Expulsion and Valuation Clauses – Freedom of Contract vs. Legal Paternalism in German Partnership and Close Corporation Law

42 Pages Posted: 17 Jan 2012 Last revised: 15 Feb 2013

See all articles by Klaus Ulrich Schmolke

Klaus Ulrich Schmolke

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Law School

Date Written: January 17, 2012

Abstract

The question of whether and when expulsion and valuation clauses in partnership agreements or the articles of close corporations are valid has occupied German courts as well as legal scholars for many decades. While the courts nowadays take a rather restrictive stance on the validity and enforceability of such clauses, a growing body of literature criticises the case law of the Federal Supreme Court as overreaching with regard to the members' freedom to arrange for the internal affairs of their own association. This article depicts the changeful case law of the German Federal Supreme Court on expulsion and valuation clauses as well as its echo in the scholarly debate. Subsequently, the analysis turns to the question whether and how this restriction of the partners' and shareholders' freedom of contract can be justified. It comes to the conclusion that limiting the members' private autonomy on the issues of expulsion and valuation of the exiting member's share in the association can, in principle, be justified as a manifestation of so-called libertarian paternalism. Applying this regulatory concept that builds on the insights of psychological and behavioural economic research to the Federal Supreme Court's case law shows, however, that the court's grip on the arrangements of the members of partnerships and close corporations is unjustifiably tight and has to be loosened in deference to the members' freedom of contract, thereby bringing it more in line with English and U.S. laws on closely held business associations.

This publication is with permission of the rights owner freely accessible due to an Alliance licence and a national licence (funded by the DFG, German Research Foundation) respectively.

Suggested Citation

Schmolke, Klaus Ulrich, Expulsion and Valuation Clauses – Freedom of Contract vs. Legal Paternalism in German Partnership and Close Corporation Law (January 17, 2012). European Company and Financial Law Review (ECFR), Vol. 9, No. 3, pp. 307-341, September 2012, DOI: 10.1515/ecfr-2012-0307, Max Planck Private Law Research Paper No. 13/8, Available at SSRN: https://ssrn.com/abstract=1986799 or http://dx.doi.org/10.2139/ssrn.1986799

Klaus Ulrich Schmolke (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - Law School ( email )

91054, Erlangen
Germany

HOME PAGE: http://www.wr2.jura.uni-erlangen.de/

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