MOPEG IS ADOPTED – NOW WHAT?
The German Act to Modernise the Partnership Law (Gesetz zur Modernisierung des Personengesellschaftsrechts, in short MoPeG) has been adopted by the German Bundestag and is currently awaiting proclamation. Countless partnerships under German civil law (Gesellschaften bürgerlichen Rechts, also called GbR or BGB-Gesellschaften) are now asking what this new law means for them.
1. Who does the MoPeG affect?
The changes to the law will impact tens of thousands of partnerships of varying scopes, but many are not able to immediately understand what effects the changes will have for them. While the legal framework for partnerships under civil law has remained mostly unchanged since 1900, there have been some fundamental changes over the years to its classification, how it is understood but also its use in conducting legal transactions. Originally, the partnership was nothing more than an exclusive contractual obligation between the partners and a partnership did not have its own assets separate from those of the partners. More than 100 years later, the German Federal Court of Justice (Bundesgerichtshof) recognised the legal capacity of partnerships under civil law to participate in legal transactions, even though partnerships under civil law are not legal persons.
The partnership under civil law has been used in various ways. Some partnerships are formed when the partners agree to achieve a common purpose, but are not involved in any legal transactions vis-à-vis third parties. Other partners limit the use to the holding of assets, especially real estate or shares. Other partnerships under civil law conduct professional or business activities, without being a commercial partnership (such as OHG, KG, GmbH & Co. KG, and similar forms). This variety is possible because the law has always been largely negotiable. facilitating individual tailoring of the partnership and the relationship between the partners. Without wanting to lose this flexibility, the core statutory provisions applicable to partnerships under civil law - §§ 705 et seq. of the German Civil Code (Bürgerliches Gesetzbuch, BGB) - have been rewritten. This rewrite raises the question of when which provisions of the partnership agreement should be adjusted in order to comply with the statutory provisions of the new §§ 705 et seq. BGB.
This article will not go into detail about the new law or the first disputes; we’ll let other technical articles look at these issues. Instead, this article is designed to provide some information on what the MoPeG is about and what steps must now be taken.
2. What MoPeG is about
A COMPANY REGISTER
A major innovation is the possibility or in some cases obligation to register the civil law partnership in a specially created partnership register (similar to the commercial register for commercial partnerships and stock corporations).
UNDISCLOSED OR DISCLOSED PARTNERSHIP? – LEGAL CAPACITY OR NO LEGAL CAPACITY
Before asking whether and which changes to the partnership agreement must or at least should be made, there needs to be an answer to the fundamental question of whether the partnership under civil law is currently an undisclosed (Innengesellschaft) or disclosed partnership (Aussengesellschaft), what form it will take in the future and, accordingly, whether the partnership should be listed in the new partnerships register that will be established. Registration will be similar to entering commercial partnerships or stock corporations in the respective registers.
In order to put an end to the numerous past difficulties in distinguishing between undisclosed and disclosed partnerships, legislators created a clear rule expressly recognising the legal capacity of partnerships under civil law. The creation of a public register provides partnerships under civil law with an official publication to use as proof of their existence, identity, and the rules applicable to representatives.
For the distinction between partnerships with legal capacity and those without, the question of whether the common stated intention of the partners provides that the partnership should conduct legal affairs will be decisive. The partnership with legal capacity can acquire assets and conduct outward legal transactions in accordance with the new § 705 para. 2 BGB. Consequently, in a partnership with legal capacity, not only can the partners jointly own assets, but the partnership itself may too. The partnership without legal capacity is merely intended as a way to shape a legal relationship between the partners. A partnership without legal capacity may not hold assets.
UNDISCLOSED PARTNERSHIPS DO NOT NEED TO REGISTER
Partnerships that do not currently hold assets, even shares in a limited liability company, and do not conduct outward legal transactions, are not partnerships with legal capacity and therefore do not have to do anything in principle. However, in light of the substantial amendments introduced by the new §§ 705 et seq. BGB, it is also beneficial for such partnerships to consider whether and to what extent, for example, the partnership agreement provisions concerning the retirement of partners, the dissolution of the partnership, or the adoption of resolutions should be amended. The law applicable to partnerships is largely negotiable, as the new law confirms, making it highly likely in many cases that the current partnership agreement can remain as is.
