Employee participation in the german GmbH

Options for medium-sized businesses, small entrepreneurs and startups in Germany

The employee share ownership model was originally mostly used only in foreign countries or large german companies. In the meantime, the idea of allowing employees to share in the company's success is increasingly finding favor in the german SME sector as well. In the following, we present the reasons for and against such a participation program and explain which different models are available in Germany.

Detailed information on virtual stock options and virtual shares under german law can be found here: Virtual Employee Participation

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Why employee share ownership are used in german practice...

The reasons are obvious, because studies prove the high motivation factor of employee share ownership. With the help of employee shareholdings, german executives and managers in particular can be attracted to the company in the first place and also retain their loyalty over the long term. There are also advantages from a financing point of view if employees strengthen the company's capital base through their own contributions or make borrowing partly or completely unnecessary.

In contrast, employee shareholdings have no disadvantages in german practice. In principle, employee shareholdings do not entail any co-determination rights, unless otherwise stipulated. Such co-determination rights may, but need not, be granted. The advantage of employee shareholdings lies in their flexibility. They can be designed in accordance with company-specific requirements.

Employee participation models under german law

There is extensive freedom in designing models for employee participation in the company's entrepreneurial success. Established models for implementing employee share ownership are:

1. Direct shareholdings
2. Employee loans
3. Granting of silent partnerships
4. Issuance of shares or business shares (employee shares, employee stock) - Granting of stock options
5. Employee loans with profit-related interest - Profit participation rights or profit participation certificates
6. Various forms of virtual participation (virtual stock options (vso), stock appreciation rights (sar), phantom stock)
7. Formation of employee investment companies

In the following, you will find more detailed information on the various participation options in Germany.

1. Direct shareholdings in german practice

The granting of direct participations, e.g. in the form of shares of an AG or business shares of a GmbH, belongs to the classical variants of the coworker participation in german practice. These company shares, often also called employee shares or employee business shares, are normal shares or business shares. In german practice, however, these are often endowed with higher profit-sharing rights on the one hand and lower participation rights on the other.

2. Employee loans under german law

Employee loans are loans granted to the german company by the employee. Typically, the loan is granted by withholding salary components. However, they are not usually traditional loans. Employee loans are usually structured as "participatory" loans, i.e. the employee does not receive a fixed rate of interest. Instead, the funds provided by the employee earn interest based on profits or sales.

3. Silent partnership in Germany

The employee can also participate in the german company through a silent partnership. In this case, the employee makes an asset contribution to the company (any commercial enterprise). In any case, the employee participates in the profit of the company with his / her contribution. Participation in losses depends on the form. The silent partnership, which is similar to debt capital in accounting terms, can be structured variably. It should be noted, however, that this form of participation as a dormant partnership is also regulated by law in the German Commercial Code and establishes a genuine corporate relationship.

4. Stock options in Germany

Companies in the legal form of a stock corporation can issue employee stock options to their employees. In this way, the employees concerned, in german practice this regularly concerns managers, can acquire shares in the company concerned under certain conditions. The price to be paid by the employee for the shares is generally fixed at the time the options are issued.

5. Profit participation rights in Germany

When profit participation rights or profit participation certificates are issued to employees, they entitle them to a certain share in the profits of the company concerned. In this respect, they are purely claims under the german law of obligations and not, like the otherwise similar silent partnership, a relationship under german company law.

6. Virtual participation in german practice

When virtual shareholdings are granted, no shares under german company law are transferred to the employees. In financial terms, the employees are merely placed in the same position as if they were shareholders. Particularly in the startup sector, virtual shareholdings are often granted in the form of virtual stock options (also known as ESOPs). In this variant, employees are only entitled to a share of the sale proceeds in the event of a company sale, the so-called exit. In Germany, employees acquire this entitlement over a longer period, the so-called vesting period. However, highly qualified employees in particular can only be attracted if they also share in the company's profits.

7. German employee investment companies

Employees can also participate as shareholders in german employee investment companies. In this case, they do not participate in the company itself, but in a company that holds shares in the company. This indirect participation option is often used in large companies with a large number of employees and/or in companies with a high staff turnover.

References to german company law, labor law, tax law, accounting law and social security law

When designing and structuring employee participation models, it is important not to limit oneself to the implementation under german company law, but to also consider the points of contact with other areas of law. This essentially involves the german labor law, tax law, accounting law and social security law aspects of employee participation models:

1. Firstly, depending on the employee participation model, the financial contributions to the employee can be structured as wages, as capital income or as business income with different taxation consequences for the employee.
2. Secondly, the financial contributions to be made by employees to the company under the participation model can be structured as debt or equity in the balance sheet for tax and / or commercial law purposes, depending on the structure, with consequences for the creditworthiness and borrowing capacity of the company.
3. Thirdly, the german labor law implications of employee participation programs must be taken into account. In most cases, these programs have a direct impact on the employment contracts of the employees. As a consequence, the courts apply established principles of german labor law to employee participation programs as well, which must consequently be taken into account when designing them.
4. Fourthly, there is the option of structuring the financial inflows to the employee as wages under german social security law or also as other remuneration exempt from social security, depending on the employee participation model.

If you have any questions regarding employee participation, please contact one of our lawyers and specialist attorneys in Berlin, Hamburg, Munich, Frankfurt or Cologne. They will be pleased to be at your disposal as contact persons.