Updated 26 March 2020
The German legislature is currently enacting a package of measures to enable businesses to face the impact of COVID-19.
The German government will protect businesses with new measures to provide liquidity, the volume of which is unlimited. Due to the high degree of uncertainty in the current situation, the government has very deliberately decided to not set any limits on the volume of these measures. This is a very significant decision which is supported by the entire federal government.
KfW liquidity assistance programmes
The existing liquidity assistance programmes have been expanded to make it easier for companies to access cheap funding, e.g. via various programmes provided by the German state-owned development bank KfW. Also, KfW has established a new special programme for business who have temporarily come into financial difficulties due to the current crisis. More detailed information on the different measures available with KfW can be accessed here.
These measures are subject to existing state aid rules and were approved by the European Commission. For more information on the EU Commission’s Temporary State Aid Framework, click here.
Economic Stabilisation Fund Act
In addition to the KfW liquidity assistance programmes the Federal Ministry of Finance has prepared a legislative initiative that has passed the German Bundestag on 25 March 2020 and is expected to be adopted by the German Bundesrat later this week, the Economic Stabilisation Fund Act (Wirtschaftsstabilisierungsfondsgesetz, “WStFG”).
The German government is making use of measures that were successfully applied in the financial crisis in Germany. Those measures are now being made available to companies meeting at least two of the following criteria (for at least two consecutive financial years prior to 1 January 2020):
- total balance sheet of exceeding 43 million;
- sales revenue exceeding 50 million; and
- more than 249 employees on a yearly average.
Provided that the companies can demonstrate to meet further requirements, they may apply for the following support measures:
- debt instruments guaranteed by the newly established economic stabilisation fund (the “Economic Stabilsiation Fund”) for up to 60 months; and
- equity investments by the Economic Stabilsiation Fund, inter alia, by share capital, subordinated debt and equivalent hybrid equity instruments.
Members of our German team have extensive experience advising the German government in stabilisation measures in the financial crisis. We will provide a more detailed overview in due course.
Protection of tenants against termination of contract
On 25 March 2020, a bill aimed at mitigating the consequences of the COVID-19 pandemic by making various changes inter alia with respect to German civil, insolvency and criminal procedure law (the “COVID-19 Relief Bill”) has passed the German Bundestag and is expected to be adopted by the German Bundesrat later this week. The COVID-19 Relief Bill proposes a number of relief measures for those who are currently unable to meet their payment obligations as a result of the pandemic, including tenants of residential and commercial properties.
Under the bill, landlords may not terminate lease agreements solely on the grounds that a tenant failed to pay its rent during the period from 1 April 2020 to 30 June 2020 (the period may be prolonged until 30 September 2020 by way of an ordinance (Rechtsverordnung)), provided that the tenant can prove that such rent arrears are based on the effects of the COVID-19 pandemic. This suspense of the termination right shall apply to both residential and commercial leases and shall apply until 30 June 2022, i.e. the landlord will only be entitled to terminate the lease due to rent arrears of the tenant between 1 April 2020 to 30 June 2020 as of 1 July 2022. In its rationale, the bill, however, also emphasises that the obligation of the tenants to pay the rent in due course remains unaffected, i.e. the draft bill does not stipulate a remission of the obligation to pay rent.
Publicly listed companies: virtual shareholder's meetings
In order to ensure that shareholders’ meetings of publicly listed companies can take place despite social distancing in response to the COVID-19 pandemic, the COVID-19 Relief Bill also simplifies the existing legal framework for the convention and holding of annual shareholders' meetings, mainly in order to allow virtual annual shareholders’ meetings. In more detail, the bill contains the following points:
- Management boards may opt to hold shareholders' meetings as (purely) virtual meetings if certain technical requirements are met to safeguard shareholders' voting and information rights.
- In order to hold such a virtual meeting, management boards may opt to use certain means of electronic communication even if the articles of association do not provide a management board with the authority to do so. For instance, a management board may require the company's supervisory board to attend the virtual meeting through audio and video transmission.
- The minimum invitation period to convene shareholders' meetings is shortened from 36 days to 21 days. Accordingly, the record date and the timing for shareholders to exercise certain rights (e.g. request for the extension of the agenda) have been changed.
