legal form remains unaltered; the shares are contributed to a foundation in which the donor and his or her legal successors are no longer able to take decisions, or at least not on their own. The governing bodies of the foundation decide on whether the donor and his or her legal successors will share in the company’s economic success, as stipulated in the foundation’s statutes where applicable.
Another popular approach consists in what are termed double foundation models. Here, some of the company shares are contributed to a private family foundation while some are contributed to a charitable foundation. Profit from the shares contributed to the family foundation can benefit the family while the profit from the shares contributed to the charitable foundation is used for charitable purposes.
Fundamentally, this kind of model can be effected irrespective of the legal entity’s form (usually a German stock corporation (AG), limited liability company (GmbH), or limited partnership with a GmbH as general partner (GmbH & Co KG). It is considerably more flexible than the model of a limited liability company with steward ownership (GmbH-VE). In particular, the founders and/or owners and their offspring may continue to hold a minority economic share in the company, securing a livelihood for further generations.
One disadvantage of foundation-based solutions compared with the steward ownership model is the greater structuring and higher costs involved. Moreover, foundations are subject to State supervision; this may make it harder to change a foundation’s statutes or purpose. On the other hand, this means that there is an independent supervisory body offering a certain degree of protection against any self-enrichment by the foundation’s governing bodies.
Standardising laws on foundations
On 28 September 2020, Germany’s Federal Ministry of Justice and Consumer Protection submitted a ministerial draft bill for an Act to Standardise Laws on Foundations (Gesetz zur Vereinheitlichung des Stiftungsrechts). Under this bill, the entirety of civil law on foundations would in future be exhaustively provided for in the German Civil Code, rather than in both the German Civil Code as well as laws on foundations in Germany’s regional states. To date, legal uncertainty has arisen many times owing to the relationship between rules of the federal and regional state levels.
The draft bill would also create a central register of foundations, inclusion in which would constitute due publication. Following a three-year transitional period, all foundations would be obliged to be registered here. This would not only solve the practical issue of proving who is permitted to represent a foundation, but would also improve the transparency of foundations in general, raising their status.
Overall, standardising laws on foundations will likely increase legal certainty and facilitate the application of law. Accordingly, foundation structures will become even more attractive in future.
Conclusion
The steward ownership model is an interesting initiative, especially for small and medium-sized enterprises. But it throws up a considerable number of legal issues that still need to be clarified. In the short term at least, no specific legal form is available for steward ownership. The basic ideas underlying steward ownership can, however, already be realised through existing legal forms, in particular through foundation-based solutions. We will continue to monitor developments and keep you updated.
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