- during life or after death
= If you plan ahead of time, you can avoid disputes and unpleasant surprises!
by Johannes Reich-Rohrwig1
The transfer of companies, company shares and other assets must be planned in good time and thoroughly thought through. Especially when it comes to companies or company shares, this can make an essential contribution to maintaining and successful development. In my following remarks, I make suggestions that include sociological and family aspects. The aim is to avoid future disputes over inheritance or compulsory share.
”Whoever has money has many heirs,
And whoever has can can die in peace.”
(A verse of the folk song: “Everything is one for me”)
“We would like to have your concerns”
(This is the advertising slogan of Wiener Städtische Versicherung).
Yes, both the inheritance of assets and even the planning of succession planning can actually cause concerns and headaches.
Planning asset succession is crucial both from the perspective of parents (or each individual parent) and from the perspective of the generation of children. Because it is a question of who gets what and how much wealth? When and how should the individual successor be able to dispose of it, alone, or is his disposal restricted by the corset of a company relationship, will requirements or an executor. Or is the generation of successors prevented from disposing of the assets at all by a private foundation or in the form of a subsequent inheritance?
And finally: If the assets are distributed unevenly among the beneficiaries: Will the heir be able to afford to pay the compulsory share claims?
Anyone who wants to answer these questions sensibly, i.e. in line with their interests, cannot offer a single “one-size-fits-all solution”, but must always focus on the circumstances of the individual case. This makes generalizing statements difficult. Nevertheless, I believe that certain trends can be identified and recommendations can be made as to what needs to be considered when planning asset succession and which arrangements regularly prove effective.
My remarks below assume that the asset owner who plans to transfer his assets — let's call him cliché the father — strives to arrange his succession in such a way that his immediate relatives (who would also be legal heirs) — here in my exemplary assumption: his wife as future widow and his three children) — can live in peace with each other so that he does not create extreme inequalities and thus avoid creating the basis for future Settle a dispute. The aim of the succession plan should not divide the descendants, but that they would like to see each other again in the future and have positive feelings about them.
And of course, compulsory share law must also be observed, which could plunge the heir or heirs into financial difficulties or force them to make emergency decrees if beneficiaries of compulsory shares demand the short-term payment of their monetary claims, e.g. company shares — cannot be sold or can only be sold with large losses, e.g. because the articles of association contain sales restrictions. When an heir is appointed as a beneficiary of a private foundation, this problem also worsens: because the beneficiary of the private foundation cannot sell or encumber his beneficiary status and must still finance the payment of the compulsory share to his siblings entitled to compulsory shares.
When structuring the succession, the father will therefore keep an eye on Austrian inheritance and compulsory share law and avoid extreme unequal treatment of his successors. Otherwise, its distribution would be seen as unfair. In addition, compulsory share law imposes certain limits on the father when it comes to unequal treatment2. This also applies to donations that he makes during his lifetime because, within the circle of legal heirs, these must be considered as an inheritance received in advance for an indefinite period of time in order to assess whether the donation triggers compulsory share claims from other relatives.3
Where appropriate, in particular if foreign marital property law is applicable in relation to the wife or future widow, foreign marital property law must also be taken into account.4 This can make inheritance law drafting significantly more complicated.
The same applies to domestic and foreign tax law, which may apply. It is important to think of deferred taxes, which are linked to certain donated or inherited assets (e.g. real estate, company shares, securities) and thus reduce their value in terms of this net proceeds. We must also take into account real estate income tax and any applicable inheritance and real estate transfer tax, which reduce revenue.5 Our neighboring country Germany is a chilling example.
My following remarks are limited to purely internal Austrian aspects when — as in my example — the father leaves behind his wife, i.e. the future widow, and three children upon death and foreign inheritance or matrimonial property law plays no role. Tax law aspects are also excluded here.
Anyone thinking about their asset succession should answer the following questions for themselves in advance:
If you want to plan asset succession prudently, you shouldn't just choose an oversight horizon.
Regardless of all efforts to find appropriate solutions for the future, the human ability to predict the future should not be overestimated.
As far as the date of handing over a company is concerned, the father should not be subject to a miscalculation of his own abilities and his future “performance curve”: It is in line with life experience that most people's physical and mental powers decline as they get older; it's just that you often don't want to admit this. Anyone who misses the right time to hand over the company can cause great damage, virtually destroying their own “life's work.” The father should also remember that the growing generation wants to take over the management of the company in good time — not just at the age of 45 or 50. The “boys” want to be creative and managerial much earlier, without being under the daily supervision or paternalism of the “superfather.” And with the rapid technological developments — keywords: digital transformation and artificial intelligence — it is usually the order of the hour for the father to hand over in good time so that the next generation, which has much more affinity for the new developments, can implement them in good time.
The question may also arise as to whether the father wants his spouse or efficient children in law to join society during their lifetime or after death — permanently or temporarily. It should be noted that, in the absence of any other agreement, the vending Company shares in children in law cannot be reversed because their marriage is later divorced; in fact, the divorce would not eliminate a typical basis of business for the purchase of shares8. However, this could be different when donating company shares or shares on the occasion of marriage9; this is, of course, opposed by the idea that the company relationship is in any case a continuing obligation which, in the prevailing opinion — apart from exceptional cases — cannot be rescinded on a regular basis10.
