Berlin Online Glossary of German Business Law

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Articles of association (Gesellschaftsvertrag) Co. law in German also ‘Satzung’; contract by which a company is established. For a partnership (GbR, KG), the equivalent is the partnership agreement. It sets out, among other things, the purpose, shares, profit distribution, management and share capital. For a GmbH, a UG (haftungsbeschränkt) and an AG (German stock corporation), it must under German law be recorded by a notary and can be inspected by anyone via the Handelsregister (commercial register). Confidential arrangements are therefore better placed in the shareholders’ agreement.

B

Business angel Inv. [short form ‘angel’] private individual who invests their own money in a start-up at an early stage, often a former founder themselves. Alongside capital, the angel contributes experience and contacts. Typical at pre-seed and seed stage, before venture capital funds invest.

C

Cap table Co. law, Inv. [short for ‘capitalisation table’] internal overview of all shareholdings in a company. Presented on a fully diluted basis, including options and convertible loans, it shows the dilution before and after a funding round. To be distinguished from the list of shareholders in the Handelsregister (commercial register), which alone determines who is deemed to be a shareholder in relation to the company. CE marking (CE-Kennzeichnung) Reg. mark by which the manufacturer declares that its product meets the European requirements for safety, health and the environment. Often a stringent conformity assessment is necessary. Depending on the product, an independent body is also involved. It is mandatory for products for which EU legislation requires it, for example machinery, electrical appliances, toys and medical devices, and from 11 December 2027 also certain products with digital elements. Cease-and-desist declaration (Unterlassungserklärung) IP, Lit. contractual commitment under private law to refrain in future from conduct that has been objected to. It is usually backed by a contractual penalty payable on any breach (‘with a penalty clause’). A cease-and-desist declaration is a standard demand in cease-and-desist letters. The claim for injunctive relief can also be enforced in court, though often not to the extent demanded. A sufficient cease-and-desist declaration with a penalty clause generally removes the risk of repetition and, with it, the grounds for a claim or an interim injunction. If the other party rejects the declaration, however, the risk of repetition remains. The declaration is binding indefinitely, including for essentially identical infringements, and is enforced like a contract. CISG Bus. [abbr. for ‘Convention on Contracts for the International Sale of Goods’] see UN Sales Convention (CISG). Compliance Bus., Reg. adherence to statutory rules, industry codes and internal policies. In a broader sense, the organisational set-up that prevents breaches of the law (compliance management system). Such systems are mandatory in some cases. They are often advisable so that management fulfils its duty of supervision and thereby reduces its own liability risk. Copyright (Urheberrecht) IP protection for personal intellectual creations, for example texts, photos, music, graphics and software. Arises automatically on creation, without any application or registration. Copyright lasts until the end of the 70th year after the author’s death. Under German law, copyright itself cannot be transferred; third parties can only be granted rights of use (licence). Corporate housekeeping Co. law the ongoing legal upkeep of a company: passing and documenting resolutions, keeping the list of shareholders, the Handelsregister (commercial register) and the Transparenzregister (transparency register) up to date, adopting and disclosing the annual financial statements, and putting agreements with management and shareholders in writing. Gaps come to light in due diligence at the latest. Court order-for-payment procedure (Mahnverfahren) Lit. simplified court procedure under German law for pursuing certain monetary claims in euros. The court does not examine the merits of the claim. If the debtor lodges an objection, the case moves to ordinary court proceedings. If not, the creditor can apply for the enforcement order (Vollstreckungsbescheid). A claim established by a final and binding decision generally becomes time-barred after 30 years.

D

Data processing agreement, DPA (Auftragsverarbeitungsvertrag, AVV) Law, Reg. contract required by the General Data Protection Regulation (GDPR) when a service provider processes personal data on behalf of and on the instructions of a business. This may apply, for example, to hosting, AI service providers, cloud software, newsletter distribution or an external payroll provider. The mandatory content is prescribed by law. Deadlock Co. law stalemate in which no majority can be reached for a shareholder resolution. A typical risk in companies with equal shareholdings, for instance two shareholders with 50% each. If no provision has been made, the only options under German law are usually an action for expulsion or an action for dissolution. Prevention and exit mechanisms are best dealt with in the shareholders’ agreement. Due diligence Co. law, Inv., Bus. [short form ‘DD’] thorough review of a company’s legal, financial and tax position before an acquisition or an investment. The outcome influences the purchase price and the guarantees in the SPA or investment agreement. Duty to give notice of defects (Rügepflicht) Bus. see Duty to inspect and give notice of defects. Duty to inspect and give notice of defects (Untersuchungs- und Rügepflicht) Bus. requirement that the buyer in a commercial sale between merchants inspects the delivered goods without undue delay and gives notice of defects immediately. For hidden defects, this applies immediately after discovery. A buyer who fails to do so loses its statutory rights in respect of defects to that extent. How quickly the goods must be inspected and notice given depends on the goods and the circumstances. Once a defect has been discovered, there may be only one to two days left to give notice. Applies only if both parties are merchants. Under the UN Sales Convention (CISG), a more generous ‘reasonable time’ applies.

