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

[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.

[ava_camen]

i believe the remaining share stockholders would decide what to do with the company - either to buy the shares, sell to someone or liquidate the whole company.