Abstract
Social purposes and the interests of stakeholders are traditionally taken into account by German corporate law, in particular since codetermination for worker participants in supervisory councils has been introduced. Thus, this chapter describes how interests of stakeholders are considered leitmotiv in the business judgement rule in Germany. Moreover, the charter may contain clauses of nonprofit goals, making German corporate legal forms flexible to respect stakeholders’ interests. Finally, the new proposals for limited liability company in steward ownership are discussed briefly.
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1 Introduction
The financial market crisis in 2008 and the ongoing climate crisis have led to a reassessment of corporate goals and to a strengthening of interests other than those of shareholders. Social, environmental, or human rights aspects are today essential when it comes to discussing corporate ethics. The short-term maximization of profits is not anymore the only goal to achieve for the management (and the corporation); rather, sustainability and long-term effects, including the interests of stakeholders, need also be taken into account. What has been for a long time regarded as irreconcilable—profit orientation on one hand and the respect of stakeholder interests on the other—is now being viewed as compatible. On both sides of the Atlantic, different movements strive to integrate profit maximization and stakeholder interests, such as environmental protection or human rights.
2 The US Model of Benefit Corporation
The European Union has recently adopted a thorough corporate social responsibility (CSR) report system,Footnote 1 obliging every stock-listed company to render an account of its activities in different social and public interest areas. In the United States, the idea of the so-called benefit corporation is spreading across the country, instigating different corporate law reforms in US states, following more or less the business corporation law model (Model Benefit Corporation Legislation, Footnote 2 written by William H. ClarkFootnote 3 and part of the project of the B Lab foundation).Footnote 4 The B Lab foundation acts as the certifying organization,Footnote 5 but unlike other institutions, they do not focus on a product or a service but on the entire corporation and the whole range of their products and services as being “a good citizen/corporation”.Footnote 6 The first specific act on benefit corporations was adopted in 2010 in Maryland,Footnote 7 and then subsequently in a number of other US states.Footnote 8 Also, Delaware, as one of the most relevant US states when it comes to corporate law, adopted the public benefit corporation in 2013.Footnote 9 Shared characteristic of all these legislations is the combination of a for-profit organization whose intention is also to produce a public benefit “and to operate in a responsible and sustainable public benefit or public benefits manner.”Footnote 10 In their white paper on the need for and rationale of benefit corporations, Clark and VrankaFootnote 11 emphasize that consumers, investors, and the public are demanding new organizational forms that combine profit and stakeholder orientation and reverse the traditional shareholder value paradigms.Footnote 12 The background for this reasoning is the—assumed—strong directive of (Delaware) courts for directors (and corporations) to maximize shareholder value,Footnote 13 referring to such famous decisions as Dodge v. Ford Motor Co.Footnote 14 and Revlon, Inc. v. MacAndrews & Forbes Holding, Inc.Footnote 15 Even though corporate constituency statutes may modify this strong orientation on shareholder value, they cannot abolish it completely since they can only allow to consider stakeholders’ interests, but not oblige directors to pursue such interests.Footnote 16
Hence, the principal rules on benefit corporations address corporate purpose, the accountability of directors, transparency, as well as the enforcement of benefits. According to Sec. 201(a) of the model law, a corporation has to pursue a general public benefit, which is specified in Sec. 102 of the model law. Its charter may indicate other public benefits (Sec. 201(b) of the model law), including the examples listed in Sec. 102, such as services for low-paid employees or communities, environmental protection, the enhancement of public health, or the fostering of science and/or arts. The model law emphasizesFootnote 17 the obligations of directors in Sec. 301(a)(1), who should respect the impact of their decisions not only upon shareholders but upon all stakeholders such as employees, the environment, and the public etc. None of these interest groups, however, is dominant or has to be preferred (Sec. 301(a)(3) of the model law)—notwithstanding the charter which may state that one of these interest groups is to be preferential.
To achieve transparency, the corporation has to annually publish on its website a benefit report (Sec. 401), a copy of which shall be provided to all shareholders. However, the model law does not provide for mandatory auditing (in contrast to the CSR provisions of the EUFootnote 18). The model law allows for the position of a benefit director or officer but without making it mandatory (Secs. 302, 303).
