Death of a Close Corporation Member – Now What?
Key Takeaways:
Death of a close corporation member or private company director / shareholder triggers specific procedures.
Key steps involve legal notifications, valuation of shares, and potential business restructuring.
Professional assistance ensures compliance and smooth transitions in managing business interests after a member's demise.
Assets in a deceased estate may include interests or shares in a business venture, such as a Close Corporation or Private Company PTY (Ltd), which are also subject to be dealt with by the Executor in the administration of the deceased estate however, this is subject to the provisions of an Association Agreement, the Close Corporations Act in the case of a Close Corporation and the Shareholder’s Agreement (if any) in the case of a private company.
Pursuant to the death of a person, what follows is a process of administering and distributing their estate to the heirs. The rules of Testamentary and Intestate succession will determine how the deceased estate will devolve, depending on whether a valid Will was left by the deceased or not. Having superintendence over this process will be the entity appointed as the Executor of the deceased estate, who will account for all the assets and liabilities in the estate and distribute them accordingly.
Such assets in the deceased estate may include interests or shares in a business venture, which are also subject to be dealt with by the Executor in the administration of the deceased estate. The Executor attends to the transfer of these assets to a nominated heir for their benefit and ownership. While the transfer for example, of a house involves registration of the beneficiary’s name at the Deeds Office, and transfer of a vehicle involves taking possession and registering with the Vehicle Registries, there seems to be lack of awareness where the interest of a deceased member of a close corporation and shares of a shareholder in a private company need to be transferred to heirs.
Transfer of the interest of a deceased member in a close corporation to a beneficiary happens in much the same way as other assets in the deceased estate. This is provided under Section 35 of the Close Corporation Act 69 of 1984 (CC Act);
Subject to any other arrangement in the association agreement, an executor of the estate of a member of a corporation who is deceased shall, in the performance of his duties-
Cause the member’s interest in the corporation to be transferred to a person who qualifies for membership of a corporation in terms of section 29 and is entitled thereto as legatee or heir or under a redistribution agreement, if the remaining member or members of the corporation (if any) consent to the transfer of the member’s interest to such person; or
If any consent referred to in paragraph (a) is not given within 28 days after it was requested by the executor, sell the deceased member’s interest –
Evidently there are conditions under which the deceased member’s interest in a close corporation may be transferred to a beneficiary. The beneficiary must firstly as per Section 29, be qualified to be a member of a close corporation. Among the categories of entities who can be members of a close corporation as provided in subsection (2)(c), is an Executor, in representative capacity of the deceased estate of the deceased member. Ultimately this means that upon the finalisation of the administration process of the estate, the interest will be transferred and registered to the heir who will then hold membership of the interest (also subject to section 29).
The second condition is that the surviving members (if any) must consent to the transfer of the deceased member’s interest to the beneficiary. In the case where there are no other members, this condition falls away and the heir needs to comply only with the first condition as aforementioned.
In the event that the surviving members refuse to consent, or withhold consent for at least 28 days since consent was requested, the interest should then be sold to;
The close corporation itself;
The remaining members in proportion to their existing interests or as per agreement;
Any other person who qualifies to be a member of a close corporation as per Section 29 of the Close Corporations Act, whereas the procedure in section 34 (2) applies mutatis mutandis.
The Executor can also be authorised to act in representative capacity of the close corporation where the deceased member was the only member. However and in the event where there are other members, the Executor of the deceased estate may request the amendment of the Founding Statement to designate him/her as the representative of the deceased member, as provided under 29 (2) (c) read with (3)(c). This effectively means in any further activity (voting, participation) where the deceased member would have taken part in their capacity, the Executor would fill that position in representative capacity of the deceased member and the estate. In that manner, it is expected of the Executor to act in the best interests of the deceased estate at all times, in as far as the affairs of the close corporation are concerned. The Court in Boerboonfontein BK vs La Grange NO and Another 2011 (1) SA 58 (WCC) accepted and upheld the representative authority of the Executor. There are various other capacities as well which are accepted to have representative authority for the interest of a member in a close corporation such as a trustee, administrator, or curator of an insolvent or a mentally disabled person.
A fiduciary duty also is expected of the Executor, to act in the best interests of the close corporation in as much as it would have been expected of the deceased member had it not been for their passing away. Section 42 of the Close Corporations Act sets out fiduciary duties based on common law, such as the duty to act honestly and in good faith, avoid conflict of interest, not act unauthorised as well as the duty of care and skill.
Upon the distribution of the deceased member’s interest in the close corporation to the beneficiary who will become the new member, such must then be amended with CIPC to reflect the new member. Such will also need to be amended in the Association Agreement of the close corporation. In the event that the close corporation holds interest in an immovable property that needs to be sold, the Executor will act as the Seller or one of the Sellers in the transaction, whereby the property will then be disposed of as deemed fit under the circumstances.
What about the transfer of shares of a deceased person in a private company?
As a point of departure, Section 1 of the Companies Act of 2008 defines a shareholder as, subject to 57 (1), a holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be. It follows that for someone to have shares as assets in their estate, they must be a shareholder recognised and registered as such, certificated or uncertificated. Section 57 (1) gives qualification to persons who hold voting rights, for the purpose and exercise of governance, as shareholders. However, such a person who holds voting rights only is not a shareholder for any other purpose, as they do not receive any dividends with regards to actual shares and therefore no shares form part of their deceased estate.
In the case where a shareholder of a private company passes away, their shares are recognised as assets and will form part of their deceased estate, to be dealt with in much the same way as other assets in the deceased estate.
Where the shareholder of a private company left a valid Will as per the provisions of the Wills Act 7 of 1953, prescribing what should happen to their shares, the Executor of the deceased estate must then distribute and transfer the shares to the appointed heir as such. The rules of Intestate Succession Act 81 of 1987 will also apply where the shareholder had no valid Will in place at the time of their death. The shares will therefore devolve to the heirs intestate and this must be certified and amended at the Companies and Intellectual Property Commission (CIPC).
In practice however, the best way would be for private companies to have a Shareholder’s Agreement which is drafted to provide for procedures where one of the shareholders passes away. This agreement is important so as to avoid uncertainty, the possibility of the shares being acquired by persons who do not share the same level of interest in the business, lack of expertise and/or experience on how the business must be run. The Shareholder’s Agreement may be made to provide that in the event of the death of a shareholder, the other shareholders will have pre-emptive rights with regards to the shares of the deceased before the shares are sold or transferred to any other party by succession or purchase.
The interest of a deceased member in a Close Corporation and the shares of a deceased shareholder in a private company form part of the assets in their deceased estate and will thus be dealt with by the Executor in much the same way as other assets either by testamentary succession or by the rules of intestate succession. However, this is subject to the provisions of the Association Agreement, the Close Corporations Act in the case of a Close Corporation and the Shareholder’s Agreement (if any) in the case of a private company. These instruments give certain rights, with regards to the transferability of interest and shares in the two business ventures.
Our approach is comprehensive and our able attorneys stand ready to assist you in the administration of deceased estates, as well as insightful guidance with regards to business related matters. Contact us to set up an appointment for consultation on these and a host of other legal matters.