Partnership Agreements of LLCs in Germany

Clauses, Form, Features and Amendment of LLC Partnership Agreements and Articles of Association in Germany

The articles of association are the most important legal document in connection with the establishment and operation of a german limited liability company. It is used to adjust the balance of power, profits and risks. The hour of the articles of association always strikes when a dispute arises between the parties involved. Above all, procedural regulations in german law concerning the shareholders' meeting, prohibitions of voting rights and compensation regulations, for example in the case of a hostile exclusion of shareholders, are therefore of great practical relevance.

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Our range of advice on limited liability company agreements

Our team of corporate lawyers, specialists in german corporate law and tax advisors provides advice on all levels of corporate contract issues, in particular:

1. Drafting of articles of association in the case of a GmbH formation or company transformation with a GmbH target legal entity
2. Review of the articles of association and individual contractual clauses (such as succession, transfer restriction, non-competition and tax clauses)
3. Extrajudicial and judicial enforcement of claims under the articles of association and defense of shareholder rights in connection with a shareholder dispute
4. Amendment of articles of association in preparation for restructuring (company succession, company acquisition, etc.)
5. Optimization of partnership agreements in terms of tax law and review of existing tax clauses

If you have questions regarding the articles of association of a limited liability company (LLC) in Germany, please contact our corporate lawyers in one of our offices in Hamburg, Berlin, Munich, Frankfurt or Cologne. We advise shareholders, managing directors and companies nationwide.

Legal Significance of the Partnership Agreement for the german Limited Liability Company

Currently, there are approximately 1.2 million GmbHs in Germany. In many GmbHs, individual or all shareholders are actively involved. The widespread use of the GmbH is due to its limited liability, tax framework and the scope for structuring associated with it. Every GmbH requires a partnership agreement. In german practice, the articles of association of a GmbH are sometimes also referred to as statutes.

With the articles of association, the GmbH shareholders agree on the essential legal and power relationships in the GmbH. The responsibilities, rights and duties of the GmbH's bodies in relation to each other (relationship between the shareholders' meeting and the management and, if applicable, the position of an advisory board) are regulated. In german corporate practice, one also finds single-member GmbHs. The partnership agreement can be concluded by natural persons or legal entities. This means that the private limited company can also be held by one or more limited liability companies. Often, a parent-subsidiary shareholding relationship is referred to as a group or affiliated company in Germany. Finally, the GmbH has a special role in its role as general partner of the GmbH & Co. KG has a special role to play. With such a general partner GmbH, the shareholders can conduct business in the tax regime of partnerships.

In the GmbH partnership agreement, the partners define the common business object (e.g. the operation of an advertising agency). The partnership agreement in Germany contains mutual obligations and important property and management rights for the partners. The question of whether a shareholder is involved in day-to-day operations or only makes a financial contribution can be determined by the GmbH partnership agreement.

The articles of association contain provisions that are necessary for the formation of a GmbH, such as the scope of the managing director's power of attorney or the shareholders' contribution obligations. Other regulations concern the safeguarding of the operational business (non-competition clauses, requirements for profit distributions and internal financing). If the shareholders do not expressly regulate certain constellations, the relationships are governed by german law. In this context, the statutory regulations are not always in the interests of all shareholders. Individual concepts in the partnership agreement, corresponding to the individual interests of the partners, protect against later surprises.

Model Protocol - only conditionally recommendable in Germany

The german legislator has made a simplified procedure possible for the formation of a GmbH through the use of a model protocol. This simplified and inexpensive formation procedure has proven to be a favorable formation option in german practice, especially for one-person GmbHs. Due to the high relevance of the articles of association in the event of shareholder conflicts, the use of a model protocol is not recommended for a GmbH with several shareholders.

Even in the case of a UG (limited liability), a model protocol is only useful for a one-man UG, as it is inexpensive in Germany. In the case of a multi-partner UG, an individual partnership agreement should always be used. If the UG is to be held by several partners, it is advisable to draw up an individual partnership agreement.

