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I. German Corporate Law
German law distinguishes between companies limited by shares and partnerships (general partnership, limited partnership, dormant partnership).
The most common type of business organisations in Germany is the company with limited liability (Gesellschaft mit beschränkter Haftung = GmbH) governed by the Act concerning Companies with Limited Liability (Gesetz betreffend die Gesellschaften mit beschränkter Haftung - GmbHG). The shareholders participate by means of capital contributions into the share capital, broken down into initial individual payments on the total investment, but without being personally responsible for the company debts. Just one person is sufficient to set up a GmbH. The share capital must be at least EURO 25,000. In order to set up a GmbH, an agreement between the shareholders must be prepared and notarized by a notary public. The company's existence becomes legally effective upon its registration into the commercial register. The company name of the GmbH must always contain the addendum "with limited liability" or the pertinent abbreviation mbH.
For a joint stock company (Aktiengesellschaft = AG), subject to the Stock Corporation Act (Aktiengesetz- AktG), the required share capital must be at least DM 100,000. Articles of association authenticated by a court or notary public are initially required to set up an AG. The AG only turns into a legal entity when it has been entered into the commercial register. The name of the AG can generally be taken from the purpose of the enterprise and must contain the expression "Aktiengesellschaft (AG)".
General rules on partnerships are laid down in Sec. 705 to 740 of the Civil Code (Bürgerliches Gesetzbuch - BGB), mercantile partnerships are governed by the Commercial Code (Handelsgesetzbuch - HGB). Instead of setting up independent companies, many foreign undertakings establish non-independent subsidiaries or branch offices in Germany.
A subsidiary is a legal entity separated from the parent company. It is to a certain degree independent, usually confirmed by having its own management, accounting system, balance sheet procedure and its own business assets. In contrast, branches are no separate legal entities and depend almost entirely on the head office, which is also in charge of central administration. Therefore, an entry into the commercial register has to be made only for subsidiaries, but not for branches.
The setting up of a joint venture, notwithstanding if between domestic or foreign firms, is not limited to special legal entities. Joint ventures can be carried out in any of the above-mentioned types of companies and partnerships. Therefore, for instance, in the case of companies limited by shares, the foreign company is only liable with its contribution. In partnerships, the liability of the limited partners may be restricted, i.e. only one of the partners (general partner) is fully liable. There are neither upper limits to the share capital nor licensing procedures. However, joint ventures in Germany are subject to German and European Antitrust Law as well as the law of the home country of the parties if they fulfill certain requirements with regard to the turnover and market shares of the undertakings concerned. They may be subject to merger control as well as to the prohibition on cartels.
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II. Antitrust and Competition Law in Germany
For doing business in Germany, German Antitrust Law, i.e. the Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen - GWB) and EC Antitrust Law, i.e. Articles 81 and 82 EEC Treaty and the Merger Control Regulation, have almost the same importance in practice. The German Federal Cartel Office (Bundeskartellamt) enforces German as well as EC Antitrust Law. In addition, German Antitrust Law is enforced by State Antitrust Offices (Landeskartellbehörden), while EC Antitrust Law is enforced by the EC Commission.
Unfair Trade Practices are governed by the Act Against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb - UWG). In practice, most cases fall under the general prohibition of § 1 UWG and are therefore subject to case law. § 1 UWG provides that whoever in commerce, for competitive purposes, acts contra bonos mores is subject to an action for injunctive relief or damages. The UWG is enforced by private parties, especially competitors, and private consumer organisations before the courts, but generally not by governmental authorities.
Several branches which are in the process of deregulation and liberalisation are subject to specific regulation: The telecommunications industry is subject to the Telecommunications Act (Telekommunikationsgesetz) and several ministerial ordinances enforced mainly by the Regulatory Authority for Telecommunications and Post (Regulierungsbehörde für Telekommunikation und Post). The Energy Sector is governed by the Energy Act (Energiewirtschaftsgesetz). In addition, deregulation and liberalisation of these industries as well as other industries is influenced and enforced by German Antitrust Law (for instance the essential facilities doctrine, § 19 (4) No. 4 GWB) and EC Antitrust Law. In addition to specific industry regulation, the provisions of the GWB and UWG apply to the above-mentioned industries.
