News

Reform of the German law on partnerships (MoPeG)

26.08.2021

The most significant reform of German partnership law in over a hundred years is on the cards, aiming to align it to today’s needs: The German Parliament passed the Act to Modernise the Law on Civil-Law Partnerships (MoPeG) (the “Act”) in the evening of 25 June 2021. The Act had already been approved by the Bundesrat on 25 June 2021. All existing enterprises have the possibility to adjust to the new legal situation (modifying their articles of partnership/partnership agreements if necessary) during a transitional period lasting until the end of 2023. The Act is scheduled to come into force on 1 January 2024, one year later than originally planned. When analysing the literature and comments, it must be remembered that (minor) amendments have been made to the government bill published in January 2021 and therefore any comments from before the end of June must be read with caution.

The reform is not exactly a bold step. The legislator is essentially codifying the decisions developed in case law and the legal literature. What is new is that in future it will also be possible for civil-law partnerships (GbRs) to apply to be entered in a register. Besides this, the legislator is also finally making clear that German company law can apply to all partnerships registered in Germany as well (as long as they remain registered in the country), even if they move their main activity abroad.

The Act will trigger many legal changes. These not only affect new partnerships that may be established, but are also relevant for partnerships that already exist. This results in a need for action in the following situations:

	Need for action	Deadline
*Civil-law partnership (GbR), general commercial partnership (oHG), limited partnership (KG)*	Revise articles of partnership/partnership agreement (where are contractual deviations from the future legal situation desired?)	by 31 Dec. 2023
Civil-law partnership with real estate or other registered rights	Correct all registers, bring forward any foreseeable changes in the partnership structure if appropriate	by 31 Dec. 2023
	Obligation to register civil-law partnership in new company register at time of first legal change requiring entries in a register (e.g. land register) to be amended	from 1 Jan. 2024
Public procurement tribunals	Decide whether all bidding consortia will have to register as a registered civil-law partnership in future in order to reduce the time for checking this	from 1 Jan. 2024
(Family-owned) civil-law partnership and similar associations	Possibly restructure if registration of part of the legal relationships is desired/necessary in the future and another part is not intended to be disclosed	by 31 Dec. 2023
*Working group (ARGE) and similar associations*	Decide whether it is advantageous to act as a civil-law partnership	from 1 Jan. 2024
Professional associations of so-called freie Berufe (pharmacists, doctors, architekts, lawyers)	Have partnership’s future name as a civil-law/limited partnership registered	by 31 Dec. 2023
So-called freie Berufe (pharmacists, doctors, architekts, lawyers)	Review option of choosing general commercial partnership/limited partnership as legal form	from 1 Jan. 2024

Existing civil-law partnerships will also have to look at the issue of whether they should register in the new register of companies and partnerships which is to be introduced:

Real estate partnerships under civil law (Grundstücks-GbR): The draft Act does not provide any time limit for entering the partnership in the register of companies and partnerships. But registration in the register of companies and partnerships may in fact be necessary: not only the acquisition of plots of land by a civil-law partnership will require registration in future (section 47(2) Land Register Code, new version); future changes to the land register relating to rights in an existing real estate partnership under civil law will also require an entry in the register of companies and partnerships and an entry in the land register (Article 229, section 21(1) Introductory Act to the German Civil Code, new version).
Construction working groups and bidding consortia: There is no objective requirement for working groups and bidding consortia to be entered in the register of companies and partnerships. Practice will show whether registration is required/will become the norm in legal transactions.
Family-owned companies: Entrepreneurial families are concerned about private family matters in asset management companies and the coordination of interests in pooling and voting agreements being disclosed. Although there is still no actual duty to disclose, it is to be feared that many of these family-owned companies will be subject to an effective obligation to register in future, and thus a duty to disclose, for example because their asset management company acquires plots of land or other rights subject to registration or because banks require registration in connection with their anti-money-laundering audits. Apart from this, information may also be indirectly disclosed (unintentionally) in certain scenarios (see also our article from June 2020: Noerr und Wittener Institut für Familienunternehmen veranstalten virtuellen Roundtable zur Reform des Personengesellschaftsrechts (in German)).
Where duties to register will exist in future but transparency regarding internal matters is to be avoided, partnerships will have to consider whether and how they can restrict disclosure in certain (business) areas, for example by having separate organisational units. Depending on the type of organisational separation, however, it may be possible to access certain information that has an influence on the balance of power in a registered partnership through the transparency register.
Restructuring: Civil-law partnerships will be able to change their form. If the partnership is to take part in a restructuring measure during a restructuring process, the partnership will have to be registered in the register of companies beforehand.
Compliance: A registered civil-law partnership will have to obtain details of its economic beneficiaries and send them to the transparency register. This extended disclosure requirement is to be borne in mind when deciding to register a civil-law partnership.

