US/ German Startup differences– Legal Differences in Startup Contracts and Agreements

As part of the ongoing series on in US and German Startup/VC processes, laws, and culture, I’ll be addressing some of the most glaring differences I’ve observed regarding shareholders’ agreements, startup contracts, etc.  It should be noted that most of these observations are relevant only to GmbHs.  While many of the same differences apply to German AGs, I’m limiting this post to GmbHs, where I have more experience.

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Under German law, any contracts which deal with the transfer or sale of shares must be notarized.  This is not as in the US, where the process can take only a few minutes and most law firms’ secretaries are also state certified notaries.  The situation in Germany is quite different.

For one, there is a set number of notaries in the country (“Notar”) who are allowed to notarize documents, so it’s not a question of just asking a secretary or paralegal to do it.  Notary positions are highly sought after in Germany, with only the most highly qualified legal specialists allowed to become one.

Notaries assume personal liability for the documents they are certifying.  For example, in a 100T€ transaction, the notary can be liable for the 100T€ if he fails to verify that the details of the transaction are all permitted.  For example, if someone signs a contract for someone else without having a proxy or power of attorney, the notary is liable for any damages that arise from this.  This leads to a situation where the notaries are basically paid to go thru every detail of what is permissible in a transaction with the parties, verifying everything, and only then will he notarize the transaction.

The process can be very long.  For a typical seed investment, for example, there is a shareholders agreement, new bylaws, IP and Software assignments, etc.  To verify the agreement of all the parties, the Notary will ask everyone to come together, and then he will read EVERY SINGLE WORD of all of the contracts.  After finishing that (which can take many hours) everyone agrees to them and prepares to sign the contracts.  Now the Notary must verify that everyone present is actually able to sign the contracts.  If someone is representing the startup, or the VC firm, or someone else, then the Powers of Attorney must be checked.  This becomes even more complicated with the Powers of Attorney documents are also linked to entities which also are given by Powers of Attorney.  The Notary must verify all the parts of the chain, make sure they are correctly done, and then check the identities of the people present (passports, etc).  Then and only then can he notarize the contracts.

Since the Notary is personally liable for any problem he may have missed, he is of course very thorough.  His costs are also representative of his liability (and standardized across the country, so don’t bother trying to shop around).  A 500T€ Seed Investment notarization can be many tens of thousands of Euros, a signification portion of the attorneys and transaction costs.

I’ll leave the relative advantages and disadvantages of this system to another post; for now any US-based VCs or Entrepreneurs who are participating in a financing round based in Germany should be made aware that the transaction itself can be more complicated and formal and expensive than simply getting together around a conference table and signing.