On a shareholder’s death their shares pass to their heirs, and the company can find itself in partnership with people it has never met. Holding ninety-nine per cent does not prevent it.
Among the risks family businesses notice last is that company shares form part of an estate. When a shareholder dies, their shares pass to their heirs, and the company can end up in partnership with people who have no connection to the business.
Size of holding is no protection
A common assumption is that holding the great majority of the shares prevents this. It does not. Being the majority shareholder does not stop the minority shares passing to heirs. A shareholder with ninety-nine per cent cannot determine where the remaining one per cent goes if the articles are silent.
Nor is this only about dividends. Attending general assemblies, obtaining information and inspecting records, requiring an audit and challenging resolutions are all rights attached to the shares.
Joint stock companies: restricting transfer
In a joint stock company the transfer of registered shares can be restricted by the articles.
Where shares pass by inheritance, the company may refuse approval only if it offers to take the shares over at their real value. The company is not obliged to accept the heir as a shareholder, but must be prepared to pay for the shares.
Two things are needed for that to work: a restriction provision in the articles, and a source of funds planned in advance for the buy-out. Neglect the second and the provision stays on paper.
Limited companies: provisions in the articles
In a limited company the passing of shares on death can be regulated in the articles. They may make the admission of heirs subject to the approval of the general assembly and set out what happens if approval is withheld.
The same balance applies: the heir can be kept out of the company, but the value of the shares must be paid.
The reserved portion
All of this has to stay within the limits of succession law. An arrangement that removes heirs' reserved portions invites an abatement claim.
The aim is not to disinherit anyone but to keep the heir out of the company while ensuring they receive the value of the shares. A properly drafted arrangement pays the heir and leaves management with the shareholders who run the business.
Timing
All of it has to be done during the shareholder's lifetime. After a death, the only thing left is to negotiate the position that has arisen.
A practical order:
- Review the current articles from the point of view of succession,
- Add the necessary transfer or succession provisions by resolution of the general assembly,
- Identify the funds that will be used to buy out shares,
- Put a shareholders agreement in place alongside the articles,
- Align the whole arrangement with the will or succession agreement.
Conclusion
Company shares are the most easily overlooked item in an estate, and the one most likely to shape the ownership of a business for years. A few paragraphs in the articles prevent a dispute that could otherwise run long after the death.
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Inheritance and Real Estate Law
This article is provided for general information only. It is not legal advice and should not be acted on without an assessment of your particular circumstances.
