The Responsible Ownership Company - the Alternative Form of Ownership

Corporate social responsibility (CSR) has gained importance worldwide in recent years. Companies have recognised the need to take into account the interests of shareholders and stakeholders in harmony with environmental, employment, social and human rights concerns, not only to improve their corporate image but also to live a good neighbourly life with the community in which they operate.

The CSR philosophy is being internalised and practised by more and more start-ups, family-owned and medium-sized companies. They define themselves as purpose entrepreneurs and want to transform their companies into purpose companies (responsibly owned companies). A responsible ownership company does not primarily serve the capital market, but seeks to establish and maintain a healthy balance between profit, competitiveness, public welfare and sustainability in the long term.   

The philosophy of responsible ownership companies

The responsible ownership company should practise the basic idea of the social market economy:

The purpose of the responsible ownership company is not profit and its distribution to the shareholders, but the reinvestment of generated profits in sustainable goals of the enterprise.

In a responsible ownership company, investors are not allowed to have a say; instead, the voting rights lie with the entrepreneur. In this way, the entrepreneur retains control over the company’s activities and always places the mission of the company at the centre of corporate action.

The entrepreneur sees himself as a trustee rather than the owner of the responsible ownership company. He has a fiduciary function and cannot sell or bequeath the company. When he leaves, he passes it on to the next (fiduciary) managing director. The responsible ownership company therefore belongs “to itself”.   

German legal forms and ownership structures for responsible ownership

In Germany, responsible ownership can be implemented with the help of various legal forms and ownership structures:

• The gGmbH
  The gGmbH differs in essence from a classic GmbH in that it uses its profits for charitable purposes. A gGmbH is fundamentally altruistic and oriented towards the common good. The focus is not on profit maximisation, but on non-profit status. In order to obtain the status of non-profit, a review is carried out by the tax authorities, because the gGmbH is exempt from corporation tax and trade tax. Profits may only be distributed if the shareholder itself is a non-profit organisation. 
• The veto share model
  The company is managed by trust owners who hold shares with voting rights, but which cannot be freely sold or inherited, and who have no or conditional profit participation rights and no liquidation proceeds rights. A change in the legal position of the “responsible” owners, as defined in the company’s articles of association, is only possible with the consent of the veto share holder(s). This is usually a foundation specialising in veto rights, which, as a minority shareholder, is given the right to veto a sale of the company or changes to the articles of association that undermine the separation of voting and dividend rights. When the trust owners leave, the shares are passed on or returned to successors selected according to defined rules or to the company.
• The individual foundation model
  The company is majority owned by a self-governing, usually non-profit foundation that does not distribute profits to private individuals. As a rule, the foundation has two decision-making bodies - the company council, which exercises voting rights, and the charitable foundation board, which is responsible for distributing profits for charitable purposes and often determines the company council. The double foundation model Two share classes are created in the articles of Association: Shares with voting rights without a dividend rights and shares with dividend rights without voting rights. The share classes are held in a legal entity created for this purpose: The shares with dividend rights are usually donated or sold to a charitable foundation, a limited liability company or an association, the shares with voting rights are held by trust owners, e.g. with the help of a second foundation, an association or a limited partnership.   

Foreign legal forms and ownership structures for responsible ownership

In Denmark, the ownership structure of the individual foundation model is widespread.

In the Netherlands, individual foundation models are organised in so-called STAK structures - a special form of foundation that is allowed to issue share-like certificates/derivatives.

In the UK, the trust partnership model is practised: The company is owned by a trust that represents the partners of the company and their interests through a democratically elected partner council. The management, on the other hand, is elected meritocratically and monitored and controlled by the partners’ council. The partners of the company can only participate in the profits to a limited extent. The company itself is designed to be inalienable.

Finally, the Perpetual Purpose Trust (PPT) from the USA should be mentioned: The PPT holds the majority of voting rights in the company and determines the management. The trust is managed by a so-called Trust Protector Committee, the composition of which is flexible and usually involves a large number of stakeholders.   

Inadequacies of the existing legal forms and ownership structures

Due to the very high and narrow legal requirements for tax recognition of non-profit status, the gGmbH is rarely suitable as a legal form that seeks to meet the flexibility needs of a responsible ownership company as an active player in the social market economy.

The foundation construct may, on the one hand, be too complicated for start-ups or medium-sized enterprises, and on the other hand, it may not be in line with interests due to the rigid purpose of the foundation and due to the strict separation of ownership and responsibility in the foundation models. Finally, the foundation is subject to foundation supervision.

The use of foreign legal forms and ownership structures requires a case-by-case, well-founded examination of both the foreign legal system and the legal treatment of the legal form in Germany.   

Proposal of a new alternative legal form for responsible ownership

At the end of 2019, the Stiftung Verantwortungseigentum (Responsible Ownership Foundation) was founded in Berlin, which aims to disseminate and promote the alternative model of responsible ownership. To this end, there is already a “Draft Law for the Limited Liability Company in Responsible Ownership” (GmbHG-E), which provides for the amendment of the GmbH law and the creation of a new legal form, the GmbH-VE (GmbH in Responsible Ownership), as follows:

• Permanent asset lock/asset lock
  Shareholders have no claim to the profits and assets of the company either in the course of business or in the event of the dissolution and liquidation of the company (sections 77e (1) and (2), 77f, 77j (1) GmbHG-E). Only the contribution is refunded in the event of the dissolution of the company and the withdrawal of a shareholder (sections 77i (1), 77j (2) GmbHG-E).
• Securing the family of skills and values
  Beyond the generation of the founders, the GmbH-VE should only be successful in the long term with shareholders who are convinced of the concept of responsibility ownership and the vision of the specific company. Therefore, the transferability of the business shares is severely restricted: Shares will be restricted by transferability and in principle only transferable to natural persons, other companies in responsible ownership or legal entities with assets tied up in the same way by law on a permanent basis (section 77b (2) GmbHG-E) or inheritable (section 77b (3) sentences 7 to 9 GmbHG-E). Complete exclusion of the inheritability of the shares is possible (section 77b (3) and (4) GmbHG-E).
• Safeguarding the asset commitment through appropriate governance
  Appropriate governance must ensure the mandatory asset commitment of the GmbH-VE and counteract attempts at abuse or circumvention (§ 77h GmbHG-E).
• Freedom of organisation
  The principle of the shareholders’ autonomy in the articles of association is retained to the greatest possible extent. However, some provisions implementing the responsible ownership concept are to be mandatory and irreversible. In particular, the asset lock or the choice of the VE-GmbH as the legal form in the sense of a genuine asset lock should no longer be reversible, § 77a (2) sentence 2 GmbHG-E.   

Conclusion

The proposal has caused a stir in the media and a divided response. In advisory practice, structures designed for responsible ownership are playing an increasingly important role. Should the submitted draft law on the GmbHG be implemented in this or a similar form, a significantly less complex arrangement will be available in the future.

Author: Nikolay Stoykov