E

ESOP Co. law, Inv., Emp. law [abbr. for ‘employee stock option plan’, an employee incentive scheme with actual share options] see VSOP. Exit Co. law, Inv. sale of a shareholding in a company, usually the goal of venture capital funds. In most cases, the company is sold to a strategic buyer or a financial investor; an exit through an IPO is rarer.

F

False self-employment (Scheinselbstständigkeit) Emp. law work that is agreed as freelance work but is in fact carried out as dependent employment. Under German law, it may have serious consequences for the business engaging the freelancer, including back payment of social security contributions and wage tax. Under employment law, an employment relationship may have existed from the outset, with corresponding consequences for termination. The status determination procedure clarifies the status under social security law.

G

GmbH Co. law abbr. for ‘Gesellschaft mit beschränkter Haftung’ (German limited liability company): the most common type of corporation in Germany and the standard legal form for small businesses and start-ups. Share capital of at least EUR 25,000. Formed by notarial recording of the articles of association and registration in the Handelsregister (commercial register). Its corporate bodies are the management and the shareholders’ meeting. The UG (haftungsbeschränkt) is its ‘little sister’, with share capital from EUR 1.

H

Holding company (Holding) Co. law, Bus. company whose main purpose is to hold shares in other companies. Not a legal form of its own, but a function. Usually organised as a GmbH or a UG (haftungsbeschränkt). Makes it possible to separate risks and assets and offers tax advantages on distributions and on an exit.

L

Licence (Lizenz) IP [from Latin ‘licentia’, ‘permission’] contractual permission to use another party’s IP right, such as a trade mark, a patent or copyright. An exclusive licence gives the licensee the sole right of use, even against the licensor. A non-exclusive licence permits use alongside others. The consideration is usually a licence fee, either fixed or based on revenue. Limitation period (Verjährung) Law lapse of time after which a claim can no longer be enforced. This requires the debtor to invoke it. Under German law, what is known as the standard limitation period is three years from the end of the year in which the claim arose and the creditor knew, or would have known but for gross negligence, of the relevant circumstances and the identity of the debtor. Claims for defects in the sale of movable goods generally become time-barred two years after delivery. Claims established by a final and binding decision generally become time-barred after thirty years. Limitation can be suspended by, among other things, bringing a claim.

M

Musterprotokoll Co. law articles of association prescribed by statute under German law for the simplified incorporation of a GmbH or a UG (haftungsbeschränkt). Available only for up to three shareholders, one managing director and cash contributions; no deviations are permitted. Reduces the incorporation costs but leaves no room for individual arrangements.

N

NDA IP, Bus. [abbr. for ‘non-disclosure agreement’] contract that obliges one or both parties to keep exchanged information confidential and to use it only for the agreed purpose. NDAs are common before negotiations, cooperation projects and company sales. Breaches can be sanctioned by a contractual penalty. Nice classes (Nizza-Klassen) IP see Trade mark classes.

O

Option Inv. [from Latin ‘optio’, ‘free choice’] right to acquire shares in a company at a later date on terms fixed in advance. The basis of employee incentive schemes (ESOP) and a component of many funding rounds. In the fully diluted cap table, options are counted before they have been exercised.

P

Product liability (Produkthaftung) Reg. liability of the manufacturer under German law for personal injury and for damage to other privately used property caused by a defective product. Liability applies regardless of fault. Companies that merely put their trade mark on the product or import products into the European Economic Area (EEA) may also be liable. It cannot be excluded by contract, but rights of recourse can be agreed within the supply chain.

