Tightening of the reporting obligations to the German transparency register

I. Background

For the purpose of combating money laundering, associations (i.e. legal entities under private law and registered partnerships) in Germany are obliged under the German Anti Money Laundering Act ("AMLA") to report their beneficial owners to the German transparency register. In multi-level shareholding relationships (e.g. in the case of a parent company and its subsidiary), each association must generally determine for itself whether its shareholders are subject to the reporting obligations to the transparency register. If a natural person is a shareholder of the parent association, he or she can be both the (direct) beneficial owner of the parent association and the (indirect) beneficial owner of the subsidiary association.

If a natural person holds more than 25% of the capital shares of an association, controls more than 25% of the voting rights or exercises control in a comparable manner, he or she is deemed to be the beneficial owner pursuant to section 3 para. 2 sentence 1 AMLA. The exercise of control in a "comparable manner" pursuant to section 3 para. 2 sentence 1 no. 3 AMLA covers constellations in which a natural person is given the opportunity to directly or indirectly influence an association, inter alia in a controlling way. Pursuant to section 3 para. 2 sentence 4 AMLA, the controlling influence is determined in accordance with section 290 para. 2 to para. 4 of the German Commercial Code (HGB) and exists in particular if a majority of the voting rights or capital shares are held (cf. section 290 para. 2 no. 1 HGB). Thus, indirect control over an association under section 3 para. 2 sentence 2 AMLA exists in particular if the shareholdings providing direct control are held by one or more associations, which are themselves controlled by a natural person.

Until the publication of the new FAQ on the reporting obligations to the transparency register by the German Federal Office of Administration (BVA), the beneficial owner could be determined in multi-level shareholding relationships using the following formula: At the first level, over 25% of the shares or voting rights had to be held/controlled. At the second level (cases of indirect control), the "controlling influence" required a holding of more than 50% of the shares or voting rights or a comparable exercise of control. According to the interpretation of the BVA, a comparable exercise of control existed if a natural person, irrespective of his or her voting rights and capital shares at the parent association, had a right of objection or veto with regard to decisions made at the members', general or shareholders' meeting of the parent association. In such cases, the natural person was both a direct beneficial owner of the parent association and an indirect beneficial owner of the subsidiary association.

II. Changes according to the FAQ of the BVA dated 19 August 2020

In the FAQ of 19 August 2020, the BVA went one step further in determining the beneficial owner on the basis of a comparable exercise of control and also qualified as beneficial owners those natural persons who do not have an explicit right of veto or objection with regard to the decisions made at the members', general or shareholders' meeting, but whose participation in the decision-making process is mandatory by law or under the articles of association. In point B.II.4 . of the FAQ, the BVA states in this respect: "If a natural person is able to directly or indirectly prevent a decision from being made by the general meeting of members or the general meeting of shareholders of the parent association or if no effective shareholders' resolution is possible without the natural person's consent, a controlling influence within the meaning of section 3 para. 2 sentences 2 to 4 AMLA exists. [...] The respective natural person with a controlling influence on the parent association shall then be deemed to be the indirect beneficial owner of the subsidiary association if the parent association controls more than 25% of the voting rights/capital shares in the subsidiary association or exercises control in some other way.”

This so-called "preventive control", on the basis of which a natural person is deemed to be the beneficial owner in accordance with the principles explained above, can thus be considered in the following constellations:

1. Direct beneficial ownership

Direct beneficial ownership exists if an individual can prevent a decision of an association in which he directly holds shares. This is the case if the participation of the person in the decision-making process of the association is mandatory by law or under the partnership agreement or the articles of association. Such a mandatory participation is conceivable if the partnership agreement or the articles of association explicitly refer to the participation of the person concerned, prescribe the presence of a certain capital participation for the passing of a resolution, which would not be reached without the respective person participating or provide for unanimity. However, according to the new FAQs of the BVA, it is not sufficient for "preventive control" if two or more shareholders of an association must collaborate to block a decision of the association.

