What happens to a shareholder’s shares if they die?
The death of a shareholder does not prevent the continued operation of the corporation, but what happens to the shareholder’s shares?
To find out what will happen to a shareholder’s shares once the shareholder has died, it is important to determine whether the shares are subject to any restrictions on share transfers. Restrictions will be found in the corporation’s bylaws, the corporation’s shareholders’ agreement(s), or both.
There are several different types of restrictions on share transfer that might interfere with the transfer of the shares from the deceased shareholder to his or her beneficiaries. A few common restrictions include:
- Specific restrictions applicable on death or divorce of a shareholder. These restrictions can be quite detailed and may include specific instructions on when, how, and to whom the shares can be transferred.
- For instance, there may be provisions requiring the corporation to take out life insurance policies on their key shareholders so that upon the death of a shareholder, the corporation will then buy back the deceased shareholder’s shares from the shareholder’s estate using the proceeds of the life insurance policy.
- Right of First Refusal – this restriction disentitles a shareholder from transferring his or her shares to a third party unless the shareholder first offers the shares to a particular party (usually the existing shareholders or the corporation itself) and that party has chosen to decline the offer.
- This restriction is usually accompanied by a method to determine the price at which the shares are to be offered.
- Piggy-Back Rights – If the deceased shareholder’s will provides for a transfer of the majority of the corporation’s shares, the transfer could trigger piggy-back rights, which entitle the minority shareholders to sell their shares to the transferee (the deceased’s shareholder’s beneficiary) as part of the same transaction.
- This could be very problematic if the beneficiary does not wish to purchase any additional shares.
- Limits on the maximum number of different shareholders – this may prevent the deceased shareholder’s shares from being apportioned to multiple beneficiaries.
In the absence of any transfer restrictions, the shares are transferrable in accordance with the shareholder’s will (assuming the will is compliant with all applicable law) or the law of intestacy.
However, when transfer restrictions do interfere with the wishes of a deceased shareholder, it can cause unnecessary delay, stress, and conflict during a time that is already difficult. Fortunately, a well-drafted shareholders’ agreement can provide a clear plan for what happens when a shareholder dies so that all parties are as prepared as possible.
If a shareholder has passed away, it is important to note that:
- If the deceased shareholder was also an officer and/or a director of the corporation other issues may arise that are outside the scope of this post, for which you may want to seek legal advice.
- The transfer of shares from a deceased shareholder can attract significant tax consequences and that it is highly advisable to consult with a tax lawyer.