Right of a silent partner regarding information and control

A silent partner may terminate the silent partnership for cause for being persistently denied information despite the information right being only contractually agreed. This was decided by the Hamm Higher Regional Court (Oberlandesgericht, "OLG") on February 1, 2023 (Ref.: 8 U 29/22).

Facts

The decision of the OLG Hamm is based on the following facts: The defendant had participated as silent partner in the plaintiff’s limited liability company ("GmbH"). The partnership agreement governing the silent partnership stipulated that each partner is entitled to terminate the partnership for good cause without notice if the other partner breached any duties under the partnership agreement or the duty of loyalty as a partner. According to the partnership agreement the silent partner has the right to information and control pursuant to Section 716 of the German Civil Code (" BGB") “even after termination to the extent necessary for reviewing the settlement balance".

At the beginning, the silent partner was granted access to business information. Subsequently, disputes arose between the partners, which resulted in the silent partner no longer being provided with information. The silent partner then terminated the company for good cause. He argued that his right to information had been violated by the GmbH's persistent refusal.

The GmbH claimed that the silent partnership agreement continues to exist. The Dortmund Regional Court dismissed the respective action. The GmbH appealed against this ruling.

The decision of the OLG Hamm (judgment of February 1, 2023 - Ref.: 8 U 29/22)

The OLG Hamm confirmed that the termination by the silent partner due to the violation of his right to information was effective.

The breach of duties under corporate law constituted good cause for termination. The stipulation of additional "good causes for termination" in the partnership agreement further to the statutory reasons for termination pursuant to Article 234 of the German Commercial Code ("HGB") in conjunction with Article 723 para. 1 of the German Civil Code ("BGB"), was considered permissible. The parties had aimed to not merely refer to Article 723 para. 1 BGB but to establish easier termination possibilities. The OLG Hamm explains this mainly with the personal relationship between the parties.

A prior warning was not required. Article 314 para. 2 BGB, which provides a warning requirement, is not applicable. The statutory right of termination for partnerships pursuant to Article 723 para. 1 BGB as the more specific provision supersedes Article 314 para. 2 BGB. A requirement for a warning is even more not required if the parties have agreed on easier termination possibilities.

The persistent denial of the right to information constituted a breach of an obligation under the partnership agreement, entitling the silent partner to terminate the partnership.

Practical advice

The silent partnership is of great practical importance, including for young companies in the financing stage and as an employee participation program or for investors as a form of participation. It is a pure "internal partnership" which does not appear externally. The silent partner generally remains anonymous, but in certain cases, an entry in the transparency register might be required.

In addition to discretion, flexible structuring options are a notable advantage. Contrary to capital increases in corporations that require stringent formal and procedural prerequisites, the establishment of a silent partnership is possible without any formalities.

According to the statutory provisions in Articles 230 et seq. HGB, the silent partner is generally limited to certain information and control rights. At the request of the silent partner, the annual financial statements must be provided to enable an assessment of their accuracy through examination of books and documents. Under the statutory provisions, the silent partner does not have any further rights of participation, in particular voting rights, rights of consent or veto rights.

However, the statutory provisions are dispositive. Investors regularly insist on further control and information rights and demand that certain transactions require their consent. In addition, the participation in profits and losses is often structured more specifically.

Depending on the structure of the partnership agreement, a distinction is made between typical and atypical silent partnerships, which particularly has tax consequences. In contrast to the typical silent partner, the atypical silent partner is to be classified as a so called co‑entrepreneur (“Mitunternehmer”). It is necessary that the atypical silent partner bears co-entrepreneurial initiative and risk. Criteria for this are the extent of control and information rights, involvement in the operations or loss sharing to the limit of the contribution.

Companies and investors should therefore carefully examine how to organise and structure a silent partnership. The decision of the OLG Hamm illustrates that the freedom of contract can entail potential risks, especially if clauses in the partnership agreement are not clearly phrased.