Categories of german Partnership Agreements

Basically, individual types of articles of association can be distinguished for the respective specific GmbH purposes. The different legal characteristics of limited liability companies in Germany and their articles of association can be categorized as follows:

• Multi-level commercially active GmbH - this includes the typical commercially active GmbH with a circle of several shareholders. The articles of association must capture the - often conflicting - interests of several shareholders or groups of shareholders in Germany. For example, it is in the nature of things that there are major differences in positions between minority and majority shareholders on very many regulatory complexes.
• Asset-managing real estate company - The purpose of this enterprise is to pool, hold and manage real estate assets. Whether a partnership or a limited liability company is suitable for this purpose must be examined on a case-by-case basis.
• Family pool, family company - The family pool is often also called family company, in which private assets and also business assets can be bundled. The family pool has strategic and tax objectives. It is a flexible instrument for permanently preserving family assets and pooling them for future generations in Germany. Special regulations in the articles of association are indispensable for this.
• Linked GmbH with family foundation - Special foundation constructions between an operating GmbH and foundations can prevent the fragmentation of family assets, realize asset protection goals and often also optimize inheritance and income taxes.
• One-man LLC, group company - The articles of association of a one-man LLC or a group LLC soften the least complexity in most cases.
• Joint Venture Ltd. - In this type of company, two or more companies in Germany cooperate at the corporate level on a permanent or temporary basis in order to achieve a - usually larger - business goal. The complexity of the articles of association of a joint venture company is very high. The provisions in the articles of association regarding the respective responsibilities and control rights at the management and supervisory board/advisory board level are very important for the joint venture partners, as the investments in the joint venture business are often very large.
• Special purpose vehicle - This is a new german limited liability company that is set up for specific M&A and private equity activities. In certain deal structures, a new, unencumbered special purpose entity is required to take over assets and business shares as well as liabilities, and is often also encumbered with large loans. Such a special purpose entity usually has liability-limiting, tax-relevant and strategic background.

The presentation of the individual types of companies and partnership agreements does not claim to be exhaustive. In german corporate practice, new models and market standards for company agreements are emerging as a result of technical, legal (legislative measures and case law in Germany) and tax developments.

The most important clauses in german LLC partnership agreements: the checklist

The german law and case law provide different content specifications for the limited liability company articles of association. Many of the provisions are discretionary, i.e. the shareholders can agree on deviating clauses in accordance with their interests. The following are important areas of regulation, which differ in each of the GmbH partnership agreements described above:

• Company name: Every partnership agreement in Germany must contain the company name of the LLC. An individual company name is intended to distinguish the company from other companies and make it clearly identifiable to all. In german practice, in cases of doubt, the admissibility of the chosen company name is checked by means of a preliminary inquiry at the Chamber of Industry and Commerce.
• Contribution by shareholders in Germany: The minimum share capital of a GmbH is 25,000.00 EUR. When founding a GmbH or UG, shares are only granted to the shareholders in return for capital contributions. A cash contribution, contribution in kind (e.g. contribution of real estate) or a mixed cash and non-cash contribution can be agreed as the GmbH's capital contribution. Stricter regulations apply to contributions in kind, which, in the interest of creditor protection, ensure that the contribution is actually of value (in particular, founders in Germany are obliged to provide proof of value and to prepare a report on the formation of the company in kind, which in practice leads to increased formation expenses).
• The shareholders are the supreme decision-making body of the GmbH. The managing directors are the performance and representation body of the german company. The precise allocation of responsibilities and control rights between the shareholders, the shareholders' meeting, the management and, if applicable, the advisory board/supervisory board takes place through corresponding regulations in the articles of association.
• By german law, all managing directors (third-party managing directors and shareholder managing directors) are subject to a non-competition clause which is based on the corporate purpose of the LLC. If the scope of the non-competition clause is to be specified in terms of content, extended to the shareholders or also extended to the post-contractual area, this must be organized via the articles of association. Such regulations are accompanied by confidentiality provisions in the articles of association.
• The scope of the shareholders' rights to information and disclosure vis-à-vis the management is defined by german law. The articles of association often contain procedural provisions concerning all control rights.
• Tax clauses in the articles of association can limit or prevent unjustified tax burdens, such as the loss of loss carryforwards, at the expense of all shareholders.
• In order to avoid escalating shareholder conflicts, articles of association in Germany contain various procedural provisions (convening and holding shareholder meetings) and content-related regulatory mechanisms (e.g. in order to avoid a long-term deadlock situation and thus a dangerous situation for the GmbH, voting prohibitions and guidelines for the chairman of the meeting for certain critical situations).
• Provisions on termination of shareholder status and on compulsory redemptions and shareholder exclusions.
• Severance payment provisions in the event of withdrawal of shareholders from the german company. Since the question of severance payment after a shareholder leaves the GmbH is very often the subject of contentious negotiations, specific severance clauses in the articles of association are of great importance.
• Regulations on the preparation and approval of the annual financial statements in the partnership agreement are also important. In addition to the corresponding majority requirements for the resolution on the adoption of the annual financial statements, many articles of association provide for specific procedural rules in this context in Germany.
• The appropriation of profits is directly related to the adoption of the annual financial statements. In german practice, corridors for the appropriation of profits are standardized in the articles of association, e.g. 25% of the annual net profit is always to be distributed to the shareholders as profit. Such distribution rules often take account of german minority shareholders, who fear retention resolutions by the majority shareholders and are not able to receive any profit dividends even in the case of lavish corporate profits.
• However, disproportionate profit entitlements and voting rights (rights that differ from the share capital participation) can also be regulated in the articles of association in Germany. In addition, various special rights can also be agreed, such as the right to appoint and dismiss a managing director by a particular shareholder.
• Individual regulations on succession in the GmbH belong in every partnership agreement if the GmbH shareholders are natural persons. The succession regulations in the articles of association take precedence over testamentary regulations.
• In german practice, the so-called transferability clauses in the partnership agreement are very important. The transfer restrictions prevent uncontrolled transfers of shares and thus provide protection against third parties.
• If the group of shareholders wishes to avoid the light of day in the event of a court dispute, mechanisms for out-of-court dispute resolution, mediation and arbitration can be agreed in the articles of association.

