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

Abstract

The question of whether and when expulsion and valuation clauses in partnership agreements or the articles of close corporations are valid has occupiedGermancourts as well as legal scholars formanydecades. While the courtsnowadaystake a rather restrictive stance on the validityand 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 caselaw 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 questionwhetherandhowthis restriction of the partners’ and shareholders’ freedom of contract can be justified. It comes to the conclusion that limiting themembers’privateautonomyonthe issues of expulsionandvaluationof theexitingmember’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 morein line with English and U.S. laws on closely held business associations.