In a statutory merger (Verschmelzung) pursuant to the German Transformations Act (Umwandlungsgesetz, "UmwG"), a corporate entity (the merging entity) transfers the entirety of its assets and liabilities to another corporate entity; in exchange, the (former) shareholders of the merging entity typically receive shares in the surviving entity. The merging entity ceases to exist: it "disappears" without any liquidation or insolvency proceedings and is succeeded by the surviving entity, which "inherits" its assets and liabilities. But what happens if the transferring entity's liabilities exceeded its assets? While the UmwG provides for mechanisms that are meant to protect the surviving entity from such risk, such mechanisms may fail; and the transferor – the merging entity – is no longer available for any recourse. Hence, it has widely been discussed under what circumstances – notwithstanding the "corporate veil" – the (former) shareholders of the merging entity may in such case be held liable. The German Federal Court in Civil Matters (the "Court") has now further clarified this question (BGH NZG 2019, p187 et. seq.).
In summary, the Court held that the (former) shareholders of a merging limited liability company (Gesellschaft mit beschränkter Haftung, "GmbH"), who in exchange receive new shares in the surviving entity, are not subject to a strict liability in case the value of the merged assets falls short of the value of the new shares. Pursuant to the Court, however, they may in such case be held liable if they benefited from the transaction and/or implemented the merger to get rid of the merging company's liabilities and to liquidate the entity without formal proceedings on the basis of a tort-based liability for so-called existential interference.
III. The Decision
The defendant was the sole shareholder and managing director of an insolvent GmbH. This entity was merged into another GmbH by way of a statutory merger (Verschmelzung) pursuant to the German Transformation Act (Umwandlungsgesetz, "UmwG"). The defendant, in his capacity as (former) sole shareholder of the merging entity, received in exchange shares in the surviving company. The surviving company subsequently filed for insolvency. The insolvency administrator sought to hold the defendant liable for having caused the surviving company's insolvency.
- The Court first discussed whether the defendant was subject to a strict liability against the surviving entity since the total value of the assets of the (over-indebted) merging company fell short of the nominal value of the newly issued shares in the surviving entity that the defendant had subscribed for.
- Such strict liability has been advocated by some authors on the basis of an analogy to the principles governing capital increases against contributions in kind: If the fair value of a contribution in kind that is made in a capital increase falls short the nominal value of the newly issued shares, the subscriber is liable to the company to pay the difference (so-called “Differenzhaftung”, or differential liability). Similarly, the argument goes, in a statutory merger, the merging company's shareholders that subscribe for new shares in the surviving company should be subject to a differential liability if the fair value of the merging company falls short of the nominal value of the newly issued shares in the surviving company.
- In 2007, however, the Court held that a differential liability does not apply where the surviving company in a statutory merger (Verschmelzung) is a stock corporation (Aktiengesellschaft, or AG). The Court argued that, firstly, the pertinent provisions of the UmwG, which govern the merger into a stock corporation, do not refer to the provision of the stock corporation act on the basis of which the liability for difference with respect to capital increases had been established. Secondly, according to the Court, the concept of differential liability was based on a the (implied) commitment of a share subscriber to provide sufficient capital to the company in exchange for the subscribed shares (Kapitaldeckungszusage). Such commitment does not exist in a statutory merger, where the merging company (and not its shareholder(s)) commit under the merger agreement to transfer its assets and liabilities to the surviving entity.
- For the case at hand, the Court could not rely on the formal aspects of the argument employed with respect to the AG. This is because the provisions of the UmwG governing mergers into limited liability companies involving the issuance of shares by the surviving company do not explicitly exclude the application of the provisions of the German Limited Liability Company Act (Gesetz über die Gesellschaft mit beschränkter Haftung, or GmbHG) that establish the differential liability for capital increases of GmbHs. Nevertheless, the Court held that the differential liability did not apply in a merger scenario where the surviving entity is a GmbH either, thereby confirming the substantial aspects of its arguments developed in 2007 with respect to the AG. According to the Court, the surviving entity's shareholders are in particular protected through their statutory right to have the commercial terms of the merger assessed by an auditor.
