The Reform of the Partnership Law
Publication of the newly adopted Act to Modernise the Law on Civil Law Partnerships (Personengesellschaftsrechtsmodernisierungsgesetz – MoPeG)
- 1. Introduction
- 2. General Comments
- 3. Overview of the most important changes
- 4. Comming into effect
- 5. Summary and Assessment
The law of partnerships, which traces back to the beginnings of the German Civil Code (Bürgerliches Gesetzbuch, BGB) and German Commercial Code (Handelsgesetzbuch, HGB), is probably one of the areas of German law in which theory - i.e. the wording of the law - and practice - i.e. case law and practice - differ the most. Now, the legislator has extensively modernised the law on partnerships.
The act to modernisethe law on civil law partnerships ("MoPeG") has been publicised in the Federal Law Gazette on 17 August 2021, but comes into force on 1 January 2024. The published version is based on the so-called Mauracher draft by an independent expert commission. Many of the expert’s ideas were adopted, even though the version adopted by the German parliament differs from the Maurach draft in terms of language.
The main changes to the German Civil Code and the German Commercial Code are summarized below, without discussing in depth the vast number of detailed and consequential changes. Due to the large number of amendments, only the essential changes are summarized.
2. General Comments
The provisions in the German Civil Code ("BGB") concerning civil law partnerships have been completely revised (Section 705 BGB-new version). A fundamental change is the statutory recognition of legal capacity for civil law partnerships (Gesellschaft bürgerlichen Rechts, "GbR").
The further changes of the HGB on general and limited partnerships (OHG, KG) are also based on the extensive changes of the BGB. While the law on general partnerships (OHG) is comprehensively reformulated, changes in the law on limited partnerships (KG) are of a more marginal nature and include adaptations to the new law on civil law partnerships (GbR) and general partnerships (OHG).
3. Overview of the most important changes
3.1 Recognition of the legal capacity of civil law partnerships
The legal capacity of civil law partnerships is now recognised and a corresponding definition of the ‘company with legal capacity’ is included. According to Section 705 Subsection 2 of the new version of the German Civil Code, such civil law partnership can "acquire rights and incur liabilities itself, if, according to the joint will of the shareholders, the civil law partnership shall be entitled to participate in legal transactions". On the one hand, this codifies the case law of the Federal Court of Justice (Bundesgerichtshof, BGH, so called 'Weißes Ross' case), which traces back to 2001. On the other hand, the BGB now provides for a definition that is extensively referred to in other areas of law.
It follows from the recognition of legal capacity that the partnership itself can hold assets (Section 713 BGB-new version) and that these assets are no longer regarded as "joint assets of the shareholders" (so-called Gesamthandsvermögen, as currently provided for in Section 718 BGB-old version). The unlimited joint and several personal liability of all partners for the partnership’s obligations and liabilities remains unchanged economically, although not legally (see Section 721 BGB-new version). The liability concept has been modified in accordance with the concept of the partnership with legal capacity and adapted to the case law of the Federal Court of Justice and the principles of the law on general partnerships (OHG).
However, the legal capacity of civil law partnerships is not mandatory. The partners have the option to establish a civil law partnership as a ‘company with no legal capacity’ for the purpose of structuring their internal legal relationships (Section 705 Subsection 2 BGB-new version). From a legal perspective, such partnership can be regarded as an internal partnership amongst its partners that does not participate in legal transactions. Presumably, such internal partnership will be of little practical significance and, therefore, has not been codified in detail.
3.2 Possibility of registration of civil law partnerships
In the future, civil law partnerships with legal capacity will be entitled to register in the newly established public civil law partnership register. This register is similar to the commercial register and the entries enjoy a similar protection of good faith (e.g. with regard to the persons/entities being partners and the representation of the partnership by its partners) (Section 707a Subsection 3 BGB-new version). Registered civil law partnerships carry the corresponding addition to their name (also shortened as ‘eGBR’, where ‘e’ means registered – ‘eingetragen’).
Although there is no obligation to register, it brings advantages for legal transactions. Contracting partners may rely on the register’s entries regarding representation of the partnership by its partners; as a result, complex guarantees regarding the existence of partnerships and representation by their partners may no longer be necessary. For real estate transactions, registration of civil law partnerships is obligatory, since only civil law partnerships duly registered in the partnership register can be registered in the land registry as real estate owners (cf. Section 47 Subsection 2 land register ordinance (GBO)-new version). In the land register, only the eGbR will be named as the real estate owner and, with respect to the partners, reference is made to the partnership register. A change in the partnership structure will be registered centrally and thus in a uniform manner for all real estate properties by an update of the partnership register. The individual land registers do not need to be adapted. Comparable regulations are implemented for other public registers.
3.3 Transformation Law – change of status of a registered civil law partnership
In the future, a registered civil law partnership will be capable of conversions (such as mergers, splits, spin-offs etc.) within the meaning of the German Transformation Act (Umwandlungsgesetz, UmwG) (cf. Section 3 Subsection 1 no 1 of the German Transformation Act-new version).
