The German corporation (for the purposes of this post: “Aktiengesellschaft”) is known for its two-tier board system, employee codetermination on the level of the supervisory board, and minimum capital. With the rise of the law and finance literature, another feature of German law has come under scrutiny, namely its level of legal investor protection. Using the common law systems as a benchmark, many economists argue that Germany provides investors with a relatively weak set of rights, resulting in a comparatively weak capital market. A probe into history, however, reveals that things are more complicated than that. In a paper recently posted on ssrn, I attempt to explain several core strands of German corporate law in the 20th century.
German corporate law (“Aktiengesetz”) started at the outset of the century with a corporate governance model revolving around shareholder power. According to the law in the books, the shareholders’ assembly was the supreme authority within the Aktiengesellschaft. The law in action, however, stipulated for a strong supervisory board with executive powers, thereby shifting power from the shareholders to the directors. Notwithstanding the intense debate on corporate law reform during the Weimar Republic, legislation was sparse. The year 1923 saw the introduction of the minimum capital requirement, aimed at providing creditor protection and limiting the number of “minuscule” incorporations: the “hyperinflation” had led people to buy shares and to found corporations because this allowed them to counter the rapid decline in the value of money.
After a partial reform by emergency decree in 1931, legislation in 1937 fundamentally altered the Aktiengesellschaft’s shape. The executive board was strengthened and shareholder rights were curtailed, with only those issues left to vote on expressly provided for in the law or in the articles of association. The shareholders’ assembly was reduced to the role of a “deposed king”. Although the reform was couched in Nazi terminology, US and English corporate laws served as a major source of inspiration. This was not only true in regard to a stronger executive board (coined as the introduction of the Führerprinzip in corporate law), but also with respect to the two-tier board system. Even if the 1931 and 1937 reforms had moved German (civil) corporate law closer to US (common) corporate law, the once very active German stock market did not pick up speed again. The Nazi government early on intervened in business and business politics, thus impeding economic growth.
The first significant legislative measure after 1945 was not a change in the Aktiengesetz, but the (re-)introduction of board-level codetermination. Codetermination laws in 1951, 1952 and 1976 established board-level employee participation, building on older laws and a debate about worker participation rights with roots in the 19th century. To appreciate how these laws came into being, it is important to consider them against the broader historical background: from the Allies’ perspective and in the eyes of many Germans, employers and “capital” had supported Hitler’s rise and the Nazi regime. The worker unions represented a partner in the Allies’ efforts to denazify Germany and to decartelize the steel and coal conglomerates. Additionally, the unions, calling for better participation rights, pressed for a general strike, thereby threatening the economic recovery which had started in the course of the Korean War. In order to protect the economy, the German government bought peace by granting participation rights.
After a partial reform in 1959, the Aktiengesetz underwent a more thorough revision in 1965. The two-tier structure of executive and supervisory board, however, remained in place. The government wanted to keep employees out of the board, which would have been the outcome of collapsing supervisory board with codetermination and executive board into one. As a measure to provide better incentives for market participants to create capital and to achieve greater dispersion of ownership, shareholder rights were strengthened. This did not lead, however, to fundamental changes in the separation of power. Additionally, the 1965 reform introduced two new features without any known foreign counterpart. Firstly, it contained a section on Konzernrecht, ie, the law of corporate groups. Secondly, it substantially restricted the freedom of contract in corporate law by disallowing deviations from the Aktiengesetz in the corporate charter, thus standardizing the corporate form by law.
In the last quarter of the 20th century, legislative action concentrated on details and incremental change. Closer inspection reveals two overarching lines of development. The first indicates that the Aktiengesetz evolved into a regulation of what could be called two types of corporations: one being the “small Aktiengesellschaft”, without access to public markets and not intended to be taken public (eg, family-owned corporations), the other the public corporation. This tendency to essentially split corporate law in two is complemented by the everincreasing influence of capital market regulation. The second strand of development relates to corporate governance. One important aim of regulation, heavily influenced by European legislation, is to strengthen the supervisory board and equip it with better means to exercise control over the executive board.
As a matter of general context of German corporate law, one should pay attention to the broader historical, social and legal environment German corporations are part of. To give just two examples: the pension system in Germany traditionally does not rely on the stock market. Consequentially, the number and size of pension funds creating demand is significantly smaller than, say, in the US. Moreover, the economy after 1990 had (and still has) to deal with the consequences of reunification.
Thilo Kuntz is Professor of Private and Corporate Law and Legal Theory at Bremen University, Faculty of Law.