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Thread: What is the implication of the death of a shareholder on a company?

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    What is the implication of the death of a shareholder on a company?

    I would imagine that if the shareholder owns 100% of the company and there is no will, then the company is liquidated or sold off.

    But what happens when the shareholder only owns a portion of the company?

    Would the executors of the estate be able to force the company to liquidate in order to convert the asset into cash or would this only be possible at a certain percentage, say 50%+ shareholding?

    Anybody had any experience with this? I'm a little concerned as to what happens if an employee ownership scheme, resulting in multiple small shareholders is started.

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    Site Caretaker Dave A's Avatar
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    I'd suggest a good partnership agreement would foresee and prescribe the consequences of the situation. If the estate can't be wound up immediately as consequence of a well written partnership agreement, so be it.
    Quote Originally Posted by BusFact View Post
    I'm a little concerned as to what happens if an employee ownership scheme, resulting in multiple small shareholders is started.
    What is the purpose of the scheme? BEE issues?
    The trouble with opportunity is it normally comes dressed up as work.

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    Quote Originally Posted by Dave A View Post
    I'd suggest a good partnership agreement would foresee and prescribe the consequences of the situation. If the estate can't be wound up immediately as consequence of a well written partnership agreement, so be it.

    What is the purpose of the scheme? BEE issues?
    But that type of agreement would probably involve the biggest of the minority shareholders or the major shareholder having to pay out cash for the deceased shares. That may not be convenient at the time. An insurance policy for that type of event may work, but if we end up with several of these shareholders, these policies may become an admin issue.

    I would be quite happy if the onus is on the deceased's estate to try and sell their shares or negotiate with the other shareholders on a deal. I would be most unhappy if it would be possible for a minority (less than 50%) shareholder's estate to be able to liquidate a company in order to get cash for their asset.

    So I suppose I'm trying to find out if there is a percentage shareholding where this would be possible.

    Its to be used more as an employee incentive scheme in one case, but its also pertinent for several new (small) business ventures we have lined up in the future which will involve more than one business partner.

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    I am currently going through this at the moment,luckily we had a bit of time to prepare.The company that I run has a 91/9% split and the major shareholder, my father in law passed away this morning after a long battle with cancer.

    It is strongly advisable to get your house in order before the death happens.We transfered the 91% shares into his wifes name before the death and there was a small fee due to STC? tax,the estate tax is now deffered to the spouse.This saved the company any problems with dealing with executors and the business just carries on going.We have then taken out life policies on the wifes life to pay for the the deffered death duty and executors fee once she passes away.

    I will also be trying to get some sort of agreement from the minor shareholder in case of his death.Always better to have it on paper.... signed!

    It is amazing how we prepare for everything else well but when it comes to death many of us do not plan properly.

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    BusFact (25-Jan-11), Dave A (25-Jan-11)

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by BusFact View Post
    But that type of agreement would probably involve the biggest of the minority shareholders or the major shareholder having to pay out cash for the deceased shares. That may not be convenient at the time.
    Then don't write the agreement up that way. No will or estate executor is going to be able to supercede an agreement signed by the deceased while of sound mind. Have something that sets a fairly low value at time of death and provides a reasonable window for remaining partners to purchase before the interest may be offered elsewhere (and subject to remaining partners' approval, of course).

    Some deceased estates take many years to wind up because of such complexities.

    Of course you've got to bear in mind your estate could be bearing the brunt of the same rules one day. It's one of the reasons I prefer ownership being in trusts.
    The trouble with opportunity is it normally comes dressed up as work.

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    Diamond Member Justloadit's Avatar
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    Quote Originally Posted by BusFact View Post
    An insurance policy for that type of event may work, but if we end up with several of these shareholders, these policies may become an admin issue.
    Why would it be an administrative issue?

    The policy for this type of cover is purely payment on death, so the premiums are relatively low for one, and secondly, the cost of the life policy is borne by the insured party and taken from the loan account or dividends the respective shareholder earns.

    Allowing minority share holders to liquidate on a partners death will have dire consequences.

    IN fact the agreement with the death policy should be such that the proceeds of the policy are to sell the dead partners shares immediately to the estate when the death occurs.

    Transferring shares to other members may sound good now, but you may have a partner from hell who may by default get more shares in the company as an individual, making him the major partner, thereby shifting the balance of power.

    You must look at the worst case scenarios when drawing u the agreement, and placing yourself in the worst situation before making a decision.

    I like Dave's idea of a Trust owning shares, solves all these problems.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    Quote Originally Posted by Justloadit View Post
    Why would it be an administrative issue?

    The policy for this type of cover is purely payment on death, so the premiums are relatively low for one, and secondly, the cost of the life policy is borne by the insured party and taken from the loan account or dividends the respective shareholder earns.

    Allowing minority share holders to liquidate on a partners death will have dire consequences.
    Over the next few years I hope to setup several companies, each with several shareholders. These will largely be smallish ventures with little value in the beginning. The admin comes in with deciding at some point that the company has enough value to make the shareholders take out these policies. I would then need to deal with brokers, ensure there is enough cash in the accounts for the debit orders, adjust the amounts each year for the increase in company value. Its not excessive admin, just unproductive and something I would prefer to avoid. Sounding a bit lazy aren't I? But in 5 years I might find myself with 30-40 of these.

    If the shareholder is elderly, these policies become a problem too.

    However the above said, deep down I know you are right.

    Your last comment above still concerns me... can a minority party do that?

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    Quote Originally Posted by Dave A View Post
    Then don't write the agreement up that way. No will or estate executor is going to be able to supercede an agreement signed by the deceased while of sound mind. Have something that sets a fairly low value at time of death and provides a reasonable window for remaining partners to purchase before the interest may be offered elsewhere (and subject to remaining partners' approval, of course).
    Now thats a clever way of looking at it. Are you sure about the shareholders agreement seperceding the will? Sounds like it could get messy if deceased leaves his shares in the company to his wife, yet also has an agreement with the other shareholders to allow them to buy him out.

    Perhaps the wife is then just entitled to the proceeds from the shares as opposed to the shares themselves. Hmmmmm.

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by BusFact View Post
    Are you sure about the shareholders agreement seperceding the will?
    How could it otherwise? A unilateral statement of wishes vs a contract agreed and duly signed by all the parties...

    In most instances no contest, I'm sure.
    Last edited by Dave A; 25-Jan-11 at 01:06 PM.
    The trouble with opportunity is it normally comes dressed up as work.

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    Quote Originally Posted by BusFact View Post
    Your last comment above still concerns me... can a minority party do that?
    I was quoting your statement here, not sure if this is legal in practice.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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