Experience the future of law, today Reflections on the legal form after the cri- sis or Strengthening the equity base of a company through ...

Experience the future of law, today | Inhaltsverzeichnis

Experience the future of law, today
Reflections on the legal form after the cri-
sis or Strengthening the equity base of a
company through third-party participation
while at the same time securing control
by the previous owners

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Experience the future of law, today | Inhaltsverzeichnis

Inhaltsverzeichnis
Inhaltsverzeichnis                                         1
Initial situation: Interest in securing control of
the company despite the need for equity            2
The partnership limited by shares
(Kommanditgesellschaft auf Aktien) as a
solution                                                   3
What is the KGaA?                                          3
What makes the KGaA so unique?                             3
Summary                                                    4

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Experience the future of law, today | Reflections on the legal form after the crisis or Strengthening the equity base of a
company through third-party participation while at the same time securing control by the previous owners

Reflections on the legal form after
the crisis or Strengthening the eq-
uity base of a company through
third-party participation while at
the same time securing control by
the previous owners
Initial situation: Interest in securing control of the company despite the need
for equity
The current crisis is eating away at the equity capital of numerous German companies. Many of them will in the
medium term need additional financial resources, whether to replace state-backed loans from KfW or other state
loans and thus restore their ability to pay dividends, to finance investments or simply to strengthen their equity
base again. Also, it is conceivable, that acquisitions shall be made without impairing liquidity and that in view of
the current slump in share prices other companies shall be taken over - because the opportunity is favorable or
circumstances require it (rounding off the portfolio, acquisition of digital competence, securing and making the
supply chain more flexible, insourcing, etc.).

From businesses' point of view, pure debt financing is often not an option in this situation. Rather, companies are
forced to in addition consider not only hybrid financing instruments but (at least in part) also equity financing,
which often cannot be raised from the existing shareholders. In these cases, the funds must therefore come from
new, outside investors.

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Experience the future of law, today | Reflections on the legal form after the crisis or Strengthening the equity base of a
company through third-party participation while at the same time securing control by the previous owners

Especially in German Mittelstand companies, the shares are often wholly or mainly in the hands of a single or only
few (family) shareholders. The family shareholders have control over their company and it is often important to
them to secure this control permanently and to preserve it for future generations. In their belief, management and
control powers should usually also remain secured if external third parties (must) participate in the company in
order to strengthen the equity capital base.

The partnership limited by shares (Kommanditgesellschaft auf Aktien) as a
solution
A change in legal form to a partnership limited by shares (Kommanditgesellschaft auf Aktien - KGaA) makes it pos-
sible to secure the influence of the family shareholders even when raising new equity financing. In addition, the
legal form allows new shares to be used as acquisition financing in the context of further expansion.

Admittedly, the KGaA is not as widespread as other legal forms. But it is regulated by law, has long been estab-
lished and is recognized. It also offers extensive structuring options, especially in the form of a Corporation & Co.
KGaA.

Not only Henkel and Merck have chosen this legal form, but for example also Bertelsmann, Ströer, Drägerwerk,
CEWE and Fresenius.

What is the KGaA?
The partnership limited by shares (Kommanditgesellschaft auf Aktien) is a combination of a limited partnership and
a stock corporation; it combines flexibility with trustworthiness and, last but not least, suitability for the capital
market.

The capital of the company is raised by the limited liability shareholders. The shares of the KGaA can be freely traded
and even listed on the stock exchange, just as with a stock corporation. However, a stock exchange listing is not
required; rather, the free tradeability of the shares can also be more or less severely restricted.

As in a limited partnership, only the personally liable partner (general partner) is responsible for managing the
business of the company. His position can be made almost unassailable by appropriate regulations.

As with a limited partnership, the general partner does not have to be a natural person. Rather than that, a corpo-
ration can also act as a general partner (GmbH & Co. KGaA, AG & Co. KGaA, SE & Co. KGaA, etc.). Hereby - similar
to a GmbH & Co. KG - the liability can be effectively limited.