With regard to spouses and children in law, it is recommended on a case-by-case basis to refrain from their participation in the company and to appoint them only to management if they have the appropriate qualifications. This is particularly due to the fact that almost half of all marriages end in divorce and experience shows that the company is affected as a result of divorce disputes if there are no clear circumstances here. Payment offers of assignment often cannot remedy this to the same extent as if the spouse had not been involved from the outset11. At least in a marriage pact, a retirement arrangement could be made or an offer of donation12 be created. The form of the notary act must be complied with.
In my opinion, when planning succession, a father should not so much pursue his own interests/goals, impose his own (possibly not achieved himself) goals of his descendants, but be guided by the interests, needs and inclinations of his successors so that they can continue to shape their lives independently in the future and get along peacefully with each other. It is therefore important that the father regulates the succession of assets in agreement with all his successors! However, it should also be considered and regulated what happens if this consensus later ceases to exist or successors prove to be unsuitable for business, economically unsuccessful or dishonest.
If the type of assets (e.g.: several houses, securities, company assets) allows it, the first step in succession planning is:
These forms of arrangement have very different effects on the future relationships between heirs and on the ability to dispose of the gifted or inherited assets:
In case segregated assets is each of his successors able to manage or use the assets transferred to him in their own opinion. This enables him to sell inheritance at his own will, reallocate, diversify (i.e. avoid the “clump risk” associated with the family business) and “live his own life” without having to endure the involvement, influence or coordination with his mother, siblings or possibly — after their death — with their children (= nephews, nieces) as co-owners.
When you see in practice how different the characters of the siblings/cousins/nephews/nieces or their needs often are or become over time, the separation of assets among the heirs is usually very appropriate. In this way, it is also possible to prevent the heirs from forming a community of fate with regard to the development of the joint asset/company, which, in the event of poor business development, often leads to mutual recriminations when the company makes losses, is virtually “run down”.
The creation of separate assets naturally presupposes that there is sufficient wealth and that such division measures can be formed. Where appropriate, the testator will order that beneficiary heirs must compensate for differences in value through payments. However, this is only practicable if the financial situation of the payer heir also allows this and does not force him to sell his own assets (through emergency sale), provided that such a sale, in particular of company shares, is possible at all — and not only severely or with significant loss of value. The valuation of assets is also problematic: The heir of a share of a business share can quickly feel disadvantaged or even happy when the value increases accordingly. If the heirs are not blessed with great rationality and composure, this can lead to conflicts.
What are the consequences in the opposite case if the successors joint ownership receive or give them the assets as part of a Social relationship is coming?
Just remember that differences of opinion can easily arise between siblings when managing joint assets: different perspectives on business issues, different interests, but also character traits such as greed, domination, envy and the like can massively impair the heirs' cooperation. Disputes between siblings are common. Dislikes between siblings/cousins that have already developed in childhood often come to light later, especially as soon as the parents have passed away. Even if the siblings are peaceful in themselves, the influence of their spouses/partners can cause disputes if they think that their spouse is disadvantaged, oppressed or undervalued among the siblings.
Positive qualities within the family, such as consideration for the interests of the other, the personal situation of a sibling, a possibly worsening economic situation at the moment, which made it appear appropriate to support them financially and permanently out of family ties or at least to relieve them of certain burdens. The often conjured “Family cohesion” In my opinion, in today's individualistic, sometimes egocentric, consumption-oriented social order that is no longer based on solid values, it is often just a buzzword that is not lived out or that is lost over time.
Experience shows that tensions can exist between successors even at the time of transfer of assets (e.g. as a result of donation or death), and even more so can such tensions arise as a result.13 This is not unusual, but is more in line with the course of events. This should be taken into account when designing asset succession and not — as is often the case — the transfigured image of a”heal”, one”perfect family” Hang on, conjure up the “sense of family” and regard this situation as assured for all the future. Joint ownership or joint company assets in particular can lay the foundation for later disputes and for the emotional breakup of the family.
In many of my lectures, I had asked my — more than 1500 in total — listeners the question of how likely it was that within the family a person called by me as”Querkopf“exists. By “querkopf” I mean a child or spouse with the right of succession who shows completely contrary views, lifestyles, patterns of behavior than would generally be expected within the relevant family. In other words, someone who absolutely does not want what the other family members want, who has no regard for their interests, who does not want to participate in an appropriate discussion and discussion of emerging issues, who expresses nonsensical points of view, who quick-tempered, bossy, perhaps even threatening only wants to assert his own point of view or block the others and, if necessary, with the threat of “blowing everything up” — i.e. to endanger family assets, family businesses, etc. — to enforce them recklessly tried.
The majority of the participants in my lectures gave the question of the probability that there is such a “crosshead” among all successors at around 30%. This probability means that such a “crosshead” is to be expected in approximately every third family. A not inconsiderable percentage and therefore a significant risk potential if assets are transferred in joint ownership or as part of a company relationship: Because in the next generation at the latest, there is therefore a predominant probability that at least one of the family members will be far outside the family consensus.
