The battle over German LLPs – Kultur Klub

A coalition of German professional bodies and firms is mounting a spirited fightback against the march of the Anglo-Saxon LLP. The battle has barely begun

Wolfgang Ewer
Wolfgang Ewer

Wolfgang Ewer does not look like a revolutionary. But if the president of the German lawyers association, the Deutscher Anwaltsverein (DAV) manages to push through the plans he has just presented at the association’s annual meeting, a revolution at the German bar there will be.

Ewer, whose most radical act until now has probably been his choice of spectacle frames, wants to make ­German bar regulations the most modern in Europe. At the same time, he hopes to create a bulwark against more German law firms taking the structure of the English LLP rather than the longstanding German ­alternatives.

Professional associations have been watching the exodus of ­German firms towards the English LLP ­structure with mounting alarm. For one thing, they fear a competitive disadvantage for firms that operate under a German legal structure. ­Furthermore, they believe the ­preference for the LLP undermines the ’Law – Made in Germany’ project, a campaign by the German legal ­profession to raise the prestige of German law. (The irony of the campaign having a tagline in English has not been lost on German lawyers.)
The project started just under three years ago as a reaction to the Law Society of England and Wales’s initiative in October 2007, ’The ­Jurisdiction of Choice’, which was seen in Germany as a hostile act.

The Law Society paper was ­sponsored by three City firms, ­Herbert Smith, Norton Rose and Eversheds, with input from Addleshaw Goddard, Allen & Overy, Ashurst, Clifford Chance, Edwin Coe, Fox Williams, Hammonds (now Squire Sanders), Linklaters, Lovells (now Hogan Lovells), Slaughter and May and Stephenson Harwood.

The German response was to explain in detail how German courts and German law do not put commercial clients at a disadvantage and, in many cases, represent a better option than the expensive and ­verbose English system.

However, it has taken a long time for a serious opposition movement to challenge the onward march of the LLP. Not until Noerr became the first big German firm to switch to the English legal form just over a year and a half ago, did many people take much notice of the scale of the issue.

Since Noerr’s decision to go for the LLP, German interest in the English legal structure has rocketed.

“Around half a dozen other firms have asked us about our experiences with the LLP,” says Noerr ­co-managing partner Dieter Schenk. “There’s a string of firms currently preparing for the switch to the LLP.”

One other large German firm is believed to be seriously considering making the switch.

The strongest argument for the LLP is its international recognition, says Schenk.

“A lot of competitors function as LLPs – in other words, by choosing the LLP, you’re choosing the legal form used by international competitors,” he says. “It gives a competitive advantage in international instructions, and German clients too are used to the international firms’ LLP form, so there’s no need for explanation.”

This may be an advantage, but even among the internationally established German firms, few find the LLP attractive as a label. And there is a bigger question lurking in the background.

“The factor propelling firms towards the LLP is the inadequacy of German liability law,” declares one partner of an international firm.

Limits and liabilities

It is precisely this liability question that is driving firms to consider a change in status.

While in the English structure only the LLP itself has to approve ­payments, members of a German partnership are personally liable for continuous payments such as rent or salaries as well as errors in advice given, at least insofar as they were ’involved’ in the mandate. The ­question – especially in international firms where work is divided up – is, when is a lawyer involved in a matter and when not?

“Compared with the LLP, the ­German partnership is extremely hostile to teamwork,” says Markus Hartung, former managing partner of Linklaters in Germany and now director of the Bucerius Centre on the Legal Profession and also ­chairman of the DAV committee on the legal profession.

A number of lawyers at both small and large German firms clearly feel disadvantaged as a result of these uncertainties, compared with the English system.

“The pressure on law firms is intense,” says Rainer Loges, managing partner of Gleiss Lutz, a German partnership. “We suffer long-term competitive disadvantages because we have to vehemently fight for ­limitations to liability in every case.”

This stress can have an effect on individuals. Lawyers claim there are partners in Germany who think about possible liability cases every day and feel as though they are betting their mortgages.

