Compensation for shareholders is a complex and frequently discussed topic in corporate law. In this blog post, we will take a closer look at the legal basis and the various aspects of compensation for shareholders when they leave a company. In particular, we will look at the calculation, the legal framework and the potential for conflict.
Important reasons for the exclusion of a shareholder and how this is done can be read here (LINK).
What is severance pay?
A severance payment is financial compensation that a departing shareholder receives from the company or the remaining shareholders for giving up his shares and associated rights. The right to a severance payment usually arises when a shareholder leaves the company, be it through termination, exclusion, death or other reasons specified in the articles of association.
Legal basis
The regulations on compensation for shareholders are not uniformly regulated by law, but can vary depending on legal form of the company and the individual agreements in the articles of association or partnership agreement. For example, the GmbH Act does not contain any specific provisions on severance pay, which means that the conditions and amount of severance pay are often determined individually by the partnership agreement.
calculation dthe severance payment
The compensation can be calculated in different ways and is often a reason for disputes. As a rule, the compensation is based on the value of the shareholding of the departing partner, which can be determined using various methods such as the earnings value method, the net asset value method or combined methods. It is essential that the valuation method and the calculation basis are specified in the partnership agreement and accepted by all partners. If no specific calculation method has been agreed, the market value of the shares at the time of departure is often used as the calculation basis.
Legal framework
The articles of association or partnership agreement may contain provisions that limit the amount of the compensation or provide for certain deductions. Such clauses are particularly important if the payment of the full compensation would endanger the company's liquidity. However, such provisions must be appropriate and must not disproportionately disadvantage the departing partner. Case law sets strict limits here in order to protect the interests of the departing partners.
conflict potential and solutions
The issue of severance pay can lead to significant conflicts between shareholders , especially if the amount of the compensation or the valuation of the shares is disputed. In order to avoid such conflicts, it is advisable to set out clear and unambiguous provisions on compensation when drafting the articles of association. In addition, it can be useful to involve a neutral third party, such as an auditor or an arbitration tribunal, in the valuation of the shares in order to ensure an objective and fair valuation.
Installment payments and liquidity protection in severance clauses
Severance clauses that provide for staggered payment of the severance payment play a crucial role in protecting a company's liquidity. By spreading the payment of the severance payment over a set period of time, it is ensured that the company's financial obligations to the departing shareholder do not become excessively burdened. This type of payment arrangement is particularly important for smaller or financially stressed companies where a large one-off payment could limit operational capacity.
Earn-out clauses and behavioral exclusions
Earn-out clauses tie part of the compensation to the future economic performance of the company, thereby creating incentives for the departing shareholder to make a positive contribution until the end of his or her time as a shareholder. In addition, the compensation clauses can define specific conditions that allow for exclusion from the compensation in the event of harmful behavior by a shareholder. These regulations encourage responsible and company-beneficial behavior while avoiding potential financial losses that could arise from actions that are contrary to this. Careful drafting of these clauses makes a significant contribution to minimizing future legal disputes and maintaining harmony within the company.
Severance Pay for Shareholders: Tax Treatment
The tax treatment of a severance payment that a shareholder receives when leaving a company is another key aspect that is important for both the departing shareholder and the company. In principle, severance payments are considered income in Germany under certain circumstances and can therefore be subject to tax.
Tax treatment of the shareholder
For the departing partner, the compensation can count either as income from capital assets or as income from a business, depending on the situation. If the entire share is sold, the profit realized (difference between the compensation amount and the original purchase price of the shares) is subject to withholding tax or income tax at the partner's personal tax rate if the partner chooses an option for taxation according to the partial income method. This regulation allows for a partial tax exemption of the profit, whereby 40% of the capital gain remains tax-free.
Tax treatment of the company
On the company side, the severance payments can be deducted as business expenses under certain conditions, which can reduce the company's tax burden. However, this is only possible if the payment of the severance payment serves to secure or acquire the source of income and is not primarily based on corporate law reasons. The exact tax deductibility of the severance payments should therefore be examined on a case-by-case basis and ideally agreed with a tax advisor.
Important aspects
It is important that both the company and the shareholders carefully examine the tax implications of a severance payment in advance and adjust the tax reporting accordingly. Through careful planning and advice, tax disadvantages can be avoided and the financial interests of all parties can be optimally supported. The tax treatment of the severance payment is therefore a decisive factor in the design of shareholder severance payments and should not be underestimated.
Conclusion
Compensation of shareholders is an important aspect of corporate law that requires careful planning and clear agreements. In order to minimize future disputes, the compensation provisions should be precisely formulated and adapted to the specific needs and structures of the company. Through forward-looking contract design and fair valuation mechanisms, the interests of all parties involved can be protected and the continued existence of the company can be ensured.
