The Control of Non-Cash Contributions to Companies

Table of Contents

Abstract

Acknowledgments

Table of Abbreviations

INTRODUCTION
1. Background
2. Statement of the Problem
3. Objectives of the Study
4. Scope of the Study
5. Methodology
6. Limitation of the Study

CHAPTER 1- COMPARATIVE DISCUSSION OF THE LAWS ON THE CONTROL OF NON-CASH CONTRIBUTIONS
Part One: The EC Company Law
1.1.1 Definition of Valid Forms of NCCs
1.1.2. Valuation and Payment of NCCs
1.1.3 Disclosure Requirements Relating to NCCs
1.1.4. The Liability Regime
1.1.5 Scope of the Control System
1.1.6 Areas of Non-application and Silence
Part Two: The German Legal System
1.2.1. Definition of Valid forms of IKCs
1.2.2. The Evaluation and Payment Phase
A. The Stock Corporation
B. The Limited Liability Company
1.2.3 The Disclosure Phase
A. The Stock Corporation
B. The Limited Liability Company
1.2.4 The Confirmation Phase
A. The Stock Corporation
B. The Limited Liability Company
1.2.5 The Liability Regime
A. The Stock Corporation
B. The Limited Liability Company
1.2.6 Scope of the Control System
1.2.6.1 Increase in Capital
A. The Stock Corporation
B. The Limited Liability Company
1.2.6.2 Amendment of the Articles- the AG and the GmbH
1.2.6.3. Indirect IKCs and Post-formation Acquisition - The AG and the GmbH
Part Three: The French Legal System
1.3.1 Definition of Valid Forms of IKCs
1.3.2 Valuation and Payment IKCs
1.3.3 The Disclosure Phase
1.3.4 The Confirmation Phase- an SA and the SARL
1.3.5 The Liability Regime: an SA and the SARL
1.3.6. Scope of the Control System
Part Four: The English Legal System
1.4.1 Definition of Acceptable Forms of NCCs
1.4.3 The Disclosure Phase
1.4.4 The Confirmation Phase
1.4.5 The Liability Regime
1.4.6. Scope of the Control System
Part Five: The Ethiopian Legal System
1.5.1. Definition of Acceptable Forms of IKCs
1.5.2. Control of IKCs in Respect of the Share Company (SC)
1.5.3 Control of IKCs in Respect of the Private Limited Company (PLC)

CHAPTER 2- CONCLUSION, RECOMMENDATIONS AND SUGGESSIONS
2.1. Conclusions
2.2. Recommendations
2.3. Suggessions

1. STATUTORY MATERIALS AND CASES

2. BIBLIOGRAPHY

Abstract

The capital of a company is considered as security for creditors and legal systems provide the framework to safeguard this security. This paper demonstrates overvaluation of non-cash contributions as a risk this security is to be safeguarded from. It outlines what a comprehensive control system on non-cash contributions looks like and comparatively assesses the laws of the EC, Germany, France, England, and Ethiopia as to the mechanisms they provide to control this form of contribution. The paper shows that the three member states of of the EC have transposed the Community law on the subject of control of non-cash contributions in a similar fashion and that they converge on a number of areas regarding their approaches to controlling non-cash contributions like definition of valid forms of tnon-cash contributions and the expert valuation , payment and disclosure requirements. The above three legal systems are selected because of their relevance to the Ethiopian law for they are the sources of the latter’s Commercial Code. Compared to these legal systems, the control system over non-csh-contributions under the Ethiopian law involves a number of matters that need addressed through amendement of the law..

Acknowledgments

First of all, I thank God who enabled me to bring this work to an end. No words that match God’s deeds. My special gratitude also goes to my supervisor Professor Peter Behrens for his helpful comments and follow up.

I am also immensely happy to express my sincere appreciation to my beloved mother Workinesh Wassie and to my dear sisters and brothers. They have been and will continue to be the source of persistence and strength in my life.

Yitayal Mekonnen

Table of Abbreviations

illustration not visible in this excerpt

INTRODUCTION

This introductory part provides a brief background about the concept of a company’s capital, describes ’non-cash contributions’ and discussess the problem associated with them. Moroever, it outlines what should a comprehensive system of control over non-cash contributions look like and lays down the structure of the thesis: its hypothesis, scope, objectives, significance, and limitation.

