The death of a shareholder can create significant practical and legal issues for a company, particularly in a small or owner-managed business.
If two people have spent years building a company together and one dies, what happens to that person’s shares?
Do the shares automatically pass to the surviving shareholder? Can the deceased shareholder leave them to their spouse or children? Can the surviving shareholders be required to buy them? And how is the value of the deceased shareholder’s interest determined?
One of the most important points for business owners to understand is that a shareholder’s shares do not normally become the property of the other shareholders simply because that shareholder dies.
Shares are assets. What happens to them following death will depend on the deceased shareholder’s estate, the company’s constitution, any shareholders’ agreement, applicable company law and the particular arrangements put in place by the shareholders.
For an owner-managed Irish company, these issues should ideally be addressed long before a shareholder dies.
Generally, no.
The death of a shareholder does not ordinarily mean that their shares automatically transfer to their business partner or the other shareholders.
The deceased’s shares form part of their estate and must be dealt with as part of the administration of that estate, subject to the company’s constitution, any shareholders’ agreement and applicable law.
This distinction is particularly important in a 50/50 company.
Imagine two founders each own 50% of a successful company.
One founder dies unexpectedly.
The surviving founder should not assume that they now own 100% of the business.
The deceased founder’s 50% shareholding remains a valuable asset which must be dealt with appropriately.
Without advance planning, the surviving shareholder may find that the ownership structure of the company becomes very different from what either founder originally intended.
Shares can form part of a person’s estate and may ultimately pass in accordance with their will or the applicable succession rules.
However, that does not necessarily mean that the beneficiary named in the will can immediately become a registered shareholder with unrestricted rights.
The company’s constitution and any shareholders’ agreement need to be examined.
They may contain provisions dealing specifically with the death of a shareholder and the transmission or compulsory transfer of shares.
This is where succession planning becomes particularly important.
A founder may naturally want the financial value of their shareholding to benefit their family.
The surviving founder, however, may not want to find themselves running a company with their former business partner’s spouse, adult children or other beneficiaries as their new co-owners.
Both concerns are legitimate.
A properly structured shareholders’ agreement can attempt to reconcile them.
Consider a company owned equally by two shareholders, Aoife and Brian.
They have worked together for 15 years and each owns 50% of the business.
They make all major decisions together.
Brian dies unexpectedly and leaves his estate to his family.
Without appropriate arrangements, difficult questions can arise immediately.
Who exercises rights relating to Brian’s shares while his estate is being administered?
What happens to decisions that previously required the agreement of both shareholders?
Will Brian’s family ultimately retain the shares?
Does Aoife have the right to purchase them?
Can Brian’s family require Aoife to buy them?
What is Brian’s 50% shareholding worth?
And, crucially, where will the money come from if Aoife is required or wants to purchase it?
These questions can become even more difficult when the company itself represents a substantial proportion of the deceased shareholder’s wealth.
This is why death provisions in a shareholders’ agreement can be extremely important.
A well-drafted shareholders’ agreement should consider what happens when a shareholder dies.
There is no single arrangement suitable for every company.
However, the agreement may address matters such as:
The objective should be to provide certainty for both the deceased shareholder’s family and the surviving business owners.
A shareholders’ agreement can contain provisions designed to deal with the transfer of shares following the death of a shareholder.
Depending on how the arrangements are structured, the death of a shareholder may trigger a compulsory transfer mechanism or an option relating to the deceased shareholder’s shares.
These provisions require careful drafting.
The agreement needs to work alongside the company’s constitution, succession arrangements and any insurance or funding structure established by the shareholders.
Tax consequences also need to be considered separately with appropriate professional advice.
The shareholders should understand the commercial outcome while everyone is alive:
If I die, does my family inherit my shares, or do they receive the financial value of those shares instead?
Those are not necessarily the same thing.
Valuation can be one of the most important—and potentially contentious—issues.
Suppose two founders each own 50% of a company.
The business has grown considerably since it was established, but there has never been an independent valuation.
When one founder dies, what is their 50% interest worth?
A shareholders’ agreement can establish a share valuation mechanism.
It may address questions such as:
The appropriate mechanism will depend on the particular company.
However, leaving the valuation issue entirely unresolved until after a shareholder has died can create uncertainty at an already difficult time.
This is a critical practical issue.
A shareholder’s interest in a successful private company may be worth hundreds of thousands or even millions of euro.
The surviving shareholder may have a contractual mechanism allowing them to acquire the deceased shareholder’s interest but simply not have the cash personally available to fund the purchase.
