The small stock company

• General information
• Continuity of an enterprise
• Going publicGoing public

The middle-sized stock company

Middle-sized enterprises usually take the corporate form of the limited liability company (GmbH) or of the limited liability company and limited partnership (GmbH & Co. KG). Apart from the high prestige enjoyed by the stock company and the possibility of succession of ownership, the so-called “small stock company” is actually structured on equal terms as the limited liability company. Moreover, it offers many advantages due to a theoretically unlimited possibility to raise capital by selling shares on the stock market.

Already before the “stock fever” started, middle-sized enterprises have enjoyed very favourable opportunities of raising equity capital by changing the corporate form into a small stock company. This form of raising capital lets middle-sized enterprises exploit all advantages of the stock company while avoiding the uncomfortable issues relating to credits and loans which are often granted or allowed against a security in the case of limited liability company.

The initial reservations which middle-sized enterprises used to have against taking the form of a stock company (due to the then mandatory participation of workers’ representatives in the supervisory board) have meanwhile been dispelled by changes in law. The requirement for the employees’ codetermination does not apply to enterprises whose number of employees lies below 500, which is also the case for the limited liability company. On the other hand, the advantages of the profit-sharing plan (Mitarbeiterbeteiligung) and corporate loyalty programmes (Mitarbeiterbindung) are now easier to achieve, for instance by means of an employee benefit plan through which the employees receive a share of the profits of the business. Moreover, the mere effect of the word “stock company” makes an enterprise with this corporate form more attractive to executive staff; “managing board” or “spokesman of the managing board” are positions which not only sound as if their denomination implied responsibility but they do imply it indeed.

Enterprise continuity (Unternehmenskontinuität)

Succession of ownership, especially the transfer of shares to the following generations, accounts for continuity of the enterprise. As a result, the prospective decedent at first continues to control the strategic part of the business in the position of the president of the supervisory board, and thus he can further accompany his life’s work while passing on his experiences. A question regarding the nomenclature arises in this context, i.e. if the founder of an enterprise should carry the title “president of the supervisory board” or – as is the case with the limited liability company – should he be a member of “the advisory council” (Beirat).

Going public

The most relevant economical advantage of a small stock company as compared to a limited liability company is the possibility to raise capital by selling shares on the stock market. Nevertheless, going public is quite a complicated process, which must be preceded by comprehensive preparations. Apart from legal issues, numerous fiscal matters have to be considered. Other questions also arise, for instance in which of the four market segments of the stock market the initial public offering (IPO) should take place (Official Market, Regulated Market, Neuer Markt and Regulated Unofficial Market). Moreover, business valuation shall be necessary in the course of going public in order to determine the value of a share. However, as soon as the above-mentioned obstacles have been overcome, there are no limits to capital issues and to increasing share capital.

Already the first step, the conversion of a middle-sized enterprise into a stock company, involves many uncertainties. Although company law contains numerous formal requirements, those applicable to the “small” stock company are generally similar to those applicable to the limited liability company. What’s more, the new Act regulating the Transformation of Companies (Umwandlungsgesetz) makes the conversion of the legal form easier. However, both the transformation and the initial public offering of the company cause considerable costs in the beginning which, however, do pay off in the long run.

The minimum share capital of the small stock company is Euro 50,000. One person is enough to found the small stock company and he can hold all shares in the beginning.

The memorandum of association must be recorded in the notarial form when converting the form of a company and when founding a company. The founders elect the first auditors and the supervisory board who in turn appoints the board of directors and the shareholders’ meeting. The founders deliver a written incorporation report that the supervisory board and the board of directors scrutinize to determine whether all conditions for a proper incorporation have been met. In some cases the court appoints independent auditors to verify the report. Then the founders, the supervisory board and the board of directors apply to the local commercial register for registration.

To sum up, the middle-sized stock company in the form of the “small PLC” provides a sensible solution for raising and maintaining capital in the long run. Introduction to the stock market provides for capital increase and consequently for an increase of the equity ratio and of the credit worthiness. At the same time, the shareholders or the owners of the enterprise can keep their independence by means of appropriate strategic planning. Another advantage involves employees’ loyalty.