- Annual shareholders' meeting may be held throughout 2020.
- Management boards may decide in favor of an advance payment of distributable profit even if a company's articles of association do not authorize the management to do so.
- Shareholders will not be able to contest shareholders' resolutions because a company has (allegedly) not complied with requirements for the usage of electronic communication, unless a company willfully violated applicable rules.
For any of the above measures management boards need the approval by the respective supervisory board.
German Transformation Act: Extension of Filing Deadlines up to Twelve Months
The corporate law related measures also include changes to the German Transformation Act (Umwandlungsgesetz). In case of a merger (Verschmelzung) the applicable deadlines relating to the reference date (Stichtag) of the final financial statements (Schlussbilanz) of the respective transferring entity (übertragender Rechtsträger) have been extended. The reference date for the final financial statements may now lie up to twelve months before the filing of the merger with the competent commercial register. The reason for the extension of the relevant deadline from eight months to twelve months is to avoid that transformation measures fail because current restrictions for holding conferences or meetings in person in response to the COVID-19 pandemic prevent to hold shareholder’s meetings regarding the approval of the merger agreement of the entities involved. This corresponds to the reasoning for the implementation of virtual shareholder’s meetings described above. The extension of the deadlines relating to the reference date of the final financial statements also apply for all filings of split off measures (Spaltungen) in the course of 2020. The German Federal Ministry of Justice and Consumer Protection has been empowered to extend the aforementioned measures through to 2021.
The German parliament (Bundestag) has passed the new laws on 25 March 2020 and it is envisaged that the German Council (Bundesrat) will consent to the new laws on 27 March 2020.
In each individual case it should be assessed carefully whether the extension of the relevant deadlines also applies for tax purposes. In this respect, the legal developments should be monitored and it remains to be seen whether the German legislators will clarify the implications of the deadline extension for tax purposes.
The COVID-19 Relief Bill also aimes at mitigating the consequences of the COVID-19 pandemic of 23 March 2020 also contains more details on the changes to the insolvency rules. For our legal briefing on suspension of the insolvency application obligation please click here.
The EU Commission published on 19 March 2020 a Temporary Framework to support the economy in the context of the COVID-19-outbreak. This Framework gives guidance to Member States on state-aid-measures, which are considered admissible with the EU State Aid regime. The EU Commission emphasizes that the general rules remain applicable. It furthermore does not provide a block exemption from the requirement for Member States to notify and obtain Commission approval. It does, however, set out certain types of liquidity support measures that the Commission will consider as compatible with the internal market and would be able to approve very rapidly upon notification.
For more information on the EU Comission's Temporary Framework please click here.
According to two decrees issued by the German Federal Ministry of Finance it will become easier to defer tax payments and reduce prepayments and enforcement measures and late payment penalties will be waived until 31 December 2020. This will not only apply to federal taxes such as corporate income tax, insurance tax and value added tax, but also to taxes that are administered by the customs administration such as energy duty and aviation tax. The German government estimates that overall businesses will be able to defer billions of euros in tax payments.
The plans in more detail:
- Make it easier to be granted tax deferrals. Tax offices can generally defer taxes if their collection would lead to significant hardship of the taxpayer. The German Ministry of Finance plans to instruct the tax offices to lower threshold for this condition to be met by taxpayers.
- Make it easier to reduce tax prepayments. According the German Federal Ministry of Finance, tax prepayments will be reduced in a swift and straightforward manner as soon as it becomes apparent that a taxpayer’s income in the current year is expected to be lower than in the previous year.
- Waive enforcement measures and late-payment penalties until 31 December 2020 if the debtor of a pending tax payment is directly affected by COVID-19.
The employment law related measures to ease the burden on companies in the crisis are as of now limited to a relaxation of the regulations on short-time work compensation. However, during the last financial crisis, the instrument of short-time work had already proven to be a suitable means of avoiding high unemployment rates in times of drastic reduction in the workload. The previous conditions for the granting of short-time work compensation will be relaxed as follows:
- The threshold of employees affected by the loss of work has been lowered to 10%.
- No negative time account balances must be built up
- It is now clear that temporary workers are also entitled to short-time pay
- The social security contributions are now fully covered by the Federal Labour Office
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020