Secure foundation with individual articles of association

The rule of thumb in incorporation is as follows:

If one shareholder is founding, then with a standard protocol (unless there are exceptions to this). If more than one shareholder is founding the company, it is better to use a proper set of articles of association.

If there is only one shareholder, the sample protocol formation is usually suitable. With 300 € for notary and commercial register one does little wrong and this fits also for approx. 95% of the cases. In the case of several shareholders and proper articles of association, the costs are somewhat higher, but the cost savings do not justify the waiver of rights or rules among themselves, or also in relation to the company, especially in the case of managing directors and power of representation. 

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WHAT ARE BYLAWS?

The articles of association is the term for the shareholders' agreement, which is required as a document for the establishment of a corporation. The company is established by the association of partners (or one partner). The shareholders' agreement (or the articles of association) defines the cooperation of the shareholders and the company's activities and actions.

The minimum requirements for it are:

• the company name and registered office;
• the object of the company;
• the amount of the share capital;
• the number and nominal amounts of the shares that each shareholder takes over in return for a contribution to the share capital (capital contribution).

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WHY MORE THAN THE MINIMUM REQUIREMENTS?

As a rule, this statutory minimum requirement is not sufficient for proper business operations. Founders and shareholders are well advised to include further clauses in the shareholder agreement. 

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1. managing director

For example, the company must have one or more managing directors. It is advisable to make comprehensive arrangements for the future at the time of formation in order to be able to operate the business in the long term - without amending the articles of association - and to be able to appoint and dismiss managing directors. 

Although the managing director is appointed by resolution of the shareholders and there is no need for a mandatory provision in the articles of association, it is advisable to regulate certain rights or procedures or restrictions on the management in the articles of association, such as the rules of representation, restrictions, exemptions or rules of procedure, since otherwise, according to the legal normal case, several managing directors can only represent jointly.

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2. rules of the game

Very often, rules of the game are defined, about the interaction and effect of the shareholders. This ranges from simple formalities about convening and holding a shareholders' meeting, about passing resolutions, necessary and sufficient voting ratios, contestation, to grounds for termination and the exercise and period of notice of termination.

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3. protection of business shares

Another, often important, point is the issue of protecting the shares, for example, against access by third parties. As a rule, a shareholder does not want the wife of a co-shareholder to have access to the share in the event of divorce, or for the share to pass to an undesirable third party in the event of inheritance. It is also advisable to include a provision in the event of insolvency, foreclosure or pledging, i.e. protection against sale by an insolvency administrator or bailiff.

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4. protection against divestiture

Without individual regulation, each shareholder can sell his shares at any time and at almost any price to any possible purchaser. In order to protect against this, one usually regulates one of several possible protective mechanisms and pre-acquisition rights.

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5. individual

Points 1 to 4 are not included in the model protocol. As soon as these, or even a deviation from the model protocol is agreed, the notarization is no longer considered a privileged model protocol formation. However, items 1 through 4 are included in most model bylaws. Because of points 1 to 4 alone, it is worthwhile to use a model charter instead of a model protocol. This costs more in the notarization, however not with production. Further topics, should the founders wish these - and it is advisable - are usually provided by attorneys. Here it is not the draft of the contract that is important, but the prior consultation and coordination and the draft individually tailored to it, such as:

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a) Severance payments

Redemption of shares, rights of prior acquisition, and termination lead to the withdrawal of the shareholder. However, this does not occur without replacement. If no arrangement is made, the company owes the fair value of the share (even in the case of termination and redemption), which quickly leads to an outflow of liquidity. For this reason, individually coordinated exit and compensation scenarios are suitable, which regulate what compensation the withdrawing shareholder receives.

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b) Language

In an international context, it is advisable to draw up bilingual articles of association at the same time. If a founding shareholder does not speak German, this would usually even be advisable, but also with a view to later investors who are not only German-speaking, it is advisable to have articles of association that every potential investor or co-founder can read.

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c) Further

Points a and b are only examples, but there is room here for all the regulations among the shareholders that make sense when individually discussed and coordinated with a view to the venture. Such as vesting, deadlock mechanisms, competition regulations, individual obligations etc.

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THE MOST IMPORTANT REASON FOR AN INDIVIDUAL CHARTER TO START WITH

A sample protocol formation several shareholders shows investors inexperience. The shareholders' agreement can be subsequently amended or supplemented at any time, but this is always associated with costs. It should be noted that for each amendment or new version of the articles of association, a shareholders' resolution must then be passed, and the resolution and the amendment to the articles of association must be notarized, and the amendment must be entered in the commercial register. This means that the costs are incurred twice.

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The most common reasons for amending the articles of association are

• Structure of ordinary articles of association after foundation with sample protocol
• Supplementary regulations on the managing director, such as sole power of representation
• Exclusion of fiscal unities
• Addition of a right of first refusal
• Protective regulations such as confiscation, reservations of consent
• Regulation on severance pay and company valuation
• Deadlock mechanisms
• Extensive regulation on the determination of shareholders
• Capital increase
• Regulations for retirement / standstill / illness of the shareholders
• Rules of the game
• Language

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