Preliminary Remarks
When founding or acquiring a company, financial or operational issues often take center stage at first. Contractual matters, particularly the forward-looking drafting of the articles of association, are sometimes overlooked in this process. As the business progresses, the need for action in this regard is often not recognized, or any subsequent amendment to the articles of association is subject to the approval of co-shareholders. The importance of a (corporate) legal structure tailored to the entrepreneur’s needs—including the drafting of the articles of association—is frequently underestimated and dismissed as “standard.” The (negative) consequences often become apparent later, when practical circumstances create an urgent need for action. In the “worst-case scenario,” it is then too late to establish the necessary provisions.
The scenarios and structuring options are extremely diverse, so this section is intended merely to raise awareness of the topic through a few examples. In the context of business succession, for example, the provisions governing the transfer of company shares or succession to the entrepreneur’s shares are of particular importance—such as provisions for transferring shares to successors during the entrepreneur’s lifetime or for succession in the event of the entrepreneur’s death. These issues are particularly relevant for owner-managed companies and family-owned businesses.
With regard to the transfer of company shares, the question always arises (the answer to which may vary depending on the type of company) as to whether and how the intended succession planning can be effectively implemented based on the existing articles of association, and what consequences might otherwise arise.
Transfer During the Entrepreneur’s Lifetime
The transfer of company shares during the entrepreneur’s lifetime to one or more designated successors generally poses no legal problem if the transferring entrepreneur is the sole shareholder of a GmbH. Any approval requirements under the law or the articles of association—such as those of the shareholders’ meeting or co-shareholders—or other statutory requirements or rights of the shareholders do not pose an obstacle in this regard, since the transferring entrepreneur, as the sole shareholder, can grant the necessary approvals or amend the articles of association as desired.
The situation is different if the transferring entrepreneur is not the sole shareholder and, under the law or the articles of association, is required to obtain the consent of the co-shareholders for the transfer. For example, in a civil law partnership (GbR) as well as in partnerships such as a general partnership (oHG), limited partnerships (KG), and GmbH & Co. KG—subject to any contrary provisions in the articles of association—the transfer of partnership interests always requires the consent of all other partners. The German Limited Liability Companies Act (GmbH-Gesetz) does not, in principle, provide for a consent requirement in favor of the other shareholders in the case of a GmbH; however, such a requirement is typically stipulated in the articles of association (a so-called transfer restriction clause). In addition, it must be examined on a case-by-case basis whether, pursuant to the articles of association or any additional shareholders’ agreement, the co-shareholders are entitled to other rights in connection with the intended transfer of shares—such as a right of first refusalor co-sale right. In such situations, the entrepreneur wishing to transfer shares may find that the transfer of company shares to the desired successor(s) is made more difficult, subject to conditions, or even completely thwarted.
In the case of a multi-member company, care should therefore always be taken at an early stage to ensure that the articles of association (along with any co-owner agreement that may also exist) allow for future succession arrangements without these being hindered or even prevented by co-owners. Co-shareholders will typically want to claim the same rights for themselves, so it is important to carefully weigh whether and to what extent the shareholders wish to allow each other the freedom to transfer shares.
Transfer Upon Death
The need for review and regulation typically becomes even more complex when it comes to succession to a corporate interest upon death—that is, the question of who succeeds the deceased shareholder in their shareholder status.
First, there are differences here as well among the various legal forms (e.g., GbR, oHG, KG, GmbH) within the framework of statutory provisions. Unless otherwise provided for in the partnership agreement,
• under the current legal framework, the death of a partner in a civil-law partnership (GbR) results in its dissolution (changes will take effect under the MoPeG as of January 1, 2024, and are not discussed in detail here),
• a partner in a general partnership (oHG) withdraws from the partnership upon his or her death; in principle, the heirs receive a settlement in lieu of the partnership interest—unless this is excluded by the partnership agreement,
• Upon the death of a general partner (Komplementär) in a limited partnership (KG), that partner ceases to be a member of the partnership; unless another general partner exists or is appointed, the partnership is dissolved. In contrast, the limited partnership interest of a deceased limited partner passes (pro rata) to his or her heirs;
• The GmbH business share of the deceased shareholder passes to his or her heirs (as a community of heirs).
The articles of association may deviate to a large extent from the statutory provisions outlined above; therefore, the shareholder(s) should carefully consider whether succession (with the company continuing to operate) should be possible at all (unless already provided for by law or the articles of association) and who should be entitled to succeed to the status of shareholder in the event of a shareholder’s death. The persons entitled to succession under the articles of association may be specified in the articles of association. For example, a provision could be included under which the company is continued with the heirs of the deceased partner (unless this is already the case by law). Furthermore, it may be stipulated, among other things, that only the heirs (or legatees) of the deceased partner who meet certain requirements specified in detail in the partnership agreement (e.g., only “lineal descendants”) are entitled to succeed.