1. Background

The corporation, as a vehicle of doing business, is regarded as having played a significant role to the economic growth of nations.¹ However, history has also witnessed corporate abuses, among others, to creditors and hence necessitated the need for protection from the risk of abuse against the capital of a company, which is regarded as a security to creditors and more important in the context of companies than partnerships since in the former case, unlike the latter in general, ’the members are liable only to the amount of their promised contributions.’²

This security is usually defined as ’the amount specified in the formation instruments as the capital of the corporation, which is to be paid in or contributed to it, and to be represented by shares.’³ ’In accounting terms, ’capital’ is the name for the source and not for the asset’ which is mainly laid down by the laws of states prescibing what can be validily contributed to a company for the purchase of shares.⁴ As such, there may be difference among states regarding these sources. In ’many practical instances’ the capital of a company consists of cash and non-cash contributions.⁵ Due to the very topic of the thesis, only the latter category forms the subject of this paper.

The company laws of different countries, as we shall see later, do not provide a definition of ’non-cash contribution.’ Legal systems provide either a general criterion of what constitutes a valid contribution of such a type or exclusion of certain forms of such contributions as unacceptable to a certian form of company, or both. Some legal systems, like the German Stock Company Act, thus provide the criterion that the asset must be one the economic value of which can be ascertained.⁶ What we get in the literature is also an enumeration of the types of NCCs such as trademarks, copyright, patent, goodwill, going concern, shares, claims, receivables, buildings, land, machinery, equipment, vehicles.⁷

There is, however, a problem associated with NCCs. Cash contributions, however they are defined in the laws of states, are considered as posing ’little problem since their value is easily determinable.’⁸ Whereas, where a NCC is made to a company, it is said that there always arises the problem of ascertaining the true value of the property.⁹ And a company’s capital may be evaded with respect to this type of contribution where such a contribution is overvalued.¹⁰ This phenomenon, called ’stock-watering’, constitutes one form or cause of ’overcapitalization of a company which is seen as one of the greatest evils those dealing with a company will face.’¹¹ And legal sytems provide different mechanisms, like expert valuation of the asset, primarily in their company laws to address, this problem.

This paper claims that the control system over NCCs shall be comprehensive in order to effectively address the above problem. The writer contend that a comprehensive system of control shall include five phases and be broader in its scope. The first phase i.e.definition of valid forms NCCs determines what types of NCCs to different forms of companies are acceptable in the eyes of the law and thereby prevent the making of contibutions that pose risks of one form or another. Secondly, there must be stage at which these contributions must be valued properly so that it could be ensured that the value of the contribution can actually pay the value of the shares to be issued for it. This stage must also be complemented by rules governing the time at which a NCC, so valued, must fully be transfered to the company so that there will not be depreciation of the asset before it is put in the hands of the company.

Third, there has to be a way through which subscribers and third parties could be informed about the transations concerning a NCC made or to be made to a company as well as various particulars about the asset. This disclosure phase is important in enabling interested persons to make an informed decision regarding NCCs. Then, fourthly, there should be a framework for confirming that a company has observed the legal requirements regarding the above phases so that contraventions of rules and the danger that may arise as a result will be prevented before- hand. Fifth, the control system over NCCs could be strengthened more where the law attaches civil liabilities and criminal penalties for violations of its requirements on the above phases.

However, the protective role of the phases of control mentioned above will only be partial if it is limited only to a company’s formation stage. A comprehensive system of governance over NCCs could be there only where the scope of the governance is extended to cover various activities of a company that may lead to the circumvention of the rules regulating the above stages. Thus, I argue that the rules on definition of valid forms of NCCs, their valuation and payment as well as diclosure, confirmation and liability shall be extended to the event where a company is to issue shares against NCCs at the time of increase in capital. The rules governing disclosure, confirmation, and liablity shall apply at the time where a company amends its formation documents, especially where a legal system requires these documents to contain particulars about NCCs.

