Choice-of-Law Clause in the Articles of Association: Which Law Applies in Cross-Border Situations?

Published on 09.10.2026

Choice-of-Law Clause in the Articles

Anyone who acquires an interest in a foreign company, enters into an international joint venture or moves abroad as a shareholder of a German GmbH will sooner or later face the question of which law governs the contractual framework. The obvious answer, to include a choice-of-law clause (Rechtswahlklausel) in the articles of association (Gesellschaftsvertrag), falls short in international company law. Unlike a sales or service contract, a company’s articles of association do not simply allow “the applicable law” to be chosen. Two legally separate levels must be distinguished, and confusing them is one of the most common mistakes in international shareholdings.

The question becomes particularly practical when the shareholders are spread across several states, for example because a co-shareholder emigrates. The tax consequences of such a move for the shareholding itself are covered in the article on exit tax on GmbH shareholdings. This article deals with the civil law side: what can be validly chosen, and where does freedom of choice end?

Law Governing the Company and Law Governing the Contract: Two Levels

Private international law distinguishes between the law governing the company (Gesellschaftsstatut) and the law governing the contract (Vertragsstatut).

• Law governing the company: It determines the law governing formation, legal capacity and capacity to act, internal organisation, representation, the raising and maintenance of capital, dissolution and the personal liability of shareholders and corporate bodies. The parties are in principle not free to determine the law governing the company. It follows its own conflict-of-laws connecting rules.
• Law governing the contract: It concerns contractual agreements between the shareholders themselves or with the company that have no effect on the company’s organisation, such as pre-emption rights, non-compete clauses, information rights, put and call options or exit rules. Here, the parties are in principle free to choose the applicable law.

The distinction has direct consequences. A clause intended to subject the entire articles of association of a German GmbH to a foreign law has no effect as regards organisational matters. An accompanying shareholders’ agreement with purely contractual content, on the other hand, can be made subject to a different legal system.

Real Seat Theory and Incorporation Theory: Who Determines the Law Governing the Company

In Germany, the law governing the company is not codified by statute. Neither the Introductory Act to the Civil Code (EGBGB) nor secondary EU law contains a general connecting rule for companies. What is decisive is conflict-of-laws case law developed by the courts, which moves between two models:

• Real seat theory (Sitztheorie): The decisive law is that of the state in which the company has its actual administrative seat. Germany in principle continues to apply it to companies from states outside the EU and the EEA, unless an international treaty provides otherwise. Such a company with its administrative seat in Germany is then assessed under German law.
• Incorporation theory (Gründungstheorie): The decisive law is that of the state under whose law the company was formed, irrespective of where it is administered.

The Case Law of the European Court of Justice

Within the EU, the European Court of Justice has reshaped this starting position through the freedom of establishment (Art. 49, 54 TFEU). The most important milestones:

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As a result, the incorporation theory essentially applies within the EU and the EEA. In relation to third countries, the real seat theory in principle continues to apply. For US companies, the German-American Treaty of Friendship, Commerce and Navigation of 1954 likewise results in recognition under the law of incorporation. What this means for transferring the seat of a GmbH is explained in the article on relocating a GmbH abroad.

The Rome I Regulation: What Can Be Freely Chosen

Within the EU, contractual obligations with a cross-border element are governed by Regulation (EC) No 593/2008 (Rome I Regulation). It applies to contracts concluded on or after 17 December 2009 and applies in all member states except Denmark. Under Art. 3 Rome I, the parties can choose the applicable law themselves, either expressly or clearly demonstrated by the circumstances.

Exclusion of Company Law under Art. 1 (2) (f) Rome I

One exception is decisive: Art. 1 (2) (f) Rome I excludes questions of company law from its scope. It mentions in particular the creation, by registration or otherwise, legal capacity, internal organisation and winding-up of companies as well as the personal liability of shareholders and corporate bodies for the obligations of the company.