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III. Distribution Systems in Germany
Foreign suppliers are not subject to specific regulations with regard to their distribution channel. However, if they choose not to rely on direct distribution but on indirect selling methods, several rules which also apply to domestic undertakings have to be considered. Indirect sales include the sale of goods through independent traders (importers, wholesalers, retailers) or through sales agents such as commercial representatives, commission agents and exclusive representatives (independent dealers).
For the distribution through wholesalers and retailers, foreign suppliers have to consider EC antitrust law as well as German Antitrust Law. In general, resale price maintenance is prohibited, with a number of exceptions, for instance for commercial representatives and for books (§ 14 GWB) under German Law. Other vertical restraints such as exclusive practices, territorial restrictions etc. may be prohibited by the Bundeskartellamt under § 16 GWB. Furthermore, vertical restraints are subject to Art. 81 EEC Treaty but may be excluded from the prohibition by various block exemptions or individual exemptions by the EC Commission.
Those antitrust law restrictions do only partly apply to the co-operation with sales middlemen. This group of legally and economically independent sales middlemen comprises commercial representatives, commission agents and dealers:
The commercial representative works on a commission basis as a self-employed business entity on behalf of and for the account of third parties. Many commercial representatives in Germany act on behalf of several companies, often supplying mutually complementary product lines. Commercial representatives are subject to §§ 84-92c of the Commercial Code (Handelsgesetzbuch- HGB).
In contrast to the commercial representative, the commission agent (§§ 383-406 of the Commercial Code - Handelsgesetzbuch- HGB) conducts business in his own name on behalf of a third party. He also works on a commission basis but he can claim such commissions generally only when the transaction he has contracted with the third party is actually completed.
The sole/exclusive distributor (often called a dealer) conducts his business on a commission basis or on his own account. When buying and selling imported goods on his own account and in his own name, he is an independent importer and not an agent under German law.
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IV. Intellectual Property Rights in Germany
Patents are subject to the Patent Act (Patentgesetz) and are granted by order of the German Patent and Trademark Office located in Munich, entered into the patent register and announced in the Patent Office Gazette. The procedure for issuing patents is subject to a fee. Only new inventions permitting commercial use can be patented. Only the original applicant (excepting a prior application of the invention in a Convention Country of the Paris Union) has the right to be granted a patent. Foreigners may apply for a patent under the same conditions as German Nationals. Protection is given for a period of 20 years from registration. The holder of a patent or, in the event of an exclusive licensing agreement, the licensee, may apply for an injunction against any unlawful use of a patented invention by third parties. This "right of prevention" provides temporary protection and is effective as soon as the patent registration is announced by the Patent Office.
Applications for international patents may also be submitted to the German Patent Office. Based on the Community Patent Convention, European patents with validity in several European Union states may be registered with the European Patent Office which is also based in Munich. Formal regulations for licensing agreements do not exist. The prerequisite that the licensing agreements must be made in writing if they include competitive restrictions has been repealed by the 1999 Amendments to the Act Against Restraints of Competition (GWB).
Registered trademarks are protected under the Trademark Act (Markengesetz). The trademark is a protected mark or name which a manufacturer or dealer uses to differentiate his products from those of other suppliers. In order to be protected, the trademark must be new and characteristically different in order to be entered in the trademark register kept at the Patent and Trademark Office. The trademark is published by the Patent Office. A registered trademark is protected for a period of ten years starting from the day after registration and can successively be extended by further ten year periods. If the trademark is also to be protected outside the Federal Republic of Germany, it must be registered internationally. In this case, the length of protection is ten or twenty years and can be extended.
Under the Act on Utility Models (Gebrauchsmustergesetz), the inventor of certain technical improvements to tools or articles of daily use has the right to exclusive use of this innovation ("minor patent") for a total of eight years. This legal protection of a utility model is acquired by entry in the Utility Model Register at the Patent and Trademark Office.
Protection of registered designs is regulated in the Registered Designs Act (Geschmacksmustergesetz). It applies to artistic forms of consumer goods such as fabrics, audio products or glasses. Registration in the Register of Designs takes place at the local court which is in charge of the region in which the author is domiciled. The length of protection varies between one and three years, but can be extended to a maximum period of fifteen years. Foreign applicants require a domestic representative for starting and handling the registered design procedure.
The registration and protection of domain names is not subject to specific legislation. A claim with regard to an internet domain may be based on §12 Civil Code (BGB) covering the protection of names, §14 Trademark Act (Markengesetz) dealing with trademark infringement and §15 Trademark Act (Markengesetz) concerning trade name infringement. Furthermore, the registration and use of domain names may be subject to the Act Against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb - UWG ) which prohibits commercial behaviour contra bonos mores (§ 1 UWG) and misleading statements or claims (§ 3 UWG).
