Recent Developments in the Act on the Modernisation of Partnership Law

The legislative procedure for the modernisation of partnership law is over. The “Act on the Modernisation of Partnership Law” (Gesetz zur Modernisierung des Personengesellschaftsrechts, in short: MoPeG) introduces numerous key changes for all types of partnerships. Of note are the register for partnerships governed by civil law and new rules on contesting shareholder resolutions. The law will enter into force on 1 January 2024.

Overview of the planned changes

Basic difference between internal and external partnerships under civil law

The distinction introduced by the MoPeG into § 705 (2) of the Civil Code (Bürgerliches Gesetzbuch) between the legal capacity to make agreements with third parties on the one hand (external partnership) and the lack of legal personality of the partnership for internal agreements on the other (internal partnership) is a key element of the new law on partnerships under civil law (Gesellschaft bürgerlichen Rechts (GbR)). This distinction follows the relevant case law of the Federal Court of Justice (Bundesgerichtshof) and should be welcomed.

Under § 705 (2) alternative 1 BGB-MoPeG, there will be an external partnership when the shareholders have expressed a common intention for the partnership to engage in business transactions. Under this provision, the partnership can have rights and obligations, and it can also hold assets under § 713 BGB-MoPeG. External partnerships include professional partnerships, small traders, or other companies active in business, such as real estate companies. Under § 719 (1) BGB-MoPeG, such a partnership will exist vis-à-vis third parties as soon as it takes part in legal business with the approval of all shareholders, but at the latest with its entry in the newly created register (see below).

Under § 705 (2) alternative 2 of the BGB-MoPeG, an internal partnership only serves to establish the legal relationships of the shareholders to one another. Sections 740 to 740c of the BGB-MoPeG apply some standards for external partnerships to internal ones. However, internal partnerships do not have any legal capacity or, in accordance with § 740 (1) of the BGB-MoPeG, hold corporate assets. Internal partnerships, therefore, can still be used to establish rules for voting trust agreements and pooling arrangements, sub-participations in shareholdings, and similar relationships, which only affect the rights and obligations between the shareholders. However, internal partnerships do not appear in legal transactions with third parties, i.e., with those who are not shareholders, as external partnerships or at least pseudo-external partnerships otherwise apply and, accordingly, shareholders are personally liable.

Distinction between the external and internal partnership

Sections 705 et seq. of the BGB-MoPeG are based on the assumption that the basic legal type of partnership will be an external partnership with legal capacity. In line with the statutory presumption under § 705 (3) of the BGB-MoPeG, the partnership will be presumed to have the ability to participate in legal transactions (and thus an external partnership) when its business purpose is the operation of a company under a joint name. The courts would otherwise have to interpret the common will of the shareholders in each case. In the future, the issue of the distinction between internal and external partnerships is likely to increase. A clearly defined corporate purpose can provide a remedy.

Introduction of the partnership register

External partnerships can register in the newly established partnership register under § 707 (1) of the BGB-MoPeG. Following § 707 (2) of the BGB-MoPeG, the register records the name, headquarters, and address of the partnership, as well as the names, and residence or headquarters of the shareholders, and their powers of representation. Following registration, partnerships must add the suffix “eingetragene Gesellschaft bürgerlichen Rechts” (Registered Partnership under Civil Law) or “eGbR” to their name in accordance with § 707a (2) of the BGB-MoPeG. Upon entry in the register, the good faith protection of § 15 of the Commercial Code (Handelsgesetzbuch, HGB) applies following § 707a (3) of the BGB-MoPeG. Third parties can rely on the validity of the register. Publication in the register provides a sound basis for legal relations and creditors with information about the shareholders that are personally liable for the partnership.

The draft bill provides in § 707c the possibility to change from the partnership register to the commercial register when a partnership (GbR) changes its form to another form of partnership or company. This affects small, registered enterprises (GdR) transforming into a general commercial partnership (offene Handelsgesellschaft, OHG), as well as those with activities exceeding the thresholds for not requiring a commercially organised business operation under § 1 (2) of the HGB. Conversely, small commercial partnerships registered in the commercial register until now can change their status to the GbR in accordance with §§ 106 and 107 of the HGB-MoPeG.

