shareholding

The shareholding impasse: when a shareholder is deceased

‘We vote to crash this meeting, Madam Secretary,’ the Chairperson in charge of a company meeting I attended last week announced. ‘You have to advise us on how to treat this issue of Oturo’s shares since he is deceased.’

“Shares” is a broad topic.

It cannot be exhausted in this brief article. Therefore, the reader is advised to seek legal counsel on this area of business law. However, the following extract can give a succinct response to the inquisitor.

In most cases, shares are under the control of the Board of Directors. The allotment of these shares may be subject to certain regulations as the Company wills but definitely upon approval by the Board.

Shares are direct security for a Company. In essence, they are its assets.

They can be sold, transferred, classified, allotted, etc., following Company wishes as long as such move is subject to the articles of association of the Company or the law of the jurisdiction in which the Company holds legitimacy.

Every person who purchases shares of any Company becomes entitled to certification (presently, companies issue electronic certification). The certificate identifies the particulars of the holder (“shareholder”), the class of shares and whether the shares are paid up or otherwise.

The Company can vote to not use its funds to purchase shares whether directly or indirectly. This is a good move. It saves the Company from fraudulent trading and any form of suspicions of money laundering.

On deceased shareholders

One principle of shares dictates that shares are the property of the holder and can be treated by him/her/it as he/she/it wishes as long as the transaction follows the procedure established by the law affecting the Company.

Another principle is that shares are transferrable. The element of transferability does not differ from transfer of any other property.

While a shareholder is alive, he/she/it can transfer, sell or alter the classification of the shares held by applying to the Board of Directors and the transaction will be dealt with according to the memorandum and articles of association. Safe to say, the physical presence of the shareholder eases the issue of alteration of shares held.

However,

When the shareholder is deceased, the practicality of share alteration will follow specific procedures to ensure that the actors are not tampering with the property of the deceased (which is a criminal offence in most countries).

That is why the Registrar of Companies will require formal Letters of Probate or Letters of Administration from the claimant (the person applying to alter the deceased’s shareholding).

Similarly, a Company is ‘deceased’ if it is dissolved. If it held shares in another company (it would have been a company shareholder); and its dissolution means that it ceases to carry on its duties as a company shareholder. Therefore, its receivers or other directors responsible for concluding its dissolution will apply to the company where it held shares, inform the former of the its dissolution and vote to transfer, sell or alter its shares.  It can use the proceeds to settle its creditors, if any.

A deceased shareholder acts upon his/her/its shares through an administrator, assignee (if the Company articles of association allow for assignment of shares), trustee or donee or any other third party with authority to act as if it is the deceased acting on the shareholding issue.  Most jurisdictions require that proper Letters of Probate or Administration form part of the documentation proving representation of the deceased.

Upon receipt of legitimate documentation proving that any of the above persons is allowed to act on behalf of the deceased, the Company will then draw up a Resolution. In this Resolution, it informs the Registrar of Companies about the demise of the shareholder, the appointment of the deceased’s representative etc. and request the Registrar to honour any document where the representative will be signing in that capacity.

Sometimes, the representative may offer the shares for sale; he/she/it must follow the procedure in the articles of association and upon approval by the Board of Directors.

Conclusion

With a representative, a deceased’s shareholding is safe. This does not meant that the deceased loses his/her/its shares upon death. Representatives simply continue the shareholding as if the previous shareholder is alive but are allowed to trade the shares so long as they act within the articles of association.

NB: Company articles of association dictate how shares are to be handled. They must be consulted whenever an issue on shares arises. Away from that and the Company will be in legal trouble.

Also Note: This article is not intended to give legal advice to any party but is for educational purposes. All legal queries can be answered on a case by case basis by a lawyer in the company’s jurisdiction.

BY ATUHAIRWE AGRACE

This article appears in our digital law newsletter, The Deuteronomy Vol 6, Issue 5 of June 30th, 2017

To receive The Deuteronomy in real time, click HERE

The law permits sharing.
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