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20 April 2018
Transaction structures involving special purpose vehicles, whose main assets after completion of the purchase process consist only of the purchased real estate, are often chosen in Germany. Such structures are used in particular to shield from liability, so that third-party access to the special purpose vehicle's assets is limited. They are also used to facilitate a sale without incurring real property transfer tax for the exit.
In commercial real estate transactions, this is why special purpose vehicles often act as sellers that, when concluding a real estate purchase agreement, undertake to sell the real estate held by them and therefore (almost) their entire company assets to a buyer. It is a special feature under German law that in such a situation a valid purchase agreement is only considered validly entered into if the special purpose vehicle's shareholders have first adopted a resolution consenting to the conclusion of the real estate purchase agreement. Therefore, if a special purpose vehicle sells its entire real estate assets without a valid resolution, the purchase agreement would be considered invalid until the adoption of a valid resolution, meaning that either party could demand its rescission.
The requirement of shareholder resolution is based on Section 179a of the Stock Corporation Act. According to Section 179a, a contract under which a stock corporation undertakes to transfer its entire company assets requires a resolution by the general meeting. Although Section 179a applies directly only to sales of (almost) the entire assets held by the stock corporation, there is consensus in Germany that a shareholder resolution granting consent is also required for limited liability companies and partnerships because Section 179a is an expression of the general company law principle, which states that the transfer of a company's entire assets is no longer covered by the power of corporate bodies to represent that company and therefore requires a shareholder resolution. This principle can also be transferred to other forms of company.
However, it is not yet clear whether such a resolution can be validly adopted only in notarised form in the case of the limited liability company or partnership. With respect to German limited liability companies, there is a near consensus view that such resolution must be notarised because Section 179a states that consenting resolutions of the general meeting are treated the same as general meeting resolutions that change the company's articles of association. Section 53 of the Limited Liability Companies Act has a corresponding notarisation requirement for changes to articles of association (which are equivalent to resolutions changing the articles of association at a stock corporation). For partnerships, however, there are no regulations similar to Section 130 of the Stock Corporation Act (required notarisation of resolutions of the general meeting) or Section 53 of the Limited Liability Companies Act (required notarisation of changes to the articles of association). Member resolutions of partnerships do not generally require any specific form. However, some legal commentaries have argued that an equal need for protection and uniform treatment of all types of company advocates applying Section 179a and Section 130 of the Stock Corporation Act to partnerships. Based on these authorities, due to the absence of any higher court case law relating to real estate purchase agreements, notaries and lawyers have regularly recommended taking the safest route. This safe route has consisted of adopting an appropriate member resolution in notarised form when the entire real estate assets are sold by a special purpose vehicle in the form of a partnership.
In its November 23 2017 decision (I-6 U 225/16), the Dusseldorf Higher Regional Court established for the first time, based on the example of a public limited partnership, that a member resolution need not be notarised if it is not expressly required by the relevant partnership agreement. The court stated that this resulted from the fact that according to the Commercial Code applying to limited partnerships, no specific formal requirements exist for the members of a limited partnership. It further argued that an analogous application of Section 130(1) of the Stock Corporation Act and Section 53(2) of the Limited Liability Companies Act was not considered as no unintended regulatory gap existed, which was, however, required under German law for the analogous application of statutory regulations. The court stated that unlike for a limited partnership, stock corporations and limited liability companies must notarise resolutions of the general meeting or changes to the articles of association of a limited liability company. That said, the legislature included no corresponding regulations for limited partnerships in the Commercial Code, although the code likewise contained regulations on the adoption of valid member resolutions by a limited partnership. According to the court, any requirement for notarisation could therefore, at most, result from the company's partnership agreement.
The decision is to be welcomed and is relevant for future contractual practice because it has for the first time been established by a higher regional court with convincing argument that a valid purchase agreement with which a partnership sells its entire real estate assets does not generally require a notarised resolution of the seller's members. It also stated that anything to the contrary could apply only if the company's partnership agreement contained a notarisation requirement for such resolutions. However, it is unusual in German contractual practice to include notarisation requirements for member resolutions in the partnership agreement of a limited partnership. The court said that for this reason it would have to be regularly assumed that the partnership agreement did not provide for any requirement for notarisation. Even if a notarisation requirement in exceptional cases was required by the partnership agreement, the adoption of a member resolution which has not been notarised is considered sufficient if it has been adopted unanimously by all members of the limited partnership. In this case, the notarisation requirement provided for in the partnership agreement was considered to be waived by the unanimous resolution (or, in any event, by implied conduct). Therefore, if a unanimous resolution signed by all members of a partnership regarding the sale of the entire assets of a special purpose vehicle has been adopted (as is normally the case in real estate transactions in Germany), the need for such a resolution to be notarised can be ruled out, even without reviewing the underlying partnership agreement.
This decision is likely to lead to lower transaction costs for real estate sales conducted by limited partnerships, because notarisation of the relevant member resolution often caused considerable notary fees. The judgment also provides more legal certainty because a decision to the contrary would have questioned the validity of a large number of purchase agreements entered into in the past.
For further information on this topic please contac David Zafra Carollo at Noerr LLP by telephone (+49 211 499 860) or email (email@example.com). The Noerr LLP website can be accessed at www.noerr.com.
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David Zafra Carollo