Is your company's articles of incorporation strong or weak?
Whether business succession succeeds or develops into a quagmire of disputes between relatives or with non-relatives.
One of the decisive factors that determines that fate is the company's "Articles of Incorporation."
The articles of incorporation are, so to speak, the "company's constitution," but in many companies, they remain dormant, having never been reviewed since they were created at the time of incorporation.
However, if you face business succession with "weak articles of incorporation" that have been left as a generic template, you will be tripped up by unexpected risks.
In this article, we will thoroughly compare and explain the differences between "strong articles of incorporation" and "weak articles of incorporation" in business succession, including specific risks and countermeasures.
What are "strong" and "weak" articles of incorporation in business succession?
In short, the difference lies in "whether they are customized in advance by anticipating future management risks and troubles."
Weak Articles of Incorporation
This is a state where the templates (model articles of incorporation) from the notary office or legal affairs bureau at the time of company establishment are used as they are. While they meet the minimum legal standards, they lack the power to prevent unique troubles that occur during the major turning point of business succession (such as stock dispersion or management rights disputes).
Strong Articles of Incorporation
These are articles of incorporation that fully utilize the various special provisions and customization functions permitted by the Companies Act, and have built-in mechanisms for smooth consolidation of management rights to the successor and defensive measures against hostile shareholders.
Three Decisive Comparison Points
Let's compare the specific differences from three aspects that are particularly prone to conflict during business succession.
1. When the previous owner passes away and shares are inherited
In the case of weak articles of incorporation
When the predecessor passes away, their shares are divided among heirs such as spouses and children.
If a relative who is not involved in management at all or who is on bad terms with the successor inherits the shares, that relative gains the right to interfere in the company's management as a "shareholder."
In the worst case, management will come to a halt.
In the case of strong articles of incorporation (strong defensive functions)
Include a provision in the articles of incorporation that states, "The company may request that a person who has acquired shares of the company through inheritance or other means sell said shares to the company (demand for sale to heirs, etc.)."
This allows the company to forcibly buy back shares at a fair price if they are inherited by relatives other than the successor, thereby completely preventing the dilution of management control.
(2) Decision-making flow for important company matters when the representative's judgment capacity declines
In the case of weak articles of incorporation (dysfunction)
If a representative who holds the majority of shares becomes unable to exercise voting rights due to dementia or similar conditions, the company will fall into dysfunction, unable to appoint officers or make important decisions.
In the case of strong articles of incorporation (flexible functionality)
This is a state where it is already determined to whom the company's decision-making authority will be transferred when the representative experiences a 'decline in judgment capacity' such as dementia.
This ensures that decision-making for important matters continues to function, making it possible to prevent the company's operations from coming to a halt.
(3) When you want to concentrate 'shares (voting rights)' in the successor, but also need to distribute assets to other relatives
In the case of weak articles of incorporation
If all shares remain under the principle of 'one share = one voting right,' the only way to transfer management control is to concentrate the shares in the successor. However, this leads to unfair distribution of inheritance to other relatives, causing inheritance disputes (such as legal reserve of inheritance issues).
In the case of strong articles of incorporation
We incorporate provisions into the articles of incorporation to introduce 'class shares' under the Companies Act. For example, we give the successor 'shares with voting rights,' while giving other relatives 'shares that have no voting rights but receive higher dividends (non-voting dividend-preferred shares).' This achieves strong protection by concentrating 100% of management control in the successor while maintaining fairness in terms of assets.
Three steps to create strong articles of incorporation
So, how can you transform your company's articles of incorporation into 'strong articles of incorporation'? The procedure is as follows.
A comprehensive review of the current articles of incorporation
First, pull out the current articles of incorporation sleeping in the company safe and check what is written (especially provisions regarding transfer restrictions and inheritance).
Simulation of the future succession process
We predict 'to whom, when, and how shares and management rights will be transferred' and 'how other relatives and existing shareholders will act at that time' to identify risks.
Resolution for amending the articles of incorporation at a general meeting of shareholders
We create an optimal amendment plan tailored to your company (such as adding a demand for sale to heirs or setting up issuance quotas for classified shares) and amend the articles of incorporation through a special resolution of the general meeting of shareholders (approval by two-thirds or more of the voting rights).
Summary: Preparation for business succession begins with a 'review of the articles of incorporation'
Amending the articles of incorporation requires a special resolution of the general meeting of shareholders.
In other words, you cannot strengthen your articles of incorporation unless it is 'now,' while the previous owner is still healthy and firmly holds the voting rights. If you think about 'changing the articles of incorporation' after the successor has taken over, if the shares have already been dispersed, you may find that a veto is exercised, making it impossible to even make changes.
Business succession is not just an event where you hand over the president's chair. It is a major project to safely and reliably pass on the company's control (shares) to the next generation.
Why not start by checking with a professional tax accountant or judicial scrivener to see if your company's articles of incorporation remain 'weak'?
That first step will become the strongest shield to protect the future of your company and your family.
Our office also provides an 'Articles of Incorporation Diagnosis Service'.
If you have read this article and would like to know the current status of your company, please contact us via the inquiry button on the website below👇
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