This is the second article in a series on succession planning for business owners. In the first article, we discussed why owners should think ahead about their company’s future, what risks arise when inheriting shares and stakes, and how the interests of family, partners, and the business intersect. Now we move on to specific corporate mechanisms that allow owners to implement a pre-planned succession scenario.
Why Corporate Mechanisms Matter
The death of a business owner almost always becomes a stress test for the corporate structure. If a succession plan has not been predetermined, the company faces a difficult legal situation: heirs have not yet accepted their inheritance, partners do not know who they will work with, and key decisions may be blocked.
As a general rule, shares and stakes form part of the estate. According to Article 1112 of the Russian Civil Code, the property rights of the deceased, including participation in business entities, pass to the heirs. However, for partnership businesses, this does not always lead to a safe or prudent outcome.
As we noted in the previous article, the interests of heirs and the interests of the business often diverge. In many cases, owners would prefer the business to remain with their partners, while heirs receive financial compensation. Modern corporate law allows owners to lock in such a scenario in advance, but only if the relevant mechanisms are embedded in corporate documents while the owner is alive. Below, we discuss how this works for LLCs and joint-stock companies.
LLCs: How the Charter Preserves Company Control
In limited liability companies, the charter is the key instrument for regulating stake transfers.
According to paragraph 8 of Article 21 of Federal Law No. 14-FZ of February 8, 1998 “On Limited Liability Companies,” the charter may condition the transfer of a stake to heirs on the consent of the other members. If consent is not obtained, the stake transfers to the company, and the heir is entitled to payment of the fair value of the stake (Article 23(5) of the LLC Law). Fair value is determined based on accounting data for the last reporting period preceding the death of the member. In practice, this amount often significantly differs from the heirs’ expectations, since accounting value and market value of the business may diverge.
The net effect for the heir may be equivalent to exclusion from the business: he does not become a member and receives cash compensation instead. For the partners, this means they retain control of the company.
However, in practice, many business owners underestimate the importance of the charter. If the relevant provisions are absent, the stake passes to heirs without restrictions and without member consent, under the default rule of law.
It is important that the charter be consistent: restrictions on transfers to heirs and transfers to third parties (including a surviving spouse) must be aligned. Charter contradictions are a source of corporate disputes.
Court practice confirms the permissibility of such corporate mechanisms. The Russian Supreme Court, in its ruling of April 6, 2023 No. 305-ES22-26611, stated that charter provisions requiring consent of other members for stake transfers to heirs and surviving spouses are a permissible restriction, and their non-compliance results in the stake passing to the company. This position was confirmed in the Survey of Russian Supreme Court Practice No. 3 (2023), approved by the Presidium of the Supreme Court on November 15, 2023.
This means that corporate documents determine the fate of the business after the owner’s death.
Joint-Stock Companies: Free Transferability of Shares and Associated Risks
In joint-stock companies (JSCs), the situation is fundamentally different from LLCs. Shares are freely transferable securities, and their transfer to heirs does not require company or shareholder consent.
According to paragraph 3 of Article 1176 of the Russian Civil Code, the estate of a JSC member includes the shares owned by him, and heirs who inherit these shares become members of the joint-stock company. The JSC charter cannot restrict the inheritance of shares, unlike an LLC charter.
This makes a JSC the most favorable form for heirs to participate in a business, but simultaneously creates risks for partners, who cannot use charter mechanisms to limit the arrival of new shareholders.
However, the transition period between the shareholder’s death and the formalization of heirs’ rights creates specific complications. After accepting the inheritance, the heir’s rights are deemed to have arisen from the date the inheritance opened (Article 1152(4) of the Civil Code), but the exercise of corporate rights – voting at meetings, receiving dividends, participating in management – practically requires registration with the registrar. This requires obtaining a certificate of inheritance rights and presenting it to the registrar (Article 29 of Federal Law No. 39-FZ of April 22, 1996 “On the Securities Market”).
In practice, this means that for at least six months (and often longer), heirs cannot exercise corporate rights, while the company continues to make decisions, including on major transactions, dividend distribution, and reorganization. A controlling stake may remain “suspended,” creating opportunities for abuse by other shareholders.
An additional risk is that information about shareholders is held by the registrar and typically does not appear in the Unified State Register of Legal Entities (EGRUL). If the deceased did not leave information about his participation in a JSC, unaccounted corporate assets create a separate search and procedural risk for heirs.
To protect the interests of heirs and the business itself, JSCs are advised to establish trust management of shares during the period until heirs obtain certificates of inheritance rights (Article 1173 of the Civil Code). If the management model assumes active share disposition, the status of the manager and the scope of his authority should be separately verified under securities law and Bank of Russia regulations.
Since charter restrictions are impossible in a JSC, the main tools for succession planning become shareholder agreements (Article 67.2 of the Civil Code), option structures, and advance documentation of the owner’s wishes in a will or hereditary contract.
Corporate Contract: A Pre-Agreed Scenario
Even when the LLC charter contains appropriate provisions (or when charter restrictions are impossible in a JSC), partners often prefer to lock in additional mechanisms in a corporate contract. This instrument is provided for by Article 67.2 of the Russian Civil Code.
A corporate contract allows partners to determine in advance: who acquires the deceased member’s stake (shares), the valuation procedure for the business, the timeline and process for the buyout, and the financial structure of the transaction.
The key advantage of this mechanism is the ability to determine transaction economics in advance. A pricing formula fixed in the corporate contract avoids negotiations over business valuation at the moment of corporate crisis, when the parties’ positions inevitably diverge.
For a JSC, a corporate (shareholder) agreement becomes especially important, as it is practically the only tool allowing partners to agree in advance on a succession scenario in the event of one partner’s death, given the impossibility of charter restrictions on inheritance.
