There are significant differences between the typical silent partnership with a German GmbH (limited liability company) and a German AG (stock corporation) which are not always taken into consideration in practice. A case recently brought before the Munich I Regional Court illustrates this quite well (decision of 25 August 2023, 5 HKO 4013/22).
A typical silent partnership describes a person or a company investing in the commercial business of a company as a silent partner. It is called a 'silent' partnership because the legislature provides for the silent partner to not generally appear in external relationships in contrast to an open participation. The silent partner and the company merely form an undisclosed partnership (Innengesellschaft) based on a partnership and participation agreement.
There are only very few legal provisions concerning silent partnerships, for example in sections 230 et seq of the German Commercial Code (Handelsgesetzbuch, HGB). The distinguishing feature of a typical silent partnership is the share of the silent partner in the profit of the company in return for the contribution of assets (section 231 HGB). Generally, a silent partner also participates in losses of the company up to the amount of such partner's contribution (section 232 (2) HGB). The partnership and participation agreement, however, may provide otherwise. While the typical silent partner has the right to be informed by the company, it does not usually have voting rights nor the opportunity to influence the management. The partner benefits from the economic success of a company but it is not able to exert any influence on it.
Due to the particularities mentioned earlier, a typical silent partnership is an agreement as to the partial absorption of profit and loss (Teilgewinnabführungsvertrag) within the meaning of section 292 (1) (2) of the German Stock Corporation Act (Aktiengesetz, AktG) Although the provision originates from stock corporation law, it is generally accepted that agreements as to the partial absorption of profit and losses may also be concluded with a GmbH. However, the prerequisites as well as the legal consequences in this context greatly vary between a GmbH and an AG with differing effects on the silent partnership.
A typical silent partnership is a relatively frequent way of financing for a GmbH. In addition to the usual investors, banks often use this opportunity to participate in companies, often indirectly through their own holding companies. A typical silent partnership is appealing for a GmbH, mainly because it is fairly simple.
An informal partnership and participation agreement between the company and the silent partner suffices to establish a typical silent partnership. While this agreement is usually made in writing for documentation and verification purposes, it is not mandatory to do so. The prevailing opinion is that there are no further validity requirements; at least not if the typical silent partnership has no effects that amend or override articles of association, in particular does not restrict the shareholders' right to participate in the profits, and if the silent partner will not receive the majority of the profits of the company. While there are no strict limits, this should regularly only be the case beyond 50%. In the internal relationship, it is advised that the company passes a resolution in this respect before establishing a typical silent partnership. The same is true for the amendment of a typical silent partnership even if no particular requirements for its effectiveness exist in this respect either.
In accordance with the intentions of the legislature, the silent partner thereby remains anonymous. This makes the typical silent partnership with a GmbH particularly appealing for investors who want to benefit from the economic success of a company but do not want to be disclosed to the public.
Matters are different for an AG. A typical silent partnership is classified as an agreement as to the partial absorption of profit and loss (Teilgewinnabführungsvertrag) which means that the provisions of sections 291 et seq AktG apply.
In contrast to a GmbH, an AG has to sign a written partnership and participation agreement requiring the consent of the general meeting to be effective. On top of that, a silent partnership must be registered in the company's commercial register - and is therefore not 'silent' but visible to any interested party. The typical silent partnership will only become effective upon its entry into the commercial register. Furthermore, the consent of the general meeting as well as the registration in the commercial register are required not only for the conclusion but also for each amendment of the partnership and participation agreement. These strict validity requirements are mainly in place to protect the shareholders and creditors of the company to a much larger extent in the AG than in the GmbH.
As the anonymity intended by the legislature is lost at the AG, it comes as no surprise that the typical silent partnership is much less popular in practice with an AG than with a GmbH.
The case recently judged by the Munich I Regional Court (decision of 25 August 2023, 5 HKO 4013/22) illustrates what consequences the differences between a silent partnership with a GmbH and an AG can have.
In this case, a GmbH entered into a written partnership and participation agreement on a typical silent partnership with a silent partner which provided for a share in the profits but not in the losses. When the company later changed their legal form from a GmbH to an AG, the typical silent partnership was continued unchanged but not recorded in the commercial register. Then, the partnership and participation agreement was amended to include a provision stating that the silent partner would also have to share the losses of the company up to a maximum amount in the future. This amendment was not recorded in the commercial register either, nor was the consent of the general meeting obtained. When the share in losses of the silent partner was later taken into account in the annual financial statement of the company, a shareholder filed an action for a declaration of invalidity of the annual financial statement.
The Munich I Regional Court ruled in favour of the shareholder who had brought the action. It decided that considering the obligation of the silent partner to compensate losses in the annual financial statement was a mistake. It argues that instead of a claim, a liability - i.e. the remuneration claim of the silent partner - should have been recorded and that the annual financial statement is therefore void.
In its reasoning, the court explains that the amendment to the partnership and participation agreement is void because neither has the general meeting consented nor has the amendment been recorded in the commercial register. It states that while it is true that the silent partnership as such has not been recorded in the commercial register either, this does not affect the validity of the typical silent partnership as the partnership and participation agreement had effectively been entered into with the company at the time it was signed. The court is of the opinion that the change of legal form from a GmbH to an AG performed in the meantime did not lead to a termination of the typical silent partnership because the company as a legal entity continued to be a contractual party. It comes to the conclusion that registering it in the commercial register has thus at no time been a validity requirement against the background of contract continuity.
The court argues that this, however, does not apply to the amendments to partnership and participation agreements. As the amendments were made after the conversion to an AG, the court states that the provisions of stock corporation law apply without any restrictions and therefore a resolution adopted by the general meeting as well as a registration of the amendment in the commercial register were mandatory. As neither requirement has been met, the court comes to the conclusion that this results in the silent partner's share in losses as intended by the amendment agreement is void.
As this case illustrates, the differences between a typical silent partnership with a GmbH and a typical silent partnership with an AG are not always taken into consideration in practice with a potential for far-reaching consequences for both the company and the silent partner. In particular where the legal form of a company changes, the impact on existing or intended silent partnerships should therefore not be overlooked.
