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The Importance of the Shareholder Agreement in Company Succession
The shareholders' agreement (ABV) is frequently used in public limited companies and also plays a prominent role in company successions. With regard to a succession, the shareholders' agreement can represent an important structuring and control instrument and is also useful during a possible transitional phase, during which both the retiring and the succeeding owner hold shares in the company. The same can be said of the shareholders' agreement in the case of a limited liability company, although in practice it is of much less importance.
In a company succession, the planning of the succession of the ownership of a company is usually in the foreground. This takes place in the case of corporations as a share deal (transfer of shares) and in the case of companies without legal personality as an asset deal (transfer of assets). Depending on the succession, a distinction is made between a management buy-out (acquisition by the existing management) or a management buy-in (acquisition by an external management). If the acquisition of a family business is carried out by a family member, it is also referred to as a family buy-out. In every case of succession, the interests of the parties involved and in particular those of the business must be put into a reasonable relationship. If the business is to be transferred within the family, the ABV must also be designed in accordance with matrimonial and inheritance law instruments.
In order to serve as an effective instrument of succession planning, suitable corporate governance rules are first needed. Such agreements concern rules relating to the general meeting and the board of directors of the joint-stock company and deal, among other things, with the composition of these bodies and their decision-making. In many cases, it is worthwhile to take into account the performance principle when electing the board of directors and to appoint members according to their suitability. Furthermore, the boards should not be too large and it should be ensured that decision-making is not unnecessarily complicated. Voting agreements also serve to control corporate governance and policy and can ensure that a succession process reaches the desired goal in the best possible way.
Restrictive covenants then play a central role in almost every GIP. These are intended to prevent shares from being transferred to an undesirable third party without the other contracting parties being able to intervene. In addition to prohibitions on sale, rights of first refusal and rights of first refusal and, in the case of involuntary transfers, purchase rights (also "purchase options") are to be provided for. In the event of the death of a shareholder, the right of purchase of the other contracting parties should not be absent from any ABV with the participation of natural persons. In order to avoid problems under inheritance law, the purchase price in the case of purchase rights in the event of death should correspond to the real value of the shares. The requirement of a disposition upon death is to be cautiously negated, provided that purchase rights are also granted for other scenarios in the ABV. The same importance also applies to purchase rights as a result of incapacity, property disputes or other involuntary transfers of shares to third parties. Restrictions on disposal in the broader sense also include over-commitment clauses, whereby a party acquiring the shares assumes the position of the withdrawing party in the GTC with rights and obligations.
Overall, care must be taken to strike a healthy balance between the interests of the parties involved and those of the company. If an ABV is set up sensibly, it offers control and forms an effective optimisation instrument within the framework of succession planning, whereby each regulation must be adapted to the specific case with regard to effect and practicability. Accordingly, a GIP must also be periodically checked for its suitability and, if necessary, adapted to changed circumstances. This can be emphasised with integrated review or renegotiation clauses. Finally, the enforceability of a DPL can be significantly strengthened with the inclusion of contractual penalties and share deposit obligations.
This article has already appeared in CORE Newsletter 31 of June 2022.
