On 22 July 2013, the German Capital Investment Code (Kapitalanlagege setzbuch – KAGB) came into effect, which implements the AIFM Directive. It contains a range of provisions relating to fund managers, which the law refers to as investment management companies. Under section 17 sub-section 1 of the KAGB, a company is an investment management company if it manages an investment fund by providing portfolio management or risk management (or both of these services) for at least one investment fund.
The KAGB makes a distinction between internal and external investment management companies. An internal investment management company manages its own assets only, in the interests of investors with a holding in the company. An external investment management company manages third-party assets. These comprise either pooled funds which are legally separate from the assets of the investment management company and which are managed for the joint account of the investors, or assets of other investment management companies. Section 18 sub-section 1 of the KAGB extends the range of legal forms available to external investment management companies beyond the public limited company (AG) and limited liability company (GmbH) options which have been available for over 50 years to include limited partnerships where the personally liable shareholder is a company with limited liability.
The legislator authorised the GmbH & Co. KG as a legal form for external investment management companies in order to meet the practical needs of existing closed-end alternative investment funds. However, the GmbH & Co. KG option is not restricted to investment management companies which manage AIFs – all investment management companies, including those which manage UCITS, can adopt this legal form.
A GmbH & Co. KG typically comprises a company with limited liability (GmbH) with one or more share- holders, a general partner and one or more limited partners. However, a GmbH & Co. KG can also take the form of a consolidated unit company,i.e. a limited partnership with one or more limited partners where the sole general partner is a company with limited liability (GmbH) whose shares are in turn held by the limited partnership itself. This kind of consolidated company is thus a closed system. There is a particularly high risk of conflicts of interests as a result. It would therefore appear to be unsuitable for use as an investment management company. It is only likely to be able to gain authorisation as an investment management company if the articles of association of the GmbH general partner and the partnership agreement of the limited partnership ensure that the specific risks associated with a consolidated unit company will not have a detrimental effect on investors.
Section 18 sub-section 2 sentences 2 and 4 of the KAGB require an external investment management company in the legal form of a GmbH & Co. KG to set up an advisory board. In this regard, section 18 sub-section 2 sentence 4 states that 19 regulations from the German Stock Corporation Act (AktG) apply accordingly to the advisory board of the GmbH & Co. KG. This is the first time that legislation has been passed relating to the advisory board of a GmbH & Co. KG. However, its value is limited because key questions remain unanswered. This includes the issue of where the advisory board of the GmbH & Co. KG should be established in accordance with the KAGB:
- attached to the KG or
- the GmbH general partner or
- the KG and the GmbH general partner at the same time.
Legally, all three solutions are permitted and all three are also used in practice under company law.
A GmbH & Co. KG always comprises two companies, namely a limited partnership and a GmbH general partner. As such, this causes difficulties when applying the incompatibility rule set out in section 105 sub-section 1 of the Stock Corporation Act as per section 18 sub-section 2 sentence 4 of the KAGB because the legislator has not only failed to clarify which of the two companies the advisory board should be attached to, but also not made clear which of the two companies the incompatibility refers to. A clear separation of functions is only achieved if the incompatibility rule in section 105 sub-section 1 of the Stock Corporation Act is applied to both the GmbH general partner and the limited partnership.
The brief overview provided above shows that many legal issues which have been left unresolved in the legislation will need to be addressed when setting up and authorising investment management companies structured as a GmbH & Co. KG.