Emotional or profound disagreements can be stressful:
Not every “lateral thinker” is a “crosshead”
However, care should be taken when categorizing people: Not every time a family member has a different point of view than the rest of the family, this can be labelled as a querulatory crosshead: Disagreements, even if they last for several months, do not have to mean that a family member is acting grossly unobjective or reprehensible. Divergent opinions that question traditional practices, understand, anticipate or implement modern developments can be absolutely necessary for positive corporate development. The current fourth industrial revolution (“Industry 4.0”) and the use of artificial intelligence mean a fundamental change in business processes and business models in almost all industries. Anyone who doesn't understand them or reacts late to them, doesn't change their products and services or at least their business model in good time, is missing out. Current developments in digitization and the use of artificial intelligence are bringing about changes in the “corporate landscape,” which are disrupting many companies — to use a much-used buzzword — and threatening many companies with the downfall. Companies that are unable to participate in these developments — for example because there is no affinity among (family) shareholders for such developments or because the decision-making bodies (managing director/board of directors, supervisory board, advisory board, syndicate meetings) block each other in connection with the introduction of new business or sales models or investments in new technologies — are more likely to fall behind in business in the short term than in the long term. Such companies will sink into insignificance and disappear from the market. For the vast majority of medium-sized and large companies, these new developments pose a serious challenge, not to say a threat. However, it is not yet recognized as such by many entrepreneurs. Some business models and industries may already be doomed anyway. From this point of view, an exit would be the right choice instead of a succession plan, even if it breaks with family tradition.
My forecast: The rise and fall of well-and poorly managed companies, but also the inevitable downfall of companies due to digital disruption, will happen even faster in the future than before. For innovative companies, this means a great opportunity, a high level of development potential that needs to be exploited. Otherwise: - see above!
When people talk so often about the positive value of “family businesses,” it is suggested that there is an “healthy family” or an “intact family” that expertly manages the fortunes of the company, makes do with the available funds and does not stand out due to a luxurious lifestyle that it cannot actually afford. And that family peace would last forever is a (mere) pipe dream.
Anyone who has a bit of life experience knows that life doesn't play out that way.
Hugo Wiener had one of his books eloquently titled:”The dear relatives and other enemies”.
In Social relations — particularly when decisions can be passed by a majority — family members involved in minority groups often find themselves in a situation of being unobjectively outvoted or at least feel powerless when it comes to managing their significant assets. The idea that majority decisions are presumed to be correct because they are supported by a large number of shareholders (“shareholder democracy”)14, is usually at a first and second generation family company with its small circle of shareholders Not really given. Shareholders often also pursue other interests, which they then recklessly enforce as majority shareholders alone, or — if they, without being individual majority shareholders — in the form of a majority syndicate through uniform voting behavior. Just think of the personal interest of co-shareholders in maintaining a well-paid position as managing director/board member for themselves or for family members, even though they are far from being the most capable, not the best possible candidate for the management position.15 From the point of view of the co-shareholders, such a procedure means that the relevant family member is offered “a playground at the expense of others” at the expense of the company's success. In the longer term, this can even lead to the downfall of the company.
Nevertheless, such a personnel policy (nepotism) when filling management positions in family businesses is often in line with the self-image of the majority shareholders. The employment of family members is still understandable to a certain extent if the young family member is given the opportunity for a management role as successor, because you have the expectation/hope that the junior in question will “follow in the footsteps of his successful father,” because his family, entrepreneurial background makes him expect a higher level of social competence and leadership quality, and because his own interest in the well-being of the family business, which he (in the future) to a certain extent is more motivated than a merely employed external manager would be motivated. One possible advantage of the family-related manager can also be seen in the fact that, as a result of his involvement in the family as a “social group,” he is subject to stronger, i.e. family sanctions, than an external manager, so that he is more likely to be expected to conduct business in an honest and interest-based manner.
However, this family sanctioning usually ceases when the common parents die or become increasingly “powerless” at an advanced age, and disputes develop between siblings or, even more so, between cousins. The more distant the relationship, the lower the “bite inhibition”, i.e. the inhibition threshold for entering into a conflict.
Back to family business and whose immanent disadvantages: Because limiting the recruitment of managers and supervisory (advisory board) members to the circle of family shareholders narrows the selection options. As a result, the family business loses the race for the best, the most efficient managers in competition with externally managed companies and thus falls behind.
Ultimately, entrepreneurial success depends not only on intelligence, diligence and commitment — all qualities that I tend to expect from family members of a family business more than the average population — but also requires a certain entrepreneurial fortune. While the efficient and honest but hapless external managing director can be quickly replaced, this is often met with family resistance in family businesses. The exchange of family members in management positions is more difficult and is therefore not implemented or is only implemented too late when there is already a “fire on the roof.”
Although it is certainly difficult to overcome this acquis thinking in corporate or syndicate agreements — which are usually characterized by legal positions (such as special rights to management, joint posting or nomination rights) — to overcome this acquis in the right to fill (nominate) management positions, in the long term, those medium-sized and large companies that fill their bodies with the involvement of external, in practice provide a proven manager of format, i.e. in their management positions Allow non-family managers or even make them obligatory.
In addition, usual corporate or syndicate agreements do not pay enough attention to the potential risks posed by weak, inexperienced family members who have not grown up to their task.
