A social contract of a partnership or a GmbH in which two or more natural persons are involved should necessarily contain 5 important points. On the one hand, the continuation of the company in the event of the death of a shareholder should be regulated in the articles of association. Secondly, it is advisable to agree on a clause obliging all partners to exclude the transfer of shares to the spouse under a marriage contract. In addition, the question of how to deal with a situation should a shareholder want to sell his shareholding to third parties should be clarified in advance in accordance with the social contract. Furthermore, the severance payment of an exiting shareholder is worthy of regulation. Finally, in social structures where there is a tie in votes, it is necessary to clarify which solutions should be applied in situations where there is a stalemate in voting and one therefore tries to force one another out of society.

1. These 5 points belong in a social contract – Introduction

Most companies have two or more partners. The only significant exceptions to this rule are the GmbH (we also include the entrepreneur company (haftungsbeschränkt)) and the GmbH & Co. KG, each of which manages with only one natural person as a shareholder. But we want to refrain from these in our contribution today. Because this time we consider companies with two or more natural persons as shareholders. The focus is on which 5 points shareholders should include in their social contract in order to avoid possible later disputes.

2. Point 1: Succession arrangements for death

A society you enter with another natural person usually only because you trust each other. Should one of the shareholders die now, his participation usually passes to his heirs. But you usually have no relationship with these as a co-partner, so it is unclear whether you can continue the company as usual. Although there are differences between a partnership and a corporation, the resulting challenges are comparable.

And yet the solutions are different. While in a partnership after the death of a shareholder the continuation of the company is only possible with the remaining shareholders, in case of doubt also as a sole proprietorship, a GmbH with two or more shareholders requires a special agreement. So the first of the 5 points that belong in a social contract is the provision that heirs receive only a severance payment instead of participation. But more on that later.

Incidentally, this clause also prevents the transfer of company shares by donation.

3. Point 2: Commitment to the marriage contract with clause to the company

Partners who are married also carry a certain risk that threatens to materialize in the event of divorce. Because in the case of a profit compensation, it could happen that the divorced spouse receives shares in the company in this way. It is usually understandable if co-partners are not very enthusiastic about this idea.

But there is also a remedy for this. Because with point 2 of our list of 5 points that belong in a social contract, we include a clause in the social contract that obliges the partners to conclude a marriage contract. This primarily refers to a clause which excludes the spouses of the partners from the shareholdings in the compensation of profits. In this way, the risk of an unwanted entry of a spouse as a new co-partner is averted.

But even without company participation, a spouse who is entitled to compensation for profits in the event of divorce would have a say in pending disposals of company shares. The marriage contract clause also averts this restriction.

4. Point 3: Sale of shares

Nevertheless, a possible sale of shares continues to concern us. Because if a shareholder makes such a decision, then for the other shareholders this has the consequence that in the future you have to deal with foreign third parties in the company. As already mentioned, a society works only if a mutual relationship of trust exists. But this has to be built. Foreign investors who simply buy into a company hardly fit into the picture. So one of the 5 points we recommend to a social contract is that you make provision for the sale case.

A suitable clause could, for example, stipulate that the co-shareholders may exercise a right of first refusal in the event of a shareholder leaving the company or even collect the shares of the willing shareholder against a severance payment. In this way, no external sale can take place if the co-shareholders refuse this. However, this regulation applies exclusively to limited liability companies. In the case of partnerships, the entry of a new shareholder is in any case dependent on the approval of the general meeting.

5. Point 4: Rules in the event of a dispute involving equal voting rights

The next item on our agenda is particularly applicable to cases where two shareholders each have a 50% share in the company. If they now quarrel on a matter of society without a solution to the conflict emerging, then this is a situation that is hardly acceptable in the long term. In the end, this leads to the fact that each shareholder would prefer to push the other out of the company in order to continue it alone.

To clarify this case in advance, there are several possibilities. A simple procedure is the lottery procedure. It decides which shareholder may remain in the company and who will receive a severance payment instead.

A somewhat fairer regulation, because it is less random, provides for a different approach. A shareholder determines a price for which he is willing to either sell his shares or buy those of his co-shareholder. The other shareholder then has the right to decide whether he prefers to buy the shares of his shareholder at this price or sell him his own.

6. Point 5: Settlement provisions in the social contract

This brings us to an often central aspect, namely severance payments. This point is relevant both in the case of a resignation of a shareholder and in the case of the severance payment of possible successors. In doing so, it depends on the company value, which usually corresponds to the market value. But there can also be quite different views on this, especially in the case of severance payments.

Now you can hire independent experts to determine the company value, but the procedure for appointing the experts should already be recorded in the company agreement. One possibility here is to ask the locally responsible chamber for support.

In detail, however, there may be certain influences which lead to a lowering of the severance pay entitlement in terms of height. For example, when it comes to a severance payment, which a shareholder has to answer for by a self-induced exit from the company, the severance payment is often 70% of the maximum amount. However, the severance payment may under no circumstances be less than the book value. In the case of severance pay for heirs, however, the market value must be taken into account as severance pay.

Another regulation on severance payments concerns payment arrangements. As a rule, it should be difficult to pay the full severance payment amount in one sum. In this case, the last of our 5 points in the social contract provides for an installment payment. But how long can such a deferral of severance payments take? The BGH has decided that a duration of ten years is clearly too long. A clear answer, however, how long an installment payment may be scheduled, remained the BGH. However, the prevailing opinion in the literature is that stretching over six annual installments is probably still permissible. Anyone who still wants to set a period between seven and nine years risks at least a questionable legal dispute.

7. Important points in the social contract – conclusion

This brings us to a final point, albeit not one that belongs in a social contract. Because at this point we would like to point out that we are happy to provide clarifying advice in such situations. In any case, we hope that with the previous remarks we were able to present our expertise in this area convincingly. So if you need advice in this regard, then please contact us. But also on all other questions about your company, we of course take a technical position. Especially for all other aspects regarding company start-ups is relied on our competent advice.