Introduction to Corporate Law
Corporate law forms the foundation for all associations of persons who unite through a legal transaction to achieve a common purpose. It regulates the rights and obligations of the shareholders, the organization of the company, and the relationships with third parties. In German law, corporate law is not codified in a single code but spread across numerous provisions that complement each other. These include, among others, the Civil Code (BGB), the Commercial Code (HGB), and specific laws for individual corporate forms. Adjacent legal fields such as capital market law, insolvency law, and accounting law also significantly influence corporate law. This multitude of regulations ensures that corporate law can flexibly address the diverse needs and purposes of businesses and associations of persons.
Basics of the Arbitration Agreement
An arbitration agreement is a central instrument in corporate law to resolve disputes between parties outside of state courts. It is usually made in writing and can be agreed upon when concluding a contract, subsequently, or even for an existing conflict. By means of an arbitration agreement, the parties commit to referring any dispute to an arbitral tribunal, which decides on the matter instead of a state court. The legal basis for arbitration procedures can be found in §§ 1025 – 1066 of the Code of Civil Procedure (ZPO), unless the parties agree otherwise. Through the arbitration agreement, the parties have the opportunity to design the procedure individually and thus find an efficient and confidential solution to their conflicts.
Advantages and Disadvantages of Arbitration in Corporate Law
Disputes between shareholders, managing directors, or the company itself can strain the relationship of trust, block the company’s ability to act, and in the worst case, endanger its existence. Increasingly, companies therefore choose to resolve conflicts not in state courts but through arbitration. The arbitration agreement, as part of the contract between the parties, forms the basis for the arbitration procedure. Arbitration offers both advantages and disadvantages in corporate law.
Arbitration serves as an alternative to state jurisdiction, replacing a lawsuit before a state court. The dispute is heard before one or more arbitrators. No formal lawsuit is filed with a state court in arbitration. Often, the parties already conclude an arbitration agreement in the form of an so-called arbitration clause in the company agreement, according to the law firm MTR Legal Rechtsanwälte, which provides advice in corporate law and represents parties both out of court and in court. Arbitration allows complex disputes and conflicts to be resolved efficiently and flexibly, with the choice of languages individually determined.
Procedural guarantees such as the right to a fair hearing and equal treatment of the parties are of central importance in arbitration. The procedural rules of the chosen arbitration institution govern the conduct of the arbitration and can be tailored individually. Negotiations before and during the arbitration play an important role in reaching an amicable resolution. Arbitration is especially suitable for complex disputes and conflicts, as it can be adapted to the parties’ needs. The international dimension of arbitration also allows the choice of different languages and adjustment to international circumstances.
The decision of the arbitral tribunal, called the arbitral award, has the legal effect of a judgment and is recognized and enforceable worldwide. If a valid arbitration agreement exists, recourse to state courts is excluded. Except for very few exceptions, the award cannot be reviewed by a state court and is enforceable worldwide.
High Confidentiality
A key argument for arbitration is confidentiality. Corporate disputes often involve sensitive information, such as internal strategies, financial statements, or shareholder agreements. While state court proceedings are generally public, arbitration takes place behind closed doors. For many companies, it is crucial that trade secrets do not become public. Additionally, the parties can choose the arbitrators themselves, allowing experts with specific corporate law knowledge to be appointed. Especially in complex matters such as the validity of shareholder resolutions or the exclusion of shareholders, this leads to higher quality decisions and increases acceptance of the outcome.
Arbitral Award Enforceable Internationally
Another advantage lies in flexibility. Arbitration is not bound by the strict rules of the Code of Civil Procedure. The parties can largely design the process themselves – from choosing the procedural language, setting deadlines, to determining the venue. This can be particularly beneficial in international corporate structures where shareholders from different countries are involved.
The international enforceability should not be underestimated either. While the recognition and enforcement of foreign governmental judgments is often difficult, arbitral awards are recognized in more than 160 states thanks to the 1958 New York Convention. Therefore, anyone involved in an international joint venture can create a reliable basis for dispute resolution with an arbitration clause.
