60th anniversary of the Stock Corporation Act – timeless classic or obsolete model?

The Stock Corporation Act in its current form, first enacted in 1965, is celebrating its 60th anniversary this year. It is a celebration with a subdued mood. Listed companies are increasingly choosing to move away from the German stock corporation (AG), favoring the Dutch Naamloze Vennootschap (N.V.) instead. Investment bankers and consultants who advise companies on IPOs are advising against the AG.

Companies need a corporate legal framework that allows them to react flexibly to rapidly changing economic conditions and capital markets. This legal framework must provide companies with solutions to challenges they face, beginning with their formation and continuing throughout their growth, IPO and capital increases. Key requirements include more flexible financing options, a general meeting process that provides legal certainty and enables investors to be informed and engaged, as well as a governance structure that allows supervisory boards to effectively oversee and advise management. The increasing shift toward alternative legal structures highlights the necessity for German stock corporation law to evolve.

Together with our partner Deutsches Aktieninstitut (DAI), we are presenting proposals to modernize the German Stock Corporation Act. These recommendations are also an indication of aspects that should be considered in a 28th regime for company law at the European level.

Our proposals are based on a survey of listed companies from the DAX 40, MDAX, SDAX, and Scale indices of Deutsche Börse AG, as well as m:access of the Munich Stock Exchange. Insights from 19 expert interviews with company representatives, investment bankers, investors, and experts from academia and employee representatives enhance the credibility and depth of the survey findings.

Reform Recommendations at a Glance

Improve Equity Financing Options

Make it easier for companies to raise larger amounts of equity on the stock exchange by

• Accelerating the process for ordinary capital increases - from convening the general meeting to due registration of the capital increase in the commercial register
• Allowing the use of conditional capital for ongoing “at-the-market” capital increase programs, giving companies more flexibility to raise equity as needed
• Increasing the cap on authorized capital, which is currently limited to 50 percent of share capital
• For cash capital increases accompanied by a simplified exclusion of subscription rights, permitting new shares to be issued at a price discount of up to ten percent (instead of the current five percent) on the stock market price

Revitalize General Meetings

The current rules around challenging shareholders’ resolutions - and the possibility that even minor defects can result in lawsuits - often make general meetings monotonous, lengthy and overly formal. 

To foster a more open and engaging dialogue between shareholders and management, it is time to rethink how general meetings are conducted.

• Reform the rules on challenging shareholders’ resolutions: Only significant, particularly serious errors in management’s responses to shareholder’s questions should provide grounds to challenge resolutions.
• Expand the review proceedings for the release of resolutions for entry in the commercial register (“Freigabeverfahren”) to all resolutions that require registration and accelerate decision-making by shortening both the lawsuit filing period and the duration of proceedings.
• Exclude minor formal or procedural mistakes—such as typos in meeting invitations—from being used to declare general meeting resolutions null and void.
• Provide remedies other than retroactive nullification as a consequence of legal challenges: No automatic right to challenge the validity of all supervisory board resolutions following a challenge to a member’s election.
• Allow shareholders to submit questions in advance for all meeting formats (in-person, virtual, or hybrid), with the possibility of first answering these questions during the general meeting.
• Announce shareholder motions early to prevent fluke majorities if attendance is low at the general meeting.
• Abolish unnecessary formalities, such as reading aloud the full voting results during the meeting.

Adjust Supervisory Board Rights

The current legal framework for the supervisory board, especially for the chair, no longer matches the growing responsibilities of the role. Key recommendations include:

• Allow companies with large, co-determined supervisory boards to set the size of their boards together with shareholders, while maintaining co-determination rights
• Grant both active and passive voting rights to employees abroad to ensure that the interests of all employees in co-determined companies are represented through international employee representation
• Establish clear rules and broader powers for the supervisory board chair, such as the authority to engage external advisors
• Shorten the limitation period for liability claims against supervisory board members from ten years to five years (as well as for the liability of management board members)

Looking Ahead: Introducing a 28th Regime for Europe

Establishing a 28th regime for company law at the EU level - one that companies can choose to adopt - would be a valuable addition to the range of available legal forms. Key benefits include:

• Ability and structure to access capital markets for companies of any size
• Greater flexibility for capital increases and business growth
• A practical solution for fast-growing companies, allowing them to develop from startup to IPO without having to change their legal form
• Applicability across all group structures, helping to streamline processes for European businesses
• Integration with other areas of law, such as liability, insolvency, and jurisdiction

The full study is available in German.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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