- The Court then argued, however, that the defendant may potentially be held liable under the concept of the so-called existential interference (existenzvernichtender Eingriff).
This liability concept, which "pierces the corporate veil", has been established by the Court in its settled case-law. It provides that notwithstanding the limited liability of the shareholders of a GmbH, a shareholder may be held liable if he withdraws from the company the assets required to fulfill its obligations and thereby causes or deepens the company's insolvency. It further requires that the shareholder acted willfully, i.e. at least considered and accepted the consequences of his interference. Given that this liability kicks in only once the company is insolvent, claims for existential interference – while technically being claims of the company against its shareholder – are practice brought by the company's insolvency administrator, who in such cases also bears the burden of proof to establish the relevant claim.
- In arriving at its holding, the Court first clarified that the requirement of a withdrawal of assets (Entzug des Gesellschaftsvermögens) does not necessarily require an actual transfer of assets (realer Vermögensabfluss) from the company but may also be satisfied where the company assumes liabilities. According to the Court, however, such assumption of liabilities needs to be carefully distinguished from situations where liabilities result from merely mismanaging the business of the company, which does not per se give rise to shareholder liability. For this purpose, the Court applies subjective and objective criteria: subjectively, "unloading" liabilities on the company has to be the purpose of the interference (zweckgerichtet); objectively, such liabilities must not have arisen from the company's business operations (betriebsfremd). On this basis, the Court held in the case at hand that merging the assets and liabilities of an insolvent entity into a (theretofore financially sound) surviving entity may establish a "withdrawal of assets" as required for an existential interference.
- The Court then further held that merely inflicting damages on a company does in itself not suffice to establish a shareholder liability for existential interference. Rather, the shareholder also needs to have financially benefited from the relevant course of action. The Court argued that this requirement followed from the legal basis on which the existential interference doctrine had been developed, namely a provision of the German Civil Code (Bürgerliches Gesetzbuch, or BGB) establishing tort liability for damages that are inflicted intentionally and in breach of bonos mores. Pursuant to the Court, a breach of bonos mores follows in the context of the liability for existential interference from the relevant shareholder's availing himself of the company's resources ("Selbstbedienung") that – one has to add: at least in an insolvency context – primarily serve to satisfy the company's obligations vis-à-vis its creditors.
In the case at hand, however, the Court argued that the required breach of bonos mores may be based on two aspects. Firstly, the Court argued, the defendant may have availed himself of a relevant benefit by subscribing for newly issued shares in the surviving company, the value of which was not covered by the total value of the merging entity's assets and liabilities. Secondly, the defendant appears to have intended to de-facto liquidate the merging entity outside of formal liquidation – or insolvency proceedings, thereby (i) at the level of the surviving entity, invoking the principle of separation of assets for an abusive purpose, and (ii) at the level of the merging entity, circumventing the statutory rules governing liquidation- or insolvency proceedings.
The Court's decision is convincing in both rejecting a strict differential liability in the context of statutory mergers and applying the liability for existential interference to the case at hand. The latter provides an adequate instrument for addressing the undesirable "disposing of" insolvent entities while generally respecting the corporate asset partitioning (and, correspondingly, the corporate liability shield) for the merging entity outside of insolvency scenarios.
In detail, one may, firstly, criticize that the Court does not seem to bother too much with identifying and analyzing the subjective requirements of the concept; it discusses them in passing in the context of its analysis of other (conceptually rather objective) aspects. Secondly, and more importantly, the Court is not entirely consistent in employing the argument that the defendant abused the statutory merger mechanism to unduly shift liabilities to the surviving entity, thereby circumventing insolvency proceedings, to establish an (indirect) benefit to the defendant; rather, the Court's language in the relevant passages seems to suggest that such abuse constitutes a breach of bonos mores in its own right.
Such critique put aside, however, the Court clearly establishes that "disposing of" a GmbH through a statutory merger to avoid burdensome insolvency proceedings will trigger significant liability risks for the merging entity's shareholders. Hence, it is for all practical purposes not a feasible structuring option to achieve a quick liquidation of an insolvent GmbH "to merge it away"