date | theme

21. August 2019 | Settlement of a GmbH shareholder: Settlement clauses vs. Law

11. February 2020 | Severance pay in the event of company exit – legal limits and severance clauses

22. January 2021 | Payment of severance payments by moving abroad tax-free: is this possible?

23. May 2022 | Severance payments for partnership partners: how high they must be (this contribution)

Retired partnership partners have a claim for severance payments against the partnership in accordance with § 728 BGB and § 135 HGB. This is amended by the MoPeG and applies as of 01.01.2024. Originally, the severance payment entitlement was in § 738 Abs. 1 sentence 2 BGB. We explain the changes, what consequences they have in practice and how severance payments to partnership partners are now calculated.

§ 728 BGB-neu now regulates the claims of the retired shareholder. In contrast to the old regulation of § 738 (1) sentence 2 BGB, the company is obliged to pay the retired shareholder a severance payment appropriate to the value of his share. According to the previous arrangement, however, the retired person had to be paid what he would have received in the dispute if the company had been dissolved at the time of his departure. This calculation is called the liquidation hypothesis. We now clarify whether the new right creates a departure from this and thus establishes a new valuation requirement on the basis of the proportion.

§ 738 (1) sentence 2 BGB is based on the so-called liquidation hypothesis. For the severance payment, the law is based on a hypothetical dispute credit, which would result in the dissolution and winding up of the company. Therefore, the law refers to a fictitious liquidation at the time of exit. Therefore, the departing shareholder should benefit in terms of value in the same way as the remaining shareholders. Therefore, the true value of society must be determined and broken down to the true share. Consequently, the valuation is indirect since the value of the shareholding is derived from the value of the company. Consequently, the outgoing shareholder is no longer interested if the remaining shareholders continue an unfavorable business activity.

In the case of a holding company, the value of the company supported therefore naturally depends. In addition, the outgoing shareholder is entitled to the liquidation proceeds that would result from an optimal utilization of the company assets. In the case of advertising companies, the optimal utilization regularly consists in a sale as a unit.

In summary, it can be stated that in § 738 (1) sentence 2 BGB no direct valuation of a partnership participation is applied. Rather, the value of the shareholding results from the value of the company’s assets. Rather, a direct valuation of the share takes place only exceptionally if the share as such is to be used on the basis of other statutory valuation requirements. This is conceivable, for example, in family or inheritance codes.

From 01.01.2024, the new § 728 (1) sentence 1 BGB applies, which has the following wording in the version of 10.8.2021: Unless otherwise agreed in the articles of association, the company is obliged to release the retired partner from liability for the liabilities of the company and to pay him a severance payment appropriate to the value of his share. This legal change could have led to a move away from the liquidation hypothesis towards a direct valuation of the shares.

A distinction must be made between two levels, the statutory valuation objective and the divergence power of the shareholders. The wording suggests that the shareholders could be called upon to specify the criteria for the severance payment themselves. Then one would come to the conclusion that the law at best minimum standards are to be taken.

But this cannot be wanted by the legislator. Rather, the determination of the severance pay entitlement should continue to be subject to judicial review. However, this requires determining when a severance payment can be considered appropriate. Although the legislator states that the value of the share results primarily from the company value. Nevertheless, it should also be possible to evaluate the share directly. The amended wording of the provision is also along these lines. It is therefore questionable how the basis of the severance payment is determined. However, it is clear that the change in the law should give the shareholders more room for manoeuvre. However, this should be limited to the extent that the severance pay must still be appropriate. When the severance pay is appropriate, we clarify the following.

The problem of calculating severance payments depends on whether the share valuation is company-related or share-related. However, both valuation approaches cannot be combined because they are based on opposing valuation requirements. The valuation in relation to the share amounts to a valuation from the perspective of an intended acquirer of the shareholding. This would mean, for example, that minority shareholders would suffer a minority shareholder discount and majority shareholders would receive surcharges. Socially agreed withdrawal restrictions, termination restrictions or divestment restrictions would also reduce the severance pay. The possibilities of deduction restrictions would therefore be greatly extended by a share-based valuation. On the other hand, the company-related valuation indicates that the shareholders are entitled to the real value of the company in the event of liquidation.

Even under the new law, only such a severance payment corresponding to the pro rata value of the company’s assets shall be regarded as appropriate. Only the severance payment to the proportionate company value preserves the compensation provided for in the explanatory memorandum of law for the divergent interests of outgoing and remaining shareholders and justifies the synchronization of retirement and dissolution. Only a share calculated in this way constitutes a complete equivalent for the loss of membership caused by leaving the company. Therefore, share-related valuation factors, such as special voting rights or withdrawal restrictions, must be ignored. This understanding results from the corporate law function of the severance payment and forms the flip side of the loss of the capital participation. The wording does not contradict understanding either. This understanding is also consistent with that of adequacy in the context of severance payments under share capital law.

The severance payment is a partial dispute under company law. It prevents the arduous path of dissolution and confrontation of the company with subsequent re-establishment among the willing shareholders. This detour would jeopardise the economic existence of the shared values. Consequently, the other continuing shareholders receive in some way advantages from the severance payment in relation to a general dissolution. However, this requires that the expelled must not be disadvantaged by the severance payment. Therefore, the severance payment must not fall short of what the shareholder would receive in the event of a fictitious liquidation. The explanatory memorandum also points to this synchronization of retirement and dissolution.

Nevertheless, the shareholders may in future make different provisions in the articles of association and limit the severance payment in view of the continuity interest of the remaining shareholders and the economic consequences of the severance payment within certain limits or determine a delayed payment. However, this restriction must respect certain limits in order not to devalue the legal right of each shareholder to terminate. However, as explained above, only the full severance payment in the form of the retired person’s share of the company’s assets can be considered appropriate in the event of a fictitious dispute.

The appropriate severance payment shall grant the departing shareholder a full equivalent for the loss of his membership. If one considers the outgoing shareholder’s view, one could consider an isolated valuation of the company’s share. Then the severance payment would have to be measured from the perspective of an imaginary share acquisition, which under certain circumstances would have been willing to pay less because of the specific configuration of the share.

The severance pay, however, has a different purpose. The shareholder is not opposed to the co-shareholders like a third party and the severance payment should not compensate the individual loss of assets of the retired person. The severance payment is only compensation for the fact that the shareholder loses his share of the company’s opportunities and risks without liquidation. In future, the retired person will no longer participate in the company results. Therefore, the participation in the earnings value of the ‘living undertaking’ at the time of departure, as determined by its shareholding ratio, should continue to be considered.

If, on the other hand, the severance payment is proportionate, the sum of the severance payment claims attributable to the individual shareholders may deviate from the value of the company assets, since the individual rights and obligations must be observed in the measurement. But there is no factual reason for this.

The share-related severance payment would lead to an unjustified deviation from the law on shares. With regard to the appropriate severance payment within the meaning of § 305 AktG, the prevailing literature assumes that the retired shareholder is entitled to a proportionate share in the total value of the company. The BGH has only recently confirmed this understanding. It would therefore be incomprehensible why partnerships should now be based on the value of the share.

Despite the change of wording, there is no need to deviate from the previous dogmatics. The decisiveness of the company value for the severance payment leads to interest-oriented results. The value of the participation is therefore still to be derived indirectly from the value of the company. By relying now on ‘a severance payment commensurate with the value of the share’, the law is based on the shareholder model of the ‘adequate severance payment’, which is acknowledged to be derived first and foremost from the value of the company. In particular, the severance pay is only appropriate if it corresponds to the proportionate value of the company.