Get ready for changes to the German Federal Lawyers’ Act
German-qualified lawyer Markus Hartung sets out the upcoming regulatory changes to the Federal Lawyers’ Act and the steps that English firms practising in Germany should take to prepare.
A completely new regulatory regime for law firms operating in Germany will begin on 1 August 2022.
The legal basis for the activities of lawyers and law firms – the Federal Lawyers’ Act (Bundesrechtsanwaltsordnung or BRAO) – has been fundamentally reformed. The Tax Advisors Act and Patent Attorneys Act have also been amended.
This article describes the changes that have been made, particularly in lawyers’ company law, and the significance for firms established under the laws of England and Wales or Scotland (English law firms).
English firms should pay attention to two key changes:
- BRAO will begin to regulate the activities of law firms, who will be subject to regulation and supervision by regional or local bars and have their own set of duties that can be sanctioned if violated
- law firms from ‘third countries’ (states outside the EU) will have a reliable and legally secure basis for their activities in Germany (section 207a)
Reading the new BRAO provisions alongside the EU-UK Trade and Cooperation Agreement (TCA), the legal position of English law firms in Germany has greatly improved.
The bar admission requirement is new and applies to every firm (with some minor exemptions). Until now, only limited liability companies needed a law firm-specific admission.
English law firms nearly always established as LLPs and could practise in Germany without bar admission. The only legal question was whether an LLP had to register in Germany under company law.
Since English firms will now need to be admitted in Germany, these firms will be faced with extra paperwork.
However, there is time to plan, prepare and carry out the individual steps because the changes will not come into force until 2022.
There is no immediate need for action, but I recommend planning how the new regulatory and legal requirements can be implemented.
In the appendix, you’ll find a working translation of the essential provisions. This is not an official translation, but it gives an idea of what firms will be facing from August 2022.
This article deals with new regulations in part two, sections 59b to 59q (professional cooperation). I’ll also introduce the new section 207a in part twelve (foreign legal professions and professional practice companies).
Overview of the main provisions
Legal form neutrality
BRAO only contains provisions that are intended to make sure that the core values of the legal profession as set out in section 43a can be observed. These are:
- the principle of independence
- the principle of confidentiality
- the prohibition of representing conflicting interests
However, the new rules are neutral insofar as they do not contain any regulations specific to legal forms.
Section 59b only regulates that lawyers may join forces to form berufsausübungsgesellschaften (professional practice companies or PPC) for the joint practice of their profession.
It’s also possible to establish PPCs with only one partner, meaning rechtsanwaltsgesellschaft mit beschränkter Haftung (RA-GmbH) continue to be permissible.
In this context, legal form neutrality means that all company formation issues are governed by company law. This applies to both German and foreign company forms.
Whether, for example, an LLP may establish itself in Germany is a question of international company law and the TCA rather than professional law.
Professional law only regulates the conditions under which legal services can be provided.
PPCs can adopt all company forms existing in Germany, including the forms of commercial companies.
This makes it possible for law firms to organise themselves as limited partnerships (kommanditgesellschaft or KG) and – for the first time – to use the liability-exempt partnership (GmbH & Co KG) form.
Under section 59b(2)(2) and (3), companies can continue to use either European companies (Societas Europaea) or forms of company permissible under the law of either:
- an EU member state or
- a contracting state to the agreement on the European Economic Area
Section 59b does not directly apply to PPCs under the company law of third countries. Only section 207a applies to these firms.
The ‘German LLP’
Under section 59b(2), the English LLP form – which is popular in Germany – will no longer be an option for PPCs with a management seat in Germany.
English LLPs can continue to practise in Germany through a branch office of an LLP, provided that the LLP’s seat is in England. This right of establishment flows from international company law and the TCA.
In Germany, however, many German firms chose the LLP form as an English ‘letterbox company’ because there was no personal liability for LLP members practising in Germany.
Even before the changes come into force, it became impossible for German firms to retain the LLP legal form, as it could only be used because of EU law.
With the UK’s departure from the EU, this is no longer an option.
