Family businesses make up the vast majority of businesses, globally, on a European and, of course, on a national level. In our country they constitute 80% of the total number of businesses and 44.3% of the listed companies. As a result, they prove to be extremely important for the economy of our country (and not only). They produce economic and social wealth, create and maintain jobs. They often offer innovation. Despite their multilevel contributions, however, they are not a stabilizing factor for individual economies. Their introversion, low productivity and, in particular, the challenge (and usually impossibility) of succession, make their future uncertain and their environment, therefore, insecure.
The difficult (as proven) task of succession
The task of succession in family businesses proves to be extremely difficult. Its difficulty is confirmed by the findings of the paper “Study on the Succession and Transfer of MM Commercial Enterprises”, prepared under the auspices of the Ministry of Labor and Social Security and the National Confederation of Greek Commerce. Among those findings: “… according to Ward 14 statistics, 30% of family businesses are estimated to pass successfully into the hands of the second generation, and about 15% have successfully passed to the third generation, while longer-lasting companies end up being only 3 out of 100”.
The management of succession in family businesses
In order for the succession by the next generations to be successful, considerable effort and preparation is required. It is not enough, of course, to choose the (in the opinion of the founder or major shareholder) best successor. It requires, before anything else, a sincere commitment from the same (: founder or major shareholder). It also requires the parallel involvement of consultants in various capacities and close cooperation with them. Significant, and coordinated, effort is required.
The traditional approach to succession in family businesses seems very simple. It focuses exclusively on the delivery of the company’s reins to the successor. A tradition that has, basically, two stages (the order is random): One concerns the legal transfer of the ownership from the founder (or main owner) to the successor. The other is the transfer of management and the establishment of the successor in the position of the transferor.
The modern approach (inter: “The process of succession in family businesses” – A. Kefala, C. Georgiou) treats succession as a long-term process that is analyzed in individual phases. In more detail:
Phase A’: Diagnosis of the health (and possible pathogens) of the family.
Phase B’: Diagnosis of the health (and possible pathogens) of the business.
Phase C’: Adopting the model of the Modern Business and Strategically Aligning it with the Vision of the Founder.
Phase D: Implementation of the Alignment Strategy.
However, regardless of the methodology one would choose (also look at the aforementioned study as well as at practices and methods adopted by various counselors), one thing is certain: the process of succession in family businesses is not and should not be treated as a simple process.
The transfer of the family business
The (potential) legal actions and procedural steps of the succession vary, depending on the corporate type of the family business. Since it is impossible to record in one article what happens in all types of companies, we will limit ourselves in this case to the most important of them: the SA. Also, to the most common, at a legal level, possible options.
“Inter vivos” or “mortis causa“?
The time, the results and the terms of the transfer of the family business can be chosen (or not) by its owner. In the latter case (: when the owner does not choose) the owner lets “luck”, “old father time”, the provisions of the law and, possibly, the “battle” of any of their descendants choose for them.
In other words: The transfer of the family business can take place, on the terms that the owner will choose during their lifetime (: transfer “inter vivos”). Otherwise, the transfer will happen when, inevitably, the owner’s lifespan comes to an end (at a when unknown to all of us) (: transfer “mortis causa”). In the latter case, the terms and effects of the transfer will be those provided for by inheritance law in general. Possibly by a will of the owner. Especially in SAs, the relevant provision will also apply (: article 42 of law 4548/2018).
It is true, however, that the specific provisions of the law do not regulate the smooth succession and transition to the next generation. But neither do they guarantee it; and how could they…
The subcategories of the “inter vivos” transfer option
In a family SA, the subcategories of the “inter vivos” transfer of the shares of the main (or sole) shareholder in the succession are (basically) three: the sale, the parental benefit and the endowment. The path that will be chosen presupposes the identification of the best, tax-wise, solution. And, therefore, the optimal tax (and of course legal) planning.
Also: the shares to be transferred in the succession can be transferred in full or only in partial ownership – ie by transferring the bare ownership and withholding the usufruct.
Let’s look at the individual options in more detail.
The transfer of full ownership of the shares
In SAs, the principle of free transfer of shares applies (article 41 §1, law 4548/18). The shares can be issued pledged, only as an exception (article 43, law 4548/18). Also: it is possible to issue (or not) physical shares. In the event that physical shares have been issued, in addition to the transfer of ownership of the share, the title itself must also be transferred. That is, the physical delivery of the share titles must take place, in addition to the agreement for the transfer of the ownership of shares from the shareholder to the successor.
