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Changes for Civil Partnerships (GbR), General Partnerships (OHG), and Limited Partnerships (KG): Modernization of Partnership Law

On June 24, 2021, the German Parliament unanimously adopted a bill to modernize partnership law that will enter into force on January 1, 2024. As the new law introduces many significant changes for civil partnerships (GbR), general partnerships (OHG), and limited partnerships, there is an acute need for action. Particularly noteworthy is the introduction of a company register for partnerships under civil law and regulations on contesting partners' resolutions.

Fundamental distinction between external and internal civil law companies

Essential to the new law on civil law partnerships ("GbR") is the distinction under Article 705 (2) of the German Civil Code ("BGB") between legally capable external companies and non-legally capable internal companies. This differentiation complies with the consistent case-law of the Federal Court of Justice and is to be welcomed without reservation.

According to the new Article 705 (2) Alt. 1 BGB, an external GbR exists if the company shall participate in legal transactions according to the joint will of the partners. Furthermore, under the new Article 705 (2) BGB, an external GbR can be the bearer of rights and obligations and forms its corporate assets according to the amended Article 713 BGB. Exemplary for such external GbRs are professional practice companies, small businesses, or other entrepreneurial companies, such as real estate companies.

Under the new version of Article 719 (1) BGB, such external GbRs come into existence in relation to third parties as soon as they participate in legal transactions with the consent of all partners, but at the latest upon their entry in the newly created company register (see below).

According to the new Article 705 (2) Alt. 2 BGB, an internal GbR is solely intended to structure the legal relationship between its partners. Although the amended provisions of Articles 740 - 740c BGB apply some standards of the external GbR also to the internal GbR, the internal GbR remains without legal capacity and, pursuant to the new Article 740 (1) BGB, without corporate assets. Thus, the internal GbR continues to be suitable for regulating voting and pooling agreements, sub-participations in company shares, and similar relationships.

Demarcation issues between external and internal company

The new provisions of Articles 705 et seq. BGB assume legally capable external companies as the primary type of GbR without standardizing a presumption in their favor. Accordingly, courts must determine the interpretation of the joint will of the partners in individual cases. Therefore, questions of distinction between internal and external companies are likely to increase in the future.

Introduction of the company register

Under the new Article 707 (1) BGB, external partnerships may be entered in the newly created company register. According to the new Article 707 (2) BGB, such an entry requires the specification of the name, registered office and address of the company, the names, place of residence, or registered office of each partner, and their power of representation. In addition, after the registration, the GbR is obliged to use the suffix "eingetragene Gesellschaft bürgerlichen Rechts" or "eGbR" (registered civil law partnership) under the new Article 707a (2) of the BGB.

Furthermore, the new Article 707a (3) BGB requires that the notion of good faith under Article 15 of the German Commercial Code ("HGB") applies to such entries. Every outsider can, therefore, trust in the correctness of such entries. Furthermore, this public register allows legal transactions to assess with greater certainty who is available to the company's creditors as a personally liable partner.

Article 707c BGB in its amended version enables a GbR to change its status from the company register to the commercial register if it wishes to change its legal form to another partnership. This new possibility applies particularly to registered, small commercial GbRs that want to change their legal form of a general partnership (Offene Handelsgesellschaft, "OHG") on an optional basis, as well as to GbRs whose activities exceed the threshold for commercial business operations under Article 1 (2) HGB. Conversely, small commercial OHGs that have previously been entered in the commercial register can change their status to a GbR following the amended Articles 106, 107 HGB.

The entry of the external GbR in the register of companies is not mandatory and is not required for its legal capacity. However, Article 47 (2) of the Land Registry Act provides that a GbR may only be entered in the land register if it is also entered in the companies register. In the event of the acquisition or amendment of rights to real property or rights equivalent to real property, a GbR must, therefore, always be pre-registered in the register of companies before it can make an entry of the acquisition or amendment in the land register.

In practice, therefore, all GbRs registered in the land register or wishing to register rights in the land register in the future are advised to make such an entry in the company register directly after the act comes into force. Otherwise, there is a risk of delays due to the need to make the necessary preliminary entry in the company register in order to register in the land register.

Significant changes in the internal relationship of the civil law partnership, general partnership, and limited partnership ("KG")

The new law also changes the relationship between the partners of a GbR, OHG, and KG. Until now, voting rights and the share of profit and loss were distributed according to heads in case of doubt. In practice, these regulations were usually waived in the partnership agreement. Now, according to the new Article 709 (3) BGB, the voting power of a partner and his share in profit and loss is primarily based on the agreed participation ratios, and, alternatively, on the ratio of the agreed values of the contributions for the GbR, and through the references in Articles 105 (3), 161 (2) HGB also for OHG and KG. If no provision has been made for either, equal voting power and equal shares apply according to the new Article 709 (3) sentence 2 BGB. The agreed participation ratio represents a figure showing the value of the economic participation of the shareholder in the company's assets, and in practice, is referred to as the capital share. Thus, for the first time, the law standardizes fixed capital shares for all partnerships in case of doubt, as is common practice.

Existing partnerships should critically examine whether their partnership agreement specifies such participation ratios or an agreed value of contributions. Otherwise, there is a risk of legal uncertainties for calculating voting rights and participation in profits and losses.

Representation in the Unitary KG

For the first time, the law will also contain special regulations for the popular unitary limited partnership with a limited liability company as general partner (Einheits-GmbH & Co. KG), i.e., a KG whose sole personally liable partner is a limited liability company ("GmbH") in which the KG holds all shares (unitary company). According to the new Article 170 (2) HGB, the limited partners exercise the rights in the shareholders' meeting of the GmbH unless the partnership agreement contains a deviating provision. Until now, according to the case-law of the Federal Court of Justice, the managing directors of the GmbH exercised these rights. Unitary limited liability companies should, therefore, consider whether they wish to amend the partnership agreement.

Right to amend resolutions for OHGs and KGs

Until now, any defectiveness of a resolution in partnerships automatically lead to the resolution being null and void. Accordingly, if a partner wished to have this bindingly determined, he had to bring an action for a declaratory judgment against his fellow partners under previous law. This issue is being fundamentally reorganized, although - in contrast to what was initially planned - not for all partnerships, but only for OHGs and KGs: The new law provides in Articles 110 - 115 HGB for a law on defective resolutions for OHGs and KGs that is based on the law of the corporations GmbH and AG (stock corporations). In the event of serious errors, a resolution is exceptionally void under the new Article 110 (2) HGB. Otherwise, defective resolutions are valid but may be challenged. In this case, an action for annulment must be brought against the company according to the amended Article 113 (1), (2) HGB within three months after the announcement of the resolution under the new Article 112 (1), (2) HGB. The declaration of nullity of the resolution by the court shall automatically apply for and against all shareholders according to the new Article 113 (6) HGB.

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