Disputes over the Estates of Entrepreneurs

Crisis Scenario: What Happens to Your Company When You Die?

Who will sign the payroll for dozens of employees at that moment? Who will pay key suppliers for materials? The company becomes unmanageable, even if it is otherwise perfectly healthy.

Inheritance proceedings can take months, or even years in the event of disputes. While the court may appoint an estate administrator, their powers are very limited under Czech legislation. They can pay regular invoices and wages, but they cannot make any strategic decisions, enter into new contracts, or invest.

During this period of legal uncertainty, the company strategically stagnates and loses value. Suppliers and banks lose confidence. At ARROWS, we deal with crisis management for companies in this situation daily. We help clients establish deputisation and asset management to ensure their business continues to run smoothly. For an immediate solution to your situation, write to us at consultation@arws.cz.

Why Is Company Inheritance a Ticking Time Bomb?

The entire process, known as probate proceedings, is conducted by a notary acting as a court commissioner under Czech legislation. Their task is to identify the assets and the circle of heirs. A major problem arises if the heirs disagree on anything.

This is because the notary is not authorised to resolve factual disputes. If one heir challenges the validity of a will and another defends it, the notary will not decide the dispute. They will suspend the probate proceedings and refer one of the parties (the one with the "weaker" right) to file a separate lawsuit in court.

The most common disputes that paralyse a company include:

• Dispute over inheritance rights: Challenging the validity of a will due to formal errors or the alleged incapacity of the testator at the time of signing.

• Dispute over disinheritance: Contesting a deed of disinheritance and claiming a compulsory share.

• Dispute over the scope of assets: Disagreements about what belongs to the estate, typically disputes over the valuation of a business share.

The inheritance proceedings are frozen until this separate court case is concluded. This can take many years. Representation before courts and administrative authorities is a key part of our work at ARROWS, and our Prague-based legal team has extensive experience in handling these complex disputes over the determination of inheritance rights.

Common Flashpoints in Inheritance Disputes and Their Impact

The Fundamental Problem: Inheriting a Business Share in a Limited Liability Company (s.r.o.)

For business owners (SMEs and corporations), the biggest risk is the uncertainty surrounding the transfer of the business share itself. Here, the primary deciding factor is not the law, but what is written in your articles of association.

There are two basic scenarios:

Scenario A: The Articles of Association Exclude Inheritance

This is a very common setup. The remaining partners thus protect themselves from the entry of "unwanted" persons into the company – for example, family members without qualifications or even competitors.

In this case, the heir does not become a partner. Instead of a share, they are entitled to a cash payment of a settlement share. And this is where a huge flashpoint for disputes arises: What is the correct amount of this share? If the calculation method is not clearly defined, the matter almost always ends up in court and requires expensive expert opinions.

Scenario B: The Articles of Association Permit Inheritance

If the articles of association permit inheritance (or are silent on the matter), the heirs join the company. This brings other problems. What if the company is inherited by three siblings who cannot agree on a strategy? Or if an heir has no competence to run the company? 

Fortunately, the articles of association allow the transfer of the share to be made conditional, for example, on the consent of the general meeting.

Precise preparation or revision of the articles of association is fundamental to preventing future disputes. Our lawyers from the corporate team, who provide long-term services to a portfolio of more than 250 limited liability companies, know exactly how to set the rules to protect both the company and the interests of the heirs. Contact us for a review of your corporate documentation at consultation@arws.cz.

The Unspoken Risk: Transfer of Company Debts to Heirs

Entrepreneurs often personally guarantee company liabilities, have business loans secured by personal assets, or provide bank guarantees. However, an inheritance is not just assets, but also all the debts of the deceased.

Under Czech legislation, an heir is liable for the decedent's debts in their full extent. If there are multiple heirs, they are jointly and severally liable for the debts. A creditor can choose one of the heirs and demand payment of the entire debt from them.

However, there is a key defensive tool: an inventory of the estate. The heir must actively exercise this right with the notary within a one-month period. If they do so, they are liable for debts only up to the value of the inherited assets, not with their personal property.

But that is not enough. The inventory of the estate only protects you from debts that were identified during the proceedings. What if a creditor appears two years later with an old promissory note or a guarantee obligation that no one knew about?

For this situation, there is a second step: a call to creditors (convocation). At the heir's request, the notary publishes a notice for all creditors to register their claims within a given deadline. Anyone who fails to register in time is out of luck and cannot enforce their claims against the honest heir.

This is a complex legal procedure where a mistake in a single step can lead to the heir's personal bankruptcy.

