Online formation of corporations
The requirements of the Digitalization Directive at a glance
On July 31, 2019, the Digitalization Directive has entered into force. The Directive contains requirements for the online formation of corporations, which must be transposed into national law within two years. After its implementation, the Directive will make it possible to establish (at least) GmbHs online in Germany.
On July 31, 2019, the so-called Digitalization Directive of the European Union (Directive (EU) 2019/1151 of the European Parliament and of the Council of June 20, 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law) entered into force. The requirements introduced by the Digitalization Directive are based on the Company Law Package of the European Commission and particularly relate to the online formation of corporations. In this context, the Company Law Directive from 2017 is supplemented and amended. The Digitalization Directive is to be transposed into national law by July 31, 2021, with the legislator being granted an extension option of one year in the event of particular implementation difficulties.
2. Overarching Objectives
The overarching objective of the Digitalization Directive consists in providing more digital solutions for companies in the internal market as one of the prerequisites for a competitive internal market and for ensuring the competitiveness and trustworthiness of companies. The aim is not only to ensure a simpler, faster and more efficient company formation and the provision of comprehensive barrier-free information, but also to combat abuse more effectively. At the same time, the traditional company law principles of the member states shall be taken into account.
3. Objectives for the Online Formation of Corporations
With regard to the objectives for the online formation of corporations, the Directive contains two basic statements. Firstly, member states must allow for the formation through an online procedure that does not require the physical presence of the applicant before the competent authority. The second requirement is of a temporal nature: The procedure must be completed within five working days, provided that the applicant is a natural person and only uses model documents. In any other case, the procedure shall not take more than 10 working days.
The national legislator is called upon to develop detailed rules for the online formation while ensuring certain minimum standards. In particular, it must be ensured that the applicant has the necessary legal capacity and that legal entities are properly represented. The Directive also stipulates that the means of verifying the identity of applicants must be regulated. Furthermore, it is necessary to provide for an obligation for applicants to use the trust services referred to in the so-called eIDAS Regulation (Regulation (EU) No 910/2014 of the European Parliament and of the Council of July 23, 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC). In this respect, the implementing provisions laid down in the Trust Services Act (Vertrauensdienstegesetz, VDG) must also be observed in Germany.
The Directive does not provide for the creation of a possibility for "formation at the push of a button" in the true sense of the word, nor does it provide for a waiver of the notarization requirement or the notary – the latter will continue to have the role of a "gatekeeper" when it comes to the online formation in Germany.
4. Scope of Application
From a German perspective, the scope of application of the Digitalization Directive would generally cover all forms of corporations, i.e. the corporate forms of the Limited Liability Company (Gesellschaft mit beschränkter Haftung, GmbH), including the Entrepreneurial Company (Unternehmergesellschaft, UG), the Stock Corporation (Aktiengesellschaft, AG) and the Public Party Limited Partnership (Kommanditgesellschaft auf Aktien, KGaA).
However, due to the opt-out solution provided for in the new provision of Art. 13g para. 1 sent. 2 of the Company Law Directive as amended by the Digitalization Directive, the national legislator is free to create the option of online formation only for GmbHs (and thus also the UG as the "little sister of the GmbH"). Due to the complexity of the AG and the KGaA, in part caused by the principle of strictness of form inherent to these types of corporations, it can be expected that the German legislator will make use of this option. The practical need for the online formation of a GmbH is likely to be greatest anyway.
The Digitalization Directive covers cash formations as well as non-cash formations, i.e. formations with the initial capital not paid in in cash but in kind. Also in this respect, however, the national legislator can make use of an opt-out solution and may thus restrict the online procedure to cases of cash formations. Once again, it is highly probable that the German legislator will make use of its opt-out option and refrain from including provisions for online formation by way of a non-cash formation. This both against the background of the greater complexity regularly associated with non-cash formation processes, also in questions of the "contributability" and the valuation of non-cash contributions, as well as against the background that in the context of non-cash formations, the object of the contribution often consists of real estate and GmbH shares, the legally effective contribution of which is subject to special formal requirements anyway.
