Transfer of Business Ownership and the Liability of Managing Directors

In two articles for the Tiroler Tageszeitung of 28 August 2020 our lawyers Silvia Moser and  Franz Pegger explain questions in connection with the transfer of company ownership and the liability of managing directors.

Tiroler Tageszeitung 28 August 2020

Liabilty Risks – Managing Directors of GmbHs (Silvia Moser)

There are numerous legal provisions that can lead to the liability of a managing director. In practice it often turns out that managing directors are not sufficiently informed of this fact.

Managing directors are obliged to manage a company properly. This includes, for example, the keeping of a proper accounting system, the fulfilment of organisational and supervisory duties, the management of the company according to business management principles and compliance with numerous statutory and other legal regulations.

In exercising their function, managing directors must apply the “diligence of a prudent businessman”. This legal standard of due diligence is based on the skills and knowledge that can usually be expected of managing directors in the relevant line of business and on the size of the company. In this context, the so-called “Business Judgement Rule” was also introduced into the law some time ago to reduce the liability of managing directors to a reasonable level in certain cases. According to this rule, managing directors act in accordance with the “diligence of a prudent businessman” if they are not guided by outside interests when making a business decision and may assume, on the basis of appropriate information, that they have acted in the best interests of the company.

In the event of culpable breach of their duties, the company’s managing directors are liable for the resulting damage (internal liability). Under certain circumstances, however, liability towards third parties or shareholders may also arise (“external liability”). This case can occur, for example, if managing directors violate the obligation to file for insolvency proceedings in good time. In addition, there is also the risk of (administrative) criminal liability, which can affect managing directors.

Under certain circumstances, however, “liability-relieving” circumstances can also exist (e.g. discharge resolution, legally compliant instruction of the shareholders).

Legal tip:

Managing directors should be well informed about their duties and the applicable liability provisions. It is advisable to obtain legal advice to assess whether a managing director has acted in conformity with the law in an individual case or whether there are any circumstances which may relieve liability.

 

Company succession – Transferring ownership is more difficult than founding (Franz Pegger)

How and when should ownership of a company be transferred? Company succession poses great challenges, especially for many family businesses.

What are the legal options for the transfer?

A company can be transferred while the owner is still alive or on their death by means of a last will and testament (will or bequest). The choice of the right time for the transfer is crucial.

The transfer process can be a critical phase in a business. Often the founder sees his company as his ” life’s work “, therefore it is of great importance that the needs of each person involved are taken into account. Therefore, a tailor-made solution often needs to be found.

What are the hurdles and what mistakes should be avoided?

One big mistake is that entrepreneurs often think about to whom and how they want to hand over their business far too late. It is important to work out a concept as early as possible to avoid a rushed handover.

Typically, it’s important for the successor to be able to grow into his new role gradually. For the person handing over the company, however, it is often not easy to “hand over the reins”. These hurdles can often be overcome by a gradual transfer. In order to avoid having to hand over the company overnight, it is a good idea to grant power of attorney, (co-)management powers or even a minority shareholding; this way, the entrepreneur can still help shape the future.

Nevertheless, there are also companies where it is more effective to draw a clear line and let the next generation take over.

What are the problems with inheritance?

Inheritance also isn’t always straightforward.  If there is no last will and testament, legal succession applies and the heirs can become co-owners of the company. In order to avoid this, precautions (e.g. clauses on subscription rights and succession) should already be included in the partnership agreement.

Legal tip:

It takes a lot of time and discussion to find the suitable form of transfer that is right for everyone involved. It is therefore advisable to deal with the issue of company succession at an early stage to prevent things going wrong. It would be advisable to consult a specialist to develop a tailor-made solution.