It should be emphasized that the appointment and retention of inadequately qualified managers from the family circle may be the cause of the subsequent downfall of the family business and thus of its complete devaluation. This often results in the decline of the company, in an emergency sale or in insolvency proceedings. According to my observation, a common problem in practice is that the shareholders either do not recognize due to lack of their own expertise or do not dare, out of family consideration, to question and benchmark the success of management, to criticize the management and to demand and enforce the exchange of insufficiently capable or unsuccessful family members from management positions. The share structure or company and syndicate agreements also often prevent the necessary or desirable changes based on the facts. What results is persistence on encrusted structures. Corporate management is becoming inflexible; necessary adjustments are no longer possible.
Another problem faced by family businesses is often the embrace of managers by the family: The personal closeness makes it possible for every family member, no matter how poorly qualified, to give their brother/cousin well-intentioned advice in management, to criticize (however necessary) individual measures. And the envy complex also does its part:
For the successor working in a family business, it can be demotivating and ultimately cause disagreements if his remuneration — although he is efficient, manages the company with foresight and prudence and brings about major successes and increases in value for the company — is low or only mediocre and his services are neither adequately compensated nor appreciated.
One therefore wonders whether it is better in the longer term to implement the majority or the unanimity principle in the company and give the successor entrusted with entrepreneurial management tasks the majority of shares or at least a syndicate agreement as long as he has the corresponding success. Unfortunately, there is no clear answer to this question:
Is in society that majority principle Established, this can quickly lead to reckless majorization, enrichment of one and disadvantage of the other shareholders (group), in which the minority is largely powerless in the long term. This also applies to poor, sub-optimal management of the company and to failed or omitted strategic decisions.
Conversely, setting the The unanimity principle or the agreement high resolution quorums the disadvantage that individual shareholders — whether inexperienced, dishonest or intent on destruction — acquire a “blocking minority” in this way. This gives them considerable “blackmail potential” in order to fall annoyingly, to be bought out/resigned dearly.
In the case of 50:50 investments or other stalemate situations Could/should a contractual mechanism be provided which — if there is a paralysis in decision-making — can quickly put an end to the associated disadvantages.
Viewed over several generations, in my opinion, the majority principle is more effective than the more flexible decision-making principle, and may there also be majorizations — such as a lack of willingness to discuss facts or enforcement of dubious or incorrect decisions — and injustices.
In the following, I would like to address the specific structure of the succession in the company or in the company shares:
Is the father not an individual entrepreneur or sole shareholder, but WithShareholder in a partnership or corporation, his succession planning must also take into account any existing transfer restrictions under the company agreement16 for its share of the company17.
Otherwise, the father may try to obtain approval from his co-shareholders — which deviates from a general provision of company law — to transfer shares to the successor (s) chosen by him while he is still alive. As a rule, this will be easier for the father if he uses his personal contacts and his family ties with the other shareholders during such discussions.
Now on to the succession plan itself:
If the father, after weighing up the pros and cons — see above — comes to the conclusion that he wants to transfer the company or company shares belonging to him to two or more successors — be it among living people or because of death — the division of the share in the company represents a very important decision: Because in the future social relationship of the heirs, the reciprocal rights, obligations, powers of influence and liabilities depend entirely on the legal form of the company and the participation rates, which every successor receives, depends18.
While, for example, the principle of unanimity generally applies to a company under civil law or the OG/KG — this can, however, be amended in favour of the majority principle — the situation is exactly the opposite for corporations.
Here, the gift giver/testator can already prepare — for example after bringing their sole proprietorship into a ltd — influence the future legal status of his heirs as future shareholders by drafting the articles of association accordingly. For example, it may restrict the transfer of company shares, provide for pre-emption, acquisition, co-sale and termination rights and the exclusion of shareholders for important or factual reasons. Articles of association sometimes also give shareholders posting or nomination rights for managing directors and supervisory board members. This is particularly practiced when there are two equally strong successors or “family groups” (50:50), each of whom wants to be involved in corporate management or on the supervisory board. In order to overcome stalemates, it is regulated on a case-by-case basis that the chairmanship of the supervisory board or of an advisory board changes regularly; that shareholders have a right of termination or resignation, necessarily or when defined failures occur, or that shareholders can initiate a share auction in the form of a “Russian roulette clause” or a “Texas shoot out clause.”
Of course, the choice of legal form — whether GmbH/FlexCo or AG — also influences the future legal status of shareholders: For example, shareholders have no right to inspect books. This tends to favor the misuse of company assets, because such abuses are more likely to remain undetected by the AG. In the GmbH, the individual shareholders have a significantly stronger controlling and more influential legal position as shareholders in joint stock companies both on account inspection and on the basis of their individual right of action to dismiss managing directors for good cause and on the basis of legal approval rights for investments in fixed assets (Section 35 (1) Z 7 GmbHG) and in exceptional transactions. In individual cases, this can have positive or negative effects. FlexCo can create a voting interest in the company in the form of “company value shares” amounting to 24.9% of the share capital.19
Will a sole proprietorship gifted or inherited, the father may, with the gift or with the will — if the company belongs to two or more successors in the future — impose on them a specific structure of the articles of association. This then allows reasonable deviations from the legal regulation (such as approval of majority decisions and the other OA contract regulations).
