On June 24, 2021, the German Bundestag passed the Act to Modernize the Law on Partnerships (PMA, German acronym MoPeG) with the subsequent approval of the German Bundesrat. It affects in particular the civil law partnership (CLP, Gesellschaft bürgerlichen Rechts), but also the commercial partnerships in the form of general partnerships (Offene Handelsgesellschaft) and limited partnerships (Kommanditgesellschaft), in particular those with a company limited by shares being the general partner (the GmbH & Co KG, the legal form frequently used by the German Mittelstand businesses). The law of the CLP has remained unchanged since the German Civil Code (BGB) came into force in 1900. Further developments came solely through case law. In this memorandum, we present an overview of the main principles of the reform.
Civil Law Partnerships
Significance of the CLP for economic activities and for foreign investors
CLPs are often little known to inbound investors into Germany. Many foreign entities doing business in Germany might find themselves to be a partner in such venture, as there are no formalities required for its establishment. There is, however, joint and several liability for all activities of the partners of the CLP. Therefore, a CLP is a very simple, but also very risky form of doing business in Germany.
The PMA primarily contains provisions for amending the law governing CLPs. CLPs are permissible for all purposes. It is the default legal form for all jointly conducted activities. It may also pursue commercial objectives, unless the activity is a commercial business, i.e. requires a commercially organized business operation by reason of its nature and scope. In this case, it is automatically considered a general partnership if the parties do not choose another form of organizing their business activities.
CLPs occur in a wide variety of activities, e.g. for the exercise of liberal professions, as consortia holding real estate, as family holding companies, voting trust pools, joint ventures for the realization and/or operation of construction or infrastructure products (ARGE), bidding consortia in tender procedures, transport consortia or projects for cooperation in research.
The new Company Register for the registration of CLPs - disclosed or undisclosed partnership
The PMA establishes the CLP as the basic form of partnership. The regulations for commercial partnerships are based on it. The legal capacity of the CLP is now also recognized by law, as is its ability to hold its own assets. Previously, the CLP was regarded as being subject to the joint and several relationship of the partners.
The CLP can participate in business life by owning, for example, land or shares. These are recognized as assets of the partnership. It should then register in the new Company Register to be created. It then receives to its corporate name the addition of its legal form “eCLP”. Registration in the Company Register is not obligatory, but it is associated with incentives. The register enjoys good faith like the Commercial Register.
The authority to represent the CLP, its corporate name and the partners are entered in the Company Register. Changes in partners then no longer need to be corrected in the land register or Commercial Register, for example, but only in the Company Register. This leads to considerable simplifications in practice. The same applies to the proof of representation of the CLP if the principle of joint representation by all partners is deviated from. This is often the case when the CLP participates in legal transactions. It is also advisable for existing real estate companies to be entered in the Company Register. Otherwise, changes of partners in the CLP will no longer be entered after the PMA comes into force. The legal situation is different with regard to industrial property rights: applications for trademarks, patents, utility models and designs can continue to be filed by the CLP without being entered in the Company Register.
The introduction of the Company Register is of great value for foreign investors in Germany: They will know all relevant details to contract with the CLP, and they also have certainty about their membership in and other details regarding the CLP which otherwise is not subject to any formalities in terms of company formation or entering into the shareholders’ agreement at all.
Even for a CLP that does not hold any assets subject to registration, it is recommended that it be entered in the Company Register if it participates in legal transactions. This applies, for example, to joint ventures in construction or infrastructure projects or other projects or purchasing cooperatives that operate as CLPs and enter into legal relationships with parties. Larger medical or practices of other liberal professions and engineering firms may also decide to register in the Company Register.
If different purposes have in the past been pursued in one single CLP, it may be considered to separate the CLP in activities not suitable for registration from such activities to be registered in the Company Register. This aspect is likely to be particularly relevant in the case of family companies. For these, there is a legitimate interest in separating activities that are necessary for publicity from activities that are not to be published.
However, the partners can also choose the status of a purely internal CLP which remains undisclosed. This does not appear externally and has no assets of its own. Examples are cooperation for an event, other cases of temporary coordination or a pooling of voting rights that is not active externally. In such cases, registration in the Company Register is in case of doubt, not desired.
Registration in the Company Register entails the obligation to report beneficial owners to the Transparency Register in accordance with the German Money Laundering Act (GWG).
Facilitated conversion of CLPs into commercial companies
The eCLP may be transformed into a commercial partnership or a company limited by shares. Is is also capable of being itself be the transferring or absorbing entity in respect of spin-offs, hive-downs or split-ups. This new flexibility for reorganizations increases the attractiveness of CLPs, for example as a precursor to a trading company, in particular for start-ups.
Changes in the corporate law of the CLP
Further changes concern specific aspects of the law of the CLP, e.g. voting according to the amount of the participation instead of per capita and the conversion of the previous personal reasons for dissolution of the CLP into reasons for withdrawal from the CLP. The basic principles of the CLP have not changed: The comprehensive personal liability of the partners, self-organization and joint representation by all partners remain in place. Nevertheless, the new regulations, have in some cases a considerable impact on the structure of the CLP. Taxation of CLPs, however, are to remain unchanged.
The above-described fundamental changes makes it necessary to review the partnership agreements of existing CLPs. This review aims to determine how the provisions in current articles of association are compatible with the provisions of PMA and what need for adjustment arises from this.
New regulations in the PMA for CLP and commercial partnerships
The simplified change between the various registers (change of status) described above for the CLP also applies to the commercial partnerships.
Cross-border transfer of registered office and conversion
Clarification is now also provided on the possibility for partnerships to transfer their administrative headquarters abroad. This option has existed for a long time in the law governing corporations. From the perspective of German law, the transfer of the administrative headquarters abroad has no effect on the continued existence of the company.