The law to which the company as such is subject is therefore not determined by Art. 3 Rome I but by unwritten international company law. A clause in the articles of association of a German GmbH stating that foreign law is to apply to “all matters of the company” does not change the fact that the Limited Liability Companies Act (GmbH-Gesetz, GmbHG) governs the company’s organisational constitution.

What Remains Open to Choice: Shareholders’ Agreements and Side Agreements

In international investment practice, a distinction is, as a rule, made between two sets of contracts:

1. The articles of association (Satzung or Gesellschaftsvertrag) of the target company, which are subject to the law governing the company.
2. A separate shareholders’ agreement (Gesellschaftervereinbarung) or an investment agreement (Beteiligungsvertrag) with contractual arrangements, such as voting agreements in the internal relationship, pre-emption, tag-along and drag-along rights, non-compete clauses, information obligations, earn-out rules and put and call options.

According to the prevailing view, the exclusion does not apply to the second set of contracts insofar as the provisions have no direct organisational effect and are limited to the relationship between the contracting parties. A choice of law under Art. 3 Rome I can then be validly made. This also applies to rules on changes of shareholders, such as obligations to offer shares on withdrawal or succession rules. How a cross-border change of shareholders can affect taxation is shown in the article on business succession when a shareholder emigrates.

The boundary is not always clear-cut. Provisions that are contained in a separate agreement but in substance concern the company’s decision-making, representation or capital structure may be subject to the law governing the company despite a choice of law. What matters is the substance of the clause, not where it appears in the contractual framework. It must also be borne in mind that questions of form are subject to a separate connecting rule. The assignment of shares in a German GmbH requires notarial form under Section 15 (3) GmbHG. Whether contractual obligations to assign shares, such as pre-emption or tag-along rights, must also be notarially recorded under Section 15 (4) GmbHG if the agreement is governed by a foreign law is disputed because of the independent connecting rule for form under Art. 11 Rome I. The Federal Court of Justice (Bundesgerichtshof, BGH) expressly described the question of whether the form of the place of conclusion (Ortsform) suffices for such agreements as disputed under the predecessor provision, Art. 11 EGBGB, and left it open (judgment of 4 November 2004, III ZR 172/03, with references to the state of the debate); the discussion continues in the commentaries on Art. 11 Rome I. Notarial recording is the safer option. A notarial recording abroad can satisfy the German form requirement if it is equivalent to a German one (BGH, order of 17 December 2013, II ZB 6/13). It also matters who carries out the recording: if the officiating person lacks authority to record deeds at the place of recording, for example because a foreign notary acts in Germany, the entire deed may be void, depending on the law governing form. In a case concerning a will, the BGH upheld validity only because the applicable Dutch law did not sanction this violation (judgment of 21 January 2026, IV ZR 40/25).

Without a Choice of Law: Art. 4 Rome I

In the absence of a choice of law, Art. 4 Rome I determines the applicable law. Fixed rules apply to certain types of contract, for example the law of the service provider’s habitual residence for service contracts (Art. 4 (1) (b)). Otherwise, what matters is the habitual residence of the party required to effect the characteristic performance (Art. 4 (2)), and, failing that, the closest connection (Art. 4 (4)). In shareholders’ agreements with several parties of equal standing, a characteristic performance often cannot be determined. The result is then difficult to predict, which argues in favour of an express choice of law.

Limits of the Choice of Law: Mandatory Law and Overriding Mandatory Provisions

Even a valid choice of law has limits. If the situation is connected with only one state, that state’s mandatory provisions remain applicable under Art. 3 (3) Rome I. In addition, the overriding mandatory provisions (Eingriffsnormen) of the forum remain applicable (Art. 9 (2) Rome I). The court may give effect to overriding mandatory provisions of the state in which the obligations are to be performed insofar as they render performance unlawful (Art. 9 (3) Rome I). Of practical relevance are, for example, competition law and foreign trade law provisions.