Last, a comprehensive system of control must address particular instances of possible circumvention of the statutory provisions governing NCCs. One of these instances arises in connection with the so-called indirect or hidden NCCs, which might be revealed in different forms.¹² The first is where the founders of a company agree with themselves or a third party to the effect that the initial contribution is to be made in cash but the company, after its formation, shall acquire assets from the concerned person with the amount, directly or indirecly, contributed by this person.¹³ In my opinion, this is a pre-incorporation agreement. Through such an agreement it means that any requiremnts of the law as to valuation, among others, will be circumvented. The second form of this possible abuse arises where a subscriber who initially undertakes to pay the shares in cash but later, through agreement with the company after its formation, discharges its undertaking actually in kind.¹⁴ The other instance of circumvention is what is referred to as post-formation acqusition of non-cash assets by a company, and it arises where a company acquires a non-cash asset from a shareholder with a significant value within the initial period of its formation.¹⁵ If this arrangement is considered as mere acqusition by the company, it will lead to circumvention of the rules governing valuation of NCCs and other aspects of the control system.

A company’s capital as security to creditors thus needs to be safeguarded from abuses in connection with NCCs and this safeguarding framwork must be comprehensive in many respects for it to be effective in addressing those abuses.

2. Statement of the Problem

There is a large body of comparative writing about the company laws of EC member states.¹⁶ However, the literature is very scanty and shallow in the treatment of the subject of IKCs. The article by Katharina Pistor et al,¹⁷ for example, that anlayzes the evoluation of corporate law in a historical context address the issue only likewise and focuses on the independent valuation aspect of the control system and does not cover the issue of the compliance of the member states laws with the EC law. The book by Mads Andenas and Frank Wooldridge,¹⁸ which is a comparative analysis of EC company law and the company law of member states, only slightly covers the issue of control of IKCs at the time of amendment of statutes or increase in capital. Thus, the researches on the subject so far are limited only to one or two aspects of the control system over IKCs and hence do not provide a comprehensive image of the subject. Moreover, there is no study specifically devoted to comparatively assess legal safeguards available under the laws of Germany, France, and England and their compliance with the Community law concerning the control of IKCs. To the writer’s knowledge, Ethiopian law on the control of IKCs has not been the subject of study in itself let alone being compared with other legal systems. And these gaps and deficiencies in the law and the leiterature are the starting point of this paper.

3. Objectives of the Study

This paper, therefore, has the objectives of describing the the problem overvaluation of IKCs and examining the approaches of the different legal systems and of the EC law concerning IKCs. Moreover, it targets at making recommendations as to what the Ethiopian legal system may learn form others in controlling IKCs as well as suggesting potential areas of research in the context of IKCs. Thus, the paper aims to be both descriptive and prescriptive.

4. Scope of the Study

From among the types of companies that can be established under the legal systems in consideration, only the following are the subject of this paper. In Germany, the stock corporation (AG) and the limited liability company (GmbH); in France, the public limited company (SA) and the private limited company (SARL); in England, the public limited company (p.l.c.) and the private limited company (ltd.); in the EC, the above forms of companies in the respective countries as covered by EC law; and in Ethiopia, the share company (SC) and the private limited company (PLC) . The public limited company in France and Ethiopia assumes such a company to be formed by a public offering of shares and the one to be formed without making such offering will also be touched upon. Moreover, the primary sources of laws for the purpose of this paper will be the company laws of the respective countries, contained in a separate act or the commercial code, and other areas of law like the commercial or criminal law will be considered only where necessary. The liability regime does not cover the specific criminal penalties and the period of limitation to bring actions. Finally, the issue of control of IKCs in the event of conversion of one form of company into another as well as the case of group companies does not make up a part of this paper.

5. Methodology

Comparative legal analysis is employed as the primary tool of research. The comparision is beteween the EC law and the laws of Germany, France and England, on the one hand, and the laws of Germany, France, and England with the Ethiopian law, on the other hand. The three legal systems i.e. Germany, France and England are selected because they are the important sources of the Ethiopian Commercial Code, that contains the provisions governing companies.¹⁹

6. Limitation of the Study

One important limitation of the study is that it has not, almost totally, included court judgments in each jurisdiction due to the writer’s inability to acess them mainly for language constraints and of their unavilablity. However, an attempt has been made to overcome the problem through the use of secondary sources where the relevant cases appear.

