MPI TAX

Legal rules for closed corporations

Academic research in corporate law, and especially such relating to corporate governance, often refers to the prototype of a big listed company. Many problems discussed are only relevant for these companies and the solutions proposed are specifically tailored to their particular needs. However, small and medium-sized companies are much more important for the economy, which is especially true for Germany, where they form the famous German “Mittelstand”. Many problems and legal concepts discussed in corporate law, accounting and securities regulation do not fit small closed corporations, like family enterprises, and if they do, only in a very much modified way.

Starting from this insight, we are analysing legal rules for closed corporations. It appears that many well-accepted German corporate law concepts, like the lack of contractual freedom and the extensive capital protection rules in German stock corporations, form a too rigid regime for small companies. The necessary transition to more flexible rules should, however, be accompanied by the creation of specific rules for the protection of creditors and minority shareholders. Mechanisms like the duty of loyalty and the right to terminate the company for good cause become important.