Brexit: When the Law Governing the Company Changes Without Any Action on Your Part

Brexit shows how real an unplanned change of the governing law (Statutenwechsel) can be. Many entrepreneurs had formed an English limited company with its administrative seat in Germany. As long as the United Kingdom belonged to the EU, the limited company was recognised in Germany as a corporation under the incorporation theory.

With the end of the transition period on 31 December 2020, the United Kingdom became a third country for this purpose. In its order of 16 February 2021 (II ZB 25/17), the Federal Court of Justice ruled that such a limited company with its administrative seat in Germany is no longer recognised as a corporation under foreign law. Depending on its structure, it is treated as a civil law partnership (Gesellschaft bürgerlichen Rechts, GbR), as a general partnership (offene Handelsgesellschaft, OHG) or, if there is only one shareholder, as a sole proprietorship. The consequence is that the shareholders are in principle personally liable.

The same risk affects any company from a third country whose actual administration is located in Germany. A typical, often overlooked case: a structure, for example a trust with an associated corporation, is set up in Singapore. It is initially administered by a bank in Switzerland, later by a bank in Germany, while the founder living in Germany makes all decisions himself from the outset. As a result, the structure is in fact administered from Germany. In relation to companies from third countries, the Federal Court of Justice applies the real seat theory (judgment of 27 October 2008, II ZR 158/06, “Trabrennbahn”). The liability protection of the corporation is thus lost: the formation abroad no longer counts in Germany, although it continues to count in Switzerland. Under German law, depending on the structure, the corporation becomes a sole proprietorship, a GbR or an OHG, with full personal and unlimited liability. You cannot expect founders, sellers or intermediaries of such foreign companies to be aware of these interrelationships or to point them out.

The question “Which law applies to my company?” can therefore change as a result of political developments without the parties taking any action. A choice-of-law clause does not protect against this, but it can at least keep the contractual arrangements stable while the law governing the company changes.

Arbitration Clauses in Articles of Association

In addition to the choice of law, an arbitration clause is frequently agreed in international shareholders’ agreements. It enables disputes to be resolved outside the state courts of one of the states involved, and arbitral awards can be enforced in more than 170 contracting states under the New York Convention of 1958.

For disputes over defective shareholder resolutions (Beschlussmängelstreitigkeiten) in German companies, the Federal Court of Justice has developed its own line of case law:

• Arbitrability I (judgment of 29 March 1996, II ZR 124/95): At the time, the BGH did not consider disputes over defective resolutions in a GmbH to be arbitrable because there was no statutory provision on the effect of the arbitral award vis-à-vis all shareholders, and referred the matter to the legislature.
• Arbitrability II (judgment of 6 April 2009, II ZR 255/08): The BGH recognised arbitrability provided that the clause meets minimum requirements. In particular, it must be agreed with the consent of all shareholders. All shareholders must be informed of the proceedings, be able to join them as intervening parties and participate in the selection of the arbitrators, and all disputes concerning the same resolution must be concentrated before one arbitral tribunal.
• Arbitrability III (order of 6 April 2017, I ZB 23/16): These requirements in principle also apply to partnerships. The decision was taken by the First Civil Senate, to which proceedings concerning arbitration agreements and arbitral awards are assigned at the BGH.
• Arbitrability IV (order of 23 September 2021, I ZB 13/21): In partnerships, the minimum requirements only apply if disputes over defective resolutions are to be conducted against the partnership. Since 1 January 2024, the Commercial Code (HGB) has provided for exactly this challenge model for the general partnership (OHG) and the limited partnership (Kommanditgesellschaft, KG), so that the requirements must, as a rule, be observed there.

If a clause does not meet these requirements, it may be invalid insofar as it is intended to cover disputes over defective resolutions. For practical purposes, the Supplementary Rules for Corporate Law Disputes of the German Arbitration Institute (DIS-ERGeS, Annex 5 to the DIS Arbitration Rules 2018) offer a basis tailored to this case law; they must be agreed separately. If managing directors resident abroad are involved, additional liability issues arise, which are covered in the article on managing director liability when relocating abroad.

