When a company shareholder passes away, several questions arise regarding the fate of their shares. Since shares represent ownership and can significantly impact the company’s future, it is essential to understand how they are treated after the shareholder’s death. 

Shares are assets and are thus considered part of a shareholder’s estate, just like any other asset. After the shareholder’s death, the shares are handled through the estate administration process. If the deceased left a valid will, the distribution of shares will follow the instructions in the will. If no will exists, the Intestate Succession Act 81 of 1987 will determine how the shares are distributed.

Understanding the Role of a Will

The Wills Act 7 of 1953 (as amended) allows the shareholders to dictate who should inherit their assets, including company shares. If the will clearly specifies the recipient of the shares, the executor of the estate will facilitate the transfer in accordance with the testator’s wishes. Having a valid will is crucial to avoid disputes and delays in the transfer process.

What Happens When There Is No Will?

If there is no will, the process is more complex.  If a shareholder dies without a valid will (also referred to as dying intestate), the Intestate Succession Act 81 of 1987 (as amended) applies. This law outlines the hierarchy for inheritance, starting with the spouse and children of the deceased. If the deceased has no immediate family, the shares may pass to other relatives. The executor appointed by the Master of the High Court will manage this process, ensuring that the shares are distributed as per the Intestate Succession Act.

Further Requirements | The MOI and Shareholders Agreement 

The actual transfer of shares depends on the company’s structure, its governing documents, and whether the deceased left a will. If the company’s Memorandum of Incorporation (“MOI”) or Shareholders’ Agreement includes specific rules for the transfer of shares upon death, these rules must be followed.

The MOI and Shareholders’ Agreement

The Companies Act 71 of 2008 (as amended) allows companies to impose restrictions on the transfer of shares, particularly in private companies. These restrictions are typically outlined in the company's MOI. If the bequests in the deceased shareholder’s will are not in line with the MOI—such as a provision that restricts share transfers to specific individuals or requires board approval before a transfer can occur—the MOI takes precedence. A Shareholders’ Agreement can also impose conditions on the transfer of shares, often taking into account the interests of the remaining shareholders. If the agreement contradicts the bequest, the terms will likely override the will.

Restrictions on Transfer: Many private companies include provisions in their MOI and/or Shareholders’ Agreement that restrict the transfer of shares to outside parties. If the beneficiary named in the will does not meet the requirements set by the MOI (e.g., they are not a current shareholder or approved by the board), the company can refuse the transfer. 

Pre-emptive Rights: The Shareholders’ Agreement may also grant pre-emptive rights to existing shareholders, requiring the shares to be offered to them first before being transferred to someone outside the shareholder group, including the named beneficiary. 

Forced Buyout: Many Shareholders’ Agreements contain provisions that require the company or the remaining shareholders to buy out the shares of a deceased shareholder. In such a case, the shares cannot simply be transferred to the beneficiary in the will, as the agreement may give the existing shareholders the right to purchase the shares first, often at a pre-determined valuation. 

Approval Process: Some Shareholders’ Agreements specify that any transfer of shares must be approved by the remaining shareholders or the board, which could result in the denial of the transfer to the beneficiary.

Consequences of Conflict

If the will of the deceased shareholder is not aligned with the MOI or Shareholders’ Agreement, the following consequences may arise:

Void Transfer: The company may declare the bequest of shares invalid if it violates the MOI or Shareholders’ Agreement, meaning the intended beneficiary would not inherit the shares. 

Forced Sale: In cases where pre-emptive rights or buyout provisions apply, the shares may need to be sold to the company or remaining shareholders. The proceeds of the sale would then form part of the deceased's estate. The beneficiary may receive the financial equivalent of the shares instead of the shares themselves. 

Disputes: If the executor of the estate attempts to transfer the shares in violation of the MOI or Shareholders’ Agreement, disputes could arise between the estate, the company, and other shareholders, potentially resulting in legal action.

Importance of Alignment 

To avoid such conflicts, shareholders must ensure their wills are consistent with the company's MOI and Shareholders’ Agreement. 

Conclusion

The death of a shareholder can present challenges for a company, but with careful planning, these challenges can be minimised.  If the bequest of shares contradicts the MOI or Shareholders’ Agreement, the transfer will likely be restricted or denied. The company’s governance documents, including the MOI and Shareholders’ Agreement, generally take precedence over a will when it comes to share transfers.

By planning for the inevitable, shareholders can protect their business interests and their estate, ensuring the security of their legacy and the company’s success. Contact an expert at SchoemanLaw for assistance today!

Written by Nicolene Schoeman-Louw, SchoemanLaw