Berkeley Program in Law and Economics

This paper deals with intergenerational successions of family enterprises both in Germany and on an international level. Entrepreneurs face an unavoidable succession dilemma: they must make strategic decisions about transitioning ownership of the family business. The main alternatives are to sell the company to someone outside the family or to make arrangements for an interfamily succession. In the latter case, there are many transition modes, e.g., through a gift of shares, a will or a mixed marriage / succession contract. The choice of succession mode is the outcome of an interaction process between generations, with civil and tax laws determining the transactions costs of the different succession alternatives. This paper concentrates on successions of ownership within the family. It illustrates the nature of this intergenerational problem and discusses how a specific legal system - the German one - influences the choice of succession. The paper begins with analyzing the most common methods used to transfer ownership to the next generation. Although succession problems are universal, transition methods adopted vary around the world as each country has its own tax system. This influences the choice of laws in international successions. Consequently, the second part of the paper focuses on the conflict of laws perspective of succession treaties for family businesses. One conclusion of the paper is that it is important for a society to provide a legal system that facilitates transitions of family companies because the legal system will, among other positive factors connected with family businesses, preserve idiosyncratic knowledge of family character.