By Sanette Viljoen
Facts: Four friends jointly run a company. Each of the friends has an equal share in the company. However, the friends are concerned about the consequences should one of them die. What happens to the deceased’s shares?
As in the case of all other shares, your shares in a company are an asset in your estate. In the event of a shareholder’s death, the shares will be transferred to the heirs designated in his or her will as the heirs to those shares.
This could, of course, hold many unintentional consequences for the company and the surviving partners. Heirs could perhaps not have the necessary experience to make a contribution to the company, they may not be qualified to manage the company, and perhaps the heirs may have no desire to obtain shares in the company. At the same time the current shareholders may end up with a new unwanted shareholder. Such a bequest of shares could have very bad consequences for the future management of the company.
It is common practice for shareholders to buy out the shares of a deceased shareholder. For that reason there must be a preemptive right. What happens if the surviving shareholders do not have sufficient capital? Firstly, the shareholders can admit the heir as titleholder of the shares or, secondly, the shareholders may put the heir in a position to sell the shares to a third party. However, these options create a lot of room for uncertainty, risk and potential loss.
To avoid this, it would be better to plan ahead to avoid such uncertainty and risk upon the death of a shareholder. To determine how many shares need to be gotten rid of in the event of death, very good corporate management is necessary. For this reason it is very important for the shareholders to draw up a written shareholders’ agreement that contains all the necessary provisions regarding the disposal of shares in the event of death.
Shareholders’ agreements will contain all provisions regarding the procedures for the valuation of the shares, the selling of shares, the preemptive right of shareholders and also the procedures to be followed upon the death of a shareholder. This agreement may also include provisions regarding policies on shareholders’ lives.
Having a shareholders’ agreement is the first step towards planning for these types of contingencies. This document must also be updated from time to time. Contact any commercial attorney for assistance in the regard.