In the case of a partnership, if no heir meets the requirements for succession set forth in the partnership agreement, the partner generally ceases to be a partner upon his or her death, whereas his or her heirs typically receive a settlement. If only one or a few of the heirs meet the requirements for succession, a provision in the partnership agreement often applies whereby these heirs succeed the deceased partner (pro rata) directly at the time of death, while the remaining heirs do not receive a stake in the partnership (and usually do not receive a settlement payment either). The details depend on the specific provisions of the articles of association in each individual case.
In contrast, in the case of a GmbH, all heirs initially assume the status of shareholders (undivided as a community of heirs). If they—or any one of them—do not meet the requirements for succession set forth in the articles of association, the articles of association of the GmbH may, for example, grant the remaining shareholders the right to acquire the deceased shareholder’s shares within a transition period following notification of the shareholder’s death —and, if applicable, subject to other stipulated conditions (e.g., failure by the heirs to transfer the relevant shares to the “eligible” heir(s) within the prescribed time limit)—to redeem the shares in question by resolution of the shareholders. In this case, the ownership interest attributable to the shareholder excluded by the shareholders’ resolution is typically transferred, for economic purposes, to the remaining shareholders. Details here also depend on the provisions of the articles of association in each individual case. The departing shareholders generally receive a severance payment in accordance with the articles of association, provided that such a payment is not precluded by the articles of association.
If individual heirs succeed to the deceased shareholder (because they meet the requirements for succession), while other heirs do not (typically without receiving a severance payment), this may also have implications for the distribution of the estate and can lead to potential claims for compensation among the heirs. Furthermore, when structuring the arrangement, any statutory claims to a compulsory share or supplementary compulsory share by statutory heirs who have not been (sufficiently) provided for must be taken into account. Particularly in situations where the business constitutes the majority of the decedent’s estate, the question of how to achieve financial compensation among the heirs or those entitled to a statutory share without depleting the business’s assets may arise to a significant degree. The possible scenarios and structuring options are diverse and always require a thorough review and assessment on a case-by-case basis.
Entrepreneurs should therefore, when drafting the articles of association, pay particular attention to the succession provisions that will apply in the event of their death (especially an unforeseeable early death). It is strongly recommended to seek advice on these complex and multifaceted issues, which—in addition to corporate law—involve, in particular, aspects of inheritance law and structuring options (such as, in addition to appointing heirs, the granting of bequests, the establishment of a partition order, etc.) must be taken into account. In this context, estate planning arrangements should always be coordinated with the provisions of corporate law to ensure a functional, holistic solution and to prevent the desired succession from being (unintentionally) compromised. For example, one should avoid a will in which the business owner names heirs in the expectation that they will have equal ownership interests in the company, but who may not—or not all of whom may not—meet the requirements set forth in the articles of association for persons entitled to succeed in the event of death, and who therefore, as a result, cannot assume the deceased’s shareholder status (in accordance with their share of the estate) or, in the case of a GmbH, the shares of the deceased shareholder may be redeemed in full by the remaining shareholders. If, for example, the articles of association provide only for biological descendants as successors upon death, the spouse or, for example, adopted children—would not assume the deceased’s shareholder status in a partnership; or, in the case of a GmbH, the deceased shareholder’s shares could be redeemed by the remaining shareholders—depending on the specific provisions of the articles of association—possibly by a resolution of the shareholders, even if, based on the relevant inheritance law provisions (statute, will, or inheritance contract), all heirs were supposed to succeed to the deceased partner’s partnership interest (on an equal footing) in accordance with the deceased partner’s wishes. Coordinating the provisions of the articles of association with those of inheritance law at an early stage should lay the groundwork for the subsequent implementation of the desired succession plan.
Recommendation
When drafting the articles of association (as well as any additional shareholder agreements, if applicable), potential succession scenarios—both during the shareholder’s lifetime and in the event of death—should be considered early on and addressed in such a way that the intended succession can be implemented without difficulty. This will help avoid lengthy and potentially fruitless negotiations with the co-partner later on regarding the inclusion or amendment of such provisions and will also set the desired course in the event of the partner’s death (which could occur at any time). In this context, the provisions of inheritance law must always be observed and taken into account.
When drafting testamentary dispositions (will or inheritance contract), the provisions of corporate law—which take precedence in the event of a conflict with the provisions of inheritance law—must always be taken into account in order to ensure consistency and coordination between the provisions of the articles of association and those of inheritance law, thereby achieving the desired succession arrangement in the event of death.
In all of this, tax law considerations must also always be taken into account; therefore, early and comprehensive advice on this complex of issues is advisable.
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Disclaimer
The information contained in this article is of a general nature and is not tailored to the specific situation of any individual or legal entity. It is provided solely for general informational purposes and does not constitute advice or any other form of legally binding information. BRL BOEGE ROHDE LUEBBEHUESEN assumes no warranty or liability for the accuracy or completeness of the content of this article, nor for any action or omission based on information contained herein. For further information, please contact: info@BRL.de.