2. Indirect beneficial ownership

Indirect beneficial ownership exists in multi-level shareholdings where an individual can prevent a decision being made by the parent company in which he has a direct interest and the parent company holds more than 25% of the voting rights/capital shares of the subsidiary or otherwise exercises control. In such situations, the individual is considered to be the (indirect) beneficial owner of the subsidiary. An indirect controlling influence of a natural person on the subsidiary is conceivable if the partnership agreement or the articles of association of the parent company require unanimity for passing resolutions and several shareholders exist. Furthermore, a controlling influence is conceivable if the articles of association or the partnership agreement of the parent association provide for a majority decision and the attainment of the majority depends on the natural person concerned (e.g. if two persons each hold a 50% share in the parent association). According to the FAQs of the BVA, it is also sufficient for the natural person to achieve a blocking minority (usually more than 25%) with regard to fundamental resolutions of the shareholders' meeting of the parent association (e.g. amendments to the articles of association, capital measures, conversions).

III. New concept of domination or control

The preventive control introduced by the BVA in the new FAQ is likely to represent a new legal concept compared to the previous understanding of domination or control in German commercial law. In general, in German commercial law domination or control is understood to mean either the holding of a majority of shares or corresponding voting rights and/or the possibility of actively influencing one or more associations. The possibility to prevent decisions of an association independently of these aspects, in particular without the possibility of active influence (e.g. in the form of a right of objection or veto), is generally not sufficient for the assumption of control.

For example, the elements of section 290 para. 2 HGB, to which the AMLA refers, provide that a controlling influence of an undertaking on another undertaking always exists if (i) the controlling undertaking holds the majority of the voting rights in the other undertaking (section 290 para. 2 no. 1 HGB), (ii) the controlling undertaking can determine the majority of the members of the management body of another undertaking in which it has an interest (section 290 para. no. 2 HGB), (iii) the controlling undertaking manages another undertaking on the basis of provisions of contractual or company law by means of binding instructions (section 290 para. 2 no. 3 HGB) or (iv) the controlling undertaking has the right to derive benefit from another (dedicated) undertaking and therefore also bears the risks of the (dedicated) undertaking (section 290 para 2 no. 4 HGB).

In German stock corporation law, section 17 of the Stock Corporation Act (AktG) speaks of dependent and controlling companies. It derives from section 17 para. 2 AktG that, according to the concept of this provision, control generally exists if the controlling company has a capital and/or voting majority holding in another company. Furthermore, control can be achieved on the basis of a regular majority presence at the annual general meeting, on the basis of a subordinate domination agreement and on the basis of a combination of all the above elements.

The preventive control introduced by the BVA is not based on control that is conveyed by a majority of capital or voting rights or certain voting right quorums. It is based solely on the fact that decisions can be blocked on the basis of the majority requirements provided by law, the partnership agreement or the articles of association. This approach was previously unknown to the German commercial law system. Furthermore, the BVA does not clearly differentiate between the types of decisions that can be prevented when determining control due to the possibility of passive prevention. With the exception of the cases of a blocking minority and unanimous resolutions, it therefore remains unclear whether for preventive control

• it is already sufficient that a shareholder can prevent any resolution, or 
• at least the possibility of preventing such resolutions is sufficient for which a simple majority (according to legal provisions or the partnership agreement or the articles of association) is required, or
• whether it is necessary, entirely in the sense of a blocking minority, for the shareholder to be able to prevent fundamental resolutions (such as amendments to the partnership agreement or the articles of association, capital or conversion measures or other structural changes, for which legal provisions generally require at least a qualified majority and partnership agreements or articles of association can only provide for higher majority requirements).

Since in practice numerous partnership agreements and articles of association stipulate different majority requirements for different resolution matters, the lack of differentiation by the BVA is unsatisfactory. Due to the legal uncertainty arising in this context, it is questionable whether the BVA concept of preventive control will pass judicial control in case of dispute.

IV. Consequences and Recommendation

The new FAQ of the BVA lead to a tightening of the reporting obligations to the transparency register, as they considerably expand the circle of beneficial owners to be reported. It remains to be seen whether the new legal concept of preventive control for the determination of beneficial owners, which has been designed by the BVA, will be confirmed by German courts. Since infringements of the reporting obligations under the AMLA are punishable by fines of up to 1 million euros, associations are currently advised to check (again) the entries on their beneficial owners and, to adjust them if needed.

Whether the current entries in the transparency register meet the requirements of the new FAQ of the BVA, whether additions have to be made or whether a fictional notification is applicable cannot be determined in a generally valid way and always requires the assessment of the individual case. Due to the new approach of the BVA for the determination of beneficial owners, this entails a comprehensive and careful review of partnership agreements and articles of association as well as (especially in the case of corporate groups) entire corporate structures.

_{Published: November 2022}