For foreign investors this change is important if they acquire the partnership interests in a limited partnership (GmbH & Co. KG) and control its activities from abroad. In this context it is important that the hosting legal system recognizes the partnership established in Germany and managed from abroad. This is ensured within the EU. In relation to third countries, this question is regulated in agreements (e.g. with the USA) or by the conflict of law rules in corporate matters of the host country.
Due to the new regulation in the PMA, the registered office of the general partner abroad is recognized as administrative headquarter of the GmbH & Co. KG located in such host state. Advantages of a transfer of the administrative headquarters abroad can be tax-related, insolvency-related, a group management spatially separated from the operative interests as well as aspects in connection with the company succession. However, the effects under German tax law must also be taken into account when transferring the registered office.
In addition to relocating the administrative headquarters, companies can also relocate by transferring the registered office abroad: Within the EU, the cross-border change of legal form while preserving the identity of the company as well as a cross-border merger can be considered for such move. In the case of a move abroad outside the EU, the German company is considered to be liquidated in Germany and being reestablished in the foreign jurisdiction with the associated consequences, in particular with regard to liquidation taxation in Germany.
What works for moving out also works for moving in: Foreign EU companies can relocate their registered office to Germany or carry out a cross-border transformation from another EU country to Germany. In relation to foreign countries outside the EU, the same statements made earlier in relation to emigration apply to immigration.
Further new regulations
Other new provisions in the PMA relate to the adoption of resolutions by the shareholders' meeting, shareholders' rights to information, and severance payment for the withdrawing shareholder. These provisions give cause to review existing partnership agreements with regard to the following questions: Should the provisions contained in the partnership agreement made in derogation of the statutory provisions be retained or is it advisable to follow the future law under PMA? Are provisions in the partnership agreements compatible with the provisions of the PMA, e.g. with regard to restrictions on information rights?
Provisions in the PMA only for commercial partnerships
Contestation of resolutions
In this context, the revision of the right to contest resolutions should be mentioned first and foremost. Here, there is an alignment with the provisions for stock corporations: Whereas defective resolutions were always void under the previous law, in future they will be contestable in principle and only void in the event of serious defects. This change meets the needs of practice and has already often been regulated in this form in partnership agreements.
Opening of partnerships for liberal professions
An important innovation provides that liberal professionals can use commercial partnerships as the legal form of their professional practice. However, this opening is subject to admissibility under the respective professional law. In this respect, there is still a need for action on the part of the responsible institutions. Liberal professionals should seek comprehensive advice on the issues related thereto.
Further new regulations
Further provisions in the PMA concern regulations on the passing of resolutions in shareholders' meetings, the determination and distribution of profits, strengthening shareholders’ information rights and tightening of the limited partners' liability for transactions carried out prior to registration, and a first-time statutory regulation on the so-called unitary partnership (Einheits-KG). In this case, the limited partnership holds all shares in the general partner, if the general partner is a company limited by shares (GmbH).
These changes require a close examination and, if necessary, adaptation of existing partnership agreements. Regulations restricting the information rights of limited partners may be invalid. Due to the newly introduced principle of full distribution of profits, particular importance must be attached to the regulations on profit retention, which are so important for the success of medium-sized companies in Germany.
Entry into force of the PMA
Unfortunately, the PMA is coming at a moped pace: it will not come into force until January 1, 2024. The reason for this is the measures to be carried out at the level of the federal states for the establishment of the Company Register. In 2022, it can be foreseen, the federal states will still be occupied with implementing the requirements of the EU Digitization Directive. Major events, such as this comprehensive reform, are casting their shadows ahead. There is now the opportunity to prepare for the changes in a timely and comprehensive manner.
The KUNZ PMA advisory offering
KUNZ Rechtsanwälte focuses on a number of industries in which CLPs frequently exist. These include the construction, real estate and transport sectors, as well as the legal areas of transport, public procurement and medical law. In the case of undisclosed partnerships, the parties involved are often not even currently aware of the existence of their relationship as partners of a CLP. As a team of experts from the above-mentioned sectors, KUNZ advises its clients together with the corporate lawyers on all questions concerning the structuring of relationships as partners often arising inadvertently. This includes, in particular, whether a CLP should seek an entry in the Company Register. In addition, the optimal drafting of the partnership agreement is important with regard to the participation of the CLP in legal transactions, in particular to restrict and control the risk of unlimited liability for other partners.
Another important advisory service offered by KUNZ Rechtsanwälte relates to the drafting of new and the review of existing partnership agreements with regard to the requirements of the PMA and the standard statutory provisions that will apply in the future. The comprehensive reform creates a considerable need for adaptation in this respect. Irrespective of the PMA, forms of digital handling of partner matters arising from the COVID-19 pandemic must also be enshrined in the partnership agreements. This process of adapting partnership agreements to the new requirements should be initiated at an early stage. Working out solutions among partners under time pressure leads to results of a less comprehensive nature, especially in family-owned companies. It seems better to address issues in a timely manner and to resolve them with time for consideration and discussion.
Finally, KUNZ Rechtsanwälte advises on cross-border relocation of registered offices and other forms of partnerships and companies moving abroad or to Germany. This advice is rendered in close cooperation with KUNZ’ partner law firms abroad and associated tax advisors. For foreign investors this aspect is particularly important in connection with the post-acquisition governance of businesses acquired. In case management decisions are taken abroad a factual transfer of the place of decision making has already occurred, and the consequences – pertaining to legal and fiscal aspects – need to be properly addressed.
Cologne, July 2021
Dr. Hermann J. Knott LL.M. (UPenn) Hareth Ghalaini
Attorney-at-Law (Germany and New York)