The thesis proceeds as follows: Chapter One, which is divided into five Parts based on the number of jurisdictions covered, explores the laws of the EC on the control of NCCs in respect of both types of companies and the different aspects of the control system and then by using this as a bench-mark that of the German French, and English legal systems. The Ethiopian law will be compared and contrasted with only the three legal systems since, obviously, Ethiopia is not a member of the EC. Chapter Two wraps up the thesis by providing recommendations for the Ethiopian legal system and suggessions for further comparative research.

CHAPTER 1- COMPARATIVE DISCUSSION OF THE LAWS ON THE CONTROL OF NON-CASH CONTRIBUTIONS

This Chapter discusses of the laws of the EC, Germany, France, England, and Ethiopia on the control of NCCs. It begins with the EC company law and by using this as a benchmark it will proceed to assess the other legal systems. Ethiopia, being a non-member of the Union, its laws will be compared only with the laws of the three legal systems. The Chapter is broken down in to five Parts for each of these jurisdictions within which there are different sections on each phase of the control system in respect of companies of both categories.

Part One: The EC Company Law

1.1.1 Definition of Valid Forms of NCCs

The Second Council Directive provides neither a general definition nor a specific list of valid NCCs. Art. 7 only provides that “the subscribed capital may be formed only of assets capable of economic assessment. However, an undertaking to perform work or supply services may not form part of these assets.” Thus, we have the ’’capability of economic assessment’’ of the value of an asset criterion to determine what type of considerations other than cash can validly form the capital of a company. It then goes on and expressly excludes an obligation to do work or provide services even if they may satisfy this general criterion. Hence, one may assume that any asset, other than an undertaking to perform work or supply services, that meets the broad ’’economic assessibility’’ criterion is a valid type of NCCs for the purposes of this Directive. The rational behing the exclusion of an undertaking to do work or perform services may be that personal obligations are difficult or legally impossible to enforce.

1.1.2. Valuation and Payment of NCCs

Having identified what can be a valid type of NCC to a public limited company under the EC law, we now turn to look at what legal safeguards this law provides in order to ensure that the actual value of a NCC corresponds to its stated value and when it should be transferred to the company. Accordingly, Article 10(1) of the second Directive provides that where a NCC is made to a public limited company at the time of its formation, a report on it shall be drawn up, before the company is incorporated or is authorized to commence business, by one or more independent experts.²⁰

Article 10(4) of this Directive entitles member states to grant exemption from the above requirement but only upon satisfaction of the conditions set out therein for the application of exemption. First, 90% of the nominal value or the accountable par, as the case may be, of all the shares of a company are to be issued to one or more companies. Secondly, it must be shown that the persons who sign or in whose names the founding documents or their drafts are signed have agreed to dispense expert valuation and such an agreement is published in accordance with the First Directive. Thirdly, the contributing company must have non- distributable reserves of at least equal to the nominal value or accountable par of the shares to be issued for the NCC and guarantees up to this value the debts of the recipient company.²¹ Moreover, this guarantee shall be published per the first Directive. Last, the contributing company has to place the above mentioned values of shares in to a reserve that is not distributable for three years.²²

Per Art. 9(2) of the Directive, a NCC must be transferred in full within five years from the time of the company’s incorporation or authorization to commence business.

1.1.3 Disclosure Requirements Relating to NCCs

Article 2(1) of the first Company Directive requires member states to ensure the compulsory disclosure by companies of certain documents and particulars. These include, among others,²³ “the instrument of constitution, and the statues if they are contained in a separate instrument.” Nevertheless, this provision is silent regarding what information about NCCs shall be contained in either of these documents.

Art. 3(h) of the second Company Directive, on the other hand, provides that either in the statues or the instrument of incorporation or a separate document published in accordance with the laws of each member state must contain, at minimum, the the value or the number of shares issued for the NCC and the name of the contibutor. And Art. 10(2) of the Directive requires the expert’s report to describe the asset and state the method of valuation, its value, and whether this value corresponds to at least the number and the value of the shares to be issued for it.’’ Moreover, Art. 10 (3) mandates the publication of this report.