I therefore come to the conclusion:
Depending on the personal relationship between family members, disputes are certainly possible and foreseeable in family companies. In addition to factual differences of opinion, disputes can have family roots, such as the preference given to individual siblings in the past or in the division of inheritance; envy; resentment; jealousy between siblings or their partners; in some cases, a family member does not want to grant the other, efficient siblings/cousins the success of their management and then denies him the consent necessary for certain projects or measures, for example with the reasons that are difficult to refute or objectify, The project was “too risky.”
It is therefore often better for the heirs to transfer separate assets to them than to “chain them together” in joint ownership or in a joint social relationship, so to speak “lock them in a cage.”
This is different when the shareholder-family members have and maintain a particularly good personal relationship with each other; if they have strengths of character, such as consideration, listening, being able to discuss objectively, mutual empathy, and do not demonize other opinions from the outset or dismiss them as absurd or nonsensical. For business inexperienced or less experienced shareholders, it is important to introduce them to their tasks — professionally and in terms of human and group dynamic skills.
The mental implementation of common goals is essential for success as a family business in the generation of successors:20
The private foundation is a suitable instrument for holding together the assets that the founder dedicates to the foundation,
It can be critical when the father brings all his assets — not only the family business, but unnecessarily also other values — into a (single) private foundation and thus completely cuts off his heirs from the independent administration and use of their share of the inheritance. For example, successors cannot even have the money needed to satisfy elementary needs — such as their own house, an upscale and expensive education for the children and a decent standard of living. This is often the source of dissatisfaction and conflict. It is therefore obvious only to contribute the company's assets to the private foundation, but to retain other assets and to donate or bequeath them to the successors for their private assets. For the creation of separate assets vs. joint ownership, see point III above.
In the case of private foundations, the foundation's assets are managed by a foundation board without instructions, who may not be related to the beneficiaries and may not be married or married by marriage. The heirs/beneficiaries depend largely on the Board of Directors for both asset management and distributions (contributions to beneficiaries), and this effectively acts as an arbitrator between them in the event of diverging interests of the beneficiaries. If he fails to achieve a balanced, universally accepted balance between the more monetary interests, namely the distributions to the beneficiaries on the one hand and the self-financing of the companies belonging to the foundation, the peaceful administration of the foundation is at risk.
If you want to give each beneficiary greater influence over the assets allocated to them in the form of a private foundation, the installation of a Advisory Board considering that each of the children (their family group) is represented in the future. The Advisory Board may be given the task of regularly appointing members of the Foundation Board, including, where appropriate, their dismissal and important business decisions in the form of approval and consultation rights.
It would also be conceivable that the father would establish a separate private foundation for each of his successors, which would hold the company shares assigned to the child in question and from which each child could choose “their” foundation board themselves. This construction promotes flexibility for each successor and can optimize tax aspects, but is rather disadvantageous for the cohesion of core assets. The actual basis for the relationship between the children's foundations is then in turn the company's social contract.
But as a general criticism of the private foundation — unless it is irrevocably required for tax reasons — it is true that it is impossible to see why adult children should be excluded from managing assets or significant parts of assets in the long term.
Professor Peter Doralt Once formulated his criticism of foundation law aptly:”A generation of incapacitated entrepreneurial heirs is growing up here, who [at the private foundation] the administration and expansion of family wealth is denied.”
Cases in which the private foundation is established precisely because there is a handicapped child or who is clearly unsuitable for managing one's own asset management must be excluded from this statement, or the successors are at odds with each other.
Another negative effect of private foundations is that the members of the Board of Trustees generally only exercise their position in the private foundation on a part-time basis. Such foundation directors are often family friends, tax advisors or lawyers. Detailed knowledge of the relevant sector of the family business belonging to the foundation and strategic management are usually not their strong points. Foundation boards are also guided in their decisions from the point of view of possible personal liability. They therefore tend to act risk-averse. As a result, the Board of Directors of the Foundation only makes important entrepreneurial decisions, such as innovations and strategic investments involving the taking on of large liabilities, with great reluctance and can therefore put the companies belonging to the Foundation behind in competition with well-managed companies.
It is often the aim of the father or his successors to make more detailed regulations on the rights of the successors as shareholders of the family business. The course is set in the articles of association, in any syndicate agreement or by testamentary conditions, if a private foundation is established, in the foundation certificate or additional deed.
If the successors become shareholders of a company, the following factors generally play an important role: the extent of their participation and voting rights; whether the principle of polyvoting or unanimity or qualified majority decisions apply to resolutions in the company. Key positions also include secondment or nomination rights for management (management board, supervisory board or advisory board members) and the catalog of transactions subject to approval, for which management must obtain approval from the supervisory or advisory board.21
In the case of corporate and syndicate agreements, it is repeatedly shown that guarantees or secondment rights in the management/board of directors or supervisory boards, which are made for the benefit of shareholders of the first generation of heirs, prove to be counterproductive and disadvantageous in the long term and particularly for the second or third generation. This is because such contractual obligations often prevent you from being able to properly respond to poorly qualified or unfortunate family managers with their replacement. Excessively high approval requirements (qualified majorities or unanimity) can also be a welcome reason for individual shareholders to use their resulting blocking minority imobjectively.