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V. German Insolvency Law
The German Insolvency Statute („Insolvenzordnung”), which became effective January 1, 1999, has replaced the previous Bankruptcy Statute (“Konkursordnung”), the Settlement Statute (“Vergleichsordnung”) and the Act on Collective Enforcement (“Gesamtvollstreckungsordnung”) and thereby created a uniform insolvency statute for all of Germany. In contrast to the former legal situation, the Insolvency Statute provides for only one insolvency procedure. The insolvency procedure may lead to either the reorganisation or the liquidation of an insolvent enterprise.
1. Provisional Insolvency Proceeding (“Vorläufiges Insolvenzverfahren”)
The insolvency procedure is initiated at the request of the debtor or of a creditor if the debtor is insolvent. If the debtor is a legal entity, over-indebtedness also constitutes grounds for initiation. If it is the debtor himself who applies, the procedure may be initiated even if there is a risk of insolvency only.
Following the insolvency request, the Insolvency Court may
• appoint a provisional insolvency administrator
• issue an order prohibiting the creditors from pursuing execution or enforcement actions
• and/or prohibit the debtor to transfer property rights or require the provisional insolvency administrator's
permission for that until the decision on the insolvency proceeding has been made.
The provisional insolvency administrator shall preserve and protect the property of he debtor, carry on the business for the time being unless the insolvency court has decided and determined if the debtors' assets are sufficient to cover the costs of the general insolvency proceeding.
Most provisions of the Insolvency Statute do not apply during the provisional insolvency proceeding (“Vorläufiges Insolvenzverfahren”).
2. Insolvency Proceeding and Securities
An insolvency administrator is generally appointed when the proceedings are initiated. The Insolvency Court may, however, also leave the power of disposal with the debtor, who is then placed under the supervision of a creditors' trustee.
At the latest, three months after proceedings have been initiated, the creditors' meeting decides on the basis of a report prepared by the insolvency administrator whether the enterprise is to be liquidated or continued for the purpose of reorganisation.
Two types of secured creditors have to be distinguished under the Insolvency Statute, those delivering goods whilst retaining title and those having received title from the creditor for security reasons.
Moveables supplied whilst retaining title (“Eigentumsvorbehalt“) may not be removed from the enterprise during the first stage of the proceedings, but generally must be distributed to the owners by the insolvency administrator (“Aussonderungsrecht“). Under German law sales conditions often put the transfer of ownership of a sold product under the condition of full payment not only of the respective purchase price but also of all outstanding debts between the parties. These security-interests do not require any notarial form in Germany and can thus be provided in sales conditions.
Moveables which have been assigned by the creditor for security reasons (“Absonderungsrecht“) are realised by the insolvency administrator. The insolvency administrator takes the cost of determining the securities, the realisation costs and the turnover tax from the proceeds of the realisation. However, the rights of the secured creditors may be restricted by an insolvency plan.
In case of liquidation of the insolvent enterprise, all unsecured creditors are satisfied at the same quota. There are no privileges for certain creditors.
Employees receive protection provided by insolvency money, which covers wages lost for the period of up to three months. Furthermore, as a rule employees must be given a redundancy pay when works are closed ("redundancy payment scheme").
The Insolvency Statute furthermore provides for the opportunity of a special proceding for the reorganisation of the debtor called "insolvency plan" (“Insolvenzplanverfahren“). The insolvency plan can be submitted either by the debtor or by the insolvency administrator; the creditors vote on the plan in groups.
3. Consumer Insolvency Procedure
Under the new insolvency statute, a natural person may be discharged from his remaining obligations on the basis of a special consumer insolvency procedure. The consumer insolvency procedure consists of three phases: The debtor must initially seek an out-of-court settlement with the creditors. If this attempt to reach an agreement is unsuccessful, the court insolvency proceedings follow. In a first step, the court attempts once more to arrive at an agreement between the creditors and the debtors on the basis of a debt reorganisation plan submitted by the debtor. Here, it may also substitute the approval of individual creditors under certain preconditions if the content of the plan is suitable. If no debt reorganisation plan is prepared, a simplified insolvency procedure is carried out. If the debtor then settles with his creditors to the best of his ability for another seven years, he will be discharged from his remaining obligations.