Per Arts. 3 and 10(3) of the second Directive the disclosure of the above documents and particulars about NCC must be in the mannaer laid down by the first Directive. Accordingly, Art. 3(1,2 &4) of the Directive amending the first Directive provides that the manner of relating to the above-mentioned guarantee and which are submitted during this period have been settled. Art. 10(4/f) disclosure shall be through publication of those documents and particulars in paper or electronic form and their filing or entry in the central, companies or commercial register.²⁴

From the provision of the Directives, it is possible to identify three consequences of failure by a [public] company to satisfy the above disclosure requirments relating to NCCs. First, even if it is not expressly stated, the requirment under the second Directive that the expert report be drawn up before the company is incorporated or authorised to commence business may be understood to mean that a company may not be incorporated or authorised to commence business in the absence of this report. Secondly, pursuant to Arts. 3 (5) and 3(7) of the Directive amending the first Company Directive, a company can not rely as against third parties on documents and particulars that have not been properly disclosed.²⁵

Thirdly, under Art.11(1) of first Company Directive member states are entitled to declare the nullity of a company on the ground that ’the rules of preventive control were not complied with.’²⁶ The writer is of the opinion that the valuation and disclosure rules as set out above [ in respect of a public limited company] are rules of preventive control as can be noted form the preambular purpose of the first Directive. In the context of NCCs, this means that a member state may provide for the nullity of a public comapny where the expert report was absent or the required particulars about NCCs were not contained in this report, another document, or in the founding documents or, that these documents or particulars were not properly disclosed.

Art. 12(4) of the first Directive only provides that the effect of a company’s nullity as between members may be governed by member state’s laws. Yet, this is only a post-formation effect. It might be the case that a member state’s law may not provide for the nullity of a company on the ground that the company’s founding documents do not contain particulars which they are required to contain about a NCC, and in such a case there could arise the issue of what will happen to the relationship between the company and the contributor. Would, as a result, the contributor’s subscription be void? Or would its subscription be only unenforceable as regards the company and it be required to pay in cash? Or will the subsciption continue to be binding on both parties depite the non-disclosure and the contibutor can then oblige the company to accept what it promised? The Directives are silent on this issue.

1.1.4. The Liability Regime

The first Directive, as amended, does not contain criminal penalties, i.e. fine or imprisonment, for breach of its provisions. Neither does the second Directive, as amended. In fact, Art.6 of the Directive amending the first Directive imposes duty on member states to provide appropriate penalities for at least two cases of breaches by the responsible person but these cases are not related to the control of NCCs.²⁷ Apart from these two cases, the Community Company Directives do not impose express duty on member states to provide for penalities for breaches of those Community laws, let alone imposeing the penalities by themselves.

Nevertheless, according to ECJ’s judgment, member states are under a duty to give equal treatment to breaches of Community law and national law where the Community law does not provide specific remedies for breach of its provisions.²⁸ This Court has ruled that:

“ where a community law does not specify a penalty in case of breach of its provisions, but refers to national laws, member states are free to refrain from imposing criminal penalties provided they treat the Community law infringement in a procedural and substantive fashion comparable to similar infringement of national law, and provided that the treatment is in any event effective, proportionate and dissuasive.”

It is still important to ask what will happen if a Community law does not expressly provide a penality nor does it refer to national laws, as in the case of the second Directive, as amended? The Court’s judgment itself is not clear on this point.

1.1.5 Scope of the Control System

A. Event of Increase in Capital

The second Company Directive expressly extends its rules on NCCs where a public limited company issues shares, in the event of increase in capital, against a NCC. Art. 27(1 & 2) accordingly, provides that in such an event too the contribution must be the subject of a report by independent experts which shall contain the same particulars as the ones stated above in connection with the formation of the company, the report shall be published in accordance with the first Directive, and that the asset must be transferred in full within a period of five years form the decision to increase the share capital.

Where the increase in the subscribed capital necessitates an amendment of the statutes, Art. 2(1/b, c & e ) of the first Directive additionally requires disclosure of this amendment and the full text of the amended statutes. Despite that the provisons governing capital increment do not expressly state what makes up a valid form of NCCs nor make a reference to the provisions governing this issue at the company’s formation stage, there is no reason to assume that the latter provisions are inapplicable in case of capital increase involving issuance of shares against NCCs.

