August 17, 2022, Covington Alert
Many foreign investors operating in Germany for the first time are still surprised by what they see as cumbersome and archaic notarization procedures in connection with GmbH formations and other corporate law acts. A notarial deed essentially requires the simultaneous physical presence of all parties involved at the notary's office while the entire deed is read out. Mere certifications of signatures also require personal presence, but without the time-consuming reading out.
Effective August 1, 2022, by implementing Directive (EU) 2019/1151 (the so-called Digitization Directive), the DiRUG (Gesetz zur Umsetzung der Digitalisierungsrichtlinie/ Act on Implementation of the Digitization Directive), the German legislator has introduced the option to replace physical meetings at the notary's office by means of a video conference or a combination of physical and "virtual" meetings. However, this option is only available for certain selected corporate acts, first and foremost for the formation of limited liability companies. Details of the new online notarization procedure are regulated in more detail in the German Notarization Act (Beurkundungsgesetz) and Section 2 of the Limited Liability Companies Act (GmbHG). The new procedure is also available for shareholders' resolutions passed during the formation process. While the involvement of a notary is still mandatory, the physical presence of the parties involved can be replaced by way of video communication. However, the new law imposes stringent requirements; in particular, the notary must verify the identity of the parties on the basis of certain legally regulated electronic proofs of identity (so called “eID”). These documents must be read and transmitted via smartphone by means of a special “notary app”. In Germany, there are currently three types of documents that meet the legal requirements: (i) a German identity card for German citizens; (ii) a so-called eID card (under the German eID Card Act) for non-German EU citizens and citizens of the European Economic Area; (iii) electronic residence permits under the German Residence Act for third-country nationals. Other identification documents issued within the EU or the European Economic Area meet the requirements, provided they meet certain conditions of the Regulation (EU) 910/2014 (the so-called Electronic-Transactions-Regulation). A German passport, on the other hand, does not meet these requirements, as it does not have the required electronic functions. In principle, the notary must compare the appearance of the video-connected person with the photograph in the electronically transmitted document; an exception to this applies if the person in question is personally known to the notary. Permanently verifiable qualified electronic signatures, generated by the Online-System of the German Federal Notaries Chamber, replace the wet-ink signatures of the founders. In case of a so-called "hybrid notarization", in which at least one of the shareholders physically meets with the notary, a written (paper-form) transcript of the deed is required in addition to the electronic transcript, to be signed by the person(s) physically present. The German Federal Notaries Chamber has established a special video conference platform that must be used for the virtual (part of the) notarization, so the commonly used private platforms like MS Teams, Zoom etc. are not suitable. Likewise, while the person attending a German online notarization may physically be abroad, it is not possible to use remote notarization procedures that have been established in any other jurisdiction outside of Germany.
Initially, the scope of suitable online incorporation is limited to all cash incorporations, i.e. 100% of the stated share capital must be paid in cash. Contributions in kind, even in addition to cash contributions, still require a physical meeting with the notary. In practice, contributions in kind are often made on top of the cash contributions covering the stated share capital and are booked into the company's capital reserves. Although this technically still constitutes an all-cash incorporation, it is an open question whether an online notarization is permissible under the current law. Also, if the GmbH is incorporated in connection with measures pursuant to the German Reorganization Act (Umwandlungsgesetz) the online procedure is not applicable.
Presumably in light of the DiRUG's shortcomings, the German legislator has already passed an additional law which will supplement the DiRUG and come into force exactly one year after the DiRUG, i.e. on August 1, 2023. The supplementary law will already bring about substantial changes for the new online incorporation procedure. Inter alia, online non-cash incorporations will be allowed from this date, thus addressing a major criticism regarding the DiRUG.
So – has German corporate law arrived in the 21 st century? The clear answer is no, but with some nudging from the European legislator, it has taken the first steps of what will still be a long journey.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Corporate Governance practice.