On January 29, 2003, the German Supreme Court (Bundesgerichtshof, Docket Nr. VIII ZR 155/02) reached an important decision concerning the recognition of American companies in Germany: Companies that have been validly formed and exist in the United States are recognized as legal entities without the requirement of a formation under German laws to ensure their juridical status. In other words, companies established in the United States retain their legal capacities in the same way as companies formed under German law, regardless of where the headquarters are situated. The basis for the decision is the Treaty of Friendship, Commerce and Navigation between the United States of America and the Federal Republic of Germany signed on October 29, 1954, 7 U.S.T. 1839.
The controversy which led to the holding was a suit brought by an American corporation in a German court. The plaintiff claimed to be a validly formed U.S. corporation and alleged to be entitled to the purchase prize from the sale of a share in a German company. The defendant, however, asserted that the plaintiff had his headquarters in Germany, was not formed under German law and therefore lacked the status as a legal entity, specifically the capacity to sue and to be a party in court.
The Court stated that, pursuant to German international corporate law in general, a company’s legal status is determined by the law of the state where the company actually has its headquarters. That means that even though a company is validly established in its state of incorporation, if it subsequently moves the headquarters from that state to Germany, it will not be considered a legal entity unless it is constituted there. As a result, the company will have to satisfy the formation requirements set forth by German law to ensure its recognition in Germany. However, the Court further held that deviations from this general rule by means of a treaty are possible. In this case, the Treaty of Friendship, Commerce and Navigation between the United States of America and the Federal Republic of Germany, signed on October 29, 1954, was applicable. Pursuant to its provisions, in particular art. XXV para.5, a company constituted and existing under the laws of the United States is afforded continuous juridical status in Germany regardless of the location of the headquarters.
In addition, the Court clarified that the laws of the state of incorporation also determine if the company can act as a legal entity in the other state. With regard to this capacity, the treaty refers to the principles of national treatment* and most favored nation treatment**, which have to be accorded to any company incorporated in the territory of a party. As enumerated in the treaty, these principles cover in particular property and real estate in the territory of the other party, the right to sell or otherwise transfer property of any kind, the right of access to courts at all levels including appeals and finally the freedom for companies of both parties to set up a business in the territory of the other party. The freedom to set up a business specifically includes the full recognition of the company’s capacity to acquire rights and incur obligations as well as to be a party in a lawsuit. In the present controversy, the Court remanded the case in order to determine if the corporation had been validly established in the United States.
This decision constitutes a significant achievement in German international corporate law because it ensures the recognition of U.S. companies. Even though this aspect probably is not the determining factor in a business decision, it might nevertheless tip the scale in favor of an investment in Germany.
* National treatment requires to treat foreign companies no less favorably than domestic companies. As a consequence, U.S. companies have to be treated in the same way as German companies. See RAJ BHALA, INTERNATIONAL TRADE LAW HANDBOOK 66 (2nd ed. 2001).
** Most favored nation treatment provides protection against discrimination among foreign companies. That means, U.S. companies have to be accorded the same favorable treatment from which other foreign companies benefit. See FOLSOM, GORDON & SPANOGLE, 2002 DOCUMENTS SUPPLEMENT TO INTERNATIONAL BUSINESS TRANSACTIONS 11(5th ed. 2002).