Modernization of German Partnership Law

Modernization of German Partnership Law

July 29, 2021, Covington Alert

The civil law partnership (Gesellschaft bürgerlichen Rechts or “GbR”) is the basic legal form of all partnerships under German law. Its regulatory framework is set out in sections 705 et seqq. of the German Civil Code (“BGB”) which, in essence, dates back to the late 19th century. The civil law partnership is regularly used, e.g. by freelancers, individual owners of property or shareholdings, or by syndicates for specific projects. Despite the popularity of the civil law partnership, its regulatory framework is rather rudimentary, leading to an array of court decisions, a need for thoroughly tailored agreements, and a great deal of uncertainty. After three years of consultations and expert hearings, the German Parliament has now adopted a new bill reforming the civil law partnership regulations of the BGB and the regulations on professional and commercial partnerships contained in the German Partnership Act and the German Commercial Code. This “Partnership Modernization Act” will come into force on 1 January 2024, to allow for a reasonable transitional phase.

In the following, we have summarized the key features of the new law:

a) The New Companies Register

While commercial and professional partnerships have to be registered in the commercial or the partnership register, respectively, there was historically no registration requirement for the basic form of civil law partnerships under the BGB. In practice, this led to a lack of transparency and complicated KYC procedures of banks and other third parties. The only way to verify the identity of the current partners was to track the chain of partnership interest transfer agreements, thus relying on the GbR’s own files and records. The new law provides for a "companies register" (Gesellschaftsregister) as a tool to improve transparency and thereby legal certainty for the GbR and its partners, as well as for third parties. Although the registration is technically optional, it will be a prerequisite for being registered in other public registers. So a GbR owning real estate, shares in a limited liability company, non-bearer shares in a corporation, patents, trademarks, or ships, will have to register itself in the new companies register, at least when it intends to transfer such assets or shares. As a welcome side effect, the registered GbR will be a suitable legal form to participate in transactions under the German Transformation Act (Umwandlungsgesetz), thus it can be party to a merger or change its legal form.

However, a practical consequence for a registered GbR is that it will have to fulfill all duties under the German Anti-Money Laundering Act (Geldwäschegesetz) with respect to the transparency register. This means that the ultimate beneficial owners will have to be disclosed.

b) Broader Choice of Partnership Forms for Freelance Professions

The new law will also allow “freelance professions” like medical doctors, dentists, lawyers, and notaries to opt for a commercial partnership form, such as the OHG (offene Handelsgesellschaft, general partnership with unlimited liability), the KG (Kommanditgesellschaft, limited partnership) as well as, the hybrid form of a GmbH & Co. KG (limited partnership with a GmbH as the only general partner), and thereby limit their personal liability beyond breaches of professional duties. However, this new freedom of choice is subject to professional regulations which will have to be adapted accordingly.

c) Provisions Regarding Defective Resolutions

Under the current rules, any unlawful partners’ resolution is generally deemed null and void, which may be determined by a court even years after the original resolution was passed and implemented. This is neither practical nor appropriate in case of minor formal mistakes. Replicating the rules existing for corporations (section 241 et seqq. of the German Stock Corporation Law), the new law will introduce a distinction between valid but contestable resolutions and invalid resolutions. These rules will automatically apply to commercial partnerships and may also be included in any civil law partnership’s agreement by way of reference.

Action Required:

From a practical point of view, the partnership modernization law is to be welcomed as a major step in the right direction, increasing both flexibility and legal certainty. Existing partnerships should use the transition period to review their partnership agreements for amendments that need to be made. Those civil law partnerships holding registered assets and shares should prepare for being registered in the new companies register and for the new level of transparency it will create.

If you have any questions concerning any issue discussed in this Client Alert, please contact the members of our Corporate practice.