On 28 June 2008, the German Bundestag (Federal Parliament) passed a bill on the reform of German corporate law. Known as the Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG – Law for the Modernization of the GmbH and to Stop its Misuse) the bill is a milestone, the single most important reform of the most commonly used German corporate form. The reform will bring about major changes. Among other things the reform will make it possible to establish a GmbH with a share capital of nothing more than € 1 EURO (previously, € 25,000 had been required) and to establish a GmbH that has no active business in Germany but solely operates abroad. Although the bill still has to be approved by the Bundesrat (Federal Council of the States), which will probably vote on this matter on 19 September, experts have little doubt that the reform easily will pass this last hurdle and enter into force as soon as 1 November.

The Gesellschaft mit beschränkter Haftung (GmbH - Private Limited Company) is the most popular organizational form for businesses in Germany – numbering almost one million entities in 2007. The GmbH is not only popular for entrepreneurs, but also serves a role in corporate groups and can be more or less easily upgraded to an Aktiengesellschaft (AG - public corporation). Nevertheless, few changes have been made since its inception in the late 19th century, leading to complex case law that would most certainly put a smile on the face of any corporate lawyer. The Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG - Law for the Modernization of the GmbH and to Combat its Abuse), the most fundamental reform of the German GmbH, tries to replace much of that case law with statutory rules, while also eliminating certain formalities.

One of the probably most groundbreaking – and at the same time also most contentious – issues of the German reform of private limited companies by the Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG – Law for the Modernization of the Private Limited Companies Act and to Combat its Abuse) is the introduction of the Unternehmergesellschaft (UG – Entrepreneurial Company). This new sub-type of the Gesellschaft mit beschränkter Haftung (GmbH – Private Limited Company) is specifically designed for entrepreneurs and has already unofficially been dubbed the “Mini-GmbH” and “GmbH light”. It can be seen as the centerpiece of the legislator's overall aim to facilitate and accelerate the formation of companies and the underlying motive of increasing the international competitiveness of the German GmbH.

The treatment of shareholder loans in corporate insolvency is a controversial issue in many jurisdictions. On both sides of the Atlantic, lawmakers and courts have struggled to answer the question if and under what circumstances shareholder loans should be treated differently from loans granted by outsiders. In particular, the difficulties turn on three issues: (i) whether shareholder loans should rank pari passu with the claims of outside creditors or whether they should be subordinated; (ii) whether the repayment of shareholder loans should be subject to specific restrictions, particularly in the vicinity of insolvency; and (iii) whether specific restrictions should apply to secured shareholder loans.

The insolvency of a company does not arrive suddenly. Normally, insolvency precedes a crisis. At present, the term “crisis” is defined in § 32 a sec. 1 of the Gesetz betreffend die Gesellschaften mit Beschränkter Haftung (GmbHG – Private Limited Companies Act) as the point when the company does not receive any credits according to the usual conditions in the particular market and when the shareholders provide the company with further shareholder capital instead of debt capital. Besides the rules governing shareholder capital substitution, which will be omitted due to the upcoming reform of private limited companies, there are few legal guidelines that regulate the standards of conduct for managing directors and shareholders in the case of a crisis. In particular, § 49 sec. 3 GmbHG needs to be singled out. This paragraph establishes an obligation to call a shareholder meeting if more than half of the capital stock is lost. If an adverse balance arises because of the payouts to the shareholders, the protections of §§ 30, 31 GmbHG will intervene. An adverse balance results when there is insufficient capital to cover the liabilities, ownership's equity, and guaranteed capital. However these protections often do not suffice.

It can take a lifetime from the recognition of a legal problem until it is finally solved. Seventy-nine years after Walter Grau focused attention on gaps in the security of transactions of Gesellschaft mit beschränkter Haftung (GmbH – private limited company) shares, the GmbH reform intends to solve the problem. Until this reform, a prospective buyer of a GmbH share ran the risk that the person transferring the share was, in fact, not the true shareholder and, thus, had no power to assign the share. While the former law did not provide for a bona fide acquisition, the new § 16 (3) of the Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbHG – Private Limited Companies Act) protects the true shareholder while also taking into account the buyer's reliance upon the transferor, considering him or her to be the shareholder. This little revolution results in a new kind of good faith acquisition that mixes different elements of “traditional” bona fide rules and adds new details.

Following the 24 November 2003 decision of the Bundesgerichtshof (BGH - Federal Court of Justice) the legal framework for upstream loans granted by companies in the legal form of a Gesellschaft mit beschränkter Haftung (GmbH - Private Limited Company), i.e., loans by the GmbH to its direct and indirect shareholders or to an affiliate of such shareholder, has remained uncertain. The ruling of the BGH led to a broad spectrum of interpretations by legal scholars and practitioners – some even predicted the end of cash pooling arrangements for German corporations – which made it difficult for managers of a GmbH to continue existing cash pooling arrangements without changes to their original scope and conditions.

On 1 November 2007 the Finanzmarktrichtlinie-Umsetzungsgesetz (FRUG) came into effect. The FRUG is supplemented by two directives, the Wertpapierdienstleistungs-Verhaltens- und Organisationsverordnung (WpDVerOV) (as amended by the Erste Verordnung zur Änderung der Wertpapierdienstleistungs-Verhaltens- und Organisationsverordnung) and the Erste Änderungsverordnung zur Finanzanalyseverordnung. Together with the aforementioned directives the FRUG implements the Markets in Financial Instruments Directive (MiFID) into German law, which is itself supplemented by a MiFID Implementing Directive and a Commission Regulation. Altogether this legislation is part of the Financial Services Action Plan of the European Commission aiming at the formation of a single market for financial services. The new legislation leads to material changes in the Wertpapierhandelsgesetz (WpHG). On the one hand numerous new regulations have been added, on the other hand already existing regulations have become much more detailed. Thus the WpHG has finally become “the constitution” of German capital market law.