Corporations are considered legal entities separate from their owners. This means that the owners of a corporation can not simply pass on their ownership to someone else through inheritance. However, there are a few ways that owners of a corporation can ensure that their business is continued after their death.
What Happens When a Shareholder or Director Dies?
The death of a shareholder or director of a corporation can have various effects on the corporation, depending on the ownership structure of the corporation and the provisions of the governing corporate documents.
In a closely-held corporation, the death of a shareholder may trigger a right of first refusal in the remaining shareholders, giving them the right to purchase the deceased shareholder’s shares before they are offered to outsiders. Alternatively, the death of a shareholder may cause the corporation to be dissolved if the governing documents require dissolution upon the death of a shareholder.
If the corporation is a publicly-traded company, the death of a director may cause the corporation to lose its listing on a stock exchange if the exchange requires a minimum number of directors to be listed. The death of a significant shareholder may also trigger a change in control of the corporation if the shareholder’s shares represent a majority of the voting shares outstanding.
Steps to Take When a Shareholder or Director Dies
When a shareholder or director of a company dies, the company must take certain steps to protect the interests of the shareholders and the company itself. Below are some of the key steps that should be taken:
1. Notify the Shareholders
The company should notify all shareholders of the death as soon as possible. This can be done via a letter, email, or announcement at the next shareholder meeting.
2. Appoint a New Director
If the deceased was a director, the company must appoint a new director to take their place. This is applicable if there is no appointed director written on the will. Shareholders will vote on the new director, and the majority must approve the appointee.
3. Determine the Deceased’s Share Ownership
The company must determine how many shares the deceased owned and who the beneficiaries of those shares are. This information will be needed to issue new shares or transfer ownership of the deceased’s shares.
4. Issue New Shares
If the deceased owned shares that are not transferable (e.g. voting shares), the company would need to issue new shares in order to replace those that were lost. The company must determine how many shares the deceased owned because this information will be needed to issue new shares.
5. Transfer Ownership of Shares
If the deceased’s shares are transferable, the company must transfer ownership to the beneficiaries. The company will need to have the appropriate documentation (e.g. a death certificate) to do this.
6. Amend the Company’s Articles of Incorporation
If the deceased was a shareholder or director, the company’s articles of incorporation would need to be amended to reflect the changes in ownership and directorate. The company may also need to take action concerning any share certificates issued in the name of the deceased.
7. Hold a Shareholders’ Meeting
The company may need to hold a shareholders’ meeting to elect a new director. The shareholders’ meeting will also provide an opportunity to discuss the impact of the death on the company.
The death of a shareholder or director can have various consequences depending on the company’s articles of incorporation, by-laws, and shareholders’ agreements. In some cases, the death may trigger a buy-out clause, which allows the company to purchase the shares from the deceased’s estate. In other cases, the death may cause the company to be dissolved. Lastly, the death may not affect the company, and the shares may simply be transferred to the beneficiaries stated in the will.
If you need help with legal situations like asset division, you may reach out to us at Dreyer and Associates Lawyers LLP. Our experienced team will be able to assist you in the most difficult situations. Contact us at Dreyer and Associates Lawyers LLP for your legal needs.