What The Law Says: The Death Of A Shareholder And What Happens To Their Shares

Although leaving shares to your closest relatives may appear to be a great way of securing some form of income for them in the future, it may not be ideal. It could in fact give rise to unintended consequences not only for the company and surviving co-shareholders but also for the person who inherits your shares and it may not be in the best interests of the company.?

First things first, what exactly is a share?

Think about a share as a brick in a house. The house represents the company, the bricks are the shares in the company and the foundation on which the “house” is built, is the company’s governing document, the Memorandum of Incorporation (MOI).?

If you own a brick, you own a part of the house in the same way a share means you own part of the company. Whether you own one brick or many bricks of the house you have the right to participate in the management and day to day activities of the household just as owning one or many shares in a company gives you the right to vote at shareholders meetings, share in company profits where dividends are declared and have a say in how the money of the company is to be used.?

So it is clear that shares entitle the shareholder to certain income rights like dividends and control over company capital,? ultimately increasing the net value of the shareholder’s estate. This means that shares are regarded as assets, forming part of the movable property of your estate, and are transferable from you to another person according to the law [1]. If you die any shares you own in a company will form part of your estate and will be dealt with according to your will [2][3]. If you don’t have a will then your shares and estate will be dealt with according to intestate succession.?

What is the difference between having a will or not?

If you have a will then you should specify what should happen to your shares in a company if you die. The executor of your estate who has to administer your estate according to the will, must distribute and transfer your shares to the person you have written down as your successor. In this way your shares will be transferred to this person and he or she will replace you as a shareholder. If you don’t have a will your shares will be distributed intestate to your nearest relatives [4].

With intestate succession your estate is divided and distributed according to a hierarchy of family relations, where the person who is inheriting your shares will be determined according to whether you are survived by a spouse, with or without children, with living or deceased parents, brothers, sisters, nieces and/or nephews [5]. It involves a complicated process to decide who is entitled to inherit your estate so it is always better to have a will in place.?

What is the role of the Companies Act??

But whether you have a will or not, the Companies Act is the main law that regulates and governs companies in South Africa, including the transfer of shares [6].?

According to the Companies Act the transfer of shares in a private company can only be done according to the company’s Memorandum of Incorporation (MOI) - in other words its ‘foundation’. Compare this to a public company (which is listed on the Johannesburg Stock Exchange) where shares can be freely transferred. So, if ‘bricks’ form part of a public company household, there is no boundary wall and any member of the public can pick up and buy bricks in the house. But if the ‘bricks’ are part of a private company, there is a boundary wall, which means it is not open to the public, so they cannot pick up and buy as they please. The company ‘foundation’, its MOI, will give guidance on how shares can be sold or transferred.?

Got it? So what about unintended complications that could come from this?

Although leaving shares to your closest relatives might seem a great way of securing some form of income for them in the future, it may give rise to unintended consequences for them as well as for the company and the other shareholders.??

The person who inherits your shares - your successor - may not be interested in owning shares in a company or may not have the necessary skills or qualifications to contribute and participate in its management. All of this could be bad for the future of the company and lead to its failure and the loss of the shares as a future source of income for the shareholder. Apart from having your heirs involved in a company in which they have no interest or are not qualified or experienced, your existing co-shareholders may also be stuck with an unintended, inexperienced and ultimately unwanted shareholder.

?Follow this link to find a practical example, to understand how to avoid complications and to understand more about your shareholders agreement and transferring shares, click here.