When A Shareholder or Director Passes Away

This article highlights the issues that arise when a shareholder, who is also an active director of a private limited company (Sdn. Bhd.), passes away, and how life insurance can help to avoid or minimize the problems of such a consequence. To best understand this subject, an example is illustrated of an established and successful company with 3 shareholders who are also executive directors involved in the management and operations of the company. If one of these shareholders who owns, (for example) 30% of the shares of the company passes away, how would this affect his family, the other shareholders and the company? 

First and foremost, the following must be noted. The shares of an individual, like all his other personal assets, are part of his estate. Upon his death, these are dealt with by the estate administration laws. The legal representatives of the estate i.e. the executor or administrator, will be the only ones allowed to deal with the shares. Furthermore, they are authorized to deal with it only after the Probate or Letters of Administration are obtained from the High Court. This is applicable whether the Shareholder is Muslim or Non-Muslim.

Secondly, it must also be noted that upon death of a shareholder the Articles of Association of the company (which is a requirement of the Companies Act 1965) further stipulate that any transfer of shares may only be done with the consent of the directors. The legal representative is authorized to instruct the directors to transfer the shares according to the Will, or the Distribution laws of the country (this will differ in the case of Muslims and Non-Muslims). The beneficiaries who are entitled to the shares may also voluntarily transfer the shares to others (again with the consent of the directors). 

Thirdly, beneficiaries are entitled to only the rights and benefits (if any) that are due to them as a consequence of their ownership of the shares (e.g. dividends). They are, of course not entitled to the salary, allowances, perks or any other benefits which were given to the deceased Shareholder in his capacity as director. It must be pointed out that in such companies (as given in this example) the directors hardly ever declare dividends. Profits of the company are usually further invested in the company or are given to the directors as bonuses or in various forms of additional benefits. The net effect of this scenario is that, the beneficiaries are entitled to the shares whose monetary value would be a very subjective matter and if they are in urgent need of funds, they would need to sell the shares at a “willing-buyer-willing-seller” basis to the other shareholders / directors or any other persons interested in the purchase. It is thus obvious, that the beneficiaries would not be in a ‘strong-bargaining-position’. Family members holding on to the shares of a minority shareholder (30%), would not be too much of an inconvenience or bother to the surviving shareholders / director’s.      

In order to avoid these difficulties and pitfalls to the beneficiaries of a deceased shareholder / director, the following is recommended. Shareholders should enter into a ‘Buy-Sell Agreement’ of the shares which is to take effect upon the death of any one of them. The key issues to be addressed in such an agreement must include.

i)    The obligation of the surviving shareholders to purchase the shares of a deceased         shareholder.

ii)   The current value of each shareholders interest and provisions to revalue them in          the future.

iii)  The distribution of the deceased’s shares amongst the surviving shareholders.

iv)  The mechanisms of the transfer and execution of the relevant documents.

v)   The duty of the legal representatives of the estate of the deceased shareholder who     is bound by the terms of the agreement.

Of course, several other terms and conditions, depending on the peculiarities of each company will be further necessary to give effect to such an agreement. Foremost amongst these would be the appropriate funding method for the purchase of the deceased’s shares. Life insurance would be the obvious choice of moneys that would available upon the death of a shareholder. Suitably arranged insurance policies would be able to provide all or a substantial part of the moneys necessary to give effect to such a ‘Buy-Sell arrangement’.

As there are several details and legal matters to be considered shareholders, need to source for suitably qualified and experienced insurance agents or financial planners to ‘put together’ such a “buyout” scheme of shares upon the death of a shareholder.