Should the law of corporate groups be reformed?
In the 1965 Stock Corporation Act (the AktG), German lawmakers created a statutory regime to govern the relationship between “related enterprises”. Known in German as Konzernrecht, the law of groups of companies, this approach has earned Germany a unique, worldwide reputation in corporate law circles. But the practice of corporate conglomeration has grown in many different directions since then, and lawmakers and corporate lawyers are asking themselves whether the time has come for reform. In his report to the 2026 convention of the Association of German Jurists, Institute director Holger Fleischer examines the wisdom of reform in light of the current debate. His report is accompanied and complemented by fourteen in-depth journal articles.
Despite the title of the report, which conveys the suggestion of a neat package, the German law on corporate groups is in fact quite heterogeneous, involving principles of labour and employment, antitrust, bankruptcy, and criminal law, to name a few. It also comes from many sources: “The development and level of detail to which the law of corporate groups has been hammered out in Germany,” says Fleischer, “has always been a joint project of transactional drafting, legislation, case law, and the legal literature”. Because the AktG is silent on relations between GmbHs, partnerships, cooperatives, associations, and foundations, the statute is what one might call a “partial codification” of the law. It also has a two-track mind: it applies to groups of companies formed by contractual relationships as well as to de facto groups (groups constituted through equity ownership), introducing another layer of complexity.
Aggiornamento instead of new concepts
The glue that holds corporate groups together is someone’s, or some entity’s, ownership of a capital stake in the business and the measure of control thereby purchased over its operations. Company law mediates this relationship. The analysis in Fleischer’s report to the Association of German Jurists is therefore devoted to the company-law elements of corporate interrelations, with exclusive focus on the relations of equity ownership, particularly of AGs (German stock corporations) and GmbHs (German limiteds), by another corporate entity. “A major reform of the law of corporate groups”, concludes Fleischer, “is not indicated. What is called for instead is an aggiornamento of its rules and principles, prudently crafted, in which the judiciary will remain a key actor alongside the legislator”.
“A major reform of the law of corporate groups is not indicated.
What is called for instead is an aggiornamento of its rules
and principles, prudently crafted, in which the judiciary will
remain a key actor alongside the legislator.”
– Institute Director Holger Fleischer –
According to Fleischer’s report, the current legal regime is neither functionally deficient in any substantial way, nor is there any obvious alternative that promises substantial advantages over it. To repeal the applicable statutory principles of stock corporation law, in order to have general principles of company law apply instead, would therefore be ill advised; the number of other countries that have gone that route should not affect the calculus. And recasting the various rules into a comprehensive “groups of companies code” applicable to all types of business organizations – in the image of Germany’s Umwandlungsgesetz, the Transformation Act – would also not be a good option; at least, it is not one that legal scholars are at all prepared to assess. For Fleischer, this leaves a series of targeted, individual corrections as a relatively attractive course of action.
The Need to Optimize on Particular Issues
Fleischer’s report isolates certain clusters of problems with the current statutory regime. Where a need for optimization is apparent, perspective is gained from international comparisons; a rule Fleischer recommends to facilitate stock-swap transactions, for example, is loosely modelled on similar rules in other jurisdictions. To better protect outside shareholders of stock corporations related to other entities per equity ownership, Fleischer suggests a bundle of individual systemic measures. And while he counsels against introducing the figure of a “group interest”, such as it is known in French, Italian, or Spanish doctrine, he concludes that granting a controlling entity the right to issue orders to its wholly-owned subsidiaries, and expect them to be followed in the interest of steering the enterprise, might not be such a bad idea. As for issues of internal organization, compliance, and intragroup liability, on the other hand, Fleischer sees no need for additional codification.
