Death of a partner: how to prevent heirs from becoming your new long-term business partners overnight

When a partner dies, his or her business share passes to the heirs at the moment of death (Article 132 of the ZD). A final decision on inheritance thus only establishes who inherited the business share and does not result in the transfer of the share.

Uncertainty until the final determination of heirs

Until the heirs have been finally determined, the company faces numerous practical questions: who can exercise the rights arising from the business share, who should be invited to the general meeting, and who should be granted voting rights? The Supreme Court has already confirmed that a company cannot simply rely on the fact that a deceased person is still registered as a partner in the court register when convening a general meeting, if the company knows that the registered partner has died (decision III Ips 22/2023 in conjunction with decision III Ips 17/2021).

The company must therefore act diligently and try to determine who the heirs are and who is entitled to exercise the rights arising from the inherited business share. If the heirs are unknown, unreachable, or the representation of the estate to which the business share belongs cannot otherwise be properly arranged, the appointment of a temporary trustee of the estate could also be considered (Article 131 of the ZD).

New partners without knowledge, interest or shared vision

Once the heirs have been finally established, it is clear who inherited the partner's business share upon his death. The heirs can also arrange for entry in the court register based on the final decision on inheritance. As partners, the heirs have all membership and management rights, including the right to participate in the general meeting, vote, be informed and share in profits.

It often happens that the heirs are not familiar with the company's activities and operations and do not have the interest, knowledge or ability to actively participate in its management. This can be especially problematic if the deceased partner was also a manager, employee or other key person in the company who actively participated in its daily operations. It is also not necessary that they share the same goals and vision for the further development of the company with the other partners.

If there are multiple heirs, they generally become joint owners of the business share and must exercise the rights arising from it together. Any disagreements between heirs can therefore have an additional negative impact on decision-making and the company's operations.

The remaining partners may thus acquire new long-term business partners who were not chosen by them and whose participation in the management of the company was not foreseen. This may change the balance of power between the partners, slow down decision-making or even create a management blockade. The risk is even greater when the company was built on the personal trust, expertise and active participation of the original partners. In such a company, replacing one of them with multiple heirs is not only a change in ownership, but can also significantly change the way it is managed and further developed.

How can these problems be avoided as effectively as possible?

Partners can already determine in the partnership agreement what will happen to the business share upon the death of one of them. They can determine the conditions under which the heirs continue to be members of the company, or provide for the termination of the inherited business share and the payment of its value to the heirs. The admissibility of such an arrangement has already been confirmed by case law (VSL IV Cpg 632/2020).

However, a general provision that heirs cannot enter the company is not sufficient. The company agreement must clearly regulate the entire procedure: who decides on the heirs' continued membership and within what period, when the business share ceases, how the share capital is adjusted accordingly, and in what manner and within what period the value of the business share is paid to the heirs.

If these issues are not regulated precisely enough and in accordance with the restrictions of corporate law, it may not be possible to effectively prevent the heirs from continuing to be members of the company. Unclear or incomplete regulation may lead to registration disputes, challenges to general meeting resolutions, and lengthy disputes regarding the termination and value of the business share.

The death of a partner is not only an inheritance issue, but also an important issue for the future ownership and management structure of the company. That is why it makes sense to arrange such situations in advance, when the partners can still clearly agree on them and appropriately regulate them in the partnership agreement.