A “sunset” provision would be conceivable here in order to be able to bring about the necessary change to the articles of association or syndicate agreement at a later date: Accordingly, the applicable rules are amended (e.g. majority of decisions; waiver of posting or nomination rights; recruitment of external managers; transformation of the company into a joint stock company) when the company exceeds or falls below certain key figures (e.g. with regard to profitability; size; number the employee; more detailed benchmark criteria). Of course, a relevant shareholder (majority) resolution could also be provided for.
In medium-sized and large family businesses in particular, there is increasing recognition that family shareholders should adopt a “family constitution” in order to set their rules (“rules of the game”) for the future. Are these “syndicate agreements” in a new guise?
To a certain extent: yes! After all, according to the Governance Code created for family businesses, the “family constitution” should also22 Regulate those issues that are usually regulated in corporate or syndicate agreements, or even in foundation (additional) documents, such as
an owner can leave the joint family business (point 6 Ö-Fam-GK).
Up to this point, the content of the Ö-FAM-GK corresponds to the content of the corporate or syndicate agreements that are usual in practice. The added value of a family constitution — compared to the usual preparation of corporate or syndicate agreements by the legal advisor alone — is that the family constitution regularly includes successors go on an exam yourself for one or more weekends and jointly the rules of the family constitution (often under guidance or moderation by a coach) elaborate. This group dynamic process of defining the goals for the future of the family business and for their own future actions as its shareholders and putting them on paper not only results in a more serious discussion of the issue, but also a mutual understanding of the family members, what their thoughts and views on these and those problems are, and often also the first-time recognition that the family members depend on each other in their future interaction (unless one of them is a majority shareholder), i.e. trusting and fruitful cooperation is required to successfully maintain and expand their assets in the family business, which in individual cases may also include taking account of and withdrawing their own goals. Such exam weekends for successors bring about a process of mental unification. The exam brings the family members together unless there is a scandal and a final break because resentment and aversion within the family is “too deep.”
Finally — and this seems to me to be his most important piece of advice — the Governance Code for Family Businesses provides recommendations for communication within the owner family and with the outside world (point 8.2) and the recommendation for institutionalized family meetings in the form of regular “family days” or family events (point 8.3 Ö-FAM-gK).
In my opinion, it should be added that in order to deepen the emotional bond of kinship, children and adolescents — i.e. not only siblings but also cousins — should spend holidays together; this promotes cohesion, that “welds together.”
It is also recommended to promote advanced entrepreneurial (technical or commercial, international) education among family members in order to increase the likelihood of being able to recruit qualified managers or supervisory board members from within the family.
In my opinion, what is missing or underemphasized in the Ö-FAM-GK and what is essential to strengthen the affinity of owners from the entrepreneurial family (relatives) is also that the management
This offensive information policy towards owners is intended to ensure that there is no information gap between management and family shareholders. In this way, possible problematic developments can be identified in good time and a subsequent surprise effect, which is often associated with loss of trust, can be avoided from the outset. At the same time, this information to be provided by management (“delivery debt”) helps the family shareholders to recognize whether management is engaged at all and, if so, whether it is engaged in corporate planning and strategy in a qualitatively sound manner and thus ensures the future of the company.
However, family shareholders will also have to be required to maintain confidentiality so that sensitive internal company information does not leak out. Cases in which information is leaked or a family shareholder becomes a competitor are then particularly problematic23 or is employed by one of them.
In practice, people are often far removed from an open information policy towards family shareholders: The family “pecking order” is reflected in the corporate hierarchy; management withholds information; makes itself indispensable. With their advantage in knowledge, individual family members buy their shares in the company cheaply from others. Women often still have a lower status and are discriminated against when it comes to information or otherwise24.
There are usually two problems inherent in all regulations — whether a corporate or syndicate agreement, a family constitution or foundation certificates. Namely, future problems or conflicts are not considered or given too little consideration, are not foreseen and there is then a lack of appropriate regulations:
Amendments to existing contracts — i.e. corporate and syndicate agreements, but also the family constitution could be classified as a type of syndicate agreement — are known to be a problem for lawyers:
Only preliminary contracts are subject to the circumstance clause (Section 936 ABGB), otherwise the principle of compliance with the contract (“pacta sunt servanda”) applies. In principle, contract amendments can only be agreed upon with the consent of all contracting parties25. In the case of corporations, this generally applies to qualified majorities. However, the majority vote must not unduly affect the shareholders or interfere with their special rights26. Unanimity or “blocking minorities” can be extremely obstructing the necessary flexibility and may even jeopardize the company's existence in the short, medium or long term. Over time, the company's framework conditions, technologies, the sales model, developments at home and abroad and — personally — the success and farsightedness of participating shareholders may change; this is almost likely as the family shareholders get older. For example, the addition of a strategic partner, the abandonment of existing business areas or technologies, the purchase of another company, which, however, increases the indebtedness of the family business and thus makes profit distributions impossible or decreases for the next few years, or the merger with another company to achieve critical size in growing markets could also be desirable or necessary. This is often in conflict with the resulting need to change the shareholders' fixed influence and share structures. Flexible answers would be required.