A law firm LLP with its administrative seat in Germany is now regarded as a pure partnership with joint, personal and unlimited liability of the individual partners.
Multidisciplinary partnerships (interprofessional cooperations)
The possibilities of multidisciplinary partnerships (cooperation with members of other professions) have been significantly expanded by section 59c.
Lawyers have always been able to jointly practise with tax advisers, patent attorneys and auditors.
German lawyers have also been able to associate with foreign lawyers and tax advisers.
Under section 59(c)(1)(4), it will be possible to associate with members of other professions (angehörige der freien berufe). This enables partnerships between lawyers and, for example, management consultants, doctors, architects, experts or engineers.
There are two options for cooperation between German lawyers and English lawyers who do not practise in Germany. They can decide whether to set up:
- a German PPC with an administrative seat in Germany
- an English law firm with an English legal form and an administrative seat in England
International law firms can now be flexible in choosing which legal and organisational form suits them.
Duties of non-lawyer partners
Section 59d regulates the application of the law governing the profession to non-lawyers.
Non-lawyer partners of multidisciplinary partnerships are also subject to the professional supervision of the bar associations.
This is to respect and protect the core duties of lawyers, particularly confidentiality and the associated protection against seizure of client files by the public prosecutor’s office.
The PPC must make sure that only appropriate persons become partners.
Under section 59d(5), the partnership agreement should exclude partners who commit serious or repeated breaches of the duties set out in BRAO or in the Rules of Professional Conduct under section 59a (Berufsordnung für Rechtsanwälte or BORA).
Professional duties of the PPC
Section 59e regulates the professional duties of the PPC.
Importantly, under section 59e(2) PPCs must take appropriate measures to ensure that violations of professional law are recognised and remedied at an early stage.
If the PPC’s professional duties are violated, the partners are responsible for the violation of both the individual duties and the professional duties of the PPC.
Section 113 regulates the action of such breaches. A disciplinary action by the Lawyers’ Disciplinary Court may be imposed on an admitted PPC if either:
- a management person of the PPC has culpably breached duties
- a person who is not a management person has breached professional duties of the company
if this breach could have been prevented or made significantly more difficult by appropriate organisational, personnel or technical measures.
Such a duty has not existed in law firms so far, meaning there’s no precedent for what appropriate measures are needed to avoid sanctions.
These professional duties of the PPC will pose a significant challenge to some law firms. This is because small and medium-sized firms often do not have a professional management, let alone a compliance or legal department.
Smaller and medium-sized firms will be able to learn from the large commercial law firms, particularly English firms.
Admission to the bar
Under section 59f(1), PPCs must be admitted to the bar, with exceptions for certain smaller firms.
Admission must be granted if certain requirements are met: the bar has no discretion to grant admission or not.
Admission procedure and requirements
Admission is regulated in section 59g, which sets out rules on what information must be provided to the regional bar.
Section 59g also provides that the bar may require appropriate evidence, including the partnership agreement or other deeds to verify the admission requirements.
It’s unclear whether this means that firms will actually have to submit their complete partnership agreement.
It’s likely that there will be discussions between regional bars until a uniform approach is agreed.
For English law firms with offices in Germany, many questions arise including: what are the rules governing the admission procedure of ‘international’ law firms?
Admission procedure example: English firm branches in Germany
English law firms whose German offices are organised as branches of the firm domiciled in England must follow their admission procedure in section 207a.
If German offices exist in, for example, Frankfurt, Munich and Berlin, the firm must decide which location should be the branch in future, because the law assumes that foreign firms must have only one branch in Germany.
If the firm decides that the branch will be in Berlin, admission must be carried out at the Berlin Bar.
The offices in Frankfurt and Munich will become ‘branch offices’ or zweigstellen as under section 27(2).
No admission procedure will be needed at the branch offices; it will only be necessary to notify the Frankfurt and Munich bars that they exist.
Admission procedure example: foreign lawyer practising in Germany
Foreign lawyers wishing to practise in Germany must apply for admission at the bar in whose district they wish to establish themselves, as they do currently.