S

Seed stage (Seed-Phase) Inv. earliest funding stage of a start-up, in which the idea, the prototype and the first customers emerge. Capital comes from the founders, friends and family, business angels and the first venture capital funds, often through a convertible loan rather than an equity round. It is followed by Series A. Series A Inv. name, adopted from the United States, for the funding rounds that follow the seed stage, usually with venture capital funds. Series A finances the growth of a working business model. Series B and C (and further rounds) can follow later to fund scaling. Each round brings new investors, a new valuation and further dilution. The terms are set out in the term sheet, the investment agreement and the shareholders’ agreement. SHA Co. law, Inv. [abbr. for ‘shareholders’ agreement’] see Shareholders’ agreement. Shareholders’ agreement (Gesellschaftervereinbarung) Co. law, Inv. [short form SHA] confidential agreement between the shareholders alongside the articles of association, not available for inspection in the Handelsregister (commercial register). Typically covers vesting, tag-along and drag-along rights, non-compete obligations, liquidation preferences and deadlock. Binds only the parties to it. It often requires notarial recording. SME (KMU) Bus. Abbreviation of ‘small and medium-sized enterprises’ (in German ‘kleine und mittlere Unternehmen’, KMU). In Germany often used synonymously with the Mittelstand. Covers businesses with up to around 250 employees and EUR 50 million in turnover. Legally relevant because of the many exemptions and funding opportunities. Common thresholds are: Micro-enterprises: up to 9 employees and EUR 2 million in turnover Small enterprises: up to 49 employees and EUR 10 million in turnover Medium-sized enterprises: up to 249 employees and EUR 50 million in turnover The legal classification depends on the provision in question. SPA Co. law, Inv., Bus. [abbr. for ‘share purchase agreement’] contract for the purchase of shares in a company, the central document in a company acquisition structured as a share deal. It governs the purchase price, the seller’s guarantees and the closing conditions. Under German law, it must be recorded by a notary where shares in a GmbH (German limited liability company) are purchased. To be distinguished from the asset purchase agreement (APA) used in an asset deal, in which individual assets are transferred instead of shares. Supply agreement (Liefervertrag) Bus. contract for the one-off or recurring supply of goods between businesses. Legally, it is generally a purchase agreement, even for custom-made items. Besides price and quantity, it mainly governs the specification, delivery dates, transfer of risk, statutory liability for defects and liability. Where the contract is silent, the statutory rules apply, in cross-border trade often the UN Sales Convention (CISG).

T

Term sheet Co. law, Inv. summary of the key commercial terms of a planned investment or transaction, including valuation, investment amount, liquidation preference and vesting. Usually legally binding only in part, but the basis for due diligence and contract drafting. Trade mark classes (Markenklassen) IP also Nice classes; groups of goods (classes 1 to 34) and services (classes 35 to 45) defined in the Nice Agreement. A trade mark is applied for in respect of specific goods and services, which are assigned to these classes. The class boundaries alone do not determine the scope of protection. The fee charged by the German Patent and Trade Mark Office (DPMA) covers three classes, and each additional class costs extra. Afterwards, the list of goods and services can only be restricted, not extended. Trade mark (Marke) IP protected sign that distinguishes the goods or services of one business from those of others, usually a word mark or figurative mark. Protection as a registered trade mark arises on registration and lasts ten years. The registration can be renewed any number of times. Trade marks are registered for classes of goods and services, which determine the scope of protection. A trade mark confers the exclusive right to use the sign for these goods and services. Trade secret (Geschäftsgeheimnis) IP, Bus. information that is not generally known or readily accessible, therefore has commercial value and is kept secret by its lawful holder through reasonable measures. Examples include recipes, source code and customer lists. Under German law, statutory protection exists only if the business can prove its confidentiality measures (for example access restrictions, encryption or NDAs).

U

UG (haftungsbeschränkt) Co. law abbr. for ‘Unternehmergesellschaft’ (entrepreneurial company): a form of GmbH with share capital from EUR 1. The suffix ‘(haftungsbeschränkt)’, meaning ‘with limited liability’, is a mandatory part of the name. A quarter of the annual net profit goes into a reserve until a capital increase raises the share capital to EUR 25,000. The UG may then be turned into a proper GmbH. UN Sales Convention, CISG (UN-Kaufrecht) Bus. [in full ‘United Nations Convention on Contracts for the International Sale of Goods’; short form CISG] uniform international law for sales of goods between businesses from different states. Almost all major trading nations are contracting states, but not the United Kingdom, Ireland or India. Its application can be excluded by contract.

V

Venture capital (VC) Inv. [in German also ‘Wagniskapital’] equity that specialised funds provide to young companies with high growth potential. The fund receives shares, usually a minority shareholding, as well as special rights in the shareholders’ agreement, and usually aims for an exit. Vesting Co. law, Inv., Emp. law arrangement under which founders or employees have to ‘earn’ their equity over a certain period. If they leave before then, they receive only the shares that have already been earned (‘vested’). Periods of four years are usual. VSOP Inv., Emp. law [abbr. for ‘virtual stock option plan’, a virtual employee incentive scheme] the most common form of employee incentive scheme in Germany. Instead of actual shares, employees receive a payment claim of a corresponding amount. The claim usually falls due on an exit. The ESOP with actual share options (option) is less common.

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