The company itself may also not necessarily be able simply to fund whatever arrangement the shareholders would prefer. Company law, tax and the precise transaction structure must be considered.
For that reason, shareholders often need to consider the funding of a share purchase on death at the same time as they agree what is supposed to happen to the shares.
Appropriate life assurance arrangements may form part of succession planning in some circumstances.
Legal, tax and financial advice should be coordinated so that the contractual and funding arrangements actually work together.
Business owners sometimes put insurance arrangements in place to provide funds following the death of a shareholder.
Depending on the structure, insurance proceeds may assist in funding the acquisition of the deceased shareholder’s shares.
This can potentially achieve two important objectives:
The deceased shareholder’s family receives financial value for the shareholding.
The surviving shareholder or shareholders can continue the business without having to fund the entire purchase from their personal resources at short notice.
However, insurance should not be considered in isolation.
The insurance policy, shareholders’ agreement, options or transfer arrangements and tax treatment need to be properly coordinated.
An insurance policy providing money does not by itself determine who has the right to buy the shares or whether the deceased’s estate is obliged to sell them.
The death of a shareholder can be particularly significant in a 50/50 company.
Two equal founders will often have built the company on the basis that both participate actively in its management.
If one dies, the surviving founder may suddenly be responsible for operating the entire business while also dealing with uncertainty regarding half of its ownership.
A 50/50 shareholders’ agreement should therefore consider death alongside other events such as incapacity, retirement and voluntary departure.
Questions should include:
The time to answer these questions is when both shareholders are alive and able to agree the outcome they consider fair.
The absence of a shareholders’ agreement does not mean that the shares disappear or automatically pass to the other business owners.
The company’s constitution, the Companies Act 2014, the deceased’s will and Irish succession law may all become relevant.
The personal representatives of the deceased shareholder will also have an important role in administering the deceased’s estate.
The precise position will depend on the circumstances.
For a surviving shareholder, discovering after a business partner’s death that there is no agreement governing what happens to their shares can create significant commercial uncertainty.
For the deceased shareholder’s family, uncertainty can equally arise about the value of the shares, whether they can retain them and whether anybody is obliged to purchase them.
Specific legal advice should therefore be obtained at an early stage.
Business succession planning should not be carried out document by document without considering how the arrangements interact.
A shareholder may have:
These documents should be considered together.
For example, a will might express an intention regarding shares while a shareholders’ agreement contains contractual provisions governing what happens to those shares following death.
Business owners should therefore ensure that their will and shareholders’ agreement are reviewed as part of the same succession-planning exercise.
It is also important to distinguish between being a shareholder and being a director.
The two roles are separate.
A person may be both a director and shareholder, which is common in owner-managed companies, but their death has different consequences for each capacity.
The death of a director creates governance and management issues.
The death of a shareholder creates ownership and succession issues.
In a two-person company where both founders are directors and 50% shareholders, both sets of issues can arise simultaneously.
The company’s constitution and shareholders’ agreement should therefore be reviewed to ensure that the company can continue to function following the unexpected death or incapacity of a key founder.
Shareholders planning for the future should be able to answer five basic questions:
1. What happens to my shares if I die?
2. Do I want my family to become shareholders, or receive the value of my shares?
3. Who has the right or obligation to purchase my shares?
4. How will the shares be valued?
5. Where will the money come from to fund the purchase?
If the shareholders cannot answer these questions, their existing arrangements may need to be reviewed.
The death of a business owner is difficult enough for their family and colleagues without adding an avoidable dispute concerning ownership of the company.
For founders and shareholders, succession planning is not simply about preparing a will.
It should also involve considering the future ownership and control of the business.
A properly drafted shareholders’ agreement can establish what should happen to a shareholder’s shares following death, how those shares should be valued and how the interests of both the deceased shareholder’s family and the surviving shareholders can be protected.
For many owner-managed businesses, this is one of the most important provisions in the entire shareholders’ agreement.
Sherwin O’Riordan Solicitors advises business owners, founders, companies and shareholders on shareholders’ agreements, business succession planning and shareholder disputes in Ireland.
We can advise on provisions dealing with the death of a shareholder, compulsory share transfers, share valuation, shareholder exit arrangements, 50/50 companies, pre-emption rights and the interaction between shareholders’ agreements and company constitutions.
We can also advise surviving shareholders and personal representatives where a shareholder has already died and uncertainty has arisen regarding the ownership or transfer of shares.
If you own a business with another person, reviewing what happens to your shares on death can provide greater certainty for both your family and the future of the business.
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