Succession of a family-owned business: legal aspects

Lack of adequate planning for the succession pf family-owned businesses leads to high business mortality, which prevents a successful generational handover and has negative effects on family economies and employment.

Therefore, the succession of a company must be approached by means of planning that allows the testator’s will to be reconciled with tax optimisation in order to minimise tax costs and so that the successors do not have to bear such a high tax burden that it hinders the continuity of the business.

Below we focus on the legal aspects of family business succession. In the following article you will find information on the main tax aspects.

1. Is it advisable to make a family protocol?

The family protocol is an instrument capable of providing predictability for the generational handover and also a guarantee for third parties, investors and creditors of the family company. It is a special type of shareholders’ agreement, characterised by the fact that its parties are part of the same family group.

The family protocol should ideally take the form of a contract with rights and obligations for the parties, legally binding them to its fulfilment, establishing sanctions in case of non-compliance, and, ultimately, registering it in the Mercantile Registry so that it can be enforceable against third parties.

Among the matters usually regulated in the protocol, the most common are the dividend policy, limits on the transfer of shares, the governing bodies of the group and, in particular, the generational succession of the company.

2. Last will and testament: what special clauses can be included?

2.1. Attribution of political rights

When a married shareholder with children dies, it is common for the children to be attributed the bare ownership and the widowed spouse the usufruct of the deceased’s shares. Although the general rule in the Spanish Law of Capital Companies (LSC) is that the status of shareholder resides with the bare owner (who is therefore the one who will exercise the voting rights at the general meeting), nothing prevents the articles of association or the testator from assigning the usufructuary widow or widower the voting rights, so that the spouse can maintain control of the company if, for example, he or she had been doing so jointly with the testator.

In addition, the testator may also transfer the shares in favour of his successors, but syndicate them, i.e. providing that certain (or all) voting rights may be exercised by one or more successors, or as a unit in accordance with the agreement of the majority, for a maximum period of 10 years.

2.2. Other clauses

• If the testator has several children: it may be in his interest that his shares in the company are only inherited by one of them, in order to avoid conflicts that could arise if all of them acquire a share of the capital, to maintain control of the company or to ensure its continuity if only one of the children is to remain in the company. If the shares in the company account for almost all of the testator’s estate, this may mean that there are not enough other assets in his estate to pay the other children’s legitimate share. Article 1056 of the Spanish Civil Code (CC) allows to establish a special clause in the will, according to which the totality of the company shares are attributed to only one of the children, and that it is this one who, from his own estate, pays the legitimate share of the other children, even with a deferral of up to 5 years.
• If the children have not reached the necessary maturity: it may be the case that the shareholder dies when his children have not reached the necessary maturity to take over the business. In this case, it is advisable to defer the decision as to which of them should receive the shares in the company to a later time. This decision may be delegated by the testator, subject to certain requirements and limits, to his spouse, who may even exercise it in his own will, and who will therefore be the one to determine the terms of the succession of the company (Article 831 of the CC).
• If the testator establishes prohibitions or limitations on disposal: the testator can establish that the shares received by his successors are subject to prohibitions or limitations on disposition, in order to avoid transfers of the shares in the period immediately after the opening of the succession. A major advantage is that these limitations have effects vis-à-vis third parties, since they are recorded in the shareholders’ registry.

Due to the wide variety of situations in which a family business and its shareholders may find themselves, it is advisable to obtain comprehensive advice that takes into account all aspects, in particular succession and taxation.

At Lozano Schindhelm, we provide advice on the succession planning of the company with the aim of achieving continuity after the generational handover and the tax and organisational optimisation of the process.