Hidden Contributions in Kind (Verdeckte Sacheinlage)
Gesellschaftsrechtliche Vereinigung (VGR) - Company Law Society, VGR-Conference Series - 14 VGR 2009
20 Pages Posted: 14 Dec 2008
Date Written: December 12, 2008
Under German law, the subscribed capital of a company can either be paid up in cash or in kind. Contributions in kind are subject to special rules because they pose the danger of an overvaluation of assets which is detrimental to both the other members of the company and to its creditors. Thus, contributions in kind have to be disclosed in the company's statutes and they are subject to special reporting requirements. A court will refuse registration of a company or of an increase in capital, if contributions in kind are overvalued. Also, if after registration a contribution in kind is found to be less valuable than the nominal value of the shares issued for it, the subscriber has to pay the difference in cash.
It is quite common, however, that subscribers of capital who have duly paid up their contribution in cash subsequently conclude a contract with the company. The company having received the contribution in cash, uses this money to e.g. buy an asset from the subscriber. The economic effect is that of a contribution in kind. In reality, the subscriber did not provide a contribution in cash, but a contribution in kind. If there is a close connection between the contribution in cash and the subsequent contract between the company and the subscriber, German courts assume an 'agreement to circumvent' the provisions governing contributions in kind. German legal doctrine speaks of a "hidden contribution in kind" or "disguised contribution in kind".
Regarding the German 'Aktiengesellschaft (AG)' (public limited company) the legal consequences of such circumvention are dramatic. The contract between the company and the subscriber is null and void and the promised contribution in cash is considered to be still unpaid. The subscriber therefore has to pay the contribution in cash again. As such circumventions are usually discovered during insolvency proceedings, the subscribers are very often unable to recover the initial sum that they paid up and that was used in the acquisition of an asset. To sum it up, in the case of a hidden contribution in kind the subscribers run the risk of having to pay their contribution twice. The same was true for the German 'Gesellschaft mit beschrnkter Haftung (GmbH)' (private limited company). However, this has changed. As of 1 November 2008, the contract between the company and the subscriber is valid. The contribution in cash is still considered to be unpaid, however the value of the hidden contribution in kind is offset against it. The subscriber only has to pay the difference in value between the promised contribution in cash and the provided contribution in kind. The dramatic consequence of the subscribers having to pay their contribution in cash twice is avoided.
This article analyzes the new law on hidden contributions in kind. It discusses its scope of application and doctrinal questions raised by it. Although the new law only applies to the 'GmbH', the article shows that it has also ramifications affecting the 'AG'. It argues that the dramatic consequence of the subscriber having to pay twice can be avoided in the case of an 'AG' as well. The article concludes with a brief discussion of the capital system of the proposed Societas Privata Europaea. It is argued that the provisions of the current proposal for an SPE-statute do not require that the value of contributions in kind matches the nominal value of the shares issued for it and that therefore the question of hidden contributions in kind does not arise.
The article is based on a lecture given in Frankfurt a.M. at the annual conference of the Company Law Society (Gesellschaftsrechtliche Vereinigung - VGR) on November 14, 2008. It will be published in  VGR (2009) (VGR-Conference Series). For a partial publication see also Die Aktiengesellschaft 2008, Vol. 24, p. 883 et seq.
Note: Downloadable document is in German.
Keywords: contribution, disguised contribution, shares, assets, subscribed capital, circumvention, capital increase, insolvency, SPE, GmbH
JEL Classification: G30, G31, G32, G33, G34, G35, G38, K19, K20, K22
Suggested Citation: Suggested Citation