German Law of Partnerships: A Modernization Long Overdue

The foundations of the German statutes governing the law of the partnership were created at the end of the 1800s. The most generic form of the civil law partnership is regulated in the German Civil Code (BGB). This basic partnership is referred to as partnership under civil law (Gesellschaft bürgerlichen Rechts, abbreviated GbR).

Based on this generic (and rather rudimentary) statutory regulation, the German Commercial Code (HGB) provides a more sophisticated legislative framework for the general commercial partnership (offene Handelsgesellschaft, oHG), on which - in turn – the statutory provisions for the limited partnership (Kommanditgesellschaft, KG, a popular legal form of funds) are based. In general, the German law of partnerships makes references from the more specific form to the more general form. That’s why the statutory principles set out for the basic civil law partnership remain widely relevant.

On 20 April 2020, the German Federal Ministry of Justice and Consumer Protection published the proposal for draft legislation relating to the law of partnerships. The so-called “MoPeG” bill can be downloaded from the ministry’s web server. The document is being referred to as Maurach Draft (coined after Maurach Castle at Lake Constance where the expert commission finalized the document).

The first intention of the draft bill is to recognize and to reflect the current “legal reality” in the law of partnerships. In particular, this reality had been shaped by various fundamental decisions of the Federal Civil Court that had not yet been implemented in the statutory framework so far. Beyond such technical “updates”, the new draft legislation comprises the following four main elements of practical relevance:

1. Introduction of a new public register for (certain) civil law partnerships

2. Accessibility of commercial partnerships as legal form for independent professionals (Freiberufler)

3. Adoption of statutory regulations for actions of voidance (Beschlussanfechtungsklagen, in analogy to those stipulated in the statutes for stock corporations)

4. Free choice of the partnership’s seat

1. Public Register for (Certain) Civil Law Partnerships

Unlike the commercial partnerships (oHG, KG) and the registered partnership for professionals (Partnerschaftsgesellschaft, PartG), the basic civil law partnerships cannot be registered with a public register such as the commercial register and the partnership register, both established at the competent local courts. The MoPeG bill now proposes to establish a new register for those civil law partnerships that are intended to have legal interaction with third parties and that shall be subject of dedicated rights and obligations (i.e., so-called “exterior partnerships” as opposed to mere “interior partnerships” in which the partners only stipulate their mutual relationships towards each other). For example, whenever investors are pooled in a civil law partnership, they form an exterior partnership in that sense.

Please be reminded that exterior partnerships can still be established without any notarization. Even simple written form is not necessary for the legal creation of such partnerships. However, most cases of business relevance will involve some form of a written partnership agreement. While civil law partnerships’ names traditionally contain “GbR” (for Gesellschaft bürgerlichen Rechts), the new registered civil law partnerships shall be assigned the acronym “eGbR” as statutory suffix indicating their legal form. The “e” stands for the adjective registered (eingetragene).

In the absence of a public register, any changes in the identity of the partners usually require additional efforts. For example, a civil law partnership holding title in real estate must be registered in the land register with a full list of all partners, a change in which results in each case in the requirement to file a formal correction notice with the land register. While a registration of the civil law partnership in the new register will in principle be optional (and therefore not be a requirement for its valid existence under German law), the proposed bill makes such registration mandatory for certain cases such as holding title in real estate or the intended change of legal form.

As a welcome side effect, the public registration of civil law partnerships will further improve transparency of beneficial ownerships in these entities. Most recently, German national legislation implementing the new Anti-Money-Laundering Directive of the EU had introduced the national transparency register to that effect. An additional public register for civil law partnerships (which may be pooling entities acting as shareholders in other legal entities) will increase the effectiveness of the transparency register.

It’s worth noting that the Maurach Draft does not include the form of a “civil law partnership with limited liability”. While this had been discussed (following suggestions from various sides), the proposed bill expressly stipulates that any agreements between the partners to that effect do not affect the partners’ liability vis-à-vis third parties. Denying the civil law partnerships such limitation of liability is rooted in the fact that there are no statutory provisions safeguarding the contribution and the preservation of the partnership’s capital. Such provisions exist for other legal forms with limited liability such as the limited partnership (KG) and, of course, corporations like the limited liability company (GmbH).

When entering into contractual agreements with third parties, the partnership may, however, agree with such contractual partners on a limitation of any liability from the contract in question. For the sake of completion, please note that such limitation of liability may only work in a specific relationship and only to a certain degree, in any event less comprehensively than by means of a tailored legal form. Last, but not least, when it comes to the scope of the partners’ liability, there will be no difference between the unregistered civil law partnership and the registered civil law partnership.

2. Commercial Partnerships Now Open to Professionals

For a long time, independent professionals (Freiberufler) had regarded the commercial partnerships with envy, as the legal form of the Kommanditgesellschaft (limited partnership) provided a statutory way to limit the partners’ liability. The introduction of the registered partnership for professionals with limited professional liability (Partnerschaftsgesellschaft mit beschränkter Berufshaftung, sporting the elegant abbreviation “PartGmbB”) brought some widely embraced form of relief. However, the limitation of liability only pertained to claims under professional liability, whereas in a true limited partnership under German law, the effect of the limitation of liability is comprehensive and therefore also pertains to contractual obligations like rent payments or salaries.

Please note that even the liberal Maurach Draft leaves room for additional requirements to be stipulated under the relevant statutory provisions governing the relevant profession in question. For attorneys-at-law, to name a heavily regulated profession by way of example, this will most likely result in certain specific requirements on the professional insurance to be entertained by the law firm acting as limited partnership (most probably, in its special form with a limited liability company as the general partner, indicated by the legal form suffix GmbH & Co. KG)

3. Statutory Actions of Voidance

While the statutes governing the stock corporation differentiate between challengeable (anfechtbar) and outright void (nichtig) shareholder resolutions, the law of partnerships didn’t provide such statutory framework so far. Therefore, flawed partners’ resolutions are indiscriminately void regardless of the severity of the underlying defect. Under the proposals of the Maurach Draft, the introduction of the differentiated legal framework already known from the Stock Corporation Act (Aktiengesetz, AktG) will bring a higher degree of certainty to all stakeholders: while some resolutions will be regarded as outright void (i.e., without the need to be challenged by legal action), other resolutions with less severe defects will be subject to actions of voidance. Such actions will need to be brought within a specified period of time (three months in general, not to be reduced below one month in the partnership agreement).

4. Free Choice of Legal Seat

Traditionally, German law of partnerships resulted in the unconditional dissolution of a partnership if and when the place of its actual administration (this being the legal seat of the partnership!) was moved out of Germany. Under the Maurach Draft, it is proposed that the partners may henceforth agree on a formal seat located in Germany with a different place of actual administration. The formal seat shall then not be affected even if the partnership should actually engage exclusively abroad. While this may have been overlooked by many as a mere detail, this is a giant leap for German corporate law. It will allow more creative legal structures and, hence, will certainly be adopted very broadly.

Summary

The consequences of the proposed new law will be profound, but not revolutionary. While lawyers will rejoice in the new clarity and systematic regulation of antiquated legal concepts, the actual practical impact will be accepted very swiftly and rather intuitively. After all, the Maurach Draft implements many helpful details for the legal practice.

In a nutshell, it’s a decent piece of modern legislation.