The incorrect organisation of a transaction process can lead to high losses and risks, both on buyer and seller side, if the rescission of an intercompany agreement does not become effective at the agreed time. This can result in inadvertent liability on part of the seller and to financial losses suffered by the buyer. A judgment of this year confirms that an intercompany agreement with a dependent GmbH [Limited Liability Company] can be terminated only at the end of a financial year or of the otherwise contractually stipulated accounting period.
Judgment of the Federal Supreme Court of Justice (BGH) on the rescission of intercompany agreements
With the judgment of 16 June 2015, the Second Civil BGH Chamber decided that an intercompany agreement (such as a control and profit-and-loss transfer agreement) with a dependent GmbH as per section 296 para. 1 sentence 1 AktG [German Stock Corporation Act] can only be terminated at the end of a financial year or of an otherwise contractually stipulated accounting period (II ZR 384/13).
The judgment was based on the following case: A GmbH and its former controlling company had terminated a profit-and-loss transfer agreement (“Ergebnisabführungsvertrag – EAV”) by agreement on 27 April of a year. This agreement was preceded by a transfer of the GmbH from its former controlling company to another company of the same group. The Register Court had registered the termination of the EAV in the Company Register without objection.
The EAV had a fixed duration with automatic extension, however, it did not comprise the possibility of premature termination, in particular by way of infra-annual notice.
On 27 April the GmbH had reported losses that were substantially higher than on 31 December of the same year. After insolvency proceedings had been opened over the assets of the GmbH, the insolvency administrator filed suit against the GmbH’s former controlling company for compensation of losses accrued on 27 April. The Higher Regional Court (OLG) Munich merely awarded an entitlement for compensation of the (lower) amount of losses incurred on 31 Dec to the plaintiff. The BGH confirmed the legal position of the OLG Munich.
Reasoning of the BGH
In its reasoning the BGH referred to the fact that the restriction on the termination of an intercompany agreement at the end of the financial year or of an otherwise contractually agreed accounting period as stipulated by section 296 para. 1 sentence 1 AktG is in the interest of legal certainty and clarity. This also applies to intercompany agreements under participation of a GmbH as a dependent company. A reinterpretation of the mutual rescission of the EAV into a cancellation without notice as per section 297 para. 1 sentence 1 AktG due to the preceding change of partner was rejected by the BGH, since the buyer was part of the same company as the seller (the former controlling company) of the GmbH in question. The BGH did not clarify whether section 297 para. 1 sentence 1 AktG would apply if a dependent GmbH were to be sold to a buyer outside the company group of the former controlling company.
The outlined issue is relevant for people who are dealing with company transactions in their daily practice. Due to the above BGH judgment, we recommend the following:
The fact that the sale of the dependent company from an existing company group leads to the termination of the intercompany agreement or entitles to its ordinary notice should be taken into account as early as at the time of conclusion of an intercompany agreement. Only then it is ascertained that a contractually agreed accounting period and/or a contractually agreed possibility for ordinary notice in the sense of sec. 296 para 1 sentence 1 are in place.
If an existing intercompany agreement does not contain such special regulations for premature rescission, a short financial year should always be implemented at the time of the execution of the sale of the company by way of amending the articles of association. The intercompany agreement can then be terminated to the end of this short financial year.
Otherwise there is a risk that the intercompany agreement inadvertently continues to be effective to the end of the financial year. In the worst case, this missing reinterpretation possibility can lead to a waiting period up to the regular end of the intercompany agreement. For the seller this can lead to an inadvertent liability for losses that develop on part of the sold company between the sale of the company and the next end of the financial year. For the buyer it can lead to the inadvertent effect that the seller is still entitled to profits accruing at the acquired company between the sale of the company and the next end of the financial year.
The formation of a short financial year is recommended in such cases also when a company is sold to an external purchaser, as long as the BGH has not expressly ruled that such external sales are subject to the possibility of a termination without notice as per section 297 para. 1 sentence 1 AktG.
About the author: Rechtsanwalt Dr Thomas Lotz is a partner in the Munich-based law firm TRACC LEGAL. Dr Lotz has supported company transactions for 25 years and provides advice on corporate law issues in the context of restructuring and reorganisation of companies. He is available for personal consultation via +49 (0) 89-95 44 302-89 and by email: firstname.lastname@example.org.