The enforcement of the benefit purpose is left to the corporation and its shareholders, who can file a derivative suit if they own at least 2% of the outstanding shares of the benefit company. Those who are supposed to benefit from the corporations purpose (the stakeholders), however, are not able to enforce its pursuance by the company, Sec. 305(c).Footnote 19 Moreover, directors have no obligation towards third parties, Sec. 301(d) MBCL.Footnote 20
The enforcement issue is considered to be one of the main criticism points,Footnote 21 in particular the lack of enforcement rights of beneficiaries against the corporation to pursue its social etc. purposes.Footnote 22 Hence, authors suggest the introduction of claims for stakeholdersFootnote 23 or state supervisionFootnote 24 or a mandatory stakeholder advisory board.Footnote 25
Another weak point lies in the quality of benefit reportsFootnote 26 which often do not contain necessary information or are used more or less as marketing instruments.Footnote 27 This is not surprising, however, as misleading reports with a tendency towards greenwashing are not sanctioned.Footnote 28
3 The Setting in Germany
To understand the situation in Germany, we have to lay down the fundamentals of German corporate law, which differ quite substantially from those of the United States (and some other countries as well).
3.1 Corporations in Germany
Germany knows of different types of corporations, including, mainly, the limited liability company (Gesellschaft mit beschränkter Haftung (GmbH)) and the stock corporation (Aktiengesellschaft (AG)). The GmbH cannot be listed on a stock exchange but benefits from a very liberal regime regarding corporate governance, in particular with respect to the rights and obligations of shareholders and directors. In contrast, the AG (which can be listed on a stock exchange) is characterized by a more or less strict mandatory legal framework, allowing the corporate charter to make only slight deviations. Moreover, directors of a GmbH are subject to the instructions of the shareholder majority, whereas, in the case of the AG, Sec. 76 of the Act on Stock Corporations (AktG) explicitly states that directors are shielded against instructions from shareholders, even declaring them liable for providing such instructions (Sec. 117 AktG).
Apart from these corporate forms, Germany acknowledges the registered cooperative which is a corporation for the purpose of fostering common or social interests (eingetragene Genossenschaft).
However, one special form of corporation is not recognized by German law: the benefit corporation; even more, there is scarcely any discussion about it.Footnote 29
Although the GmbH can be formed as a nonprofit corporation,Footnote 30 it is, however, not the same as a benefit corporation. This holds also true for the AG which can be designed as a nonprofit corporation as well even though this is not yet clarified by law.
3.2 Goals of Corporations and Obligations of Directors
In contrast to the Anglo-Saxon corporate law world the German law never knew a strict orientation on shareholder value or profit maximization—not withstanding some efforts of academic literature in the 1990sFootnote 31 which, however, has been rejected by the overwhelming majority, and, above all, by courts. In contrast, since 1976 the German High Federal Court has upheld that directors of a stock corporation (AG) have to pursue the “Unternehmensinteresse,” i.e., the interest of the enterprise, which is not the same as the interest of its shareholders. The “interest of the enterprise” encompasses the interest of all stakeholders, such as employees and the public.Footnote 32 The background of this (at that time unusual) extension of the goals to be pursued is rooted in the German model of codetermination which is not known to other jurisdiction. German stock corporation law follows a dualistic approach in which corporate governance is distributed between a management board and a supervisory council. The latter is partly, depending on the size of the corporation, staffed with representatives of employees. Since members of the supervisory council are subject to the same standards as directors of the management board with regard to the corporate’s purpose, courts could not apply the usual standards to these representatives—as this would signify that representatives would have to pursue interests of shareholders in total contrast to the vote of employees. Hence, the “Unternehmensinteresse” refers to a standard for directors which encompasses all kind of interests of stakeholders, in particular of employees. This kind of benchmark is deeply rooted in German corporate law and goes even beyond the Weimar Republic to the First World War when first—and influencing—articles and books appeared about the “enterprise as such,” thus, decoupling the corporation from shareholder’s interest. When the first German stock corporation law was adopted, Sec. 70 AktG (1937) noted that directors are not subject to the instructions of shareholders and have to run the corporation in the interest of “the general public.”Footnote 33 This rule was not integrated in the new German Stock Corporation Act, but was deemed by the legislator as a provision that went without saying.Footnote 34
The general principle of “Unternehmensinteresse” (interest of the enterprise) was even more boosted when Germany introduced for big enterprises (be it a stock corporation or a limited liability company) in 1976 the mandatory codetermination on the level of the supervisory council. According to the Codetermination Act, every big enterprise with more than 2,000 employees has to establish a supervisory council (if it is not already mandatory as for the stock corporation) whose members consist to the half of representatives of employees. It goes without saying that it is difficult to oblige representatives of employees to maximize shareholder value. Hence, it is no big surprise that the German High Federal Court officially acknowledged the concept of “Unternehmensinteresse” as an overall approach, integrating different interests, especially those of shareholders and employees.Footnote 35 However, it turned out that this “interest of enterprise” is hard to specify in particular cases, which gives a lot of leeway to directors.