The key changes and their significance in practice are outlined below:

At the heart of the Act is an alignment of the rules on civil-law partnerships, general commercial partnerships and limited partnerships with modern needs. The draft changes the legal model of the civil-law partnership from a loose association into a partnership with legal capacity and its own rights and obligations which is designed to endure for a certain period of time. This change of model brings civil-law partnerships closer to “business partnerships” (i.e. oHGs/general commercial partnerships and KGs/limited partnerships). Arrangements for civil-law partnerships continue to apply in the same way for business partnerships by reference through the “building-block approach”: the law under section 705 onwards of the German Civil Code (this specifically concerns section 706 onwards of the German Civil Code, new version) always applies unless there are alternative provisions for business partnerships. Similarly, the law under section 105 onwards German Commercial Code also continues to apply in business partnerships unless there are alternative provisions for limited partnerships.

A. Key changes just for civil-law partnerships

Legal capacity of civil-law partnerships (sections 705(2) and 740 German Civil Code, new version): The legal capacity of civil-law partnerships is acknowledged in case law. This is not to be codified as well: depending on whether or not a civil-law partnership has relations with third parties (e.g. takes part in legal dealings), it is a civil-law partnership with or without legal capacity. Under section 705(3) German Civil Code, new version, which was not included in the government bill, from now on a civil-law partnership with legal capacity will be presumed even in the case of a civil-law partnership supporting an enterprise. In other words, legal capacity is the default.

Example:
Pooling/consortium/voting partnerships under civil law will as a rule remain private associations without legal capacity which do not have to be entered in the register of companies. Shareholders who form a pooling or voting partnership under civil law are, however, obliged to disclose this to any (jointly) controlled (registered) enterprise so that it can file its mandatory notification to the transparency register.

Civil-law partnership assets (sections 713 and 722 German Civil Code, new version): The new law also clarifies that a civil-law partnership with legal capacity is the entity responsible for its assets. This means that compulsory enforcement of an instrument against the partnership is only imposed on the partnership’s assets, and not on those of the partners.

Separate partnership register for the civil-law partnership (section 707 onwards German Civil Code, new version): The Act provides for the introduction of a partnership register to be maintained by the local courts for civil-law partnerships. “Optional registration” applies. However, registration in the partnership register is a condition for the registration and thus also for the acquisition of certain rights to be entered in public registers. This applies, for example, to rights to real estate (section 47(2) Land Register Code, new version) and registered ships (section 51(2) Ship Register Code, new version), for the position as a registered shareholder (section 67(1)(3) German Stock Corporation Act, new version) and as a shareholder of another company (section 40(1)(3) German Limited Companies Act, new version). As a secondary consequence of entry in the register of companies and partnerships, a civil-law partnership is subject to a duty to disclose in the transparency register. In future, civil-law partnerships will therefore have to obtain information on their economic beneficiaries and submit it to the transparency register.

Ability of civil-law partnerships to change their form: Civil-law partnerships will be able to change their form as specified in the German Reorganisation Act. As a result, after registering as a registered civil-law partnership (eGbR), partnerships will be able to take part in a demerger, merger or change of form, which increases the organisational flexibility.

B. Key changes for the civil-law partnership that also apply to commercial partnerships

Free choice of domicile (section 706 German Civil Code, new version): The Act now makes clear, at long last, that that all enterprises (corporations and partnerships) registered in Germany may choose their principal place of business freely, regardless of where they are registered. This free choice of domicile allows a German partnership to conduct all its business activities outside German territory and still remain a German partnership.

In practice, the free choice of domicile opens up new organisational flexibility. The free choice of domicile is of great practical importance above all for limited partnerships that have a general partner domiciled abroad (or at least in a different location than the limited partnership). The legal situation on this point was unclear up to now.