DISCLOSED PARTNERSHIPS REQUIRE REGISTRATION FOR THE LAND REGISTRY OR SHARE REGISTER
The situation is quite different for partnerships that – to whatever extent – conduct legal transactions with third parties and, in particular, hold assets. The latter can include assets such as real estate, company shares, or other assets; however, the criterion is also fulfilled where the partnership provides services, assumes legal obligations, or otherwise presents itself as a partnership to third parties. In the future, these partnerships will be partnerships with legal capacity and can choose to register but are not required to register. However, if the partnership has more than sporadic involvement in legal transactions, it will be almost mandatory for the partnership to be registered. If the partnership (with legal capacity) is to be recorded in the land register as the owner of real estate or as a shareholder in the share register, the registration of the partnership in the new partnership register will be a mandatory requirement. This facilitates the use and information about the owners or shareholders and the partners behind the partnership, and is also a significant further step towards increased transparency in legal transactions and strengthening the fight against money laundering and terrorism financing.
3. Amendments to the partnership agreement? Are there any transition periods?
ENTRY INTO FORCE ON 1 JANUARY 2024 – IS THERE ENOUGH TIME LEFT?
The changes to the rules for partnerships under civil law in §§ 705 et seq. of the BGB will enter into force on 1 January 2024. Is there enough time left?
For both forms of BGB partnerships, regardless of the legal capacity, the question arises whether and to what extent in the future (a) the current rules in the partnership agreement can be maintained, (b) they need to be adapted to the new §§ 705 et seq. BGB that will apply from 1 January 2024, or (c) even whether the new rules offer novel options for structuring the partnership agreement. This question needs careful analysis, and the partners must reach an agreement on the approach. Given the diverse interests and types of partnerships under civil law, a blanket assessment is not possible. The legislator did not establish any notable conditions but instead expressly sought to provide maximum design flexibility.
LEAVE OR DISSOLVE – DOES A DECISION HAVE TO BE MADE BEFORE 1 JANUARY 2024?
The legislator saw a need to legislate given the trust of the partners in the existing statutory dissolution and retirement rules. Many partnerships have not adopted any rules on these issues or the rules they have adopted are insufficient. The MoPeG amends the relevant statutory provisions so that they strongly resemble the provisions in the German Commercial Code (HGB) for general partnerships (OHG) and limited partnerships (KG). However, this should not result in partners unwillingly being confronted with new retirement or dissolution rules that don’t meet their expectations or needs. For this reason, each partner should have the option of maintaining the status quo. According to the transitional rule in Article 47 of the MoPeG, until 31 December 2024, i.e. for a period of 12 months after the MoPeG enters into force, or before one of the grounds arises within this period which would lead to the dissolution of the partnership or the retirement of a partner, each partner shall have the right to unilaterally demand that the partnership continues to apply the current statutory provisions. This demand can be overruled by a partnership resolution.
The partners, therefore, have more than two and a half years to demand that the partnership continue to apply the current statutory provisions for termination, retirement, or dissolution after the entry into force of the MoPeG. If one of the grounds for dissolution or retirement only arises after 31 December 2024, the new rules will apply, i.e. the partnership agreement or, where the partnership agreement does not contain an appropriate provision or the provision is not in line with the new statutory rules, the new statutory provisions will apply. The partners can, however, reject the partner’s demand where they have the necessary majority and partnership resolutions do not need to be unanimous – as is common nowadays. If the partner making the demand does not have a blocking minority, the other partners can outvote him, which would mean that the new rules introduced by the MoPeG would apply to all.
That is why, in addition to reviewing the partnership agreement in light of the new rules, partners should critically assess the termination and dissolution requirements. The focus should be on the possible reasons for dissolution or termination that might not be imaginable today, whether it is removing a partner or a partner terminating the partnership agreement. This will help avoid surprises, especially during separation attempts where there is often a high potential for conflict.