Options: A Partner’s Right to Buy Back Stake or Shares
Another corporate structuring tool is the option. According to Articles 429.2 and 429.3 of the Russian Civil Code, parties may enter into an option to conclude a contract or an option agreement.
In corporate practice, this allows partners to fix in advance the right to purchase a stake (or shares) upon the occurrence of a specified event, including the death of a member (shareholder). Such a mechanism fixes the acquisition right, determines the pricing formula, and creates a predictable financial outcome for heirs.
However, the practical application of options in succession planning has several nuances. The option parties are typically the members (shareholders) themselves: each partner grants the other a buyback right in case of his death. A key question is whether the obligation under the option agreement transfers to heirs. As a general rule, the obligations of the deceased transfer as part of the estate (Article 1112 of the Civil Code), but for reliability, this should be directly addressed in the contract.
Formal requirements must also be considered: an option to purchase a stake in an LLC is subject to notarial certification (Article 21 of the LLC Law). This increases the reliability of the structure but requires additional steps during formalization.
Options are especially sought after in companies where several partners own comparable stakes (share packages) and wish to preserve the current management structure.
Hereditary Contract: A Connecting Link
In addition to corporate tools, Russian law provides for a hereditary contract (Article 1140.1 of the Civil Code). Unlike a will, a hereditary contract is concluded with a specific person (including a business partner) and may impose obligations that the heir must fulfill to receive the inheritance.
In the context of succession planning, a hereditary contract may complement a corporate contract and option structures. For example, an owner may enter into a hereditary contract providing for the transfer of a stake to a partner on condition that the partner pays compensation to heirs according to a fixed formula. This creates an additional layer of legal certainty.
In practice, however, hereditary contracts are used sparingly. Their potential is still being tested by courts, and in combination with corporate tools, they require careful legal review to avoid contradictions.
The Transition Period: The Six-Month Problem
A separate risk, common to both LLCs and JSCs, relates to the period between the owner’s death and acceptance of the inheritance. According to Article 1154 of the Civil Code, the standard period for accepting an inheritance is six months. During this time, it remains formally unclear who will become the owner of the stake (shares).
To preserve the asset, the law provides for a mechanism of trust management of inherited property (Article 1173 of the Civil Code). A notary may appoint a trustee to manage the asset until the inheritance procedure is completed. In corporate structures, this mechanism allows the stake (shares) to participate in voting, prevents blocking of decisions, and preserves operational manageability of the company.
However, in practice, trust management is used relatively rarely. There are several reasons. First, the scope of the trustee’s authority in corporate matters is not always clear: is he entitled to vote on reorganizations or approval of major transactions? Second, time inevitably passes between the owner’s death and trustee appointment, during which the company lacks a representative for the stake. Third, initiating trust management requires heirs (or other interested parties) to contact the notary, and in practice heirs do not always act promptly.
Therefore, partners interested in continuous company operation should ensure in advance that corporate documents contain mechanisms that reduce business dependence on a particular stake (share package) voting during the transition period.
Limitations of Succession Planning
Even with a well-designed corporate structure, certain limitations cannot be fully overcome.
The primary limitation concerns the mandatory share of inheritance. According to Article 1149 of the Civil Code, minors or incapacitated heirs have the right to a mandatory share of the estate regardless of the contents of the will or hereditary contract.
However, this does not necessarily mean the transfer of a stake (shares) to such heirs. Their interests may be satisfied through cash compensation or other assets included in the estate.
Thus, the task of succession planning is not to completely exclude heirs, but to balance the interests of family and business. A thoughtful asset structure, in which the estate includes sufficient liquid assets apart from the business stake, allows mandatory heirs to be satisfied without harming the corporate structure.
Financing the Buyout: Where the Money Comes From
An often-overlooked question during planning: from what funds will partners or the company repurchase the stake (shares) from heirs? A corporate contract or option fixes the right and pricing formula, but does not create a source of financing.
In practice, several models are used. Key person insurance allows the insurance payout to be directed toward the buyout. The company’s or partners’ reserve fund may be formed in advance. Payment installments, fixed in the corporate contract, distribute the financial burden over time.
The choice of model depends on the scale of the business, the number of partners, and the stake value. Without a predetermined financing source, even an ideally structured corporate framework may prove impossible to implement.
What Business Owners Should Do Now
Practical succession planning begins with an analysis of corporate documents. Here is an action plan for the owner and his partners:
1. Review the company charter. For an LLC: does it contain provisions requiring member consent for stake transfers to heirs? Are restrictions on heir transfers consistent with provisions on transfers to third parties and a surviving spouse? For a JSC: establish the existence of a shareholder agreement.
2. Agree on a corporate (shareholder) agreement. Fix the buyout procedure, business valuation mechanism, transaction timeline and process.
3. Formalize option structures. Fix partners’ acquisition rights upon specified events. Directly address the question of whether obligations under the option transfer to heirs.
4. Define buyout financing sources. Consider key person insurance, reserve fund formation, and installment payment terms.
5. Establish a transition management mechanism. Provide for trust management of the stake (shares) during the inheritance procedure. Agree on a trustee candidate.
6. Align inheritance documents with corporate documents. Ensure that the will or hereditary contract does not contradict the charter, corporate agreement, or option structures. Account for mandatory heirs’ rights.
In a partnership business, regardless of its organizational form, the key issue of succession planning is not the distribution of assets, but the preservation of operational manageability.
If a succession scenario has not been predetermined, it will be shaped by legal norms and circumstances. In an LLC, this may mean the arrival of unwanted co-owners; in a JSC, it may mean loss of control during the transition period. In either case, the consequences include lengthy negotiations between heirs and partners and the risk of corporate conflict.
A business can remain stable only when its future is determined in advance – in ordinary operating conditions while the owner is alive.