When a shareholder dies, the question arises as to what actually happens to the partnership. We clarify the legal consequences and how you can cleverly regulate the legal succession in the company share.

A partner of a partnership can die. He has his own heirs who could enter into his position as a shareholder. In addition, there are also the other shareholders who may not want to cooperate with the heirs of the deceased shareholder. In the case of a partnership, however, it depends centrally on the persons of the shareholders, since they are personally liable with their own assets. The question therefore arises as to what happens when a shareholder dies and whether, and if so, how this situation could be regulated in the social contract. How the heir can limit his liability in the event of business continuation, we explained in one of our other contributions.

Before we can explain the company regulations, we first explain how and whether a share in a partnership can be inherited at all.

Since a company share belongs to the property of the deceased, it also falls into the estate of the deceased. Therefore, the heir or, in the case of several heirs, the community of heirs can inherit the share. But in the latter case – i.e. in the case of several heirs – the question arises whether the share is transferred undivided to the community of heirs as a group of persons, so that this becomes a shareholder or whether he receives only one inheritance. Then only this partner would be.

In inheritance law, the principle of universal succession applies in principle according to § 1922 BGB. Accordingly, the share of a testator without corresponding provisions in the will would pass together with the remaining inheritance as a whole to the joint heir community. However, the community of heirs cannot in itself be a member of a partnership. According to § 2042 BGB, the community of heirs is aimed at dissolution, while a partnership is a permanent association. In addition, co-heirs can limit their liability before the dispute in accordance with § 2059 BGB to the estate. However, partnership partners are liable without restriction and personally. The limitation of liability therefore contradicts the structure of a partnership. Accordingly, the interest in a partnership cannot become the joint property of several heirs by way of succession. Rather, the shares posed as inheritable in the social contract pass directly and undivided to the successor heirs by way of the special succession.

According to § 727 BGB, the death of a shareholder of a GbR basically leads to the dissolution of the company. This only does not apply if a continuation clause is included in the company contract.

The death of a shareholder of an OHG or KG does not in principle result in the dissolution of the company. Rather, the company continues to exist according to § 131 paragraph 2 no. 1 HGB. The dissolution occurs only if, as a result of the death of one shareholder, only one shareholder remains. Otherwise, the company will in principle remain among the other shareholders. Exceptions to this principle apply only if a limited partner dies or a continuation clause is included in the social contract. In the first case, the company is continued in accordance with § 177 HGB with the heirs of the deceased limited partner, while in the last case the provisions made in the social contract apply.

Whether a company is continued even upon the death of a shareholder also depends accordingly on whether a continuation clause is contained in the company contract. The shareholders of a partnership should always make such in the social contract, so that it is clear what happens after the death of a shareholder and the succession is planned. However, there are some subtleties to consider. These are explained below. There are basically two types of continuation clauses. These are called succession clause and entry clause.

4.2.1. Definition of succession clause

A succession clause exists if, according to the social contract, the heir or another person is automatically to become a shareholder. Conceptually, a distinction is made between two types of succession clauses. On the one hand there is the succession clause under inheritance law and on the other hand there is the succession clause under law.

4.2.2. Succession clause

If it is determined that the deceased should be replaced by his inheritance, then it is conceptually a succession clause. Due to the freedom to test, the later dying shareholder can freely determine his heir in his will until his death. Therefore, he can change the subsequent shareholder unilaterally, so that he is not yet bound to transfer the share to a specific person during his lifetime. The succession clause is therefore in fact to be understood as a mere declaration of intent which has the consequence that the share is regarded as heritable. The other shareholders agree that upon the death of the shareholder his share will be transferred to his heirs.

If a certain person is already designated as a successor in the social contract, this is a qualified succession clause. However, this has no further legal consequences than the normal succession clause, since it is still necessary that the person named in the social contract actually becomes heir later. If it does not, it will not receive the creation of a shareholder. However, the qualified succession clause has the consequence that only the legal successor of the company share named in the articles of association can become. Other heirs are therefore not legal successors in this respect.

4.2.3. Legal succession clause

On the other hand, the clause is referred to as a legal succession clause if a specific person is already designated in the articles of association as the legal successor to the share of the company irrespective of his or her heir status. Consequently, the entry of the notifier is based on the contractual agreement in the articles of association. Therefore, it can no longer unilaterally prevent the entry of the person. Rather, this requires a change in the social contract. Consequently, the later dying shareholder is already legally bound during his lifetime.

However, the admissibility of the legal succession clause is controversial. Since the successor clause simultaneously results in obligations and burdens for the notifier, which the latter cannot reject, there are many arguments for a contract at the expense of a third party. But these are inadmissible. Only if the named person has concluded the social contract himself, i.e. was already a shareholder before the death of the other shareholder, he has voted for the transfer. Then the successor clause must also be permitted on the basis of civil private autonomy.

4.2.4. Determining when which clause is available

It is to be determined by interpretation whether there is a legal succession clause, with the consequence of the binding to lifetime or a succession clause under inheritance law, which means that the person envisaged only gets the chance to become a successor in the event of his succession.

A legal succession clause leads to a severe restriction of the shareholder. However, since the latter cannot foresee how the relationship with the person being considered develops, such a succession clause cannot in principle be assumed. In particular, since the covered person must be a shareholder on the basis of the above justification, the later dying person generally requires his consent to the amendment of the social contract. However, since this prevents the subsequent acquisition as a result of this consent, he would not consent. Consequently, a reasonable, forward-looking shareholder agrees on an inheritance clause. Then he himself can determine in his last testament who inherits and thereby becomes successor of the company share. As a rule, a succession clause is therefore to be assumed. Only if it is sufficiently precisely indicated that a legal succession clause is meant, this is present.

The other type of continuation clause is the entry clause. Accordingly, the deceased partner is not automatically replaced by another person. Rather, this other person receives the mere right to enter society. Consequently, the beneficiary can decide for himself or herself whether he or she wishes to become a shareholder and this does not automatically occur as a result of the death of the original shareholder. It is therefore a mere claim, which can be asserted in court against the remaining shareholders. Therefore, under civil law, the clause is a contract for the benefit of a third party within the meaning of §§ 328 ff. BGB.

The nature of the continuation clauses must be determined by means of the interpretation of the social contract. However, the existence of a stand-alone clause must clearly state that the beneficiary may still make the acquisition of the share subject to its own decision. It is not enough for the social contract to talk about entering society. This is evidenced by the fact that a mere right of intermediation for the remaining shareholders is associated with considerable uncertainties due to the freedom of choice of the beneficiary. In principle, this is not appropriate and cannot be expected of the shareholders. Therefore, there is usually a succession clause in the design of inheritance law.