Requirements for Partial Profit Transfer Agreements with Limited Liability Companies

Do the strict formal requirements for profit transfer agreements in Germany also apply to a partial profit transfer agreement with a limited liability company (GmbH)? According to the most recent ruling of the German Federal Court of Justice (BGH) of July 16, 2019 (Case No. II ZR 175/18), this depends in particular on the scope of the affected profit participation and co-determination rights of the shareholders.

Background

The defendant is a German stock corporation (Aktiengesellschaft "AG") originating from the transformation of a limited liability company (GmbH). In 1992, the managing director of the (then) GmbH made a declaration to the plaintiff that "the GmbH undertakes to pay the annual surplus of up to 20% to [the plaintiff]".  The shareholders unanimously approved the declaration. The agreement was not entered in the commercial register, though.

In the lawsuit, the plaintiff demanded payment of the profit shares for the years 2010 and 2011; the defendant  argued that the agreement had been invalid from the beginning, because partial profit transfer agreements are to be entered in the commercial register not only of an AG, but also of a GmbH in order to be effective, and the requirements for amendments to the articles of association (in particular notarial certification) are to be observed.   

The judgement of the BGH of July 16, 2019 - II ZR 175/18

The BGH confirms the claim for payment of the plaintiff and denies in the particular case special requirements for effectiveness of the partial profit transfer agreement.

A partial profit transfer agreement - e.g. through the establishment of a silent partnership - is to be measured for formal requirements and equivalence with a profit and loss transfer agreement within the meaning of the provisions under the stock corporation law (sections 291 et seq. of the German Stock Corporation Act (AktG)) on the basis of whether it has an effect overlaying the articles of association. However, since only twenty percent of the profits were transferred in the case to be decided, such an effect did not exist. Therefore (in the absence of a deviating provision in the articles of association) no special requirements apply to the underlying shareholder resolutions (if at all necessary), and the agreement does not require entry in the commercial register of the company in order to become effective.

Note

The judgement clarifies some requirements on partial profit transfer agreements with a GmbH, open questions remain however in case of the transfer of more than 50% of the annual surplus.

The BGH expressly does not answer the question of what applies to the transfer of a large part or at least the predominant part of the profits. Also with an obligation to pay off exceeding fifty per cent of the annual surplus it is therefore not mandatory to assume an effect overlaying the articles of association. In practice, however, as a precautionary measure, the requirements under stock corporation law for profit transfer agreements should - in prior alignment with the competent commercial register - still be complied with (notarization, 75% majority, entry in the commercial register).

Uncertainty also exists in the case of a transfer of between twenty and fifty percent of the annual net profit.  The facts of the respective individual case will be very important in such constellations.