Admission procedure example: English firm’s German office established as a separate company
The case is different for the German offices of an English firm organised as a separate and legally independent German company.
In such structures, the German partners are often also partners in the English LLP, while some English partners are ‘bridge partners’ in the German firm.
Here, the obligation to be admitted to the bar is based directly on section 59b.
It makes no difference whether the German offices belong to an international network or act under the name of an international firm: they will be considered German law firms.
If several German offices are involved –organised as PartGmbB or RA-GmbH – then there is a head office with branch offices. Admission takes place at the bar where the head office is based.
The English firm does not need to be admitted to a German bar unless it wants to practice in Germany in addition to its sister firms (which has never happened to my knowledge.
Shareholder structure and groups of law firms
Although PPCs are in principle partnerships whose partners are natural persons, section 59i allows for licensed PPCs to be partners in another PPC.
This change is intended to make sure that company shares can be held by a holding company rather than individual partners.
It’s also possible for a professional association to set up subsidiaries (tochtergesellschaften) for certain activities and then take over their shares.
This has not been allowed before, even though it’s been contentious whether the restriction is unconstitutional – especially by firms that want to spin off risky mandates into subsidiaries or companies that develop software-based advisory products they want to distribute through a subsidiary.
This new option allows large firms in particular to organise better risk management. It will also benefit firms that pursue different business models under one roof, where it’s often difficult to manage for staff development and market reputation.
Despite liberalisation of firm structure, the ban on lawyers sharing profits with third parties remains (section 59i(3)(2)). This means that it’s not possible to take on a financial investor as a partner, unlike in English law.
The German Bar Association and the German Federal Bar were firmly against any liberalisation in this respect.
Management and supervisory bodies
Section 59j sets out the requirements for management and supervisory bodies.
In general, lawyers and those with whom they may associate can take over the management of the firm or be a member of a supervisory body. This includes management professionals, such as business economists.
In multidisciplinary partnerships, persons who are not lawyers may not give instructions to other lawyers on professional matters.
It’s expressly provided that influence by shareholders is inadmissible in order to ensure the independence of lawyers.
Right to provide legal services (rechtsdienstleistungsbefugnis)
For the first time, section 59k explicitly regulates the authority of law firms to provide legal services, ensuring the demarcation from the Legal Services Act 2007.
This sounds self-evident but, when the UK left the EU, the German Federal Bar (BRAK) took the peculiar view that English LLPs would no longer be allowed to offer legal services, even if its partners were German lawyers.
BRAK did not stick to this view, but it initially caused some turmoil.
The uncertainty has now been removed, as the new law explicitly states that PPCs are entitled to provide legal services upon admission.
In the case of multidisciplinary partnerships, PPCs act through their partners, who in turn must be authorised to provide legal services.
This ensures that PPCs with non-lawyers may conclude mandate agreements for legal services, but that the actual provision of services is only provided by authorised persons.
Right of being heard in court (postulationsfähigkeit)
Section 59l provides that PPCs may appear before courts and authorities and have the rights and duties of a lawyer in such proceedings.
A law firm can therefore be a litigation agent, meaning the exemption from liability under the mandate agreement also applies to those persons appearing in court.
This is a significant improvement for international and English law firms with a branch office in Germany as, until now, this right only existed for lawyers working in Germany.
Offices of a law firm (kanzlei)
Under section 59m, PPCs must maintain an office in which at least one managing lawyer is active. Purely virtual firms are not permitted.
Management of a law firm cannot be assigned to a salaried lawyer. It must always be a partner.
Professional liability insurance
Sections 59n and 59o set out the provisions on professional liability insurance and minimum insurance.
PPCs must now take out professional liability insurance. Under the previous law, this obligation only existed for RA-GmbHs.
The personal duty of lawyers to have professional liability insurance for themselves remains.
This new obligation for PPCs places an extra burden on German firms, but it makes a lot of sense with regard to clients.
Experience has shown that English firms with higher coverage English insurance policies have not had to worry about the insurance of the German branch until now.
It’s advisable to start negotiations for an extension of the insurance in good time.
