Family businesses are an important sector of our national economy (as well). Succession to them is always an extremely complex and potentially dangerous task. The process, the time and the way the previous owner is “cut off” from their share rights and the latter are transferred to the successor were discussed in our previous article. As we noted there, the owner can and should provide for the succession of their business. Their lack of action does not bode well for the future for the business. The same goes -in the end- in the case of the (“automatic”) regulation of the succession by life itself and the legislator).
But in the event the owner does make the (preferable) decision to act, how could the next day’s risks be avoided (or even mitigated), in particular, in an SA? What would be the appropriate options for the current owner be? How could the continuity and family character of the business be ensured?
Ensuring the continuity of the administration after the succession
The transferring shareholder does not only have to worry about the above-mentioned elements (: procedure, time and manner of the “cutting off” from their shareholder rights). They must take care of a lot more. They must also ensure, as much as possible, the continuity of the business. Successful succession, moreover, also means ensuring the continuity of the management of the business. There is no doubt that such is achieved, among others, through the proper distribution of shares to successors. And not just their number. Possibly their kind as well.
A business transferred to each subsequent generation can, in theory, be transferred to more than one successor. Among them may be some who show particular interest in entrepreneurship and others who dislike it. Some who would like to and could prove to be leaders. Some, possibly, who would like to but could not. And some who could but would not. And some third parties who could not and would not want to.
It is not uncommon, on the contrary, for there to be difficulties in co-operation between successors. The transferring shareholder is responsible for the vital decision for the business to select the appropriate successor. This vital choice does not necessarily mean the exclusion of others. The transferor must rely on a fair, but also correct, judgment. In other words: The transferor must arrange for the distribution of shares among their (possibly more) successors. Considering even those who could not and would not want to get involved.
Avoiding turning the business into a ” 50/50 SA”
The problem of two equal participations in an SA was discussed in our previous article. As we pointed out there, this problem arises when the holders of 50% of the business’s voting rights (whether they are two shareholders or two solid groups of shareholders), do not agree on making critical corporate decisions, especially in the election of the Board of Directors. We usually describe this specific, multi-level problematic situation with the term “50/50 SA”.
Succession in the family business – SA is one of the common causes for the creation of two equal participations (: 50/50). The impasse in this case proves to be a common phenomenon as well. Extra-corporate agreements aim to remove (and) such deadlocks. In some cases, they achieve, even temporarily, key agreements for the survival of the business. (As such and those concerning a coordinated vote in the General Assembly and in the Board of Directors). In some others, they fail miserably – possibly at a later time.
The solution of this problem, based on the existing institutional framework, is given by the courts. According to the law, the “solution” is, unfortunately, the dissolution of the legal entity (exception: the possibility of the acquisition of the shares of the applicant for the dissolution by the other shareholders).
From the above information only one, absolutely safe, conclusion can be drawn. Specifically: the transferring shareholder should not choose (as part of the succession process) the creation of two equal shareholdings. Either at the level of individuals or at the level of shareholder groups.
Otherwise, sooner or later, the continuity and longevity of the business will be called into question.
The concentration of the majority in a single successor
As unfair as it may seem to a father to transfer his business to only one of his two children, it would be just as dangerous to equally split them amongst them. Because, no matter how excellent the relationships between the two children are, it is so easy for them to be broken by the interventions of third parties (spouses, partners and children, for example).
And as dangerous as the choice of creating a business of two equal holdings proves to be, the more necessary the concentration of the majority of the share capital in one shareholder or group of shareholders. By at least one share. This option excludes the possibility of anarchy (: inability to elect a Board of Directors). It also excludes the possibility of a court decision to dissolve the business due to, precisely, the impossibility of electing a Board of Directors (among other reasons).
This solution seems in some cases easier. When, for example, one of the many potential successors shows particular zeal, in relation to the others, for the continuation of the family business. And even better: when they have special, compared to the others, administrative skills. And when the others, except them, present different inclinations and interests.
However, the concentration of the majority of shares in one successor should not be implemented, without the appropriate safeguards for the others. Compensatory provisions in the domination of the majority shareholder and in the (essentially) transformation of the family business into “one man authority” must be incorporated in the provisions of the articles of association. Especially those that regulate the issues (and provisions for protection) of the minority.
Maintaining the family character of the business
The choice of the successor, the time and the way for the succession, the distribution of the percentages on the share capital among the possibly more successors are, undoubtedly, particularly important elements in the process of the succession of the family business. However, in order to ensure its continuation, additional safeguards are necessary in some cases. Those, for example, concerning restrictions on the transfer of shares to third parties – outside the family. At least not without the approval of the majority.
The statutory provisions prove, in this case as well, to be decisive. The issuance of restricted shares (article 43 of law 4548/2018) is moving in this direction. (In short: those shares that have restrictions / commitments regarding their transfer are characterized as restricted).
Such commitments may, inter alia, be the obligation to initially offer the shares to be transferred to the other shareholders or to some of them (article 43 par. 2 par. A). Also: the suggestion by the business of a single shareholder to whom the shares in question will be transferred, if the latter so wishes (article 43 par. 2 par. B).
The specific data and provisions do not mean at all that the family business should avoid attracting third parties as shareholders and / or investors. In some cases it may be an appropriate – even a central, in fact, targeting. However, any such action must be coordinated. Also be accepted (and not tolerated) by the majority shareholder / shareholders.
The process of succession often proves to be long, labyrinthine and painful. It is not, of course, exhausted in its careful planning. Nor in the selection of, only, the appropriate advisors. It does not even end with the installation of the successor in the “chair” of the head of the family business.
It is necessary to create schemes that will not only prevent phenomena of inability to make decisions and anarchy but will also provide stability to the administration. Schemes that will provide adequate security for the future of the business. And, why not, schemes that will ensure its character as “family” – unless the majority shareholder decides otherwise…
The process of succession is known to be complex – “a crossword puzzle for strong solvers”.
The process of succession can, from another point of view, be the opportunity to settle issues that remained unsolved for years, even decades.
To help the development of the business and the economy!
A guide to a better day!
Let us manage it with prudence and optimism…
P.S. A brief version of this article has been published in MAKEDONIA Newspaper and makthes.gr (December 27, 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.