Succession managers: A new option for entrepreneurs | In Principle

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Succession managers: A new option for entrepreneurs

The proposed Act on Succession Management in Sole Proprietorships will offer new solutions for business owners. It is intended to allow the heirs to continue operating an individual business after the owner’s death.

Mortis causa proxy and inherited business

Under existing laws this scenario is highly problematic, which frequently means that a business ceases to operate at the entrepreneur’s death.

The proposed new law defines two key terms: “succession manager” (zarządca sukcesyjny, also referred to as mortis causa proxy—i.e. a proxy appointed in the prospect of death), and “inherited business.”

The succession manager temporarily runs the deceased entrepreneur’s business. Due to the succession manager’s critical role, the new act establishes specific requirements which must be satisfied by potential candidates. A succession manager must be an individual with full legal capacity who is not the subject of a binding disqualification from conducting business activities or activities related to managing assets.

An inherited business consists of the tangible and intangible assets intended for use in the entrepreneur’s business activity which were the entrepreneur’s property at the time of his death (as well as assets acquired later by the succession manager).

Guidelines for succession managers

The succession manager acts in his own name but on behalf of the owner(s) of the inherited business. Significantly, the succession manager may be a party to legal proceedings related to the business, and also take part in administrative and tax proceedings. To perform tasks outside the ordinary course of business, the succession manager must secure the agreement of all of the inherited business’s owners, or, court approval after failing to secure such agreement. The owners of the inherited business have the right to share in the profits and are responsible for the losses resulting from the business’s operation, based on their ownership interests in the inherited business.

In general, the succession manager is not liable for the debts incurred on behalf of the inherited business’s owners (the inherited business’s owners are jointly liable for obligations related to the inherited business’s operations). The succession manager may, on the other hand, be liable for damage caused by non-performance or improper performance of his duties.

Only a single succession manager may be appointed at one time, but the manager then may appoint additional proxies. Further, during the period of succession management, disposal of the inherited business or shares in the inherited business requires a notarial deed—a more stringent requirement than usual.

Appointing the manager

The entrepreneur may appoint a succession manager in a written document (under sanction of invalidity). Also, a commercial proxy appointed under the provisions of the Civil Code may become the succession manager following the entrepreneur’s death, provided that the entrepreneur appointing the proxy included an appropriate stipulation therein and the proxy consents to the appointment. Finally, a succession manager may be appointed by the entrepreneur’s statutory heirs. Such an appointment requires a notarial deed, is limited to a period of two months from the entrepreneur’s death, and requires the approval of heirs whose total ownership interest in the inherited business exceeds 85%.

Removal and expiration of succession manager’s appointment

A succession manager may be removed by the appointing entrepreneur, or by the court in the event of the manager’s gross dereliction of duties. The manager may also tender his resignation to the entrepreneur using the proper form. Additionally, a succession manager’s appointment automatically expires at the end of specific periods provided for various circumstances. The maximum duration of a succession manager’s term is two years after the entrepreneur’s death, but courts may extend the duration for up to five years if justified by the circumstances.

Effects of appointing a manager

An important feature of succession management is that it will allow the continuation of most civil and employment contracts. This creates an environment in which the heirs will be able to continue the business’s operations.

The new arrangement will also allow administrative decisions to remain in force, provided that the succession manager files a petition with the relevant public administration authority within three months of his appointment. The petition should request the public administration authority which issued the decision to confirm its continued enforceability, and the authority will then issue the requested confirmation.

Evaluating the proposed changes

The proposed Act on Succession Management in Sole Proprietorships has the potential to help entrepreneurs ensure that their heirs have the opportunity to continue operating the business after the founder’s death. The proposed provisions appear to be highly promising but will have to be verified in practice. The act’s proposed establishment of the institution of a succession manager may prove to be of great assistance to individuals who are beginning to explore the legal and formal circumstances related to operating a business. The succession manager is intended to be a well-informed individual who will assume day-to-day operation of the business during the challenging period of ownership transition and ensure that it continues as a going concern.

Monika Muszyńska, M&A and Corporate practice, Wardyński & Partners