Hence, according to the overwhelming opinion in German academic literature as well as court decisions, shareholder value maximization never has been adopted as a general ruleFootnote 36 rather than a more or less opaque notion of “Unternehmensinteresse,” referencing to all kind of interest of stakeholders which could be considered by directors. However, directors are not obliged to give preference to any stakeholder interests or even to respect them; it is up to their discretion to balance all interests.Footnote 37 Of course, this competence to balance various interests entails a danger of shielding directors against liability claims as they can always bring forward the argument that they merely respected other interests instead of maximizing company profits.Footnote 38
This general tendency toward a multiple -goal approach is now fostered by the new EU provisions on the corporate and social responsibility of corporations. These provisions aim at better transparency and reporting on the responsibility of corporations (and directors) concerning public interest, social and environmental responsibility, etc. Corporations must prepare a special report on their activities relating to environmental concerns, employee concerns, social concerns, the protection of human rights, and the combating of corruption and bribery.Footnote 39 These points are specified in Sec. 289c German Commercial Code (Handelsgesetzbuch (HGB)). For example, in the matter of environmental concerns, the report must contain information related to greenhouse gases, water consumption, air pollution, the use of renewable energy, and the protection of biological diversity (289c (2) No. 1 HGB). The information on human rights, for example, must include how human rights violations are avoided (289c (2) No. 4 HGB).Footnote 40 However, these reports are not audited. Furthermore, the report follows the comply or explain principle. If the corporation has no concept in one of the named matters, it must explain the divergence.Footnote 41
This general principle of pursuing the “interest of the enterprise” (rather than mere shareholder value) is flanked by the business judgement rule enshrined in Sec. 93 (1) Stock Corporation Act (AktG). As well-known managerial decisions are out of scope of judicial control as long as these decisions are taken upon adequate informationFootnote 42 and managers use accepted methods.Footnote 43 However, decisions which are legally required are not covered by the business judgement rule.Footnote 44
In sum, managers/directors are, under German law, to a wide extent free to respect other interests than those of shareholders; however, they are not obliged to pursue these goals in all of their decisions.
3.3 Goals of Corporations and Provisions on Charters
Given the fact that German directors are more or less free to respect interests other than the shareholders’, it is quite important to determine how far the charter of a corporation can prescribe goals for its directors. Even in the case of limited liability companies, where directors are subject to the instructions of shareholders, the company charter can play an eminent role. Under German corporate law the charter usually contains the abstract principles and the foundations of corporate governance such as membership, voting rights, etc. The charter also specifies the object of the corporation (such as to manufacture cars and the like). Moreover, the charter may also fix the goal for the corporation in such a way that directors must respect and pursue public benefit (such as environmental protection) or benefit for third parties.Footnote 45
Whereas the limited liability company enjoys a lot of freedom concerning the design of the charter, thus even allowing a nonprofit limited liability company (gemeinnützige GmbH)Footnote 46 the situation is different for the Stock Corporation Act. One of the peculiarities of the German corporate law system is that the charter of a stock corporation can only deviate from the provisions of the Stock Corporation Act if such provisions so allow. Hence, most of the norms under the Stock Corporation Act are mandatory (so-called Satzungsstrenge, Sec. 23(5) of the German Stock Corporation Act (AktG)). Thus, it is quite arguable whether the charter can change corporate goals from mere profit-orientation to an obligation to respect interests of stakeholders.Footnote 47 Indeed, the stock corporation can be founded for any purpose which is not forbidden,Footnote 48 that is why it is consequent to allow the corporation to pursue the interests of stakeholders—especially, as already pointed out, the common belief for German stock corporation law already acknowledges that the corporation has also to respect other purposes than pure profit maximization. Hence, it would not constitute a major deviation from the Stock Corporation Act if the charter would contain an explicit provision on the pursuance of public benefit goals.Footnote 49 However, such deviation has to be clear, and a change from a profit maximization to a public benefit goal needs the approval of all shareholders.Footnote 50
4 Discussion on Benefit Corporations in Germany
As already mentioned, German law does not explicitly recognize a corporate form for benefit corporations. Even more, there is scarcely any discussion of introducing such a new corporate formFootnote 51 rather than modifying the existing limited liability company—which is to some extent not surprising if we have a closer look on the specific needs to introduce such a new corporate form.