Pursuant to the Digitalization Directive, not only natural persons but also legal entities shall be eligible for as applicants in the online procedure. It is to be expected that the formation by foreign legal entities will continue to pose special challenges in the future. In that context, it must in particular be ensured that the respective foreign corporation actually exists and is properly represented. For this purpose, it will usually be necessary to obtain a notarial certificate or similar documents, which must be provided with an apostille (in paper form!). It is expressly stated in the Digitalization Directive that the requirements of national law regarding the authenticity and accuracy of documents remain unaffected. In addition, the provisions of the Directive allow the physical presence of the applicant to be required in exceptional cases if there are doubts about the applicant's power of representation.
5. The Future Role of Notaries
In contrast to the original proposal of the European Commission, the Digitalization Directive now explicitly clarifies that member states may involve notaries at all stages of the online procedure. Accordingly, the new provisions do not conflict with the German legal tradition of preventive administration of justice, i.e. the double check by the notary and the register court. The notary will thus remain gatekeeper. In particular, there are discussions about providing for an online notarization as a central element of the online formation procedure, which could be carried out by means of a video conference.
The online notarization could thus serve as an additional security mechanism to prevent identity theft and misuse, as is quite common in other European jurisdictions.
As regards the identification of the applicant, there is a reference in the Digitalization Directive to the eIDAS Regulation, on the basis of which the electronic identity card is currently notified for Germany as a means of identification with the European Commission. As part of the online notarization process, the notary could, in a first step, check the validity of the electronic means of identification and, in a second step, verify that the applicant is indeed the person identified. However, the procedure will not be as simple as consumers have come to know from online identification procedures in connection with the opening of bank accounts. For the required identification of the applicant, the Digitalization Directive contains a reference to the eIDAS Regulation, on the basis of which the electronic identity card is currently notified to the European Commission as a means of identification for Germany, and thus requires an identity card with online identification function or another means of identification of the highest security level according to the eIDAS Regulation.
In addition, the Digitalization Directive provides for the option of requiring the physical presence of the applicant for purposes of identification in cases of doubt.
6. Practical Relevance
The introduction of an online procedure for the formation of corporations supplements German corporate law with options that have long been part of the standard repertoire in other member states of the European Union. Against this background, the Directive brings along a strong push towards modernization.
It should be noted, however, that it cannot be assumed that the online incorporation procedure will be a procedure that will make it possible to form a company "at the push of a button" – the facilitation is limited to the fact that the personal appearance that is currently required on a regular basis will no longer be necessary and that there will be a "remote notarization", as it is already common practice in other member states.
However, it is to be expected that the scope of application of the online formation procedure will be narrowly defined. Most probably, in Germany, also in the future, the online formation of corporations such as the AG and the KGaA will not be possible. In addition, it seems quite likely that the German legislator will exclude non-cash formations from the scope of application.
Further restrictions result from the fact that the notification of means of identification on the basis of the eIDAS Regulation by states outside the European Union is not provided for. As a consequence, nationals of non-EU-member states cannot participate in the online procedure as applicants.
The Digitalization Directive will not be able to remove one (further) obstacle to rapid formation which is significant in practice, namely the requirement to open a bank account in the name of the newly formed company. This can lead to considerable delays due to the KYC procedures of commercial banks, which are based on money laundering and compliance regulations. It remains to be seen whether maintaining a bank account in (European) foreign countries will become more "respectable" and accepted by German commercial registers or become subject to explicit regulation and/or whether the legislator will create opportunities for direct communication between the bank and the notary and the prompt opening of a bank account.
On a positive note, the Digitalization Directive respects the German legal tradition of preventive administration of justice and not only allows but also requires the online procedure to be provided with the necessary protective mechanisms. Negative effects on the reliability of the German commercial register are therefore not to be expected.
Apart from that, it remains to be seen how the requirements are transposed into national law, both by the German as well as other EU member state legislators. In this respect, the question arises, for example, as to whether the national legislator will succeed in developing practical templates. In particular in more complex cases with several founders, tailor-made solutions will be required which generally cannot be developed properly on the basis of templates.
In any case, the Digitalization Directive, once implemented in German law, could make it considerably easier to establish a GmbH by means of a cash-formation. It is to be hoped that the German legislator will also bear in mind the competition between legal systems in the case of founding acts in order to avoid German legal forms further losing importance because entrepreneurs willing to set up a company prefer more liberal European legal systems – such as Estonia, for example, with its provisions for the genuine online formation of a corporation and the possibility of same-day registration.