Page 46 - Q&A 2019/2020

What happens to my shares in the company
when I die?

Linki Scholtz
July 2019

“We are four friends that started our own company a few years ago with
each of us being equal shareholders. We are thankful that is has been going
well with the business, but now that there is some money and equity in our
company, we were wondering what would happen in the event that one of us
passed away.” Commercial

As with any other asset, shares constitute an asset in your estate. Accordingly,
in the event of the death of a shareholder, our law will generally result in the
shares being transferred to the heirs of the shareholder upon his/her death. But
this may have unintended consequences for the company and the remaining
shareholders. Heirs may not have the necessary experience to run the company,
may not be qualified, or may have no desire to hold shares in the company. At
the same time the existing shareholders may also end up with an unplanned
and unwanted new shareholder, which could have dire consequences for the
future productive operation of the business.
A common practice is for the remaining shareholders to buy out the shares of
the deceased shareholder. But what happens if the remaining shareholders do
not have enough capital to buy-out the shares of the deceased shareholder
or the heirs are unwilling to sell, leaving the heirs remaining as the successor
in title to the shares or ultimately selling the shares to third parties? All of these
options create room for uncertainty, risk and potential adverse consequences
for the company.
The answer to avoid this is to rather plan ahead and prevent such uncertainty
and risk arising upon the death of a shareholder. Determining how shares will
be disposed of in the event of death is also good corporate governance. For this
reason it is prudent for shareholders to draft a written shareholders agreement
which contains all the necessary provisions relating to the disposition of shares
in the event of death, including methods for the valuation of shares, the sale
of such shares, pre-emptive rights between the shareholders, the procedure to
be followed upon the death of a shareholder and even provisions regarding
policies on the lives of the shareholders.

Having a shareholder’s agreement is the first step to planning for such
eventualities. Like a will that may need updating from time to time, so too it is
important to have a shareholder’s agreement periodically reviewed to ensure
it is still appropriate and provides for the changed circumstances of your
company. Particularly when there is a change in shareholding it is an important
time to review the shareholders agreement and also ensure that it is compliant
with prevailing law and the company’s memorandum of incorporation.

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