In the field of inheritance, it is often advisable to consult not only with a lawyer but also with a notary. ARROWS collaborates in this area with several trusted notaries, such as notary Silvie Dohnalová from Notářství Bruntál or Mgr. Tomáš Ostrožlík, as well as with other notary offices. ARROWS clients can choose from a list of collaborating notaries according to the location where they operate or where they need notarial services. For more significant cases and important client meetings, the participation of a notary directly at the meeting on the premises of the ARROWS law firm can also be arranged by prior agreement.

Hidden Debts and Heir Liability

International Hell: When Assets or Heirs Are Abroad

More and more Czech entrepreneurs own real estate or bank accounts abroad or have heirs living permanently in another country. This introduces a so-called foreign element into the inheritance, which complicates everything extremely.

Although the EU Succession Regulation simplifies matters within the EU, it raises a new question. The law of the state where the deceased had their habitual residence at the time of death will apply to the entire inheritance proceedings (including assets in the Czech Republic).

However, the term "habitual residence" is not the same as a permanent address. It is a factual concept. Where was the habitual residence of an entrepreneur who spent 8 months in Prague and 4 months in their villa in Spain? This will determine whether the inheritance will be governed by Czech or Spanish law.

The practical problem is obvious: How do you prove to a foreign bank or land registry that you are the heir? The solution is the European Certificate of Succession (ECS). This is a uniform form that proves your status as an heir in all EU countries.

Thanks to the ARROWS International network, built over ten years, we handle inheritance disputes with an international element on a daily basis in more than 70 countries worldwide. For our clients, which include over 150 joint-stock companies and 250 limited liability companies, we secure the European Certificate of Succession, represent them in inheritance proceedings abroad, and prepare international wills with a choice of law.

Do you need legal assistance with assets abroad? Contact us at consultation@arws.cz.

Prevention is 90% of Success: How to Prevent Disputes Today

The best dispute is one that never starts. As a business owner, you have several tools to ensure smooth succession planning and prevent a war among heirs.

1. Inheritance Agreement Instead of a Will

A will can be unilaterally changed or revoked by the testator at any time. An inheritance agreement, on the other hand, is a bilateral legal act between you and an heir that cannot be easily cancelled. It provides much greater certainty for the person who is to take over the company and is ideal for "locking in" a succession agreement.

2. Trusts

This is a modern and flexible instrument. Assets (e.g., a business share in a company) that you place in a trust legally cease to be your property. Therefore, they are not subject to inheritance proceedings.

This protects the company from risks – from your future creditors, enforcement officers, and even from claims in a potential divorce (yours or your children's). You can precisely set the conditions under which a successor will gain control of the company (e.g., after completing their education or gaining practical experience).

3. Family Holding and Family Constitution

The statistics are relentless: up to 70% of family businesses do not survive the transition to the third generation. The reason is the fragmentation of assets and disputes among descendants. The solution is to create a family holding company that separates the operating companies from the family assets.

The key document is then the Family Constitution. This is not just a legal document, but a strategic family agreement. It defines the vision, values, and, most importantly, clear rules of the game: Who can work in the company? How will profits be distributed? What happens if one of the siblings gets divorced?

Our Prague-based lawyers specialise in asset structuring for entrepreneurs and intergenerational succession. We provide for the drafting of internal regulations (family constitutions), the preparation of documentation for holding companies, and the establishment of trusts to protect your life's work. Connect with us at consultation@arws.cz to arrange a strategic consultation.

When the Dispute is Already Raging: How ARROWS Can Help

If prevention has failed and a dispute is already underway, there are two paths. The first is a tough court battle, where it is necessary to uncompromisingly defend your rights.

The second path is mediation, i.e., an out-of-court settlement of the dispute. For sensitive family disputes over a company, a public court hearing is often the worst option. It destroys family relationships and exposes sensitive company information to competitors.

Mediation is informal, discreet, and allows for the resolution of emotional and non-legal issues that are often the real core of the dispute. It is also significantly faster and cheaper than a court battle.

At ARROWS, we are not only experienced courtroom lawyers but also mediators. We can assess when it is time to fight and when it is strategically more advantageous to reach an agreement. Our goal is not just to "win the case," but above all to preserve the value of your assets. We provide for the preparation of settlement agreements and representation in mediation.

Risks of Active Litigation

Why Choose ARROWS for Resolving Inheritance Disputes?

Inheritance disputes over companies are not just about inheritance law. They are a complex intersection of corporate law, international law, and sophisticated asset management.

Our experience stems from the long-term care of a portfolio of more than 150 joint-stock companies, 250 limited liability companies, and 50 municipalities and regions. Thanks to our international network, ARROWS International, we are able to coordinate legal steps in more than 70 countries worldwide. We pride ourselves on speed, high quality, and deep business thinking.

Whether you are facing an active dispute or want to prudently protect your business for the future, our Prague-based legal team is ready to provide you with a tailor-made legal solution. Connect with us at consultation@arws.cz and arrange a consultation.