How the death of a shareholder affects the shareholding structure?

The death of any shareholder in a Polish limited company can potentially disrupt the running of the business, by creating uncertainty and raising concerns for the remaining shareholders and directors. In many limited companies,?there is a close working relationship between shareholders, so the death of a shareholder creates real issues for the business. From the point of view of the remaining shareholders,?the question of who will replace the deceased shareholder could be a key issue, especially regarding what happens to?their shares.?Are the heirs of the deceased going to be the new shareholders? For all concerned with the company, thinking about the consequences in advance, and ensuring specific provisions are in place, will enable the business to deal with the death of a shareholder with minimal disruption.

There are several aspects of the problem which are explored below.

What happens to the shares on the death of a shareholder?

According to the general provisions of Polish law, shares in a Polish limited company are inherited as any other assets. So, if a shareholder (a physical person) dies and there is nothing in the company’s articles about the inheritance of shares, the heirs of the deceased inherit his shares and become the new shareholders. If there are several heirs (in Poland usually the 'estate of the deceased' is inherited by a spouse and his children), they need to choose who will exercise voting rights. This new situation can cause serious problems in a company, because the new shareholders may have different views to the remaining shareholders. As such, it would be better to avoid situations like this being cognisant?in advance and planning accordingly. Fortunately, it is possible to draft the company’s articles in a format that restricts, or limits, the entry of a shareholder’s heirs into the company, if thought advantageous.

Amendments to the articles of association

Under Polish law,?there are no restrictions which prevent an existing shareholder from transferring their shares in a Polish limited company to a third party. Shareholders are therefore free to sell their shares to anyone else, inside or outside the company, and at whatever price they choose. This applies also to the process of inheritance. If the shareholders want to keep the shareholding structure as it is, it is better to include restrictions on the transfer of shares. The best option is to include some form of restrictions on the transfer of shares in the company’s articles of association (including also the situation where a shareholder who is a physical person dies). There are various ways to introduce such restrictions - such as?a shareholders’ resolution or a company’s consent. As regards the death of a shareholder and his shares, there are two possibilities which should be considered:

• excluding the heirs of the deceased shareholder from acquiring the shares upon buying them out, with proper compensation or
• limiting?the scope of heirs who could acquire the shares by referring to certain criteria, for instance,?education, age, not being involved in competitive business etc.

The most popular solution in the articles is to state that the heirs of the deceased shareholder are excluded from the inheritance process and the existing shareholders have the right to purchase these shares from the heirs.

A buyback of shares by the company

As an alternative to the purchase of the shares by surviving shareholders, the articles may provide for the company to buy back the shares of a deceased shareholder. Commercial Companies Code sets out strict procedural requirements for such a buy-back and it is important to comply with this as failure to do so will result in the buy-back acquisition being void.

The acquisition of the shares can be financed out of net profit and distributable reserves or - if the reserves are not sufficient - out of the decrease of the share capital. The procedure for the decrease of the share capital is complicated and may take up to several months.

Conclusion

Forward planning is important to ensure any smooth transition. To avoid problems that may arise on the death of a shareholder it is important to make the necessary amendments to the company’s articles of association and determine the best outcome for the business. The provisions regarding a Polish limited liability company are flexible enough to ensure the required solution.