Art. 27(3 74) exempts member states from the duty of requiring expert valuation at the time of increase in capital. One instance of this is where the capital increase is made to effect a merger or a a public offer for the purchase or excahnge of shares that is meant to pay the shareholders of the company to be absorbed or which is the object of the offer for the purchase or exchange. The second instance is where all the shares of a company are issued to one or more contributing companies and where it is shown that the all the shareholders of the receipent company have agreed to dispense with expert valuation and all the rest of the conditions applicable for the working of the exemption at a company’s formation stage, discussed earlier, are met.

A point that should mentioned in relation to increase in capital is a member’s right of preemption for new shares where he offers to pay them in a NCC. The language of Art.29(1) of the second Company Directive which entitles a member the right of pre-emption is clearly framed in terms of capital increase by cash consideration. The ECJ has ruled that, despite this wording, this provision is equally applicable with respect to NCCs without, however, precluding a member state’s domestic law from withdrawing or restricting this right with a view to ensure an enhanced degree of protection to shareholders.²⁹

B. Amendment of Formation Instruments

Art. 2(1/a & b) of the first Council Directive addresses the issue of control of NCCs in the event amendments are made to a company’s formation instruments through primarily requiring member states to provide for the mandatory disclosure of such amendments and the text thereof. However, this Directive, as stated before, does not provide which company documents shall contain what particulars about NCCs nor does it prescibe that any of the documents it requires to be disclosed shall contain information about NCCs. As far as a public limited company is concerned, the second Council Directive explicitly requires that certain particulars, which we saw earlier, about NCCs to be stipulated in either the statutes or instrument of incorporation or a separate document as given by the law of a state. And hence by virtue of the above provision of the first Directive this means that amendments to these documents and particulars, including any amendment on statements made therein about NCCs, shall also be properly disclosed together with the amended texts.

C. Indirect NCC and Post-formation Acquisition of Non-cash Assets

The EC Company Directives do not directly address the issue of ’hidden’ NCCs. It is not clear whether their provisons, especialy that of the second Comapny Directive, on NCCs in general also apply to such kind of NCC. It might, however, be argued that the issue is governed by the general provision Art.7 of the first Company Directive which provides for the unenforceability of pre-registration contracts with regard to the company; and as claimed earlier, agreements underlying indirect NCCs are in the nature of pre-incorporation contracts.

With regard to post-formation acqusition of non-cash assets, Art.11(1) of the second Council Directive provides that where a company before two years³⁰ from the time it is incorporated or authorized to commence business acquires, for a consideration of not less than one-tenth of the company’s subscribed capital, any asset belonging to a person who signs or in whose name the company’s founding documents or their drafts are signed, the acquisition shall be subject to the same requirements, set out earlier, for valuation of NCCs and be submitted for the approval of the shareholders’ general meeting.³¹ Paragraph two of this provision allows member states to extend the application of these requirements where the asset in question belong to a shareholder or any other person.

1.1.6 Areas of Non-application and Silence

As will apppear from the discussion so far and as will be analyzed below, there are a number of matters concerning NCCs that are not governed by the Community company legislations under consideration or on which these legislations are silent.

To begin with, due to the very scope of the second Council Directive, the provisons of this Directive governing the types of valid NCCs, the valuation and payment thereof, and the mandatory stipulation in the founding documents or another document about NCCs do not apply in respect of a private limited company.³² The same is true of the provisions on post- formation acquisition.

Secondly, even in the case of a public limited company, this Directive does not speak about the critera for eligibility of the valuer and its liabilities, any liability of the contributor to make up a deficiency in the value of a NCC, any role or duty of the founders and the first persons appointed to administer or supervise the company in the valuation process. Futhermore, this Directive is silent concerning the finality of the value fixed by valuer in the sense that whether it need to be approved by the subscribers or the contributor itself, as well as the majority and quorum required to approve a post-formation acqusition and the effect of non- satisfaction of the rules on post-formation acquisition.

Thirdly, the second Council Directive does not provide the consequences where the a contributor fails to fully transfer the NCC within the prescribed period, or where the company accepts an undertaking to do work or perform sevices. There is no also express provision in this Directive concerning the liability of transferors and subsequent holders of shares [issued against a NCC] to pay contributions that have not been fully paid up where such shares are transferred to another person.

