[Question] What is the implication of the death of a shareholder on a company?

[BusFact]

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.

[Dave A]

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.

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?

[BusFact]

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.

[roryf]

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.

[Dave A]

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.

[Justloadit]

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.

[BusFact]

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?

[BusFact]

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.

[Dave A]

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.

[Justloadit]

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.

[Danielle]

Hi BusFact,

The implications of the death of a shareholder depends LARGELY on the type of company you have and the shareholding in the company of the deceased, also on the deceased role in the company (was thier shareholding able to give them the power to make decisions with regards to the company? etc) Also, is the company/s public or private.

In the case of public companies like ABSA, Old Mutual etc shareholders pass away all the time and nothing affects the company, the shares are inherited. In a Private company where the shareholders are the decision makers a buy and sell agreement should be put into place. The reason for this is that no one who has sacrificed a great deal to get the company where it is wants simply anybody to walk in and be able to make decisions that can significantly affect the company, also what happens if you do not get alone with the person who inherits that shares? etc.

This can be done when setting up the company in the companies documents or at a later stage but MUST be in writing. A buy and sell agreement is an agreement between the shareholders of a company which in essence states that on death or disability of a shareholder they will be bought out. A buy and sell is funded by life insurance. There are other rules governing buy and sell, like the life insured should not pay the premium etc The reason for this is so that the estate duty implications of the life assurance can be mitigated and there are other tax advantages to a buy and sell.

If it there is no buy and sell agreement in place (with the relevant life cover) the Heir to the shares can: accept the shares and step in to run the company according to their newly acquired shareholding, they can sell the shares to whom ever they choose, the company can do a share buy back, but that can only happen if certain liquidity requirements are met as set our by SARS or another share holder can buy the shares. etc. Without a buy and sell there is no certainty.

Some finance companies has excellent products in place to simplify the process of putting buy and sell agreements into place, so that will help remove some if not most of the complexity issues

A buy and sell does take preference over a Will because the aim of the buy and sell is two fold: to provide the funds to buy the shares back with out the company having to pass the liquidity test and to compensate the heir of the shares so that no one looses.


There is much more. May I suggest that you decide what it is you wish to achieve with the shares and the companies. Once that is clear it will be easier to make the decisions with regards to how to mitigate the negative effects of your decisions and based on that, you will be able to make the necessary changes to the companies shareholding structure because you will have a clear if this-then-this map to guide you a long.

Please feel free to ask more questions or for me to give you clarity on anything I have mentioned above. Making sure a company is able to sustain its self and survive death is an important task to ponder because there are so many dependant on the survival of that company: the heirs, shareholders, employees, contractors, customers...

[BusFact]

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.

Good point. Thanks

[Dave A]

A great first post, Danielle

[Danielle]

thanks Dave

"shareholders and death' can be such a complex 'issue', I explain enough to give direction and not confuse

[roryf]

I cannot believe how fast the banks are at finding out someone has passed away.Do they have people scanning the recently registered deaths? My father in laws death was registered yesterday and the bank called me this morning offering condolences and to ask for a 'meeting'.These guys are like vultures!

Luckily for us we were able to finalise most things before he passed away.I cannot say it enough- have your buy and sell agreements and everything else in order before the time comes.