DEATH OF A SHAREHOLDER…WHAT NEXT?

DID YOU KNOW?

Shares owned by a shareholder constitute an an asset in their estate. So when a shareholder dies, in the absence of any provisions to the contrary in a shareholders agreement, shares owned by a deceased shareholder will be transferred to his/her heirs of the upon his/her death.

One of the main issues that arises in such cases is that the remaining existing shareholders inevitably end up with an unplanned and unwanted new shareholder which could have dire consequences for operation of the business, as typically heirs do not have the necessary experience, qualifications or interest to run the company (where such deceased shareholder was also a director of the company) or have the desire to be a shareholder.

Succession planning is critical for any company to avoid any such issues and risks and is part of good corporate governance. A well drafted shareholders agreement should contain all the necessary provisions governing what happens in the event of a death of any shareholder.