The core of the problem refers to the combination of a for-profit organization with the pursuit of benefit purposes as there may be numerous reasons not to opt for a nonprofit organization.Footnote 52 As already mentioned, German corporate law differs from Anglo-Saxon corporate law in that it allows considering stakeholders’ interests. However, there is no obligation on the part of directors to really pursue them if there is no explicit charter provision indicating such goals. Hence, some argue that, just like under Italian corporate law,Footnote 53 a new corporate form could fill that gap.Footnote 54 This could be in deed a strong argument to introduce such a new corporate form—if the German corporate law would not allow for a flexibility in charter provisions which it obviously does.
However, as shown German corporate law does not forbid charter provisions on benefit purposes, thus obliging directors to respect and to pursue benefit goals.Footnote 55 Even for the situation in the United States it has been argued that corporate law is flexible enough to take into account stakeholder’s interests,Footnote 56 in particular in charter provisions under Delaware corporate law.Footnote 57
The only discussion about the introduction of a new legal form in Germany in order to respect stakeholder’s interests is centered around a specific limited liability company named “steward ownership” (in German “GmbH in Verantwortungseigentum (VE-GmbH)”). Shareholders will not receive any payments out of profits etc., all assets should be locked in the company so that the relationship between power/money and the purpose of business should be disrupted in order to enhance long-term purposes, independence and stewardship.Footnote 58 Another essential aspect of this proposal is the restrictions concerning shareholders: only natural persons can be shareholders, and their shares are not easily transferable. Moreover, such a limited liability should refrain from belonging to a group of corporations. However, this new legal form does not require a specific nonprofit goal.
The aim of this new limited liability form is to enable also small enterprises to decouple profit maximization from short term interests—whereas already bigger enterprises can use the legal form of a foundation as a shareholder of a limited liability company or stock corporation such as being done by Robert Bosch GmbH or Zeiss AG. Exactly this fact that foundations are already used to pursue the goals declared by the promoters of the new legal entity forms ground for heavy criticism by corporate legal scholars.Footnote 59 In addition, the idea of asset lock seems to contradict chief corporate law principles (outside the legal form of a foundation) such as the prohibition to restrict sovereignty of shareholders.Footnote 60 Also the lack of an explicit nonprofit goal is criticized.Footnote 61 Finally, the protection of creditors is at stake as shares cannot be used for enforcement of claims.Footnote 62
The authors of the first draft of this proposal for a company in steward ownership reacted to the criticism in a second draft by strengthening creditor protection (here introducing a claim for creditors to get guarantees of the company) and by explicitly establishing the choice for nonprofit goals.Footnote 63 Moreover, external auditors should supervise that asset locks are respected by shareholders and no circumvention takes place.Footnote 64 The asset lock is flanked by introducing a separate claim for nonprofit organizations against the company in case of their liquidation—in order to prevent misuse by one-man-companies.Footnote 65 Still central and crucial for the proposal is, however, the “eternal” asset lock which cannot be changed and overruled—not even by the charter and an unanimous vote by the shareholders.Footnote 66
Hence, the final debate is about how much branding a new approach for corporations would need. Some argue that such a new corporate form would create a strong signal for investors, consumers, and employees.Footnote 67 However, since the certification mechanism already provides for such a signal it should even following the original intentions of the “inventors” of the benefit corporation be not sufficient to simply found a benefit corporation; an additional auditing and certification process is obviously needed. Hence, it seems hard to find reasons why such a certification procedure should not also work with a specific charter containing the necessary benefit purposes and mechanisms as the relevant signal is the certificate and not the mere fact that a business is incorporated using a benefit corporation. How a new corporate form (beyond the certificate) should create an additional legitimation without a thorough control and monitoring is not clear.Footnote 68 Moreover, corporate law is already able to integrate stakeholder’s interests into existing corporations by using a foundation as a shareholder.
However, one of the weak points of a mere certification model refers to enforcement mechanisms for third parties—which is obviously also true for existing benefit corporations. Here, unfair competition law as well as liability provisions for misleading information about a corporation may help; nevertheless, it will be difficult to prove for consumers or state agencies (environmental protection) that they suffered a harm whilst relying upon the benefit information of the corporation, in contrast to traditional certificates which refer to the quality of a product or a service. Thus, it would make more sense to decouple civil claims against the corporation from harm and damage and open the law for collective actions which can be pursued by consumer associations etc.
5 Summary
In conclusion, German corporate law does not know explicitly the benefit corporation but seems flexible enough to allow for charters which combine for-profit orientation with considering stakeholder’s interests. There is no need to introduce a specific benefit corporation form as long as certification mechanisms are in force and have a significant impact on the market. Moreover, enforcement mechanisms have to be improved, in particular by allowing collective actions.
Notes
- 1.
Directive 2014/95/EU of the European Parliament and of the Council, 2014, p. 1.