Conflicting Choice-of-Law Clauses

An underestimated problem arises when both sides use their own standard contracts with differing choice-of-law clauses and the contract is concluded without the question having been resolved. Which law then applies has not been uniformly settled and depends on which law governs whether agreement was reached (Art. 10 Rome I). It is therefore advisable to clarify the choice of law early on as a separate point of negotiation rather than leaving it to the parties’ standard forms.

Criteria for Drafting the Choice-of-Law Clause

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Which legal system is suitable for a specific contract can only be assessed in the individual case. If a foreign law is to be chosen, its content must be coordinated with an adviser from the state concerned. How German judgments are enforced abroad is described in the article on the enforcement of German judgments abroad (in German).

Checklist

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Example

Example: Jonas holds 40 per cent of a Munich GmbH and moves to Switzerland. He would like to conclude a shareholders’ agreement with his co-shareholders Mira and Paul that governs pre-emption rights and a drag-along clause. The parties are considering making the agreement subject to Swiss law. This is in principle possible for the contractual arrangements. The GmbH itself, however, remains subject to German GmbH law, the assignment of shares still requires notarial recording, the pre-emption and drag-along rules should also be notarially recorded as a precaution, and an arbitration clause for disputes over defective resolutions must meet the BGH’s requirements. The parties should coordinate the content of Swiss law with an adviser in Switzerland. Irrespective of this, it must be examined whether Jonas’s move triggers tax consequences for his shareholding.

Conclusion

A choice-of-law clause in international articles of association is not a mere boilerplate clause. It requires a distinction between the mandatory law governing the company, which is determined by the incorporation or real seat theory and the case law of the European Court of Justice, and the law governing contractual arrangements, which can be chosen under the Rome I Regulation. Anyone who overlooks this distinction risks a clause of unclear scope, surprises caused by a change of governing law as with Brexit, and invalid arbitration clauses for disputes over defective resolutions. In the case of international shareholdings and shareholders resident in different states, early coordination of the entire contractual framework is therefore advisable.

FAQ

Can foreign law be chosen for the articles of association of a German GmbH?

Not for the GmbH’s organisational constitution. It is subject to German GmbH law. The law governing contractual side agreements can be chosen, for example in a separate shareholders’ agreement.

Does the Rome I Regulation apply to articles of association?

Not to questions of company law such as formation, internal organisation, dissolution and liability of the shareholders (Art. 1 (2) (f) Rome I). According to the prevailing view, it applies to purely contractual arrangements between shareholders.

What has happened to a British limited company with its seat in Germany?

Since the end of the Brexit transition period on 31 December 2020, it is, according to the BGH’s order of 16 February 2021 (II ZB 25/17), no longer recognised as a corporation, but treated as a partnership or sole proprietorship.

Are disputes over defective resolutions arbitrable?

Yes, if the arbitration clause meets the minimum requirements developed by the BGH, in particular the consent of all shareholders to the clause, information and participation of all shareholders, and the concentration of all proceedings concerning the same resolution.

Does the emigration of a shareholder change the law applicable to the GmbH?

In principle, no. The law governing a German GmbH does not depend on the shareholders’ place of residence. The position may be different if the actual management is also moved abroad with the emigration; in that case, the conflict-of-laws rules of the host state also matter. The move may also have tax consequences and be a reason to amend the shareholders’ agreement.

Attorney Dr. Johannes Fiala and the Munich-based firm, which focuses on international corporate and tax law, support entrepreneurs, shareholders and investors in drafting international articles of association and shareholders’ agreements, from determining the law governing the company to drafting the choice-of-law and arbitration clause. Dr. Fiala has published extensively on corporate and asset law issues. Please get in touch with the firm without obligation to discuss your plans in an initial consultation.