Definition and Origin of Equity
The term Equity originally comes from the English legal system and refers to a legal doctrine aimed at fairness, equity, and justice. In German-speaking regions, Equity can only be approximately translated as ‘law of equity’, though this does not fully capture the historical and legal significance of the institution as developed in the Anglo-American legal tradition. Equity plays a central role as a legal principle in the development of common law and continues to influence numerous legal systems worldwide.
Historical Development of Equity
Origin in England
The equity system developed in late medieval England as a response to the often rigid and formal structures of the common law, which at times did not provide adequate solutions for individual legal matters. Cases in which the common law was perceived as insufficient or too strict could be brought before the Lord Chancellor, who, as the highest judicial authority, would decide on the basis of equity, conscience, and morality. This led to the creation of the Court of Chancery, a separate court system that resolved cases based on equity.
Dualism of Law and Equity
For centuries, there was a clear institutional and substantive separation in the United Kingdom between common law (case law and statutes) and the principles of equity. This coexistence continued until the 19th century, when the Judicature Act 1873 unified the courts, giving equity principles a general influence on the legal system. In cases of conflict between common law and equity, equity principles were given precedence.
Legal Foundations and Principles of Equity
Fundamental Principles
Equity is characterized by specific guiding principles that have been established over centuries. Key maxims include, for example:
- “Equity will not suffer a wrong to be without a remedy” (No wrong without a remedy)
- “He who comes into equity must come with clean hands” (Anyone relying on equity must act honestly themselves)
- “Equity acts in personam” (Equity acts upon the person and not directly upon property)
- “Equity follows the law” (Equity supplements but does not replace the existing law)
With these maxims, equity enables flexible and just case law, balancing the rigidity of statute with equitable interpretation.
Areas of Application of Equity
In the Anglo-American legal sphere, equity has given rise to and influenced numerous specific legal institutions, such as:
Trusts
The development of trusts is one of the most significant results of equity. A trust arises when property is held by one person (trustee) for the benefit of another (beneficiary). The legal structure and the protection of the parties’ rights are original topics of equity law.
Injunctions
Equity grants injunctions, which enable courts to order parties to do or refrain from certain acts. Such measures exist where damages under the common law would be insufficient.
Specific Performance
Where contracts would not be enforceable under common law, equity may order specific performance if monetary compensation is insufficient to restore the legitimate state of affairs.
Equitable Estoppel and Other Institutions
Other typical institutions of equity include ‘equitable estoppel’, ‘constructive trusts’, and ‘rescission’ (the unwinding of contracts).
Significance and Influence of Equity in International Legal Comparison
Influence on German and Continental European Legal Systems
The concept of equity itself has not been directly adopted into continental European civil law (e.g., Germany, Austria, France) with codified legal systems. Nevertheless, the BGB and ABGB contain provisions that allow an adjustment to the strictness of law, such as § 242 BGB (good faith) or § 157 BGB (interpretation according to the intention of the parties).
Role in International Legal Relations
In international commercial law, for international trusts, or in the recognition and enforcement of foreign judgments, an understanding of equity can be crucial, as numerous international legal acts are based on Anglo-American equity institutions. Likewise, terms such as trust or injunction are increasingly taken into account in international treaties and court proceedings.
Equity in the Current Legal System
Equity is an integral part of modern Anglo-American legal systems (England & Wales, Australia, Canada, New Zealand, the USA in varying forms) and permeates key areas of civil law, business law, and family law. Arbitration tribunals and international commercial courts also refer to equity principles in interpreting contract clauses or finding appropriate remedies, especially when contractual or statutory provisions are lacking.
Significance for Legal Practice and Contract Drafting
For international contracts or corporate structures (e.g., creation of trusts, ordering of injunctive relief), knowledge of equity principles is of considerable importance. When assessing cross-border matters, an understanding of equity is a vital foundation for solving legal problems, as Anglo-American courts regularly apply these principles when interpreting and enforcing obligations.
References and Sources
- Charles Mitchell/Paul Mitchell (eds.), Landmark Cases in Equity, Oxford University Press, 2012
- Snell’s Equity, Sweet & Maxwell, 34th edition, 2020
- Burrows, Andrew: Principles of English Equity and Trusts, Oxford University Press, 2021
- Supreme Court Judicature Act 1873 (UK)
Note: This overview is not intended to be exhaustive and does not constitute individual legal advice. Rather, it provides a structured summary of the complex historical and current legal aspects of Equity in international law.
Frequently Asked Questions
What legal requirements must be observed when issuing equity?
