About registerability of profit and loss transfer agreements within a german group of limited liability companies

published on 21 June 2023 | reading time approx. 2 minutes

In its decision of 31 January 2023 (file number II ZB 10/22), the Federal Court of Justice (Bundesgerichtshof, or "BGH") ruled that a profit and loss transfer agreement between two limited liability companies could not be entered in the commercial register of the parent company.

Facts of the case

In this specific case, a limited liability company (hereinafter "parent company" or "controlling company") and a subsidiary entered into a profit and loss transfer agreement, which provided that the subsidiary would transfer its entire profit to the parent company. The shareholders of both companies approved the agreement and it was entered in the commercial register of the subsidiary.

The parent company also applied for entering the profit and loss transfer agreement in its commercial register, but this was rejected by the competent registry court. The parent company's appeal to the Higher Regional Court (OLG) was also dismissed. The Higher Regional Court's dismissal was based, among other things, on the argument that the profit and loss transfer agreement did not change the basic legal structure of the parent company, so it was not necessary to enter it in the commercial register as a legal consequence. The parent company appealed against this decision to the Federal Court of Justice, but the appeal was dismissed. The Federal Court of Justice concurred with the decision of the Higher Regional Court and reasoned as follows:

Summary of the decision

The profit transfer agreement existing between two limited liability companies may not be entered into the commercial register of the parent company.

Only matters and legal relationships that are either mandatory or statutorily allowed to be entered into the commercial register are entered there. The function of the commercial register is to offer the public information on the legal relationships of merchants and companies and to publish important circumstances that are of great significance in legal relations. In some cases, case law also allows entering facts that are not expressly required by law if there is a substantial need for information. Nevertheless, caution should be exercised as regards entering into the register facts not required by law to be entered as the register law is highly formal.

The Federal Court of Justice, however, does not consider the profit and loss transfer agreement to be a matter that is either mandatory or allowed by law to be entered into the register at the level of the parent company.

No register entry requirement existed because the signing of a corporate agreement was not tantamount to a change to the articles of association at the level of the parent company and thus the entry into the register was not required under the law; thus the requirements arising from Article 54 of the German Limited Liability Companies Act (GmbHG) did not apply.

Furthermore, the register entry requirement arising from Article 294 (1) sentence 1, half-sentence 1 of the German Stock Corporation (AktG) also did not apply because this provision as it reads only applies at the level of a subsidiary (according to Article 294 AktG, the management is required to enter the existence and the type of the corporate agreement into the commercial register).

The Federal Court of Justice also confirmed that no register entry requirement applied on the basis of customary law. In this context, the requirements i.e. the criteria of a "constant, uniform and general practice" were not met.

According to the Federal Court of Justice, there was also no "substantial need" for making the entry into the register. Admittedly, creditors or future shareholders of the parent company might be interested in receiving information on signing a profit and loss transfer agreement, e.g. due to their obligation to cover losses under Article 302 AktG, and that this might be of considerable economic importance to them. However, the risk of such a voluntary entry of the profit and loss transfer agreement into the register could cause misunderstandings among creditors and/or future shareholders of the parent company about the existence of such an agreement. Consenting to making a voluntary entry into the register would mean that having a look into the commercial register is unreliable because an entry that is made only voluntarily could cause misunderstandings about the existence of such an agreement among creditors or future shareholders of the parent company.

Conclusion

In our opinion, the decision of the Federal Court of Justice is a welcome clarification for practice. The question of whether the corporate agreement concluded between two limited liability companies should be entered in the commercial register of the parent company had been controversial for a long time. With its decision, the Federal Court of Justice has now set the "right" direction.