This finding should be an occasion to include contract clauses in the contracts that regulate the governance of the family business, more than has been the case so far, which allow adjustment to changed circumstances27 and facilitate genuine responses to contract breaches by shareholders.
However, lawyers must admit self-critically: Good contract regulations alone cannot ensure the smooth and economically successful functioning of the family business.
The human factor is much more decisive: The goodwill within the family for positive and fruitful cooperation, also or above all in the interest of the company. And this cannot primarily be regulated by law, although the duty of loyalty28 and the prohibition of abuse of rights29 may determine or restrict the exercise of company rights to a certain extent. If it is possible to strengthen the family basis of trust and make positive use of the cohesion within the family for the company, it will be a success story. How long this lasts depends on the people involved, the shareholders.
Otherwise — if the centrifugal forces are too great and the cohesion is too low — the “emergency brake” should be applied earlier in good time, whether through joint sale to third parties (keywords: “co-selling right”, “co-selling obligation”), or that, within the circle of family shareholders, some of them buy out others. For pricing, the contract could provide for auction-like procedures such as a “Russian roulette clause” or a “Texas shoot-out clause.” If the partnership or syndicate agreement sets a discounted purchase price (“syndicate price”) for this buyout, an improvement agreement could and should also be concluded for the departing shareholder30 (“repair certificate”; additional purchase price payment obligation) are provided if the acquirer in turn resells the company shares that have just been purchased cheaply — namely at a syndicate rate — at a profit, for example within five or seven years.
Based on the frequently found self-image that a “family business” is a sui generis type of company with (supposedly) perpetual existence, contract practice often also lacks “exit” regulations, such as a right of termination, a co-sale right, co-sale obligations, and put and call options31. In fact, the interest-based opportunity to leave a company relationship in an orderly manner — and not be bound ad infinitum — can prevent conflicts preventively and decisively prevent the destruction of value due to internal shareholder conflicts.
Succession planning should also include the aspect of future care for the surviving spouse. For them, aspects other than a strict division of assets or allocation of company shares may also be appropriate:
Assuming, for example, that the widow has already reached an advanced age or that there are perhaps not so many dividing measures that each of the successors, including the widow, can be endowed with their own share of assets, then instruments such as granting a fruit participation right or a right of residence of the surviving spouse in the previous married home are certainly considered here (see also the legal right of residence of the surviving spouse in the previous married home32 as part of the “legal advance legacy”). Current money requirements could be covered by a pension legacy with monthly payments made by the children to the widow.
In addition, the surviving spouse's legal maintenance claim against the estate is also subject to33 and the heir as well as on the legal advance bequest to the household contents34 point out.
However, it should also be remembered that the widow is only used as a previous heir and the children as subsequent heirs. In this way, it is possible to ensure that the substance of the property donated to the widow remains within the family circle.
Good advice is not expensive and timely planning of the transfer of assets can avoid high follow-up costs and loss of value, which would be associated with disputes between heirs.
I would be happy to advise you
Please contact me at
Address:
Stadiongasse 6-8/2nd floor/23, 1010 Vienna
https://www.rr-law.at/
Johannes Reich-Rohrwig
1 A revised version of my article published in the magazine ecolex in 2019, § 683 ff.
2 J. Reich-Rohrwig, Inheritance Law 2 2020, 112f.
3 J. Reich-Rohrwig, Erbrecht2 2020, 138ff, 143ff.
4 For example, the lump sum compensation of ¼ of the value of the estate under German marital property law.
5 J. Reich-Rohrwig, Erbrecht2 2020, 26f, 147ff.
6 For standard problems of the intergenerational conflict, see J. Reich-Rohrwig, Succession Planning and Willensbildung in der Familienkapitalgesellschaft, in Bertl/Mandl/Mandl/Ruppe (ed.), Die Kapitalgesellschaft nach der Steuerreform 1988 (1989), 73, 81ff.
7 See Supreme Court 14.11.1991, 8 Ob 534/91, ecolex 1992, 169; 11.2.1997, 10 Ob 34/97s, ecolex 1997, 774; s also BGH 5.11.1984 — II ZR 147/83 BGHZ 92, 386 on the application of the succession clause of a GmbH when the inherited share of a community of heirs includes partly successors and partly non-successor heirs. The disposal of the co-heir's share in an estate, which includes a share in a GmbH, does not require the approval required for the assignment of the share. However, the acquirer may be obliged under obligations to restore the statutory legal position with regard to the share in the business.
8 Supreme Court 23.9.1959, 5 Ob 387/59, JBL 1960, 187 with note Gschnitzer; 2.11.1976, 5 Ob 667/76, NZ 1979, 172 = EFSlg 27.123 (see Bauerreiß, NZ 1977, 81ff); on the guarantee: continued marriage is not a typical contract requirement: OGH 8.11.1970, 7 Ob 207/70.
9 Bauerreiß, NZ 1977, 81ff. To challenge the donation made with regard to marriage due to motivation, Supreme Court RIS Justice RS0017750; RS0017677. To revoke the donation in accordance with Section 1266 of the Austrian Civil Code by that spouse who has no or only equal fault in the divorce, OGH RIS Justice RS002300. For reendowment into a private foundation OGH 4.11.2013, 10 Ob 22/13b.