The above Directive is also silent on the issue of whether a subscriber who first undertakes to pay in cash at a future date is bound to pay likewise or it can latter pay its promise in kind. In fact, the second Company Directive is in the first place silent on whether such an undertaking constitutes a valid form of cash consideration unless one argues from its requirment under Art. 9(1) about minimum amount to be paid on shares issued for cash that such an undertaking is not acceptable form of cash contribution.

Furthermore, the first Company Directive’s requirment of mandatory disclosure, as discussed earlier, envisages that member states will provide for a judicial or administrative organ charged with the task of registering companies, the Directive does not clearly state the role of the official at this organ in verfying the fulfillment of the requirments as to filing and publication and, in the case of a public limited company, that of the validity of the NCC, its valuation and payment as well as its powers if it finds that any of the legal requirments are not satisfied.

In addition, there is no clear provision in the EC Company Directives about the possiblity for a company to correct omissions from the founding documents of the required particulars about NCCs by amending those documents. The same is true about the possiblity of correcting incorrect entries in the relevant register or of the submission of the expert report if it was ommited at registration. Last, the Directives do not attach penalties for the violation of many of their provisions and are silent on the issue of any direct or derivative right of action of shareholders or creditors of a company to enforce any claims the company may have or of their own.

The above state of affairs of the Community legislations may be explained by the very purpose of the Directives and nature of Cummunity legislations in the form of directives that they primarily aim at bringing about harmonaization, rather than uniformity, of national laws of member states and give member states the choice of form and methods for their implementation.³³ Hence, in the three Parts to follow we will see how the member states under consideration have transposed those Council Company Directives and addressed the above areas of silence and non-application of the Community law as well as control of NCCs in general.

Part Two: The German Legal System

1.2.1. Definition of Valid forms of IKCs

The AktG provides neither a general definition nor a specific list of the permissible types of NCCs for an AG. § 27(2) lays down only a single criterion and one outright exclusion, whereby it provides that only ’assets that have an ascerainable economic value’ may make up valid IKCs but contributions in the form of services are not possible. This general standard and specific exclusion are in line with the second Council Directive.

[...]

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¹ Katharina Pistor ( et al) , The Evolution of Corporate Law: A Cross Country Perspective, 23 U. Pa. J. Int'l Econ. L. 791, Winter 2002, p. 791

² George W. Wickersham, The Capital of a Corporation, 22Harv. L. Rev. 319, March, 1909, p.320

³ Ibid.

⁴ Detlev F. Vagts, Basic Corporation Law: Materials-Cases-Texts, Third Edition, 1989, The Foundation Press, Inc., Westbury, New York, p. 135. According to this author, capital is different from assets in that capital remains fixed despite changes on it brought about by amndments to the formation instruments while asets may fluctuate depending on the gains and losses of the company in its transactions and by other factors.

⁵ Supra note 2

⁶ In this regard mention can be made of the German Stock Company Act as well as the second Council Directive.

⁷ Supra note 2, at 321

⁸ Id. P.320

⁹ Supra note 4, at 143

¹⁰ Id., p.135

¹¹ Id., pp.135, 139 A widely accepted and broad definitaion of over-capiatlization provides that it is ”the issue of shares of capital stock to an amount in excess of the value of the capital assets” Ibid.

¹² Ruster,Bernd (Ed.), Business Transactions in Germany, Looseleaf, New York, 1983, p.24-24

¹³ Id., pp.24-14, 24-24

¹⁴ Christian Kersting, Hidden Contributions in Kind (Verdeckte Sacheinlage), http://ssrn.com/abstract=1314983, p.2, accessed on 13-2-2010. See also Bertagna Avocats, Repair of Covert Non-Cash Contributions to Capital, http://www.mondaq.com/article.asp?articleid=200, accessed on 10-3-2010, p.1

¹⁵ Supra note 13

¹⁶ In this regard mention can be made of, for example, the following: Mads Andenas and Frank Wooldridge, European Comparative Company Law, Cambridge University Press, 2009; Massimo Miola, Legal Capital and Limited Liability Companies: The European Perspective, 2 ECFR 413 (2005); Luca Enriques and Jonathan Macey, Creditors versus Capital Formation: The Case against the European Legal Capital Rules, R. 86 Cornell L. Rev. 1165 (2000-2001); Mark R. von Sternberg, Close Corporation's Counterparts in France, Germany, and the United Kingdom: A Comparative Study, 5 Hastings Int'l & Comp. L. Rev. 291 (1981-1982); and Katharina Pistor ( et al) , The Evolution of Corporate Law: A Cross Country Perspective, 23 U. Pa. J. Int'l Econ. L. 791, Winter 2002, p. 791