One mark that Fleischer’s report is sure to make lies in his suggestion that the distinction should be abandoned between individual shareholders (“Privataktionäre”) and corporate shareholders/enterprises (“Unternehmen”). Under the status quo, one of the most basic principles in the law of corporate groups has been a definition of an “enterprise” that excludes individuals from the scope of the rules that bind the controlling shareholder. The crux of the argument behind this distinction was that an individual controlling shareholder was less prone to be a detriment to the company than a controlling entity would be. One reason this rule is behind the times, according to Fleischer, is that an individual investor as controlling shareholder is not really safer; with the burgeoning diversity of shareholding structures, it is no longer valid to assume that the individual’s interest is always in line with that of the subservient corporation. Moreover, the distinction has lost credibility since Germany’s highest civil tribunal, the Federal Court of Justice, has simply ignored it in cases involving publicly-owned entities. Labour unions and religious organizations exerting “dominant influence”, as well as the industrial foundations that control foundation-owned firms, constitute additional exceptional cases because of their pursuit of uneconomical, social, or faith-driven goals beyond the purview of the stock corporation. And never mind that the reform-minded legislator in the field of company and capital markets law has abandoned any distinction between individual and corporate shareholders. The distinction also ought to be abandoned, Fleischer continues, because recent case law on the controlling shareholder’s liability for exerting an “annihilating influence” has parted ways with any hesitation over who or what constitutes an “enterprise”, and because virtually nowhere else on earth does the parent-subsidiary conflict possess such an immense gravity as it does in Germany in terms of the perceived need to regulate it.
“For any rule we wish to impose on corporate groups,
the law must be reconciled with the realities
of these business structures.”
– Institute Director Holger Fleischer –
Prospectively for lawmakers, Fleischer sees important reasons for imposing on subservient AGs a duty to inform their controlling entity about conditions within the company. This would improve the framework for effective leadership of the enterprise, and it would make for stronger enterprise-level compliance and governance. It would also make it easier to detect, and manoeuvre to minimize, risks to the parent company, not to mention relieve the confusion of justifications and reasoning that EU law imposes on controlling entities in the banking and financial services sector. If enacted, such a duty to inform could facilitate the eventual passage of a right-to-know regime specific to corporate groups, following the model of Germany’s Insurance Regulation Act (Versicherungsaufsichtsgesetz).
Where the subservient company is a GmbH rather than an AG, the law is completely judge-made. The most recent attempts to codify this material failed in the early 1970s; the current legal regime was inaugurated by the Federal Court of Justice’s momentous ITT decision of 1975. Since then, a controlling entity or shareholder is regarded as having a fiduciary duty toward a subservient GmbH. On whether this so-called “ITT doctrine” ought to be codified, Fleischer says no: boxing this rule into statutory law would sacrifice what is currently a beneficent level of flexibility.
The final section of Fleischer’s report deals with the law applicable to transnational corporate groups. In most jurisdictions, including Germany, the fundamental principle is that the parent-subsidiary relationship is dealt with by applying the “personal statute” of the subsidiary. Fleischer’s report addresses the challenges this creates for corporate groups operating across national boundaries: the median number of subsidiaries operated by the 50 largest publicly-traded companies in Germany is 162, each, spread across 31 countries. The group structure is therefore practically the only organizational form on the EU internal market, so the introduction of a unified European legal framework (EU Inc.) would bring significant relief.
An eye on the practical realities of corporate groups
Among the report’s thirty theses and recommendations summarizing Fleischer’s findings, support for comprehensive reform is nowhere to be found. Fleischer rejects the idea: “For any rule we wish to impose on corporate groups, the law must be reconciled with the realities of these business structures. We are well served by continuing to consider the enormous influence of business practices and of contracts in the field, in particular when it comes to transnational structures. But realizing this power of the factual, we must also not cede the prerogative; any harmful outgrowths must be countered with an assertive regulatory response.”
The report will serve as a memorandum of the scholarly discourse in preparation for discussions at the Association of German Jurists convention. It is available free of charge at https://www.inlibra.com/de/document/view/detail/uuid/fd8f28c2-03fb-3dc0-8dfe-4b30f2f469d8.
Images:
Header graphic: Elements form © AdobeStock
Portrait Holger Fleischer: © Max Planck Institute for Comparative and International Private Law / Johanna Detering
