Update Shareholder Activism No. 3
Unlimited Personal Liability of Shareholders in Air Berlin PLC as a result of BREXIT?
It is generally understood by investors in public listed companies that the entire investment can be lost. This is normally the case if the stock corporation has to file for insolvency. While such event is of course an unfortunate outcome for any investor in the stock markets, shareholders in insolvent Air Berlin PLC have to be concerned that it could even get worse. Much worse in fact, as the recent ad-hoc-announcement of Air Berlin PLC disclosed: The insolvency administrator of Air Berlin PLC is about to sue Clearstream Banking AG (“Clearstream”) in its capacity as registered shareholder of public listed Air Berlin PLC for payment of just short of EUR 500 million and for declaratory judgment that Clearstream would be liable for further claims of at least EUR 1 billion.
Legal Arguments of the Insolvency Administrator
The insolvency administrator is targeting it because Clearstream is a registered shareholder of ordinary shares in Air Berlin PLC. The actual investors in Air Berlin PLC did not acquire shares in Air Berlin PLC outright but rather so called “CI” which conveyed a benefial interest in the Air Berlin shares according to the securities prospectus filed by Air Berlin on the occasion of its IPO. Air Berlin is keeping a register of all CI holders as set out in its prospectus. For the insolvency administrator it is of course more convenient to target Clearstream instead of the thousands of past and present CI holders - deep pockets and only one defendant in the first place.
What is legal argument of the administrator in going after Clearstream? This is connected to the European Treaties and Brexit: As a result of Brexit, the EU principle of freedom of establishment no longer applies to Air Berlin PLC as an English company with its administrative headquarters (Verwaltungssitz) in Germany. Hence, following Brexit Air Berlin PLC is no longer regarded as an English public limited company pursuant to German corporate law. Instead, it will be re-qualified as a German partnership under civil law (Gesellschaft bürgerlichen Rechts, “GbR”). The major difference between a stock corporation and a GbR under German law is that any shareholder in a GbR has an unlimited personal liability for the liabilities of the GbR.
Under German corporate law, a company that has been established pursuant to foreign law, but has its administrative headquarters in Germany, will generally indeed be considered a German company (so-called seat theory, “Sitztheorie”). It will not be acknowledged as an entity with limited liability. Instead, such company will be treated as a partnership under civil law or – if it operates as a commercial enterprise – a general partnership (“offene Handelsgesellschaft”), with the shareholders as partners. The limitation of liability pursuant to foreign law will not apply. The partners will be personally liable for the debts of the company.
Different Treatment of EU Companies due to Freedom of Establishment
The situation is somewhat different for companies that are established under the laws of a Member State of the European Union. These will be acknowledged as foreign entities according to the laws under which they were established due to the European principle of freedom of establishment, even if they have their administrative headquarters in Germany (so-called foundation theory, “Gründungstheorie”).
As a consequence, English law LLPs (limited liability partnerships), Ltds (private companies limited by shares) and PLCs (public limited companies) were treated as English companies, even if they had their administrative headquarters in Germany. The limited liability pursuant to English law was accepted for these companies under German law too.
German Businesses Operating as English Companies
The acceptance of English companies with administrative headquarters in Germany provided German enterprises the opportunity to operate their domestic German businesses using an English company. A number of such entites therefore chose an English company form to make use of certain advantages under English law such as low incorporation expenses or a lower minimum capital than required for German companies. Another reason was often to avoid the applicability of the strict German employee co-determination rights.
Consequences of Brexit
As a result of the Brexit, English companies no longer fall under the European freedom of establishment. This is of course not an issue for English companies with their administrative headquarters in the UK - a limitation of liability pursuant to English law will be still be accepted in Germany in those cases.
For companies under English law that are actually located in Germany, i.e., have their administrative headquarters here, the situation is different though due to Brexit as argued by many scholars and even supported by a number of German court rulings: Such companies will be treated as non-EU companies. As a consequence, the limitation of liability pursuant to English law will no longer apply and such companies will be treated as partnerships under German civil law. The result of the shareholders: they will be personally liable for the debts of the company.
Protection for Shareholders?
Some German legal scholars take the view that these so-called pseudo English companies should be granted protection, e.g., by continuing to apply English law at least for a certain limited period of time, or by limiting the liability to the company’s assets at least for those debts that existed on the date when Brexit became effective (December 31, 2020). Whether German courts will ultimately follow these proposals is unclear as of yet. One obvious counter-argument is that the Brexit vote was on June 23, 2016 already. The change in the applicable law was foreseeable for the companies affected, so that they had ample time to take countermeasures (e.g., transformation into a German company).
View of the German Federal Supreme Court
In a resolution dated February 16, 2021, the German Federal Supreme Court (Bundesgerichtshof, “BGH”) already ruled that the freedom of establishment no longer applies to English companies. The judgment does not specifically address the issue of a potential personal liability of the shareholders though. Some legal scholars at least interpret it as confirmation that the limited liability pursuant to English law will no longer be accepted for pseudo English companies. The rules regarding a potential personal liability due to Brexit are also described in a circular of the German Federal Ministry of Finance (Bundesministerium der Finanzen) dated December 30, 2020.
Apart from the question whether German courts will indeed hold Clearstream personally liable for the debts of Air Berlin PLC as sought by the insolvency administrator, the question is of course also if and to what extent the actual beneficial shareholders (= the CI holders) of Air Berlin would also face unlimited personal liability so that Clearstream could take recourse against them should it indeed ultimately be held liable. If that would be the case, the purchase of just one share (or CI) in Air Berlin PLC could turn out to be the most costly share purchase in history.
Heuking’s Shareholder Activism Team
The authors Michael Neises and Christian Staps are part of Heuking’s shareholder activism team which regularly advices on all aspects of shareholder activism in Germany, including public take over-, stock corporation-, regulatory-, finance- and restructuring- law.