Or: The Story of William, Harry and Meghan
Recently I had to deal with the following case (- names have been changed):
The brothers William and Harry are the sole shareholders of a German Limited Liability Company (GmbH), let´s call it Windsor GmbH. Harry is married to Meghan, and William is a bachelor – no, they are not the British Royals! William and Harry would like: When Harry dies, he shall be succeeded by Meghan alone, but his GmbH shares shall – if possible - go directly to William. Meghan shall not have any part of Windsor GmbH, neither shall she receive a financial compensation for these shares.
Question: Can this under German law be so stipulated in the bylaws/statutes/articles of Windsor GmbH?
And here is the answer:
1. The GmbH shares are part of a deceased person´s estate (inheritance); upon the death of a shareholder, they automatically pass to his or her heir(s). This succession by law cannot be ruled out in the company´s bylaws. That means that you cannot stipulate in a legally valid way that upon a shareholder´s death, ownership of the shares shall not pass to their heir(s) but directly to another shareholder. German law does not allow such a stipulation. We call this the prevalence of inheritance law over company law.
2. The company´s bylaws/statutes/articles („Satzung“), however, may stipulate
a) that the shares of a deceased person can be recalled („einziehen“) or
b) that the successor/heir has to transfer the shares to a third party, for instance to another shareholder of the company.
c) That means: The shares will first pass to the heir(s), but the heir(s) will not be allowed to keep them.
d) The difficult question is whether the heir is entitled to a financial compensation for having to give up the shares. In case of doubt, legal experts say, the heir is entitled to a financial compensation in the amount of the fair market value of the shares. This compensation is due immediately. However, the company´s bylaws may stipulate that this compensation shall only be due at a later point in time or that it should be less than the fair market value. Most important: It may also be stipulated that there shall be no financial compensation at all. (I personally think that such a provision could be challenged in court because it puts the heir in a very unfavourable legal position).
3. In case you don´t want to rely on the above described stipulations in the company´s bylaws, there are also instruments in inheritance law to determine how shares pass to a successor.
a) Each shareholder can determine in his or her will in the form of a legacy or bequest („Vermächtnis“) that the company shares shall pass to the other shareholder. This way the shares will still – under German law - pass to the heir(s) first, but the legatee will have a legal claim against the heir to tranfer the shares without having to pay a compensation.
In the example above, Harry would thus bequeath his company shares to William.
b) It is also possible that one shareholder appoints the other shareholder his or her heir or coheir (joint heir). If he does so, he can further lay down in directions for partitioning ("Teilungsanordnung") that the other shareholder shall receive only the company shares.
In our example above, that would mean the following: Harry will put in his will that he shall be succeeded by his wife Meghan and his brother William. At the same time he would direct that William shall only inherit the company shares whereas Meghan gets all his other assets. Such a will would make Meghan and William coheirs or joint heirs, and it would also determine specifically how the estate shall be partitioned or devided between the coheirs.
4. So these are (some of) the legal options that are available – still without taking tax aspects into account.
P.S. In case you´re interested: I recommended to William and Harry a combination of legacy („Vermächtnis“) and a corresponding stipulation in the company bylaws (recall or transfer). But I´m afraid Harry and Meghan just ran off for now without listening to my advice. … What a shame!
Dr. Wolfgang Gottwald
Attorney at Law