Quick Decision
Furthermore, arbitration proceedings are often faster than court proceedings because they usually involve only one instance. Procedures can often be completed within twelve to eighteen months, whereas court disputes can drag on for years over several instances. The finality of the arbitral award, on the other hand, creates legal certainty and prevents a dispute from extending over a long chain of litigation.
No Appeal Possible
However, the finality of the arbitral award also has a downside, as there is no appellate instance. Incorrect decisions can therefore only be corrected in very rare exceptional cases. Another problem can be the assessment of the amount in dispute. Corporate law conflicts are often difficult to express in monetary terms, which can lead to high assumed dispute amounts and thus high costs in arbitration proceedings. Particularly in the liquidation of a company, the conversion of asset values into cash and the subsequent distribution to shareholders plays a central role, which further complicates the valuation. Practical hurdles can also arise in domestic enforcement.
The Role of the Court
Although arbitration in corporate law represents an alternative to classical court proceedings, the state court remains an important actor. It is especially called upon when it comes to settling disputes between shareholders or between the company and third parties that are not covered by an arbitration agreement. Moreover, the court can play a decisive role in the formation, amendment, or dissolution of a company, for example, when it involves registration in the commercial register or the judicial appointment of an emergency manager. In connection with arbitration proceedings, the court can act in a supportive capacity, for example, in the enforcement of arbitral awards or the appointment of arbitrators when the parties cannot agree. Thus, the court remains a guarantor of the enforcement of rights and the resolution of corporate disputes within the framework of arbitration.
Types of Arbitration Proceedings
In the field of arbitration, various types of proceedings are available, differing in their organization and execution. Institutional arbitration is organized by an established arbitration institution such as the German Institution of Arbitration (DIS). These institutions provide arbitration rules and assist the parties in conducting the proceedings. In contrast, ad hoc arbitration is where the parties independently organize the procedure without institutional support. A modern alternative is online arbitration, conducted via digital platforms, which offers a fast and cost-effective solution, particularly for international or less complex disputes. The choice of the appropriate arbitration procedure depends on the individual needs of the parties and the respective corporate law conflict.
Limited Liability Company
The limited liability company (GmbH) is one of the most popular forms of company in Germany and is especially widespread in the middle market. It offers shareholders the advantage that their liability is limited to their contribution, so they are not personally liable with their private assets for company debts. The formation of a GmbH requires a notarized articles of association and the appointment of at least one managing director. The GmbH is subject to the GmbH Act, which contains detailed regulations on the formation, organization, and duties of the company. Additionally, GmbHs must fulfill certain transparency and accounting obligations to ensure transparency towards business partners and authorities. This legal form is particularly suitable for entrepreneurs seeking a high degree of legal certainty and flexibility in structuring their entrepreneurial activities.
Agreement of an Arbitration Clause
For arbitration proceedings to be considered, an arbitration clause should be included in the articles of association. For the effectiveness of the arbitration clause, a clear and legally secure contract conclusion is of central importance, as only in this way can the enforceability of the arbitration procedure be guaranteed. It stipulates that all or certain disputes between shareholders or between shareholders and the company are to be decided in arbitration.
Important points can already be regulated in the arbitration clause. It can specify the number of arbitrators to be appointed, the language in which the proceedings will be conducted, and the location where they will take place. However, it should be drafted with legal precision so that it is effective in the event of a dispute.
Arbitration Offers Advantages and Disadvantages
Arbitration offers significant advantages in corporate law, such as high confidentiality, international enforceability of the arbitral award, and speed. A disadvantage of arbitration is, among other things, the lack of an appeal possibility. Whether an arbitration clause should be included in the articles of association should therefore be based on the needs of the respective companies.
It should be noted that not all disputes among shareholders can be decided by an arbitral tribunal. There are situations that must be resolved by a public court.
MTR Legal Lawyers advise on corporate law and litigation.
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