Planning Steps for Successful Business Succession in Germany

In German law, there are multiple ways to administer a business estate. On the one hand, there is statutory succession, which applies when no will is present. On the other hand, individual wishes that deviate from the statute can be applied. These wishes can be set out in either a will or an inheritance contract. However, the will is the most used variety.

Because statutory succession often does not mirror the individual wishes of the testator, it is advisable to arrange the succession in advance by will in the event of the entrepreneur’s death. In doing so, the business should establish clear conditions for succession. In the case of interpretative gaps or an unclear intention in the deceased’s will, the tribunal is forced to construe the will. In this process, the presumed will of the testator is explored, but there remains a residual risk that the testator’s wishes may not be considered thoroughly.

Careful preparation secures the testamentary business succession. In doing so, it is essential to not only pay attention to the testator’s will but also if the will complies with the corporate contract and, if necessary, adapt it to the will. Even if German inheritance law and corporate law interact closely with each other, corporate law takes precedence over inheritance law. Therefore, it is essential to review if the testamentary succession does not contradict the corporate law regulations. In case of contradiction, it is possible that your testamentary wishes fall into void and therefore cannot be considered.

Even if you have created a will that complies with all relevant legal areas, disputes among the heirs may still arise. Then, an estate administration is often appointed for the company’s part. The execution of the will can be appointed by the testator in their will or inheritance agreement. The appointed executor will then execute the deceased’s will, § 2203 BGB. In doing so, they are legally authorised over the succession that forms part of the will’s execution. This is an especially reasonable step for businesses to lead them safely through intergenerational change. Once the testamentary execution has been appointed effectively, it is no longer possible for the heirs to avoid it. There are two distinct kinds of testamentary execution:

The testamentary execution is limited to a short timeframe and only serves the purposes of the inheritance. It is called the “Abwicklungsvollstreckung” (settlement execution). This is the statutory default case.

The “Verwaltungsvollstreckung“, § 2209 BGB (administrative execution), is generally ordered by the court. This kind of execution does not encompass the whole estate but rather certain parts of the estate. In contrast to the “Abwicklungsvollstreckung”, the heirs are deprived of control over the estate for a certain period, which is sensible if they are inexperienced or even underage heirs.

The admissibility of the order of execution depends on the legal type of the business—the same as the heritability itself. Furthermore, the execution of the will can be excluded from the partnership agreement. But even for such scenarios, there are alternatives, like the “Treuhand—oder Vollmachtlösung” (trust and power of attorney solution), both of which are forms of a power of attorney to dispose of the estate.

Generally, the company shares of a civil-law partnership (GbR) are not heritable by law. Instead, the partner is removed from the partnership upon death, and the other partners then continue the partnership, § 723 I Nr 1 BGB. The same applies to the General Partnership (OHG) and the Limited Partnership (KG).

Accordingly, the only consequence of a partner’s decease is his withdrawal from the partnership. If this is not the desired consequence and if the company shares are supposed to be heritable, it must be explicitly written in the partnership agreement.  If, in the event of death, the partnership is supposed to be dissolved, there must be a dissolution clause in the agreement.   In this case, the company share of the deceased partner is transferred to the other partners, who are obligated to pay corresponding compensation to the heir. The legal basis for such compensation for the above-mentioned partnership entities is regulated in § 135 HGB.

The only exception is the Limited Partnership. If a limited partner dies, the partnership will be continued with the heir unless a differing contractual provision is used. However, this regulation can be deviated from by using a continuation clause in the partnership agreement.

According to German corporate law, succession in partnership entities is only possible if outlined in the partnership agreement. Therefore, specific succession clauses, namely the “simple” or “qualified” succession clause, are used in the contract to lay out the conditions under which the succession is executed.

The “simple” succession clause enables the partner of a partnership entity to bequeath their heir. A possible issue arises when there is more than one heir. If, within a group of heirs, the individuals do not reach common ground on how to proceed with the partnership’s company shares, a possible risk of the partnership’s fragmentation might occur. The “qualified” succession clause is used to prevent this from happening. This makes it possible for the successor to choose certain people as their heir who hold characteristics that qualify these individuals better than others to be the successor’s heir.

However, even with these clauses, it is essential to consider possible overlaps with German inheritance law. The succession clauses must not contradict inheritance law-regulated provisions. If this happens, the succession clauses and the inheritance law regulations will cancel each other out.

If a partnership has two partners, and one of them withdraws upon death, the whole partnership will be dissolved. The reason is that a partnership always requires at least two people. With a dissolvent, the partnership’s assets are then automatically transferred to the living partner.   The same goes for the General Partnership and the Limited Partnership, §§ 105 III, 161 II HGB.

The corporation’s shares are freely inheritable. Succession clauses, as explained above, are not necessary. In a corporation without limits, the heir interstates the company shares in a “community of heirs.” This is similar to joint ownership, only in the context of multiple people inheriting something together as a group. This community of heirs exercises their voting rights as a community, for example, to avoid a deviation from consensus. The voting right within the group is exercised through a majority vote.

In the context of a stock corporation (Aktiengesellschaft), § 69 I AktG  (German Stock Corporation Act) specifies that a typical representative must exercise rights from shares. This means that shareholders cannot individually exercise their rights; instead, they must appoint a representative to act on behalf of the collective interests of the shareholders.

Each corporation operates under its specific regulations; however, it is crucial to ensure that these corporate guidelines align with inheritance laws to effectively realise your intentions. Given the complexities at the intersection of corporate and inheritance law, careful consideration is essential to upholding your wishes.

In the case of a sole proprietorship, the business becomes part of the estate as a whole in the event of legal inheritance (§ 1922 BGB). If there are multiple heirs, it passes into the communal assets of the heirs’ community (§ 2032 BGB). The heirs can then continue the business as a community of heirs.

Successful planning of business succession enables you as a business owner to make long-term strategic decisions for the business, to know it is in safe hands. At Schlun & Elseven Rechtsanwälte, our lawyers gladly support you with these important decisions.