The clauses described are classic areas of regulation. In addition, many other provisions in Germany are conceivable in the articles of association which reflect the objectives of the shareholders.

Formal requirements for GmbH partnership agreements in Germany

In contrast to commercial partnerships (e.g. KG, OHG), the GmbH Act contains strict formal requirements for the conclusion of a partnership agreement in Germany. It is mandatory for the GmbH partnership agreement to be notarized (Art. 2 para. 1 GmbHG). If the notarization of a LLC partnership agreement is missing, the agreement cannot become effective (Art. 125 BGB).

The strict formal requirements even apply to powers of attorney on the basis of which a GmbH partnership agreement is to be concluded. Such powers of attorney must also be notarized, otherwise the representation transaction is invalid and the shareholder cannot be effectively represented. The existence of the german GmbH begins with the notarization of the partnership agreement; immediately after the conclusion of the partnership agreement, a so-called pre-GmbH comes into existence, which is already the bearer of rights and obligations. The complete act of formation is not completed until the formation of the GmbH is entered in the german commercial register.

How can a LLC partnership agreement be amended in Germany?

If the shareholdings in the german GmbH change over time, there is often a need to readjust the articles of association. If there are no regulations in the LLC articles of association regarding the procedure of amending the articles of association, the following applies: In principle, the amendment of the articles of association will take effect at the shareholders' meeting with a majority vote amending the articles of association in Germany. Pursuant to Sec. 53 para. 2 GmbH, a 3/4 majority of the shareholders' votes is required for this.

Unlike in the case of commercial partnerships (KG, GbR), any amendment to the partnership agreement must be notarized in Germany. If the amendment to the articles of association is not notarized, the old articles of association continue to apply. The amendment to the articles of association does not become effective when the resolution is passed, but only when the amendment to the articles of association is entered in the german commercial register.

It should be noted that a sale of a company in the form of a sale of shares or an asset deal in Germany does not in principle constitute an amendment to the articles of association. However, special voting requirements may be provided for by the transferability clauses in the articles of association.

Further information on the amendment of articles of association can be found here:

• Amendment of partnership agreement in Germany

Significance of the list of shareholders in Germany

The articles of association are not intended to document the shareholding relationships. The question of who is a shareholder of a german Ltd. is answered by the list of shareholders.

This list of shareholders is the most important document besides the articles of association and the managing director's agreement in german corporate practice. The list of shareholders kept in the commercial register documents who is a shareholder of the GmbH. The list of shareholders indicates who is considered a shareholder in relation to the LLC in Germany. The list provision in Art. 16 para. 1 GmbHG leads to a legal situation according to which the person entered in the list is even considered a shareholder, even if he or she is not (no longer) a shareholder under german substantive law. Therefore, it is very important that the managing director and the shareholders ensure that the list of shareholders is up-to-date and correct.

In the last 10 years, the german legislator has increased the importance of the list of shareholders. The list of shareholders leads to clarity about the shareholder position, about the ownership of the shares, but not about possible restrictions on disposal and encumbrances on the shares. Since a bona fide acquisition without encumbrances is not possible on the basis of the list of shareholders, extensive so-called due diligence checks by the purchaser are necessary, e.g. in the run-up to the sale of a german company.

General information on partnership agreements of corporations and partnerships in Germany can be found here: Partnership agreement in Germany