What are articles of association?

Articles of association are the partnership agreement between the shareholders and of fundamental importance for GmbH and UG. What the constitution is for States is for GmbH and UG the partnership agreement.

Importance of the GmbH partnership agreement

The partnership agreement regulates the basis of the company and the legal relations between it and the partners.

Where no provisions are made in a partnership agreement, the law applies (especially the GmbH Act). The law regulates things oftentimes differently than well-advised shareholders would do. In addition, the law is sometimes not precise enough or even contains loopholes.

A carefully drafted partnership agreement makes clear arrangements for the expected situation and all possible eventualities. It can avoid disputes between shareholders and thereby prevent high legal costs in the future.

Minimum components – The following information must contain GmbH partnership agreements:

1. Company name and registered office,
2. Object of the company (What does the company do?),
3. Amount of the share capital,
4. The number and nominal value of the shares that each shareholder acquires in return for a contribution to the share capital (capital contribution).

Additional regulatory options – Advantages of the individual partnership agreement

In addition, individual regulations can be made with a partnership agreement, which can be sensible with regard to the following points, for example: 

• May a shareholder transfer his shares to others without the consent of the other shareholders? Attention: The law allows the free transferability of shares!
• How to convene and conduct a shareholders’ meeting
• Passing shareholder resolutions, in particular majority requirements
• Management and representation rules
• Use of profits (Should distributions primarily be paid or should reserves be formed?),
• Condition for the redemption of shares against the will of the affected shareholder (e.g. in the event of personal insolvency of the shareholder or conduct damaging to the company)
• Severance payments (good leaver, bad leaver),
• non-compete obligations,
• Protection of the company against the consequences of the equalization of gains in the event of divorce of a shareholder by obligation to conclude a marriage contract,
• Succession,
• Conflict resolution procedures (e.g. mediation).

Notarial form and amendment of the articles of association

The partnership agreement must be notarised in order to be formally effective. When a GmbH is founded, all shareholders must sign it. The representation of a partner is basically only possible with a notarial power of attorney.

Any change to the partnership agreement must also be notarised. If, for example, the company is to be changed, you have to go to the notary. The shareholders’ resolution to change the statutes requires a majority of three quarters of the votes cast. The partnership agreement can set a higher majority requirement, e.g. unanimity. Modifications to the partnership agreement must be applied for entry in the commercial register.

If the partnership agreement is to be modified before the company has been listed in the commercial register, all shareholders should also approve it as a precaution if the statutes or law actually require a smaller majority.

Practical tip: Partnership agreement for GmbH or UG with more than one partner a must!

If you are looking for “founding a GmbH” on the Internet, you will quickly end up with providers who advertise the formation with the model protocol. One learns there that one can have the GmbH establishment also completely uncomplicatedly with the sample protocol with up to three partners and a managing director. Among corporate lawyers, there is, for once and as an exception, no dispute on one point: The foundation with the sample protocol is by no means the rock-solid way or the legislative standard that ensures a trouble-free enterprise. On the contrary, it must be criticized that the establishment with the model protocol is permissible at all, if not only a partner is present, who takes over also the management.

The model protocol has the following disadvantages

• The model protocol does not prohibit the transfer of shares to outsiders,
• the managing director must also be released from the prohibition on concluding contracts with himself (i.e. the managing director can in principle, for example, grant himself a loan from the company),
• the model protocol cannot be used to make any of the “other provisions” mentioned above which are possible and sensible in a partnership agreement,
• Only if the company is formed with the partnership agreement can the company fully bear the costs of formation from the share capital.

Who founds together with others, should therefore under no circumstances renounce the foundation with a partnership agreement. Who would like to know that a co-founder has sold his shares without the consent of the other shareholders and that he now – without having wanted to – has a new shareholder in the GmbH? This risk exists, however, if one founds with the sample protocol. Especially with a small circle of shareholders, the success of the company in most cases depends on the good cooperation of the shareholders. If a shareholder simply sells his shares and transfers them to the buyer, the two other co-shareholders suddenly have a co-shareholder on board who is unknown to them without their consent being required.

In addition, in the event of a dispute, it is revengeful not to have made any arrangements for convening and holding shareholders’ meetings. The small additional costs saved during the formation of a company with an individual partnership agreement pay off very quickly in the event of a dispute. Especially if the settlement of disputes is regulated by mediation procedures in the partnership agreement, not only costs can be saved, but conflicts can even result in real advantages for all parties involved. Because mediation is a conflict resolution procedure that makes it possible for most shareholder disputes to be settled quickly, cost-effectively and with the mutual consent of all parties and thus to create genuine win-win situations.