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No Liability of the Purchaser of a Limited Partnership Interest for the Seller's Pre-Contractual Disclosure Breach vis-à-vis Investors

The purchaser of a limited partnership interest is not liable for a pre-contractual disclosure breach by the seller alleged by an investor in the limited partnership.


In 2011, the plaintiff had participated in an investment fund in the legal form of a limited partnership with a private limited company as general partner ("GmbH & Co. KG") as a (trustor) limited partner based on a brochure. The founding and trust limited partner was S-GmbH. Profit distributions and return of capital were to be generated mainly from the sale of crude oil or natural gas. The general partner of the fund had transferred the business operations of the limited partnership to a foreign stock corporation in the legal form of Société Anonyme (S.A.) in exercise of an authorization granted to it under the partnership agreement. In addition to the distributions received, the plaintiff was allocated shares in this stock corporation, which, however, the plaintiff could not freely sell due to a transfer restriction clause.

In 2015, the defendant acquired the limited partner's interest from S-GmbH and assumed its position as trustee in the course of such acquisition.

In its legal action, the plaintiff sought payment of damages (as well as a judicial declaration of the defendant's obligation to compensate for any and all further and future damages) from the defendant due to a pre-contractual disclosure breach.

The District Court ordered the defendant to pay damages as requested. The defendant's appeal against this before the competent Higher Regional Court was unsuccessful. The defendant then appealed to the Federal Court of Justice.

The Ruling of the Federal Court of Justice of 15 September 2020, Ref. II ZR 20/19

The Federal Court of Justice overturned the judgment of the Higher Regional Court, amended the judgment of the court of first instance and dismissed the action in its entirety.

The District Court had ruled that the plaintiff should have been informed in accordance with the principles of prospectus liability in the broader sense that the general partner of the fund was authorized under its partnership agreement to contribute the KG business operations to another company. By such an authorization, the purpose of the contract (according to the brochure: a time-limited capital investment) had been jeopardized.

The decisive question here, however, was whether the plaintiff really had such a claim against the defendant, which had not launched the fund and had also not been involved in the preparation of the brochure. The District Court answered in the affirmative arguing that the defendant entered into the legal relationships between the founding and trust limited partner (S-GmbH) on the one hand and the individual trustors (which included the plaintiff) on the other hand by way of "special legal succession". According to the District Court, the defendant could not plead here that it had merely acquired the position of an "ordinary" limited partner by taking over the limited partner's interest. In support of this, the court pointed out that the defendant had known that it was acquiring the limited partner's interest from the limited partner in trust and was also assuming its trustee duties along with the limited partner's interest.

However, the Federal Court of Justice clearly rejected such a far-reaching "assumption of liability" when the partnership interest was acquired. It is true that with such acquisition, the defendant had in principle also assumed certain rights and obligations of the seller in its legal position as a limited partner. However, this only applies to rights and obligations arising from the partnership relationship (as opposed to other liabilities of the seller). The claim for damages for disclosure breaches filed in the dispute qualifies as such “other liability” that does not pass to the purchaser.

Practical advice

The judgment of the Federal Court of Justice is convincing. The breach of the duty to inform fell to the founding and trust limited partner, who did not assign the limited partner's interest to the defendant until after the brochure had been issued and the business of the limited partnership had been transferred to the stock corporation. Thus, although a liability for damages arose from the position as a former partner with an obligation to provide information, it did not arise from the partnership relationship as such, but rather from the culpable breach of contractual obligations towards the plaintiff.

Had the Federal Court of Justice ruled differently here, the consequences for the secure legal structuring of acquisitions of partnership interests would have been significant. It would have been difficult to draw a clear distinction between obligations arising from the partnership relationship that pass to the buyer and other liabilities that remain with the seller. Last, but not least, the limited liability of the limited partner would also be all too easily undermined.

The ruling by the Federal Court of Justice once again demonstrates how important it is to draft share purchase agreements properly and diligently. In the present case, if this had been intended, it would have been possible to achieve a transfer of comprehensive liability from the old partner to the new limited partner in trust by means of a precise agreement. Conversely, with appropriate clarifications and corresponding indemnities in favor of the acquirer, it would have been possible to contractually stipulate any claims by the co-partners in advance. The potential for legal structuring is even more extensive if - for example in an M&A constellation - all shareholders are parties to the share purchase agreement.

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