Dutch legal succession planning tools for family owned businesses


The owners of family businesses sooner or later need to decide on either succession planning within the family or the sale of the family business to a third party.

Assuming that there are family members interested in succeeding the current owners, the following issues typically arise:

  • the family members that will not be actively involved in the business may share in the profits, but should not have any influence on the business or only very limited influence or information rights;
  • the successors need to finance the acquisition of the (shares in the) company from the founders, but may not have sufficient funds; and
  • for the continuation of the business within the family, the ownership of shares should be restricted to family members.

In addition to succession issues, another issue often encountered by the owners of a family business is that they would like to let their children share in the profits, but do not wish to relinquish any control over the business for the time being.

Dutch corporate law provides several practical and sophisticated legal tools to help facilitate the continuation of family businesses over the following generations. For example, the rules governing the Dutch private company with limited liability (the so-called “BV”) allow for the creation of different types of shares in the BV, which grant different rights to the holders thereof. Assuming that the family business is run through a local company, the shares in this company could be contributed to a newly incorporated BV, against the issuance of different types of shares in the capital of the BV to the founders, the successors and/or the non-actively involved family members.

These different types of shares can be used to address the abovementioned issues as follows:

Profit share without influence

In order to let (underage) children and other descendants of the founders share in the profits of the BV without giving them any voting rights in the shareholders meeting (and thus influence on the business), it is possible to issue BV shares without voting rights. Such shares only grant profit rights, the rights to receive certain (financial) information and the right to attend meetings of shareholders and to address the meeting (not vote of course). The founders will hold the only shares with voting rights and can continue the business in principle without requiring the cooperation of the other shareholders.

Financing the succession

If one of the founders’ children wishes to take over the family business, the successor would normally need to pay a purchase price equal to the (fair market) value of the company owning the business to the founders. Such compensation is typically necessary to ensure that the founders can get their pension out of the sale of the company and/or the siblings of the successor are guaranteed that they will (in time) receive their part of the value of the family business, even though they will not be involved in the business.

If the successor does not have sufficient funds to pay the entire (fair market) value of the company, some form of financing will be required.

One alternative could be to obtain a third party loan from a bank or a loan from the founders. However, it may be difficult to get a third party loan for the succession and/or it may be too expensive. Furthermore, although such a loan is not restricted by any financial assistance rules, a loan from the founders is still a debt for the successor and this may be undesirable for the successor. Moreover, a sale of the shares could be considered a realization for tax purposes and may therefore trigger immediate taxation for the seller(s). Whether the sale would indeed trigger a taxable realization, should of course be verified by tax advisors.

Another alternative would be for the founders to contribute their shares in the company to the BV against the issuance of so-called cumulative preference shares (“Prefs”). Such Prefs give the holders thereof a preferential right to the annual profits over the holders of ordinary shares, which ordinary shares would be held by the successor.

Furthermore, the Prefs’ profit rights can be calculated as a fixed percentage over the amount of the company’s value, established at the time of the succession. Through these annual payments, the holders of the Prefs will receive the purchase price for the company out of the profits realized by the BV over the subsequent years. Once the full amount of the value of the company is thus paid to the holders of the Prefs, these Prefs can be converted into ordinary shares or cancelled, depending on the clients’ preferences. It is also possible to make the Prefs non-voting shares, thus limiting the influence of the (non-actively involved) holders thereof.

There are other options to structure the ownership of the shares in a BV, by interposing a Dutch foundation that will hold the (non-voting) BV shares. There are numerous ways to organize the governance of the foundation, whether it can vote on the BV shares it holds or not, whether it will have a management board composed entirely of the successor, an independent director or representatives of the non-actively involved family members and any combination thereof. These options are not addressed here, as there are too many different options to elaborate on in general.

Keeping the shares within the family

It is also possible to safeguard that non-family members cannot acquire shares in the capital of the company and that the descendants in a specific branch of the family have a right of first refusal to any shares held by members of their branch of the family (for third and subsequent generations this becomes more and more relevant).

In order to prevent any non-family members acquiring shares, it is possible to include shareholder criteria in the BV’s articles of association. Such criteria could be that “a holder of shares can only be a descendant of [name founders] or a legal entity fully controlled by a descendant of [the founders]”. If a non-family member acquires the shares regardless of these criteria, this person will have no shareholder rights. These rights are suspended until either (i) the whole family/the management board of the BV has given its approval to this person becoming a shareholder and exempted this person from the shareholder criteria or (ii) a certain period has lapsed without any qualifying person offering to acquire the shares against the payment of the aggregate nominal value thereof.  

This will deter any non-family members from acquiring the shares in the BV, as they will be worthless to them. The deterrent can be further strengthened by granting the mandate to the BV’s management board to sell and transfer the shares to qualifying persons, if the non-qualifying person does not cooperate with the transfer of the shares.

Family branches over the generations

In order to give rights of first refusal to shares held in a specific branch of the family to other members of the same branch, different classes and sub-classes of shares can be created that must be offered to holders of the same class of shares in the event of a intended sale. Upon inheritance, sale or donation of shares by the founders to their descendants, the shares will be converted into different classes (A, B, C, etc.). Each descendant will hold his or her own class of shares. If they in turn wish to donate their shares to their children, these classes of shares can be converted into sub-classes (e.g. A-I, A-II, etc.) and so on through the generations. It is possible to allow for such conversions and classes of shares in advance in the articles of association, which will become active when needed.

In quite a number of jurisdictions no legal tools exist within the company law provisions that allow the facilitation of the succession and the safeguarding of the family owned nature of the businesses. The interposition of a Dutch structure may therefore provide a tailor made solution for owners of family businesses in numerous jurisdictions.

The above is a general description of Dutch legal tools that may help facilitate the succession in a family business. It will of course require tailoring in order to achieve each client’s specific needs and wishes and take into account their situation. Needless to state, the tax aspects of any particular situation and structure will need to be carefully analyzed and considered.

Please feel free to contact us for more detailed information on this subject.

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