The transfer of the shares must be registered in the shareholders’ book (article 41 par. 2 of law 4548/2018).
It should be noted that in the light of succession, when full ownership of the shares are transferred, this signals something perhaps even more important. Specifically, the final, complete, and irreversible departure of the transferor from the capital (and not only) of the family business. And finally, their complete replacement by the successor.
Needless to say, the choice of the right successor has, especially in this case, an even greater value.
The transfer of only the bare ownership of the shares
The shares of the SA may be subject to usufruct (article 54 par. 1 law 4548/2018). The usufruct can be established by agreement (articles 1143 of the Civil Code) between the transferring shareholder-usufructuary and the owner of the bare ownership-successor. Also: for a definite or indefinite period of time. In any case, and for as long as the aforementioned right lasts, the usufructuary has the power of use and benefit from the shares (1142 Civil Code). This, in practice, means that (although there may be different agreements in place) the usufructuary of the shares has the right to receive the distributed dividends; also to vote at the General Assemblies of the company (article 1177 Civil Code & 54 §2, law 4548/2018).
More specifically, in the event that the transferor transfers only the bare ownership of their shares, retaining the usufruct for themselves, they:
(a) Ensure their livelihood for the time after the transfer.
In more detail:
It is possible for the transferor to look forward to dividends corresponding to the transferred shares for their livelihood. Or, more broadly, they may look forward to managing said dividends themselves. In some cases, the (sufficient) protection of the transferor becomes more or less imperative. After all, there are many examples of (subsequent) ingratitude on the part of the successor. The retention of usufruct by the transferor is a sufficient compensation for the theoretical (and / or practical, sometimes visible) risks.
It should be noted, however, that, despite the retention of usufruct by the transferor, it is possible to agree on the transfer of the dividend to a third party, other than the usufructuary (Article 33 §5 of Law 4548/18).
(b) Ensure the maintenance of their position and power in the supreme body of the SA.
In more detail:
It is also possible that the transferor wishes (for some time and to some extent) to maintain their involvement in the management and operation of the SA. Retaining for themselves the usufruct, they retain, at the same time, the right to participate in the General Assembly. Also (and most importantly) the right to vote – in the name and on their behalf. In other words, they do not operate as a proxy of the owner of the bare ownership and successor shareholder (articles 1177 of the Civil Code and 54 § 2, law 4548/2018).
It is possible, however, to agree between the transferring shareholder-usufructuary and the acquiring shareholder of the bare ownership – successor that the latter will exercise the voting rights deriving from the shares. This agreement, in order to be valid before the company, must be registered in the shareholders’ book. However, this agreement may take place at any time after the usufruct has been established.
In the event that the shareholder holding the usufruct assigns the right to vote deriving from the transferred shares, they demonstrate the maximum possible trust in their successors. The succession will have, at least in this case, occurred. The successor will be the one who will formally be entitled to make the most important decisions for the management and operation of the family business. On a practical level: The right to elect the Board of Directors and, in general, the management of the family business.
The choice (?) of the transfer “mortis causa”
The “headaches” of the “inter vivos” transfer can be completely avoided by the main (or sole) shareholder of the SA. In what way? By them avoiding, during their lifetime, to make any choice or preparation. This choice (more precisely: denial of choice) certainly seems convenient. It is a given, however, that they will not ensure in this way, not in the slightest, the succession of their business. Moreover, the major (or sole) shareholder may assess that the issue of succession is not sufficiently important or, at least, a major priority for them.
However, the options they have, relating to the transfer of the shares of their company “mortis causa” are two. The first is to leave things in the “hands of the law” by adopting the option of unallocated succession: just whatever the law provides for their heirs. The second is to adopt the best solutions for them by drafting the appropriate, according to them, will, in order to transfer their shares and company to specific persons, in the way and in a manner that they will choose.
Successful succession in family businesses is a complex process. It requires the commitment of all persons involved. It requires effort, patience, perseverance and, of course, time.
But the latter (: time) is not always ” kind old father time” nor does it “cure all”.
Therefore: Careful planning of the succession and its completion during the lifespan of the main or sole owner is desirable.
Most importantly: the willingness and commitment to devote the necessary time and as much energy as each individual case requires.
Under the specific conditions: the result is going to reward us.-
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (November 15, 2020).
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.