4. International Insolvency Law
International insolvency law is partly governed by Article 102 of the Introductory Act to the Insolvency Statute (Einführungsgesetz zur Insolvenzordnung). Foreign insolvency proceedings may also cover the foreign debtor's domestic assets if the courts of the country in which the proceedings were initiated have international jurisdiction, i.e. if the debtors headquarter/centre of his main interests is located in the foreign country, and no violation of the ordre public is given.
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VI. German Labor Law
Labor relations between employers and employees are subject to legislation, collective agreements and contracts of employment. Labor law is mainly Federal Law and is spread on numerous Acts.
A contract of employment is a special type of contract for the rendering of services and is subject to §§ 611 et seq. of the Civil Code (Bürgerliches Gesetzbuch). Arrangements entered into in favor of employees in collective agreements and company agreements as well as industrial safety regulations must be observed when filling in the general framework of employment contracts.
Art. 9 (3) of the Federal Constitution (Grundgesetz) guarantees the so-called "freedom of coalition" to employers and employees. This ensures the freedom to negotiate collective agreements, i.e. autonomy in collective bargaining. The majority of collective agreements are restricted to particular regions. There are also so-called in-house collective agreements for individual companies.
Employees have a legal right to the continued payment of 80% of wages or salaries in the event of sickness (Continued Payment Act - Entgeltfortzahlungsgesetz). This right extends to a period of six weeks.
The employer-employee relationship comes to an end by:
unilateral notice of termination of the contract of employment
termination of the contract by mutual agreement
end of the term of the contract of employment (only permitted under specific circumstances)
According to § 622 BGB, standard periods of notice apply to salaried employees and wage-earners. The basic period of notice to be observed by the employee and employer is four weeks on the 15th or the end of a calendar month. In companies with up to 20 employees, a basic period of notice of four weeks without a fixed date can be agreed on in an individual contract. Depending on the length of service in the company, the periods of notice to be observed by employers when terminating employment are extended. They are increased to seven months at the end of the month for a length of service amounting to 20 years. The length of service is calculated from the age of 25 of the employee. The parties to a collective agreement are also free to decide on different periods of notice. Employees and employers not bound by a collective agreement may stipulate collectively agreed periods of notice in an individual contract.
Irrespective of the individual periods, a notice of termination of the contract of employment may only be issued if it is corroborated by the facts and appears socially justified (Protection from Dismissal Act - Kündigungsschutzgesetz). The circumstances of the individual case must be taken into account. In case of large-scale dismissals, the employment office (Arbeitsamt) in charge must be notified. The notices of termination of employment do not become valid until they are authorised by the employment office or alternatively until one month has elapsed since receipt of the above-mentioned information. Exceptional dismissal without notice is only possible if there is a reasonable cause due to the behaviour of the employee.
Labour co-operation between employers and employees in a company is subject to the Labor Management Relations Act (Betriebsverfassungsgesetz). According to this Act, every company with at least five employees must have a works council, whose number depends on the size of the work force. The works council has the right of co-determination in certain social matters, the right of co-determination or participation in certain personnel decisions and the right to information on specific economic matters.
In companies with more than 100 employees, an economic committee is set up to report to the works council on economic matters. In the case of joint stock companies, limited liability companies and cooperatives with more than 500 employees, one third of the members of the supervisory board must be employees. In the case of companies in the iron, coal and steel industry, provision is made for equal representation on the supervisory board by shareholders and representatives of the work force. A director representing the employees with responsibility for social affairs is also appointed (qualified co-determination).
Following the introduction of the Co-determination Act (Mitbestimmungsgesetz), co-determination was extended on a company basis to other sectors of industry. The law mainly applies to limited liability companies and joint stock companies with more than 2,000 employees. This number may be less for group companies if all controlling companies together have a total work force of more than 2,000 employees. Exceptions to the Co-determination Act are those companies which have a political, religious, educational or charitable purpose.
The Federal Holiday with Pay Act (Bundesurlaubsgesetz)
stipulates a minimum of 20 working days leave per annum for all employees.
However, there are also other collectively agreed rules regarding leave
which go beyond the statutory minimum period in the old and new federal
states. Employees are entitled to wages/salaries during their leave. An
additional payment (holiday bonus) is also made. However, there is no
legal right to this payment unless it is stipulated in a collective agreement
or individual agreement.
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