When issuing equity—such as shares or stock—a wide range of legal requirements must be observed. First, it must be checked whether the articles of association or shareholders’ agreement allow the issuance of new shares and whether a corresponding shareholder or general meeting resolution is required. For GmbHs, for instance, a change in the articles of association must be passed by notarised resolution according to § 55 GmbHG. Additionally, statutory provisions for the protection of existing shareholder rights must be complied with, including pre-emption rights and blocking minorities. For stock corporations, the key legal framework is found in the German Stock Corporation Act (AktG), especially regarding capital increases and the entitlement of existing shareholders. Furthermore, corporate and tax notification obligations must be observed; registration with the commercial register is mandatory for many forms of equity issuance. In addition, capital market regulations (such as prospectus requirements, insider regulations, and transparency requirements) may apply when targeting a wide group of investors.
What legal consequences arise for the shareholder structure when equity is granted?
The allocation of equity has a direct impact on the shareholder structure and the voting rights within the company. Legally significant is that new shareholders receive rights such as participation, voting, and possibly dividend rights. This usually changes majorities, which can play a decisive role in certain resolutions, such as qualified majorities for amendments of articles or capital measures. Existing shareholder agreements such as voting agreements, pooling arrangements or vesting regulations may be modified or become obsolete when new shareholders are admitted. Moreover, an increase in the number of shareholders can trigger corporate thresholds, such as notification obligations to register authorities or stock law thresholds for specific rules (such as §§ 327 ff. AktG for squeeze-out procedures).
What statutory rules protect minority shareholders during equity issuance?
German law provides a number of protections for minority shareholders in relation to equity issuance. Chief among these is the pre-emptive right under § 186 AktG, which allows existing shareholders to participate proportionally in capital increases and thus prevents dilution of their holdings. Comparable provisions exist under GmbH law to prevent the disadvantaging of individual shareholders. Furthermore, society law provides a general prohibition of arbitrariness: measures specifically aimed at undermining or disadvantaging minority shareholders can be deemed to be a breach of good faith and thus void. Minority shareholders may also be protected by special agreements such as vesting and good leaver/bad leaver clauses. In addition, there are participation and information rights, which are especially important for small shareholders to ensure access to key company data.
What transparency and notification obligations exist when issuing equity?
Equity issuance is generally associated with extensive transparency and notification obligations. For corporations, changes in the shareholder structure must be registered in the commercial register (§ 40 GmbHG; § 67 AktG). In listed companies, capital market notification requirements under the German Securities Trading Act (WpHG) also apply: these include ad hoc disclosure obligations (§ 17 MAR) and notification requirements for crossing voting rights thresholds (§§ 33 ff. WpHG). Moreover, existing shareholders often must be informed in writing prior to the issuance of new shares, particularly with regard to pre-emption rights or blocking minorities. In certain cases, a securities prospectus must also be prepared; this is governed by the EU Prospectus Regulation and applies especially to public offerings or listings. Finally, tax reporting obligations apply, for example regarding the withholding of capital gains tax.
What legal particularities must be observed when issuing employee participation (equity)?
Issuing equity in the form of employee participation is subject to special legal requirements. It must first be determined whether and to what extent the company is entitled to issue such shares at all—the appropriate corporate authorisations must be in place and any existing competition prohibitions need to be observed. In addition, employee participation involves labour law implications: under certain circumstances, the participation may be classified as remuneration, triggering social security and tax consequences. The principle of equal treatment in employment law must also be respected. Depending on the structure, notification and registration obligations to the commercial register and, where applicable, the financial supervisory authority may arise. For vesting—the gradual transfer of share rights—the requirements of the law on general terms and conditions must be complied with, particularly concerning notice and claw-back rights.
What restrictions apply to the sale or transfer of equity interests?
The sale or transfer of equity interests is subject to both statutory and contractual restrictions. Under GmbH law, the transfer of shares generally requires notarisation (§ 15 GmbHG). Beyond that, the articles of association may contain pre-emption rights, consent requirements (e.g., approval by the shareholders’ meeting), or other transfer restrictions. In stock corporations, shares are generally freely transferable (§ 68 AktG); however, registered shares with transfer restrictions may only be transferred with approval of the company (§ 68 para. 2 AktG). Existing pooling or syndicate agreements may impose further limitations such as lock-up periods or tag-along/drag-along rights that grant certain shareholders the right or obligation to co-sell or force a sale. In employee participation schemes, special return rights or holding periods may be agreed to safeguard company interests.
What role does competition law play in the issuance of equity?
The issuance of equity may be relevant under competition law in certain circumstances, namely when the allocation of shares to new investors results in a competition-relevant influence on the company or constitutes concentrations as defined by the German Act against Restraints of Competition (GWB) or the EU Merger Regulation. Once certain turnover thresholds are exceeded, such share transfers must be notified and may only be completed after clearance by the competition authorities. In many cases, so-called full-function joint ventures also require approval, even if they are only initially provided with minority shareholdings. Structural measures that materially restrict competition in the relevant market or lead to a dominant market position are considered problematic under competition law. Assessment is carried out by the Federal Cartel Office or the European Commission.