Names of civil-law partnerships (sections 707a and 707b draft German Civil Code): If a civil-law partnership is entered in the companies register, the law regarding company names under commercial law largely applies. Civil-law partnerships are required to use the suffix referring to legal form “eingetragene Gesellschaft bürgerlichen Rechts” (registered partnership under civil law), or “eGbR”, in legal transactions, but are otherwise just as free as business partnerships to choose the partnership’s name.

Voting powers and P&L participation according to shareholdings (section 709(3) German Civil Code, new version, section 120(1)(2) German Commercial Code, new version): The Act abolishes the current practice of weighting votes and distributing profits and losses based on headcount and introduces the rule, which is common in practice anyway, that voting powers and the distribution of profits are to be determined primarily according to shareholding ratios. If the partners want to deviate from this statutory rule, they must ensure that the articles of partnership provide for deviating rules regarding distributions in future.

Voting and resolutions (section 714 draft German Civil Code): The government draft contains rules on voting procedures in civil-law partnerships for the first time and also confirms the customary application of the rules on partnerships to civil-law partnerships. However, in cases of doubt, partners’ resolutions will still have to be adopted unanimously by all partners with voting rights, unless otherwise stipulated in the articles of partnership.

Rights and duties regarding information (section 717 German Civil Code, new version): Partners’ codified rights regarding information have been under-developed up to now. The Act now contains clear rules on the partners’ rights to be given information by the partnership, which in the case of the general commercial partnership and professional partnership replace the provision in section 118 German Commercial Code, old version. The limited partners’ rights to be given information are still specified separately in section 166 German Commercial Code, new version (see below). In practice, it will be important to bear in mind that this right cannot easily be restricted in the articles of partnership, in the same way as for limited liability companies (GmbHs).
Partners’ claims to severance payments (section 728 draft German Civil Code): Partnerships will have to pay a partner a reasonable severance payment reflecting the value of their share when they leave the partnership, unless otherwise agreed. The value of the share is to be assessed directly and not, as is currently the case, derived on a pro rata basis from the enterprise value. However, the plan is that the limits on deviations developed in the case law of the Federal Court of Justice will continue to apply.

Change in status (section 707c German Civil Code, new version): Changing between different forms of partnership/business partnership whilst preserving the entity’s identity is not covered by the German Reorganisation Act and is now regulated in a separate procedure in the German Civil Code. Such a “change in status” will be visible in the register in future.

Limitation of subsequent liability (section 728b(1) sentence 2 German Civil Code, new version, section 137(1) sentence 2 German Commercial Code, new version): The final version of the Act contains a significant change in comparison to the bill, particularly for the legal profession, with regard to the limitation of subsequent liability. A withdrawing partner is now only liable for claims for damages if the breach of duty occurred before withdrawal. Liability claims due to a breach of duty by other members after a partner has withdrawn are therefore no longer a burden on that partner.

C. Main changes for business partnerships

So-called freie Berufe (pharmacists, doctors, architects, lawyers) (section 107(1) sentence 2 German Commercial Code, new version): People in the so-called freie Berufe (pharmacists, doctors, architects, lawyers) will be able to form business partnerships in the future, although this is subject to professional law. This paves the way for freelancers to form a limited partnership (KG) and a partnership with a limited liability company as general partner (GmbH & Co. KG). Up to now they are only able to limit their liability for liabilities and damage arising from incorrect professional practices. A general limitation of liability for limited partnerships will at last be possible in Germany as well (e.g. for liabilities under leases or employment contracts); other countries have long since allowed this for the so-called freie Berufe (pharmacists, doctors, architects, lawyers). To make use of the flexibility, subsequent changes are still required, such as the use of the legal forms of limited partnership and general commercial partnership for lawyers, which has already been permitted in parallel for auditors and tax consultants and with the entry into force of the reform of the Federal Lawyers’ Regulation (BRAO). In this respect, the professional associations are called upon to support the opening up and, where this has not yet been done, to call for subsequent changes. However, the partnership will continue to be a permitted organisational form for the so-called freie Berufe (pharmacists, doctors, architects, lawyers) – only time will tell whether things will stay this way.
Procedures for adopting resolutions (section 109 German Commercial Code, new version) and right to contest resolutions (section 110 onwards German Commercial Code, new version): The Act provides for rules on procedures for adopting resolutions in business partnerships for the first time. The legislator has also decided to regulate rights to contest resolutions in business partnerships based on the model for setting aside resolutions under stock corporation law. In doing so, the legislator is following the practice for drafting articles of partnership which is common anyway, at least in larger business partnerships, and providing a more reliable legal footing.