What makes the KGaA so unique?
In addition to the special position of the general partner, the internal statutes of a KGaA - unlike those of a stock
corporation - can be drafted relatively flexibly and adapted to individual needs.

The supervisory board of a KGaA, which monitors the management of the business as in an AG, has less power than
in an AG. In particular, it has no personnel sovereignty and cannot influence the appointment of the management
(i.e. the general partner and its managing directors or members of the Management/Executive Board).

According to the prevailing opinion, in the KGaA - unlike it is the case with the GmbH & Co. KG - there is no attribution
of employees for the purposes of co-determination (employee participation, the famous German "Mitbestimmung")
at the level of the corporation acting as general partner, so that the general partner is not subject to co-determination

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Experience the future of law, today | Reflections on the legal form after the crisis or Strengthening the equity base of a
company through third-party participation while at the same time securing control by the previous owners

(unless the corporation acting as general partner itself exceeds the thresholds of 500 or 2,000 employees, respec-
tively, with its own employees).

The legal form of a KGaA is thus particularly attractive for family-owned or privately owned companies as prevalent
in the German Mittelstand. If the family shareholders have the power of management over the company acting as
general partner, their power of management is independent of the extent of their participation in the limited partner
shares (Kommanditaktien). Even if the family shareholders no longer have the majority of the limited partnership
shares - for example, as a result of a capital increase required in the course of raising further equity capital - they
can still control the fate of the KGaA in the long term.

Only in very few cases do the limited liability shareholders have the opportunity to influence the position of the
general partner. With this legal form, the family shareholders can also offer investors who enter into a so-called
alongside investment with the family an exit option via the capital market, which does not exist with most other legal
forms.

Last but not least, the KGaA is also suitable as a flexible instrument in succession planning. By distinguishing between
limited liability shareholders with only an equity interest on the one hand and shareholders of the managing general
partner on the other, individual family members or individual family trees or members thereof can participate in the
financial success of the company as limited liability shareholders without automatically being granted influence on
the management.

Summary
The KGaA enables a previously controlling group of shareholders to maintain their control over a company even if
third parties are to acquire an interest in the company in the course of raising further equity or if limited partner
shares are used as acquisition currency in the course of the acquisition of other companies.

The legal form of a KGaA therefore allows the typical objectives of family shareholders - strengthening the financial
leeway without relinquishing management authority and control - to a particular degree.

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Experience the future of law, today | Reflections on the legal form after the crisis or Strengthening the equity base of a
company through third-party participation while at the same time securing control by the previous owners

Contacts
Dr. Volker Schulenburg
Partner
vschulenburg@deloitte.de
+49 40 3785 380

Dr. Charlotte Sander
Partner
csander@deloitte.de
+49 511 307559 536

Johannes T. Passas
Partner
jpassas@deloitte.de
+49 511 3075593

Felix Skala
Partner
fskala@deloitte.de
+49 40 378 538 0

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Experience the future of law, today | Reflections on the legal form after the crisis or Strengthening the equity base of a
company through third-party participation while at the same time securing control by the previous owners

Felix Felleisen
Partner
ffelleisen@deloitte.de
+49 211 8772 2553

Dr. Michael Fischer
Partner
mifischer@deloitte.de
+49 89 290368902

Dr. Till Contzen
Partner
tcontzen@deloitte.de
+49 69 719188 439

Thomas Northoff
Partner
tnorthoff@deloitte.de
+49 89 29036 8566

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Experience the future of law, today | Reflections on the legal form after the crisis or Strengthening the equity base of a
company through third-party participation while at the same time securing control by the previous owners

Dr. Markus Schackmann
Partner
mschackmann@deloitte.de
+49 211 8772 3577

© 2020 Deloitte Legal Rechtsanwaltsgesellschaft mbH
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Experience the future of law, today | Reflections on the legal form after the crisis or Strengthening the equity base of a
company through third-party participation while at the same time securing control by the previous owners

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