On the horizon – The modernisation of German partnership law
An introduction to and overview of the regulatory areas
Many companies – especially small and medium-sized as well as those managed by liberal professionals – are organised in the legal form of a partnership. The reason for this is frequently the greater flexibility when compared with corporations; however, sometimes tax-driven motives are also behind the decision.
The key elements of the draft Act on the Modernisation of Partnership Law are:
- a revision of the legislation in respect of the GbR (acronym for Gesellschaft bürgerlichen Rechts, a partnership under German civil law) (registration option);
- generally opening up commercial partnerships for the joint practice of liberal professions;
- regulations for dealing with partners’ resolutions that are defective
Revision of the legislation in respect of the GbR
A partnership under German civil law (GbR, or also called: a BGB [Bürgerliches Gesetzbuch, or Civil Code] partnership) is the basic form for all partnerships. Its legal capacity was a matter of dispute for many years and then, in 2001, the Federal Court of Justice confirmed that GbRs did have legal capacity.
Two variant legal forms
In future, the partners will be able to choose whether the GbR, as a partnership with legal capacity, should engage in legal transactions, or whether this legal from should merely serve the purpose of organising the relationship of the partners to each other ((undisclosed) partnership without legal capacity). Only a GbR with legal capacity would be able by itself to exercise rights and be subject to obligations and have its own partnership assets.
Registration option
A GbR that accordingly has legal capacity could then be registered in a new Company Register (Gesellschaftsregister) maintained by the competent local court (Amtsgericht). Registration would then have to be indicated by means of a name suffix (e.g., eGbR [eingetragene Gesellschaft bürgerlichen Rechts, or registered partnership under German civil law]) While registration would be voluntary, nevertheless, it would be required for certain legal transactions such as, e.g., a reorganisation in accordance with the German Reorganisation Act, the acquisition of shareholdings in other companies or of properties. For the latter, the requirement according to which, besides the GbR, all the names of the partners have to be listed in the land register would then cease to apply in the future.
Please note: However, registration would not change anything with respect to either the partners’ unlimited personal liability to the extent also of their private assets, or the transparent taxation as a partnership.
Commercial partnerships for liberal professionals
The draft law provides for the legal forms of commercial partnerships (OHG [German ordinary partnership], KG [German limited partnership] and GmbH & Co. KG [German limited partnership with a limited company as general partner]) also to be opened up in the future for the joint practice of liberal professions if the professional practice regulations so permit. The German Federal Government has already provided for the respective opening up for lawyers, tax consultants and patent attorneys in a parallel draft law. Such professionals could then achieve a more extensive limitation of liability than with a Partnerschaft mbB (a partnership with limited professional liability) without having to forgo the tax advantages of partnerships. For other liberal professionals (e.g., physicians, architects) the opening up would have to be implemented at the level of the federal states.
However, it would still not be possible to hold straight equity investments in professional practice companies; in this respect there would be no change in the active collaboration requirement.
Please note: It is envisaged that the requirement that the name of a partnership has to include at least the name of one partner will cease to apply for professional partnerships in the future, almost like a kind of small compensation.
Laying down legal rules relating to defective resolutions
To-date, German partnership law has contained no provisions in respect of dealing with partners’ resolutions that are defective. A legally erroneous resolution is therefore normally null and void if the partnership agreement does not provide for any different regulations.
Now, separate rules relating to defective resolutions – based on German stock corporation law – will be codified for commercial partnerships, at least. Accordingly, violations of the law or the partnership agreement would, in principle, only result in the contestability (i.e., provisional validity) of the resolutions. Challenges to resolutions could then be brought by means of a claim before a district court (Landgericht) that has to be filed within three months after notification or becoming aware of the resolution.
Nevertheless, particularly serious violations would still result in the resolution having to be regarded as null and void from the outset. This would be the case if the content of the resolution violated legal provisions where it was not possible for the partners to waive compliance. This could be construed as referring to violations that affect core areas for the partners such as, for example, the right to participate in a meeting of the company partners.
The new legal rules relating to defective resolutions would not apply to GbRs or partnerships without further action. Although the partners could agree to these in the partnership agreement.
It is generally true to say that, even after the modernisation, the flexibility that the legal form of a partnership provides would remain unaffected to a large extent and that most of the regulations would be dispositive, i.e., may be altered by agreement of the partners.
Outlook: Since it is likely there is consensus across the board that partnership law basically needs to be modernised it is hoped that this Act can still be passed before the end of the current legislative period in the autumn. Even if this is the case, this Act would however only come into force on 1.1.2023 in order to give the competent courts time to set up the new electronic Company Register.