Under German law, several types of partnerships exist which are registered in different registers. The modernised law provides for registration in a different register when a partnership becomes a partnership of a different type. E.g. if a registered civil law partnership becomes a general partnership (OHG) due to the increased scope of its business activities, it can apply to be transferred from the partnership register to the commercial register. This so-called change of status in accordance with Section 707c BGB-new version can be regarded as a ‘conversion light’ amongst different types of partnerships. Status changes are also possible in the opposite direction, from OHG to eGbR. In addition, a change of status from and to a partnership company within the meaning of the Act on Partnership Companies of Members of Independent Professions (PartGG) is possible.
As already recognised by statutory law with respect to legal entities for many years, in the future registered civil law partnerships may have a domestic or – if accepted by the respective jurisdiction of the host country - foreign administrative office / place of management that deviates from the contractual seat (as defined by the partners in the partnership agreement). This new regulation also applies to other partnerships (general partnership, limited partnership). It has a particular significance for the GmbH & Co. KG, because until now, the administration seat/place of management of the general partner (Komplementärgesellschaft) has been regarded as the statutory seat of the KG, which could not be abroad. In this respect, the legislator now follows the theory of formation (Gründungstheorie).
3.5 Participation of the Partners
As a result of the new legislation, partnership law becomes more similar to corporation law with regard to the participation ratios of partners. The participation of partners will be based on the partners’ contributions (comparable to their capital contributions in case of a corporation), replacing the former focus on the number of people, whereby their personal services – in contrast to corporations – may be suitable contributions (Section 709 Subsection 1 BGB-new version). The legislator thus follows best practice. If nothing is agreed to the contrary, all partners will still be obliged to make equal contributions.
The concept that each partner is obliged to hold one single participation / partnership interest in the partnership remains unchanged. This concept will be revised linguistically. Moreover, the concept will be supplemented by provisions on the accession to and withdrawal from the partnership as well as – with the consent of other partners – on the transferability of partnership interests.
In the future, many reasons that previously led to the dissolution of the partnership will only lead to the withdrawal of the respective partner (e.g. death or insolvency of a company, cf. Section 723 BGB-new version). These statutory provisions correspond to what has already been best practice. The new provisions are supplemented by provisions on the liability of the withdrawing partner for the already existing obligations.
3.6 Opening general and limited partnerships for members of liberal professions
Until now, the general partnership, the limited partnership and the GmbH & Co KG were not available as a legal form to members of the liberal professions (Freie Berufe) comprising, amongst others, lawyers, chartered accountants, advisors, architects, teachers, and other professions requiring a higher education. The new legislation provides for a change, which, however, is subject to the permissibility under the relevant professional laws (cf. Section 107 Subsection 1 sentence 2 of the Commercial Code (HGB-new version)). To what extent professional law will allow access to these legal forms is currently still open.
As far as permissible, the legal form of the so called ‘Freiberufler GmbH & Co. KG’ offers members of liberal professions a more extensive limitation of liability compared to the legal form of a partnership with limited professional liability.
3.7 Contestation of Partners’ Resolutions
Until now, the partnership law did not provide for regulations on the contestation of partners’ resolutions. This changes under the MoPeG for general and limited partnerships (Section 110 et. seqq. HGB-new version). The new law is based on the legislation pertaining to the contestation of resolutions adopted by general meetings of stock corporations. Insofar, resolutions have to be contested within a period of one month; only in exceptional cases resolutions are null and void. In contrast to the Mauracher draft, the legislation on the contestation of resolutions applies to civil law partnerships only if expressly agreed upon in the partnership agreement.
3.8 Limited Partnerships
In respect to Limited Partnerships, the distinction between contributions and the amount of liability to be entered in the commercial register is linguistically emphasized more strongly and, thus, becomes more clearly understandable.
3.9 Unified Partnership
The so-called ‘Unified Partnership’ (Einheitsgesellschaft), long recognised by case law and the legal literature, which is a limited partnership having a sole general partner (Komplementär) which is, in turn, wholly owned by the limited partnership itself, is now recognised by German law. In case of a Unified Partnership, the shareholder rights in the shareholders' meeting of the general partner, which vest in the limited partnership as sole shareholder of the general partner, will be exercised by the limited partners (cf. Section 170 Subsection 2 HGB-new version). The new provision follows the recognized approach of legal practice, legal literature and case law.
4. Comming into effect
The reform of the partnership law comes into effect – apart from certain exceptions – on 1 January 2024. This is one year later as previously intended in order to ensure the timely implementation of the register for civil law partnerships by the German Federated States. Currently, there is no urgent need for action. However, in case of new formations and reorganisations the new law implemented by the MoPeg should be taken into account, especially regarding the extent of how future changes impact the envisaged structure.
5. Summary and Assessment
With the MoPeG, the legislator has reacted to case law and legal practice and has codified the “best practice” and brought partnerships closer to corporations.
The MoPeG provides for further development of partnership law only in individual cases. The new concepts such as the introduction of a public register for civil law partnerships, the rules on challenging the partners’ resolutions for general and limited partnerships, and the opening up of general and limited partnerships to members of free or liberal professions in principle, as provided for by the MoPeG, are expressly welcomed. In particular, the public register for civil law partnership will make legal transactions with civil law partnerships easier, while significantly increasing the legal certainty with respect to contracts to be entered into with civil law partnerships, and will relive the land registry from the registrations of changes to the partners of a civil law partnership.
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