Under section 59p, PPCs may only call themselves rechtsanwaltsgesellschaft if:
- lawyers hold the majority of voting rights and
- the majority of the members of the management body are lawyers
This restriction is because the brand rechtsanwaltsgesellschaft (law firm) creates particular trust over other business advisory professions.
Large tax consultancy firms or auditing firms, where lawyers are regularly in the minority, are unlikely to be able to use the rechtsanwaltsgesellschaft title.
Shared office (buerogemeinschaft)
The rules on office sharing are now regulated by section 59q.
Office communities are companies in which lawyers only join together for a common infrastructure, but each accepts and handles their mandates for themselves.
There’s no joint responsibility for handling mandates and the structure is comparable to English barrister chambers.
Special electronic lawyer’s mailbox (beA)
Lawyers admitted to a German bar must use a special electronic mailbox (besonderes elektronisches anwaltspostfach or beA) for correspondence with courts.
So far, this obligation only applies to individual lawyers.
This mailbox is administered by BRAK and made available to lawyers upon admission.
Identity verification is time-consuming, and the technical installation can be complex. However, it can all be managed with a little patience.
Until 31 December, lawyers must only be ready to receive email. From 1 January 2022, outgoing messages must be sent via the mailbox.
Until now, each lawyer used their own mailbox (even if it was the firm, not the individual lawyer who was mandated).
This made a firm-wide overview of incoming email a time-consuming management tax, especially because of court deadlines in litigation.
From August 2022, PPCs can also apply for an electronic law firm mailbox, which will make all communications with courts much easier. These will not be mandatory, but I suggest that everyone applies.
Foreign lawyers and law firms
Part 12 of the new BRAO rules (sections 206 onwards) are of particular importance to foreign lawyers.
Foreign lawyers can practise their profession and provide legal services in Germany under certain conditions, limited to the areas of law of their home state and international public law (völkerrecht).
As before, foreign lawyers must be admitted to the bar. Admission requirements and procedures are set out in section 207.
Foreign law firms
The central provision for foreign PPCs is section 207a.
Under section 207a, English law firms may provide legal services through a branch office in Germany if:
- the business purpose of the English law firm is to provide advice and representation in legal matters and
- it’s authorised to provide legal services under the law of the state in which its registered office is located
The firm’s partners must be lawyers or members of certain other professions, and the German branch office must have its own management that can represent the company and have sufficient powers to make sure that professional law is upheld.
There may be difficulties for foreign firms whose partners include non-lawyer investors (such as alternative business structures).
It remains the case that association with financial investors is not permitted. For example, German lawyers cannot associate with law firms listed on a stock exchange.
Similarly, private equity firms cannot be admitted as partners in Germany.
If an English law firm is listed on an exchange or has financial investors as partners, it must practise in Germany through separate and independent companies.
Foreign PPCs must also apply for admission to the bar at the location of their German branch.
These foreign PPCs are then subject to certain professional duties. The management of the German branch must include lawyers entitled to manage and represent the company.
Foreign firms are initially authorised to provide legal services under international law and the law of the country of origin of the respective lawyers.
If such firms wish to provide legal services in German or EU law, this must be done by appropriately authorised partners. The same applies if foreign firms want to appear before German courts or authorities.
Transitional provisions are in place for existing law firms, especially those that already have a licence.
Under section 209a, firms have four months after the new regulations come into force to be admitted to the relevant German bar. This means that firms have until December 2022.
As it’s feared that the German bars will be flooded with admission applications from August 2022, applications are not expected to be processed in the short term.
To avoid legal uncertainty, firms that apply between August and December 2022 are entitled under section 209a(2) to provide legal services (section 59k) and to appear before courts and authorities (section 59l) once the application has been filed and before a decision is made.
It’s almost certain that there will be many questions even before the changes to BRAO come into force that will not be easily answered.
But, even if this is the case, it’s generally true that the legal situation in Germany will be better and more reliable in future than it is today.
Many English firms will find that, although there are some additional duties, their obligations to the Solicitors Regulation Authority mean they’re already well prepared.