- 2.
See <https://benefitcorp.org/attorneys/model-legislation>. Accessed 16 September 2019.
- 3.
See Clark et al. (2012), p. 817 Fn.: “Mr. Clark drafted all of the benefit corporation legislation that has been enacted or introduced as of the publication of this article.”
- 4.
- 5.
See <https://bcorporation.net/> for an overview. Accessed 10 September 2019.
- 6.
See also Möslein and Mittwoch (2016), p. 407.
- 7.
Maryland Senate Bill 690, 2010.
- 8.
See the overview: “State by State Status of Legislation” by Benefit Corporation <http://benefitcorp.net/policymakers/state-by-state-status>. Accessed 10 September 2019.
- 9.
- 10.
Del. Code Tit. 8 Chap. 1, § 362(a).
- 11.
- 12.
- 13.
Clark et al. (2013), pp. 7 et seq.
- 14.
Dodge v. Ford Motor Co. (Mich. 1919): “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes.”
- 15.
Revlon, Inc. v. MacAndrews & Forbes Holdings (Del. 1986): “[C]oncern for non-stockholder interests is inappropriate when an auction among active bidders is in progress […].”
- 16.
See Clark et al. (2013), pp. 9 et seq.
- 17.
- 18.
Art. 19a Paragraph 5 of the Directive 2013/34/EU of the European Parliament and of the Council, 2013.
- 19.
See Benefit Corporation (2017), pp. 837 et seq.: “To reduce the possibility of nuisance suits, a shareholder or group of shareholders bringing a derivative suit must own at least 2% of the outstanding shares of the benefit corporation.”
- 20.
Benefit Corporation (2017), pp. 579 et seq.: “Subsection (d) negates any enforceable duty of directors to non-shareholder constituents.”
- 21.
- 22.
See Loewenstein (2017), p. 388: “[…] the persons with the greatest incentive to sue the benefit corporation – the beneficiaries of its specific public benefit – are expressly denied standing unless the articles or bylaws otherwise provide, and even then these persons would not be able to obtain monetary relief.”
- 23.
See Padfield (2015), pp. 17 et seq.
- 24.
- 25.
See Murray (2017a).
- 26.
- 27.
- 28.
- 29.
- 30.
Fleischer (2018), p. 199.
- 31.
See Mülbert (1997).
- 32.
- 33.
For a brief description of the historical development see Habersack (2020a), pp. 629 et seq.
- 34.
- 35.
Bayer (1975), p. 331.
- 36.
- 37.
- 38.
- 39.
Mock (2017), p. 1199.
- 40.
For detailed information about the report see Mock (2017).
- 41.
- 42.
- 43.
- 44.
- 45.
- 46.
- 47.
- 48.
- 49.
- 50.
- 51.
- 52.
See also Fleischer (2019b), pp. 14 et seq.
- 53.
Legge N° 208, 2015.
- 54.
See Fleischer (2019b), pp. 14 et seq.
- 55.
See also Habersack (2020a), pp. 638 et seq.
- 56.
See Heminway (2018), pp. 800 et seq.; Molk (2017), p. 7: “[M]any firms that have now converted to one of the new social enterprise forms first operated for many years as corporations. And they were able to do so because corporate law has long allowed corporations the flexibility to consider other constituents beyond investors.”
- 57.
- 58.
Mainly promoted by the Stiftung Verantwortungseigentum (2020), https://stiftung-verantwortungseigentum.de/fileadmin/user_upload/sve_presskit_051020.pdf; see also https://purpose-economy.org/en/.
- 59.
- 60.
- 61.
Reiff (2020), p. 1754.
- 62.
Grunewald and Hennrichs (2020), p. 1204.
- 63.
Sanders et al. (2021), p. 287.
- 64.
Sanders et al. (2021), p. 286.
- 65.
Sanders et al. (2021), p. 287.
- 66.
Criticized by Grunewald and Hennrichs (2020), p. 1202.
- 67.
See Murray (2017b), p. 446; Manesh (2019), p. 647 with the addition: “Benefit entity statutes facilitate this signaling function by providing socially minded businesses the statutory ‘benefit’ moniker to distinguish themselves from businesses organized as conventional corporations and LLCs, which are presumably less virtuous or altruistic.”
- 68.
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Spindler, G. (2023). Social Purposes in German Corporate Law and Benefit Corporations in Germany. In: Peter, H., Vargas Vasserot, C., Alcalde Silva, J. (eds) The International Handbook of Social Enterprise Law . Springer, Cham. https://doi.org/10.1007/978-3-031-14216-1_28
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