10 Gschnitzer in Klang² IV/1, 137; Rummel in Rummel/Lukas, ABGB4 § 859 Rz 43; Wiebe in Kletečka/Schauer, ABGB-ON 1.03³ § 859 Rz 24; J. Reich-Rohrwig, JBL 1987, 421 at FN 73 MWn.
11 See J. Reich-Rohrwig, transfer offer for GmbH shares, WbL 1987, 229ff.
12 See OGH 25.11.1997, 1 Ob 61/97w (unpublished in this respect).
13 In order to avoid future disputes over the division of assets and values, it is therefore advisable to obtain unconditional or conditional waivers of inheritance and compulsory share from the remaining legal heirs, with which at least the valuation of the assets donated to the individual heirs is virtually eliminated and binding and thus eliminates subsequent disputes over the assessment and the need for compensation payments for compulsory share claims.
14 See OGH 20.5.2008, 4 Ob 229/07s, ecolex 2008, 831 (to point 3.3.) with reference to BGH II ZR 261/86, NJW 1988, 411.
15 For the selection of board members, see J. Reich-Rohrwig/Szilagyi in Artmann/Karollus, AktG6 § 75 Rz 109.
16 J. Reich-Rohrwig, Succession planning and decision-making in the family capital company, in Bertl/Mandl/Mandl/Ruppe (ed.), The corporation after the tax reform 1988 (1989), 73, 88ff.
17 On the ineffectiveness of a gender-discriminatory succession plan for the general partner share in a KG: OGH 241, 2019; 6 Ob 55/18h; see also OGH 10.10.1986, 3 Ob 598/86, GesRZ 1987, 44.
18 J. Reich-Rohrwig, Individual Questions of Statute Drafting at GmbH, in Kalss/Rüffler (ed.), Statute Design in GmbH — Possibilities and Limits (2005), 17, 19f.
19 For this, see J. Reich-Rohrwig/A. Reich-Rohrwig/Kinsky, Flexible Kapitalgesellschaft Rz 8.1 et seq.
20 See point 7.2 below. family constitution.
21 See J. Reich-Rohrwig/Ginthör/Gratzl, GmbH2 General Assembly Handbook (2021) Rz 1.186ff.
22 “Austrian Governance Code for Family Businesses, Guidelines for Responsible Management of Family Businesses and Business Families”, version dated June 2017, ed. From Bankhaus Carl Spängler & Co AG and INTES Akademie für Familienunternehmen GmbH — abbreviated below as “Ö-FAM-GK”.
23 See Engin-Deniz, E-Note to OGH 27.10.1992, 5 Ob 1574, 1575/92 ecolex 1993, 678.
24 See OGH 24.1.2019, 6 Ob 55/18 h.
25 See OGH 25.3.1987, 1 Ob 716/86 JBL 1987, 782.
26 See Supreme Court 18.12.1980, 5 Ob 649/80 SZ 53/172 = GesRZ 1981, 44; 15.10.1985, 5 Ob 526/84 GesRZ 1986, 36 = NZ 1986, 282; 16.2.2006, 6 Ob 130/05v GES 2006, 219, 221 = ecolex 2006/282, 661 (Interventions in membership must be measured against the criteria of necessity and expediency).
27 For “adjustment clauses” and “renegotiation clauses,” see Fenyves, The influence of changed circumstances on long-term contracts, report on the 13th ÖJT 1997, 70ff.
28 For the consent requirement based on the fiduciary obligation, see J. Reich-Rohrwig, GmbH-Recht1, 359ff; J. Reich-Rohrwig, restructuring through simplified capital reduction and increase, GesRZ 2001, 69ff (75ff); OGH 30.1.1948, 2 Ob 28/48, SZ 21/62; 22.11.1988, 5 Ob 626/88, JBL 1989, 253 (Thiery) = HS 18.300; 26.2.1998, 6 Ob 335/97a, Ecolex 1998, 557; 19.5.1998, 7 Ob 38/98h, Ecolex 1998, 711.
29 See Supreme Court 7.3.1991, 6 Ob 1549, 1550/90, Ecolex 1991, 394; 27.2.2017, 6 Ob 122/16h, GesRZ 2017, 181 (Kalss) = ecolex 2017/452, 1083 (Rizzi); 23.5.2007, 3 Ob 59/07h, NZ 2008/50 = HS 38.081; 26.10.1955, JBL 1956, 72; J. Reich-Rohrwig, GmbH Law 1, 329.
30 See OGH 13.7.2007, 16 Ob 148/07v, ecolex 2007/384, 929; J. Reich-Rohrwig, M&A: Interpretation of purchase price adjustment, earn-out and improvement clauses, in Lang/Weinzierl (ed.) FS F. Rödler (2010) 763 ff; Schober, Earn-out clauses in M&A transactions: Target figures, risk allocation and contract drafting, ecolex 2026, 117ff.
31 J. Reich-Rohrwig, succession planning and decision-making in the family capital company, in Bertl/Mandl/Mandl/Ruppe, (ed.), op cit, 73, 92ff.
32 SECTION 745 ABGB.
33 SECTION 747 ABGB.
34 SECTION 745 ABGB.
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