In principle, registration of the external partnership in the partnership register is not necessary for legal capacity. However, § 47 (2) of the GBO-MoPeG (Land Register Regulation), for example, provides that a partnership may only be entered in the land register if it is registered in the partnership register. In the case of the acquisition or change of rights to property or equivalent rights, therefore, a GbR must be registered in the partnership register before the acquisition or change can be entered in the land register. Immediately after the entry into force of the MoPeG, all further legal changes to rights entered in a register will require the prior registration of the partnership concerned in the partnership register. As a result, most external partnerships in Germany will have to register in the partnership register, despite the voluntary nature of registration, in order to exercise these rights. They otherwise risk significant delays in conducting legally binding transactions in relation to the registered rights. This affects all transactions involving property and equivalent rights (transfer of ownership, priority notices, mortgages, and loans), shares the partnership holds in other listed companies (GmbH, OHG, KG and other eGbR), and intellectual property rights (trademarks, patents).

In practice, therefore, all GbR, which are recorded in registers or wish to have rights recorded or changed in a register in the future should register in the partnership register shortly after the Act enters into force. Failure to do so will result in delays to registration in the land registry and other registries because the partnership must be in the partnership register first.

Significant changes to the internal arrangements of the GbR, OHG and KG

The draft bill introduces a range of changes to the relationship between shareholders of the GbR, OHG, and KG. Until now, voting rights and the share of profit and loss were based on capital distribution unless otherwise specified. In practice, these rules were often waived in the partnership agreement. Now, under § 709 (3) of the BGB-MoPeG, a partner’s voting rights and share in profit and loss will primarily follow the participation agreement or, alternatively, the agreed values of contributions. This applies to the GbR and, through the references in §§ 105 (3) and 161 (2) of the HGB, to the OHG and KG, too. If the partners have not established specific rules for voting rights and the distribution of profit and loss, they shall have equal voting rights and equal shares pursuant to the second sentence of § 709 (3) of the BGB-MoPeG. The agreed participation ratio shows the value of the economic participation of the partners in the partnership assets; in practice, this is often referred to as the share of capital. For the first time, the law provides for fixed capital shares for all partnerships in the case of doubt, as is common in practice.

Existing partnerships should carefully assess whether their partnership agreement establishes an ownership structure or an agreed value of participation. There is otherwise a risk of legal uncertainty when calculating voting rights and the share of profit and loss.

Representation in the consolidated limited partnership

The draft bill contains special provisions for the popular consolidated limited partnership (Einheits GmbH & Co. KG), i.e., a limited partnership, where the only personally liable shareholder is a limited liability company (GmbH), in which the partnership holds all shares (consolidated limited partnership). In accordance with § 170 (2) of the HGB-MoPeG, all rights in the general meeting of shareholders of the GmbH are administered by the limited partners, unless rules established in the articles of association deviate. Until now, according to the case law of the Federal Court of Justice (Bundesgerichtshof, BGH), the management of the GmbH exercises these rights. Consolidated limited partnerships should therefore consider whether to amend their partnership agreement.

Law applicable to defective resolutions of the OHG and KG

Until now, any defects in resolutions of partnerships would result in the resolution being declared null and void. If a partner sought to have a resolution declared null and void, under the previous law, they had to bring a declaratory action against their partner(s). This issue has been substantially changed. However, in contrast to the original plan, it has not been changed for all forms of partnership, just for the OHG and KG: §§ 110 to 115 of the HGB-MoPeG contain new provisions on defective OHG and KG resolutions, based on the law applicable to limited liability companies (GmbH) and stock corporations (AG). In the case of serious defects, a resolution will exceptionally be null and void in accordance with § 110 (2) of the HGB-MoPeG. Defective resolutions otherwise apply but are voidable. Under § 113 (1) and (2) of the HGB-MoPeG, an action for annulment must be brought against the partnership within three months of publication of the resolution in accordance with § 112 (1) and (2) of the HGB-MoPeG. The court’s declaration that the resolution is null and void applies automatically to all partners pursuant to § 113 (6) of the HGB-MoPeG. Section 108 HGB-MoPeG allows partners to adopt differing rules. Existing commercial partnerships should therefore examine whether their current rules make sense in light of the new law.

Dr Barbara Mayer
Daniel Rombach