The Risk of Conflicts Following a Company Acquisition and How to Mitigate Them
In the next article regarding the transfer of a family business, we will take a closer look at measures to prevent future conflicts.
A successful transfer of a business begins with open and honest communication.
The fundamental principle to adhere to is to communicate openly with all family members involved in the transfer of the company—inform them of your intended steps in advance and understand your descendants' expectations. Through open communication, the family can better align expectations and roles of individual members, which increases the likelihood that the business will successfully continue into the next generation. Therefore, allow all family members to understand the situation that will arise after your departure in advance, so they are fully prepared and nothing surprises them.
Do not forget to inform the company internally in a timely and clear manner, for example, key employees and other important staff, so that everyone is aware of the upcoming changes and these do not deter them from remaining with the company.
Fair settlement and distribution of powers among multiple descendants
If you have multiple children, the most important consideration is to choose a fair way to settle their affairs. Again, do not underestimate communication, as not all descendants may be interested in actively participating in the operation of the company. In such cases, it is advisable to seek an alternative form of settlement, such as financial compensation, so that none of the descendants feels overlooked or disadvantaged.
However, if several descendants express interest in actively joining the company (or are already actively involved in its operations), it is necessary to find a balance of powers and competencies, and to document this in writing if possible. This particularly depends on the mutual relationships, personalities, and abilities of your descendants.
Some conflicts can be prevented by amending the articles of association. However, this will always depend on the form of the company and the specific circumstances within it. Some solutions are outlined below:
1. Transfer of shares: can be adjusted for example, by restricting the transferability of shares to individuals other than family members.
2. Distribution of profits: for example, differentiated profit shares based on activity in the company, rather than solely based on the size of the share.
3. Decision-making: change of voting majority (for example, strengthening the voting rights of an active partner).
4. Succession agreement: who and under what conditions can enter the company after the deceased partner.
The conditions within the company can also be adjusted by an agreement among the partners or a so-called family constitution, or these options can be combined, allowing you to bindingly regulate specific procedures for resolving potential disputes in various ways.
Transferring the company to children: The legal process and its reflection in the organizational structure
After outlining future powers and planning the transfer of shares, it is advisable to incorporate the changes that will subsequently arise from this process into the company's organizational structure. This will typically be a longer process, during which you will gradually implement individual changes alongside the career progression of your successors and the gradual transfer of powers.
The most significant change will be the actual transfer of shares, whether you transfer them all at once or gradually in parts. The transfer of shares changes the composition of the highest governing bodies that decide on important company matters such as the appointment of the statutory body or the distribution of profits.
When dividing shares, amend the articles of association to reflect the status of the partners and distinguish their mutual rights (especially voting rights) and obligations. This will ensure the stable functioning of the company and prevent paralysis in the event of disagreement. If you have previously entered into any of the agreements mentioned in the previous paragraph, the changes should derive from such pre-established agreements.
Company control even after the transition
If you wish to oversee the smooth operation of the company for some time after the transfer, you have several options to retain some control.
This control depends on the form of the company, as it is primarily functional in larger structures. Specifically, you can retain a minority share in the company, thereby maintaining voting rights and being able to decide with your votes in the event of disagreement. Another option is to hold a position in the company's supervisory body (e.g., the supervisory board). However, a member of the supervisory body has limited powers, primarily overseeing accounting and the functioning of the statutory body.
The transfer of a family business to the next generation is a critical moment that brings not only legal and organizational changes but also sensitive interpersonal issues. A successful transfer of the company requires timely communication, fair arrangement of relationships, and well-established legal and organizational steps. Thorough preparation is key to a smooth transition and a stable future for the company.