Germany has dipped its toes in the digital future, by passing a law that on the surface promises to bring the country into the modern era alongside countries like Estonia, Portugal, the UK, the US, and countless others by allowing a company to be formed online. This should be great news for the startup scene which has long-complained about the cumbersome systems of notaries, physical signatures and in-person meetings that have plagued the founding process here.
Unfortunately, despite the bold claims made by the new law (that was mandated by the Digital Directive of the European Parliament) there is very little innovation actually in the bill and Germany has done everything it can to ensure the engrained power structures remain and the powerful notary lobby has everything to gain from the new setup. In short, its allowing for a small degree of digitzation of the antiquated role of the notary in Germany, rather than truly digitizing the company formation process.
There is a great write up by PWC (in German) on the topic, so I’ll just summarize my findings and add my opinions below. I would recommend reading the article in reverse though so PWC’s precise analysis isn’t lost:
The online notarial procedure, which will be available from August 1, 2022, is an important step towards digitization in corporate law. However, it is unclear whether in practice it will make a significant contribution to the intended acceleration of the formation process.
Daniela Schmitt, PWC
Don’t believe the hype
What the new law does:
- Allows for new limited-liability companies (GmbH and UG) to be setup online – This sets good legal precedence that doing business online is OK
- Allows participants to be represented online by a proxy with a legally-granted power of attorney – Meaning you do not need to be physically present for this process
- Gives the Federal Chamber of Notaries (Bundesnotarkammer) the right to develop a video communication software – This is one of most cringe-worthy parts of this new regulation. Has anyone ever used Government-built software that has great UX, is stable and not ultimately more frustrating or confusing than doing things in person? This also locks in the Bundesnotarkammer’s monopoly by making them the sole provider of the software. The software will supposedly:
- Allow for the electronic transmission of documents and contracts
- Certify digital signatures
- Provide a digital notarial record
- Provide End-to-end encryption? Maybe, at least two factor authentication
- Relies on NFC-enabled Identification and eID – Users of the service must authenticate themselves, apparently through a mobile app, using these specialized documents. As an ex-CTO this step raises a lot of software development and user experience red flags for me.
What the new law does not do:
- Allow any outside organization to develop the digital tools for online appointments – We’re not really into free markets, disruption, or you know, learning from past mistakes here in Germany; locking us into one supplier worked really well with the CoronaWarn app, right? ? Luca!
- Gets rid of the notary process of reading documents outloud, very fast and requiring your signature – The law only moves this process online
- Allow non-EU citizens to use the service – Well, there goes all that foreign investment into German companies
- Allow for any other notary procedures to take place online besides company registration – So, forget doing your investment round, changing your company name, updating your articles of association, or any other meaningful company activity without traveling across town to sit in a closed room for hours with someone you don’t know reading to you for hours just to ink a couple documents. What was this about a pandemic?
So, while we have heard promises forever from politicians that they would ease the bureaucracy regarding company setup in Germany, this is at least a concrete indication that the government has some modicum of desire to be digital. But it is not much of a change in the status quo. The area is still ripe for disruption by a clever entrepreneur.
Most importantly, and we bring this up every time a politician mentions the topic in the statement above, this doesn’t address the main problem with managing a company in Germany, and that’s the time, effort, stress and costs it takes to shut down a legal entity. This, on average, based on my personal knowledge and conversations, takes three to four years. Come startup, but you better not fail in Germany!
To end this article on a positive note, I would recommend that the German government remove the need for notaries from company formation. Since that’s a beautiful pipe dream I would settle for recommending that they update this law to create the legal allowance for doing all company business online, from foundation, to updating, to dissolution but not dictate who gets to build the digital solutions. That’s how you really spur innovation and speed up digitization. Provide the framework for innovation and let us entrepreneurs do the rest.
This opinion piece (and the subsequent sarcasm and cynicism) are the sole views of Travis Todd, Managing Director of Silicon Allee, and do not necessarily represent the views and opinions of the company as a whole.