¹⁷ Katharina Pistor ( et al) , The Evolution of Corporate Law: A Cross Country Perspective, 23 U. Pa. J. Int'l Econ. L. 791, Winter 2002, p. 791

¹⁸ Mads Andenas and Frank Wooldridge, European Comparative Company Law, Cambridge University Press, 2009

¹⁹ Aberra Jembere, The Legal History of Ethiopia 1434-1974: Some Aspects of Substantive and Procedural Laws (Leiden, Rotterdam, Erasmus Universiteit, 1998), p. 207; According to this author, the legal system of Germany (specifically that of the then Federal Republic of Germany) and France are the main sources of the Ethiopian Commercial Code while certain aspects of the Code on share companies are also taken form the English legal system.

²⁰ The appointing or approving organ can be an administrative or judicial authority and it can be a legal or natural person, as the law of a member state provides. Art. 10(1)

²¹ The period of this guarantee shall be between the time of issuance of shares for the NCC and one year after the publication of the recipent company’s annual accounts in the financial year during which the NCC is furnished. Moreover, transfer of the shares within this period is prohibited. Art. 10(4/d)

²² This three -year period is after the publication of the annual accounts of the recipient company for the financial year during which the consideration was furnished or, if necessary, until such latter date as all claims

²³ These other documents and particulars are amendments to the founding documents, persons authorised to represent or administer the company, the subscribed capital in each year if the company has authorised capital, accounting documents; transfer of the seat, winding up and declarion of nullity of the company, and appintment of liquidators and termination of liquidation. Art. 2(1) of the first Company Directive and Art. 1(2) of the Directive amending the first Company Directive.

²⁴ To this effect the Directive amending the first Directive requires the opening in each member state of a companies, central or commercial register for each of the companies registered therein in such a way that the subject matter of the entries in the register must in every case appear in the file. It also imposes a duty on member sates to ensure the required filing and publication by comapnies. Art. 3(1 & 2)

²⁵ As can be deduced from Art. 3(4 & 7) of the Directve amending the first Directive, the disclosure of the required documents and particulars is said to be completed as of their publication according to the formalities or types of publication set out therein. However, in the event of discrepancy between what is published in the press and what is entered in the register, the latter controls as Art. 3(6) provides. Arts. 3(5) and 3(7) of the amending Directive, respectively, also provide exceptions to rules that a company may not rely on undisclosed information as against third parties and that third parties may, however, rely on such information as against the company.

²⁶ Nullity, however, may not in itself affect the obligations assumed by the comapny or third parties. Art. 12(3) first Council Directive.

²⁷ The instances of failure to make disclosure on which the this provision expressly imposes the duty on member states to provide appropriate penalties are failure to disclose accounting documents as required by Art. 2(1/f) of the first Directive and omission of materials from the commercial documents or particulars from a company’s website as required by Art. 4 of the first Directive. As regards the responsible person, Art. 5 of the first Directive only provides that the question of by which persons the disclosure formalities are to be carried out is to be determined by the laws of each member state.

²⁸ The ECJ, in Belgium v. Vandevenne, Case C-7/90

²⁹ Simens AG v. Henry Nold, Case C-42/95

³⁰ As this provision says ’at least’, this period is the minimum and national laws of member states may require a longer period in this respect.

³¹ The exeptions to the requirments concerning post-formation acquisition are given under Art. 11(2) second Council Directive.

³² Art.13 of the second Council Directive of course requires member states to extend the application of its provision on NCCs in the event when a private limied company is converted to a public one. This issue is, however, in the firs place excluded from the scope of the paper since this event does not as such involve the making of NCCs for the purpose of purchasing of shares in a company.

³³ Peter Hay, Reading Material for the course ’ EU Law I ’, Central European University, Budapest, 2009/2010, p.IV-3