What should the future look like when the current stewards leave the company? And who should choose the best-suited successors?
Options for Succession and transfer of voting rights
In addition to deciding which persons should hold the voting rights today and thus become the steward-owners of the company, it is also necessary to determine which persons, groups of people and/or committees should succeed or be responsible for the appointments of new steward-owners and which criteria should be considered for this in the future. As with the distribution of voting rights, there are various options, which differ greatly from one another. Various designs of succession arrangements created by steward-owned companies are presented below. They have found different answers to the guiding question of which people or group of people, based on their skills, values and relationships to the company, are the right ones to decide on the allocation of voting rights, succession and appointment of stewards. Below you will find inspiration for developing the solution that suits you best.
Typical succession arrangements
Steward-owned companies essentially choose between two different ways of structuring the succession decision: 1) co-optation, i.e., the stewards themselves decide on succession, or 2) a succession council is set up that decides on the allocation or transfer of voting rights. Both variants can be designed differently.
Co-optation is the simplest option for succession. In this case, the decision on the allocation and transfer of voting rights is incumbent on the active stewards. If nothing else is specified in the bylaws, the stewards decide on the succession or addition of stewards with the majority specified in the bylaws. If desired, the majority ratios for the allocation and transfer of voting rights can be adjusted in the bylaws. If nothing further is legally regulated in the articles of association, the shareholder concerned still votes or is involved in the notarial transfer.
The co-optation approach is mostly chosen by companies that feel that the steward-owners themselves know best who should fulfill this task in the future. Co-optation is particularly often chosen by start-ups during their formation or early transformation, when the complexity and number of stakeholders is still low. However, in addition to start-ups, this solution has also been practiced by large companies and pioneers such as Bosch for many years.
In addition to co-optation, many founders also decide that a succession council (see below) must be established when the company reaches a certain size or when the steward-owners change for the first time. Another argument is that, in the event of death, for example, there is a group of suitable decision-makers for the succession right from the start. The formation of a succession council, for example, is frequently linked to the achievement of a certain number of employees. If a successor council is not initially included in the articles of association, it can still be formed at any time in the future.
"As soon as there is a change in the A-shareholders or another A-shareholder joins the company, a succession council is established."
"As soon as 10 full-time employees work for the company, a succession council is established."
Succession council/Advisory board
Many start-ups and mature companies decide to introduce a succession council when transforming to a steward-owned structure. The concrete arrangement of the council is extremely versatile and, like the entire legal dress, can be developed to fit the respective company exactly. Some companies also set up an advisory board independently of succession considerations, which can then also take over this decision. The questions about how this council works should ideally include the following points:
- How many people should the succession council consist of (fixed or flexible)?
- How will the succession council be set up initially?
- How will the succession council be elected in the future?
- For how long are the members elected? Is re-election permitted?
- Should the members always come from one or more groups of people (employees, managers, stewards, etc.)?
- What rights does the council have? Right of nomination? Right of veto? Or a decision? If a decision, by what majority?
All these arrangements do not necessarily have to be made right from the start, but it is advisable as this provides the necessary clarity about the role of the succession council.
"The company will designate a succession council comprised of 3 to 5 members. The members of the succession council will be elected through a simple majority vote by the employees who have been working for the company for at least 24 months, from among the A-shareholders and the five employees with the longest tenure. The election will be held for the current fiscal year and the three succeeding fiscal years. The members of the council are eligible for re-election."
"The company will establish a succession council consisting of 3 to 5 members. The members of the council will be elected by a simple majority vote by the A-shareholders and/or executives of the company. The election will be valid for the current fiscal year and the subsequent three fiscal years. Re-election will be allowed."
Advisory board with succession decision
Some companies decide to legally establish an advisory board independently of the succession arrangement. This advisory board is endowed with additional rights. For example, the advisory boards must be consulted on certain topics and/or monitor the stewards' non-compliance with defined "red lines." The advisory board can withdraw the voting rights and also redistribute them should the steward-owners exceed these. Some entrepreneurs especially wish for such "red lines." They use them as an “evaluation” of their performance. In addition to these responsibilities, succession planning can be delegated to the advisory board as an additional right of determination or co-determination.
"The company will have an advisory board of three members. The controlling shareholder(s) will appoint one member from among the governing bodies of the controlling shareholder(s). The company's management will appoint one member who is not a member of the management. The other two members will appoint the third member jointly. However, the third member cannot be a member of the company's management or the controlling shareholder's executive bodies. In exceptional cases, the company's management, in agreement with the controlling shareholder or partner, may decide to have only one person on the advisory board. If either party withdraws consent, the advisory board must be reinstated to have three members."
"The advisory board will elect a chairperson from among its members, and declarations based on its resolutions will be made by the chairperson.
In the following cases, the advisory board will decide by a simple majority instead of the general meeting of shareholders: redemption of A-shares pursuant to § xx and their transfer pursuant to § xxx to the persons determined by the advisory board, who are authorized and willing to acquire A-shares pursuant to § xxx.
- If for any reason (e.g., death), the company has no more shareholders who meet the criteria for shareholders in group 1, according to § para. xxx, in which case the advisory board may at the same time decide on the appointment as managing director(s) of the persons determined by the advisory board.
- this applies if the company has no more shareholders who meet the criteria for shareholders in group 1 according to § para. xxx, or if a holder of A shares as a director of the company exceeds any of the following "red lines" with respect to the shares of such shareholder;
- the existence of a legally binding or undisputed violation of statutory obligations, obligations under the articles of association, or obligations arising from rules of procedure established by shareholders' resolution, and refusal to prevent or mitigate financial loss resulting therefrom upon request of the advisory board, or recurrence of the same or a similar violation;
- existence of compelling grounds for insolvency (Sections 17 and 19 of the Insolvency Code) in the case of the company.
The advisory board shall hear all shareholders prior to its decision. In the case of § XX, the advisory board shall also decide on the dismissal of the shareholders concerned as managing directors.
The approval of disposals of A shares pursuant to § xx shall be decided by the advisory board with a simple majority.”
The variations in succession council arrangements listed here are only typical examples from our network. Other possibilities, for example, depending on the needs of the companies, include:
- The allocation of fixed seats in the succession council for (long-term) employees, external consultants, etc.
- Retiring owners move to the succession or advisory board.
- The succession council co-opts itself.
Ultimately, the examples given here are intended to provide inspiration from which a suitable solution can be developed for one's own company.
- Elobau Case
- Waschbär Case
- BuurtzorgT Case