Start-up financing made more difficult by the form requirement for convertible loans

It is precisely because they are so simple and uncomplicated to set up that convertible loans are very popular in the field of venture capital/start-up financing. Especially as bridging finance until the next financing round, convertible loans have been an absolute standard feature of start-up practice. A recent ruling by the Higher Regional Court (OLG) of Zweibrücken (judg. of 17.05.2022, 8 U 30/19; not yet final) has now thrown the venture capital scene into turmoil.


The German Limited Liability Companies Act (GmbHG) has numerous strict formal requirements. According to section 2 (1) sentence 1 GmbHG, the formation of a German limited liability company (GmbH) requires notarial form. It is therefore not possible to establish a GmbH without a notary. Also, the transfer of shares in a GmbH pursuant to section 15 GmbHG requires a notarised contract. This applies both to the in rem legal transaction, the assignment, and to the basic transaction under the law of obligations, with which the obligation of a shareholder to assign a share in the business is established.

Further formal requirements can be found in sections 53 ff. GmbHG. For example, a shareholders’ resolution amending the articles of association of the GmbH must be notarised pursuant to section 53 (2) GmbHG. In the case of an increase in the share capital of the GmbH, a notarially recorded or certified declaration of the transferee is required for the takeover of each share in the increased capital under section 55 (1) GmbHG. It is precisely in this area of sections 53 and 55 GmbHG that the decision of the OLG Zweibrücken unfolds.

Convertible loan agreements

Characteristically for a convertible loan agreement, the creditor gives a loan to the GmbH and is contractually guaranteed conversion rights (or obligations) in such a way that either the creditor or the debtor is entitled to convert the funds invested as a loan into a share in the GmbH at a later date.

The agreement generally stipulates that the creditor will take over newly created shares in the company by way of a capital increase when exercising the conversion right. Depending on the contractual structure, the creditor is often already obligated to this takeover in the convertible loan agreement. In some cases, the convertible loan agreement also contains the obligation to amend the articles of association of the GmbH.

These contractual obligations thus amount to acts which in turn require form pursuant to sections 53 and 55 GmbHG. It is therefore questionable whether these antecedent obligations also already require form.

The decision of the OLG Zweibrücken

In this regard, the OLG Zweibrücken is of the opinion that, due to section 55 (1) GmbHG, the notarial certification of the transferee’s signature is required when entering into a takeover obligation of shares at least if the potential transferee of the shares is a person outside the company, i.e. a person who is not yet a shareholder of the GmbH.

Even though this was no longer relevant in the OLG Zweibrücken case, the court also raised concerns with regard to section 53 (2) GmbHG in the context of a so-called obiter dictum (this is the term used if the reasons for the judgement are not fundamental). The court suggests that if a convertible loan agreement provides for a binding amendment of the articles of association (!) regarding a capital increase upon activation of the conversion option, the provision of section 53 (2) GmbHG is relevant and the entire convertible loan agreement must be notarised.

Consequences of a breach of form

The legal consequence of an invalidity of form is the invalidity of the contract as a whole.

This would mean that the lender has a repayment claim with regard to his/her loan, which is then no longer subject to the restrictions, but also no longer to the rights of the convertible loan agreement.

Since in the field of venture capital, convertible loans are given precisely with the intention of obtaining shares in a then valuable GmbH when a further round of financing takes place, this economic objective would disintegrate.

Glance into the future

The judgement of the OLG Zweibrücken is pending. The case is currently before the Federal Supreme Court (BGH) in Karlsruhe for review, as strong arguments exist against the view of the OLG Zweibrücken. It therefore remains to be seen how the BGH will position itself.

For practice, however, the ruling means that until a legally binding clarification is issued by the BGH, special attention must be paid to the specific drafting of convertible loan agreements. The unchecked adoption of templates sometimes found on the internet could lead to a rude awakening. In order to ensure that the procedure is as legally secure as possible, creditors’ signatures should be notarised as a precaution. The notarisation of the entire contract, which would be much more cumbersome and costly, may be avoided in most cases by skilful drafting the contract.