It is unclear whether members of a German partnership are liable for each other. And what is more, for German firms, the LLP is not only the easiest option for making liability clear, it also provides a tangible ­competitive advantage, especially when those competitors are UK firms.

“Bizarrely, the dominant opinion is that LLPs work better in Germany than they do in the UK,” Hartung explains.

German LLPs benefit from the fact that personal liability is limited appropriately, without the partners being subject to the English concept of liability. This concept holds that a partner responsible for giving ­incorrect advice can have a claim brought against them personally.

“This shows we need customised, Europe-wide rules,” adds Hartung.

A better way

It is unlikely that federal justice ­ministers will consider such a bold plan. German legislators have ­hardly been pioneers of innovative ­regulation in this field in the past. It is hard enough for Ewer and his ­colleagues to adapt new ideas about liability to the relevant paragraphs in German partnership law. But if they manage that they could offer German firms a real alternative to the LLP – one that even gets around its disadvantages.

Despite the progress the English LLP structure has made on the ­Continent there are still numerous obstacles that, from a German point of view, need removing.

Firms with more than 50 ­employees, an annual turnover of £6.5m and a balance sheet of more than £3.26m are required to disclose their turnover – a form of transparency that large, old-fashioned ­German firms would rather do ­without. Most smaller firms can use their size to dodge this rule.

But for Noerr, a large firm, the duty of disclosure was not a significant hindrance.

“The change that would have to be made with respect to declaring turnover would be minimal, as ­publishing these figures has been established in the German market for years,” says Tobias Bürgers, a ­partner at Noerr.

But the German Insolvency Code presents another block for the LLP to stumble on. LLPs that carry out the majority of their business in ­Germany are subject to the so-called ’centre of main interest’ principle. For a firm at which no individual is personally liable, this means there is a duty to file for insolvency within three weeks in the case of inability to pay bills or excessive indebtedness.

“The requirement to file for ­insolvency must be considered ­carefully and from the perspective of the worst-case scenario,” says ­Bürgers. “But the personal liability of several partners in the current ­German partnership model is one such scenario. Ultimately, it’s about weighing the two against each other.”

The risk in the insolvency clause is the price you have to pay for the ­limited liability of the LLP, he adds.

From the point of view of taxation, the LLP and the German partnership are broadly on a level playing field, and even the internal rules in a normal German partnership contract could be carried through almost directly into the structure of an ­English firm.

But opponents of the LLP see a problem here too – in the case of a dispute, English law applies.

“We don’t want to stop setting our internal rules according to German law,” complains a partner at a large German firm. “That would mean we’d have to introduce arbitration clauses according to English law for partner conflicts, even if an arbitration court in Germany might be more appropriate.”

­Three will

The advantages of the LLP pale in comparison with the instinctive ­anxiety German lawyers feel towards it.

But it is not the relative disadvantages pertaining to disclosure duties and filing for insolvency that have given rise to a campaign against the LLP. Rather, two factors are fuelling the discussion. The first is the debate’s political dimension. The ­second is the fear, which German lawyers quietly admit to, that they will fall behind in comparison with their British colleagues.

Significantly, the concrete proposals for changing the German ­partnership structure stem from three of Germany’s top law firms. In May 2010 Gleiss Lutz, Hengeler Mueller and Flick Gocke Schaumburg held an informal gathering to put together a paper that made it onto the agenda at the most recent meeting of the DAV, last autumn.

Officially, the firms do not want to make too much of a fuss about their role in the modernisation of partnership law, but in the market their background work on its contents is an open secret.

What motivated this lobbying is something people can only speculate about.

“Hengeler Mueller, Gleiss Lutz and Flick Gocke Schaumburg didn’t take part in the wave of firm mergers and so want something as a counterpoint to the LLP,” suggests one lawyer, whose firm has itself become an LLP.

Other market observers, railing against the ’foreign’ firm type, ­perceive in them anti-European ­tendencies at a time when people ought to be protecting the status of German law.

Ewer himself makes the connection with the Law – Made in ­Germany campaign, which is meant to promote German law. It is ­downright embarrassing, he says, to promote the benefits of German law and then see one firm after another switch to the English legal structure.

