Given that the limited liability company is currently one of the most popular forms of business organisation and that the shareholders are in many cases natural persons, it is worth considering how the death of one of them will affect the company’s operation. Therefore, let’s take a look at what system and tools can be introduced into the articles of association to protect the company and remaining shareholders from undesirable situations.
Shares in a company are a property right subject to inheritance in accordance with the general rules of law.
The rights attaching to shares acquired by more than one person through inheritance are exercised by the joint representative until the distribution of the estate.
On the death of an individual who is a shareholder in a limited liability company, their shares are transferred to their heirs, unless the articles of association provide otherwise.
However, the mere fact of inheritance does not mean that the heir or heirs are automatically entitled to exercise the rights of the deceased shareholder.
Indeed, the shareholders may have already decided and written in the articles of association to restrict or exclude the entry of heirs into the company.
Restrictions and exclusions on the ability of a shareholder’s heirs to join a limited liability company
In the articles of association, the shareholders may introduce various mechanisms to regulate and restrict the transferability of shares to other persons, e.g. in the event of the death of a shareholder and the related succession.
As a rule, the heirs inherit the shares, unless the articles of association contain restrictions in this respect.
For example, shareholders can restrict or exclude the possibility of shareholders’ heirs joining the company by including clauses in the articles of association that:
- Require the approval of the Management Board/Supervisory Board/Shareholders’ Meeting for an heir to join the company. This gives shareholders control over who joins the company. If the heir or heirs receive approval, they will become entitled to hold the shares
- Require the heirs to have certain qualifications or professional qualities
- Restrict the entry of heirs engaged in competitive activities
- Restrict the possibility of heirs from a certain circle of persons joining the company. For example, the articles may provide that only the spouse or children of the deceased shareholder may join the company, thereby excluding other persons
- Stipulate that only heirs who already have a share in the company can join
- Completely exclude the possibility of heirs joining the company in place of deceased shareholders
It is understood that such restriction or exclusion applies to either testamentary heirs, intestate heirs and legatees.
Obligation to specify the conditions for the satisfaction of heirs
It should be emphasised that the foregoing also requires that the articles of association include provisions for the satisfaction of heirs. In fact, the exclusion or restriction of their accession to the company must not involve depriving them of the value of their shares.
If these conditions are not specified, the restriction or exclusion will be ineffective and the heir will become a shareholder of the company.
Although the law does not lay down any minimum requirements for the conditions for the satisfaction of heirs, it cannot be taken in a completely discretionary manner. It should be noted that an heir who does not join the company should, within a reasonable period of time, receive as satisfaction an amount calculated according to the fair value of the shares of the deceased shareholder.
Furthermore, in addition to a clause restricting or excluding the possibility of the heirs joining the company, the rules for dealing with the shares of the deceased shareholder should also be regulated, in addition to the rules for the satisfaction of the heirs. For example, the articles of association may stipulate that the shares will be redeemed.
Exclusions or restrictions on the distribution of shares among heirs
The articles of association may also exclude the possibility of distributing the share(s) of a deceased shareholder among the heirs of the company. Importantly, this can be done regardless of whether the system for dividing the share capital is based on a division into equal or unequal shares, and thus also in a situation where shareholders are entitled to one share each. The purpose of this is to avoid the risk of undesirable fragmentation of the company’s shares.
Conclusion
Shareholders who wish to restrict the ability of heirs to join the company or limit the possibility of fragmentation of the company’s shareholding should plan ahead and amend the articles of association in good time.
It will not be possible to restrict or exclude the possibility of inheriting shares in a limited liability company after the death of a shareholder, and the heirs will become shareholders (in the case of a single heir) or joint holders of shares (if there is more than one heir).
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Weronika Duchnowska
