Purpose Economy - GmbH in responsible ownership

Soon new legal form for social and sustainable start-ups?

A contribution by attorney Fiona Schönbohm

There is good news for all those who were upset by the Wirecard scandal, those of us who can no longer listen when profit-hungry investors stuff their pockets, rip off one company after another and then, at best, tax money in the billions is used to rescue supposedly indispensable institutions. Those who are stunned to see interviews of Jeff Bezos on the Internet, in which he says that he simply doesn't know where to put his money except to invest it in a penis-shaped spaceship.

Because we are not the only ones who want an alternative to this form of management. A growing international movement is questioning the primacy of profit maximization and would like to be able to legally strengthen a sustainable realization of the corporate purpose. From this movement the idea of a GmbH in responsible ownership was developed. The movement forms under the term "purpose economy".

Push from start-ups and from the middle class

There are already a few companies that have legally decoupled their progress as far as possible from the short-term profit interests of investors. At present, however, such a separation can only be legally achieved through very complex legal constructions in german law. Especially in the field of start-ups, the choice of the right legal form for the start-up is often complicated.

Apart from the interest of medium-sized companies, which often want to regulate their succession and prevent a fragmentation or sale of the family-owned company, it is precisely the upswing in the start-up sector that is responsible for the fresh wind in the sails of responsible ownership. This is because young entrepreneurs often pursue social and sustainable concepts, which usually quickly lose their importance when the start-up is financed by external investors, especially in the venture capital sector.

Due to the great interest of many entrepreneurs in a new corporate form, the "Stiftung Verantwortungseigentum" (engl. foundation responsible ownership) was finally established in Berlin at the end of 2019 to promote the idea. A group of lawyers closely associated with this foundation has now presented a "draft law for the company with limited liability in responsible ownership".

Responsible corporate governance despite financing

The idea of ownership works as follows:

1. Voting and participation rights are separated from profit distribution rights and the latter are capped.
2. The so-called responsible owners are allowed to co-determine the future of the company, while investors receive only very limited distributions.
3. Surplus profits are paid out to the company on a mandatory basis and are used to promote the company's purpose.

The current trend, especially for classic venture capital financing, on the other hand, aims at a financially profitable exit. As a result, short-term interests of investors often determine the development of the company. With responsible ownership, on the other hand, social responsibility towards employees, customers and the environment can be at the forefront - regardless of whether this initially pays off.

Complicated legal situation in Germany

In order to achieve the above objectives with the currently applicable law, quite complex legal structures must be created at present. On the one hand, the law on foundations can be used to ensure that the future of the company is managed by a community of like-minded shareholders who manage the company in a quasi fiduciary capacity. This is a popular choice, especially for medium-sized family businesses, to secure the succession of the company. Family members are then only entitled to limited profit entitlements and a sale of the company is excluded.

On the other hand, countermeasures can be taken in company law: In the so-called veto-share model, there are different classes of owners: the responsible owners are granted the voting rights and only a capped claim to profits, while the investors are not entitled to voting rights, but to higher, capped profit rights. In addition, a small portion is used for a foundation whose sole purpose is to prevent a change in this structure (so-called asset lock).

A simpler and legally secure alternative for structuring responsible and sustainable companies would therefore be more than desirable. That would be a step in the right direction, wouldn't it?