To provide for additional legal security in a general commercial partnership and limited partnership, the procedures for adopting resolutions should be set out in more detail in the articles of partnership. In particular, the person who will preside over the meeting should be named so that the responsibility for establishing the resolution is clear and the existence of a contestable resolution is ensured. A waiver of the need to comply with formal requirements and deadlines of course continues to be possible if the partners agree on this.

The legislator has deliberately decided still not to codify formal rules for contesting resolutions for civil-law partnerships (in the same way as for limited liability companies). All stakeholders are called on to agree the rules by contract in order to avoid legal uncertainty. However, the members of a civil-law partnership can voluntarily make use of the new procedure for contesting resolutions in their articles of partnership. This is particularly significant for civil-law partnerships with many partners, making reaching a consensus more prone to disputes.

Calculating and distributing profits (sections 120 onwards German Commercial Code, new version): The rules on calculating and distributing profits are to be revised. The managing partners are required to prepare the annual financial statements. The partners decide by resolution to adopt the annual financial statements, with the ratio of shareholdings being relevant for distribution of profits and losses, as in a civil-law partnership (see above). Where the payment of profits is concerned, the legislator takes the principle of full distribution as a basis.

This means, in practice, that there is a need to ensure that the provisions in the articles of partnership provide for sufficient accumulation of profits and formation of reserves, which is already standard practice in larger partnerships anyway.

Rights of limited partners to information (section 166 German Commercial Code, new version): The legislator is enhancing the rights of limited partners to access information. These rights to information cannot be excluded in the articles of partnership. This point will have to be taken into account when drafting the partnership’s articles in future.
Liability for unregistered limited partners (section 176 German Commercial Code, new version): As under the old legal regimen, the Act still provides that every limited partner who has agreed to the partnership taking part in legal transactions is to be held liable for the partnership’s liabilities that are established up to the time the partnership is registered in the same way as a personally liable partner. Thus a partner will no longer be able to escape liability if their creditor was aware that they held an interest as a limited partner. In this respect, there is a not insignificant deviation from the government bill, which did not provide for a limitation of liability if the creditor was aware. This initially planned tightening of liability for unregistered limited partners has therefore not been implemented.
Consolidated partnerships (section 170(2) German Commercial Code, new version): The consolidated limited partnership (Einheitsgesellschaft), where in a GmbH & Co. KG the limited partners are also shareholders in the limited liability company, is explicitly mentioned in the law for the first time, changing the current legal situation: the limited partners will now exercise the shareholders’ rights in the limited liability company (GmbH). The legislator is also latching on to what is already common practice in many articles of partnership in this respect.

Simultaneous insolvency of the GmbH & Co. KG (section 179 German Commercial Code, new version): The Act regulates for the first time the simultaneous insolvency of the GmbH & Co. KG, i.e. the frequent case where both the personally liable partner and the limited partnership become insolvent. Up to now, the peculiarity was that according to section 131(3) sentence 1 no. 2 German Commercial Code, old version (corresponds to section 130(1) no. 3 German Commercial Code, new version) in conjunction with section 161(2) German Commercial Code, the insolvency of the personally liable partner generally caused their withdrawal from the limited partnership. This led to difficulties in the consolidated insolvency wind-up of the company and may have thwarted a restructuring of the legal entity, especially in the two-tier company. In this respect, the legislator codified an opinion in the literature which states that section 131(3) sentence 1 no. 2 German Commercial Code, old version, is not applicable in these cases.

D. Outlook and assessment

The Act partly lives up to the objective of “modernising the law on partnerships”: legal practitioners should be happy that it will no longer be necessary to work out the legal situation from more than a hundred years of legal developments in the literature and case law. At the same time, it makes clear what the reforms of partnership law still fail to provide: digitalisation of company law (formation, changes in rights, meetings) is (unfortunately) left out. The draft does not want to pre-empt the reforms of cross-border reorganisation. Apart from this, the legislator has deliberately omitted to provide special legal rules for publicly held partnerships.