“We want German firms to have access to an adequate legal form so that they can decide whether or not they are better off becoming an LLP,” he says, explaining the DAV’s stepped-up involvement in the debate.

Ewer sees the campaign against the LLP as less of an initiative coming from large firms than an issue of ­survival for small and mid-sized ones.

“This is singing from the same hymn sheet as the Law – Made in Germany initiative,” adds DAV ­vice-president and retired Hengeler Mueller partner Hans-Jürgen ­Hellwig. “I want to prevent legislators from making the same mistake as was made back with the GmbH ­[German ­limited liability company]. In bringing in the law to modernise the GmbH the authorities reacted much too late to the spread of the ’Ltd’ company.”

With reform of the German ­partnership, legislators have the chance not only to pull it up to the same level as the English form but even to build a better LLP, creating
a legal structure with sensible ­limitations on liability but without burdensome disclosure duties and the labyrinth that is the relevant clause in the UK’s Insolvency Code.

Cover story

Just how satisfactory the situation in Germany will turn out to be depends on an issue that has rarely been ­discussed. To make it possible to implement a German partnership with reduced partner liability, the question of professional indemnity insurance for the new structure has to be settled.

The arena where this can happen is the Bundesrechtsanwaltsordnung, the Federal Code for the Legal ­Profession. Similar provisions would have to be applied to German ­partnerships as to firms that are set up as limited liability companies.

The minimum insured sum for ­single practitioners at the moment is e2.5m (£2.23m) per instruction. GmbHs have to be covered for four times that. Clearly, e10m would not be sufficient coverage for leading commercial practices. Although big German firms are normally insured for more, the cost of liability insurance would still rise because there would no longer be recourse to ­individual partners.

“So the real issue is the structuring of insurance cover,” Hellwig says.

Reform could make this extremely expensive. For the top commercial firms it would be a price worth paying to remain a German entity, but will it be enough?

This article first appeared in German legal magazine JuVe Rechtsmarkt.

It was translated into Engish by Josua ­Freedman at The Lawyer

How the UK llp evolved from its Texan origins

If you think of Texas, you probably first think of oil, but some of us think first of the LLP – one of the Lone Star state’s most successful exports.

Introduced by the state legislature in 1991 to protect accountancy and law firms from catastrophic claims, the LLP quickly spread across the US, arriving in the UK in 2000.

There are now two types of LLP. The Texan LLP, adopted throughout the US, most of Canada and Jersey, is a general partnership that protects a partner from personal liability for another partner’s negligence or misconduct. This is known as a partnership-based LLP.

The UK LLP is not, in fact, a partnership, but rather a ’body corporate’ subject to companies law (with modifications). In most circumstances UK LLP members are protected from personal liability for their own negligence and misconduct as well as that of other members. This corporate model has been adopted by Singapore, India, Dubai and Qatar.

The liability protection for members of a UK LLP is by no means absolute. On insolvency, members of LLPs have similar risks to directors of limited companies and may have to repay profit distributions. There could also be limited circumstances whereby a member might be liable in tort or equity for their own negligence.

Although corporate entities, UK LLPs have a similar look and feel to general partnerships and share many of their advantages. LLPs have considerable flexibility in their governance and membership arrangements, are tax-transparent and are not subject to a capital maintenance regime.

As with any commercial vehicles, other characteristics of UK LLPs are less favourable. LLPs have to file accounts and disclose the profit paid to the highest earning member. They are not efficient vehicles for retaining profits, and are generally not suitable for use as holding vehicles.

Naturally, structures have been developed to mitigate the impact of these characteristics.

Although widely used outside the professional services arena, for UK law firms the LLP has now passed the tipping point. All but a handful of the top 100 law firms are LLPs.
In the early days, firms had to justify their LLP conversion, but today the remaining law firm general partnerships are more likely to be asked to explain why they have not converted.
Aster Crawshaw is a partner in ­Addleshaw Goddard (LLP)’s professional practices group