Companies and Estate Planning – Understanding Company Continuity After the Death of a Shareholder or Director

How business structures outlive their members and what you need to know about succession planning

Introduction

A company’s status as a separate legal entity ensures its survival beyond the lifespan of its human members. While the death of a shareholder, director, or officer triggers administrative changes, the company itself continues unaffected. However, careful planning is required to manage share ownership transitions, decision-making authority, and financial obligations.

Here’s what every business owner needs to understand about post-death corporate governance.

Key Considerations for Shareholdings

1. Share Ownership vs. Company Assets

• • Assets remain corporate property: Company assets never form part of a deceased shareholder’s estate and can not be gifted or otherwise dealt with in their Will.
  • Shares as estate assets: Only the deceased’s shares in the Company (as opposed to the assets owned by the Company) are governed by their Will.
  • Executor authority: Estate executors or administrators temporarily exercise shareholder rights during the estate administration phase, making executor selection critical to protect other stakeholders’ interests.

2. Share Class Nuances

• • Variable rights: Different share classes may have death-triggered provisions (e.g., value depreciation or control shifts).
  • Succession planning: Next-generation shares might automatically gain voting power, requiring constitutional review.
  • It is important to review each company’s constitution, to check what will happen on the death of a shareholder to the shares and their voting rights, so you can plan accordingly.

3. Joint Shareholdings

• • First-named priority: Many constitutions grant the voting rights to the first-named joint owner. This means that if the deceased’s shares can not be divided equally between the number of beneficiaries, then some may be held jointly and the voting rights attached to the joint shares may only be able to be exercised by one person (the first named owner), who may then be able to control the company, to the exclusion of the other beneficiary or beneficiaries.
  • This problem can be dealt with by issuing additional shares to ensure that there is a number that can be divided equally between the intended beneficiaries or by ensuring that there is power to do that, after death.

Problems that arise on the death of a sole shareholder and Director

• Decision paralysis: If the sole director and shareholder has died or become incapacitated, no decisions or actions will be able to be made or taken, until a grant of probate has been made and the executor or administrator is able to appoint a new director.
• Solutions: Appoint an additional director and have the company execute a power of attorney in favour of someone else.

Loan Account Management

• Automatic repayment risk: Executors have a duty to “call in” or realise the assets of the estate. If there is money owing to the deceased, then the Executor has a duty to demand immediate repayment of the loan. This could cause problems if the Company is then required to sell assets, triggering capital gains tax or other losses.
• Possible Solutions:  
  • Ensure the loan agreement is documented and specifies alternative terms for payment in the event of the death of the lender; or
  • Ensure the deceased person’s will authorises the Executor to delay enforcing repayment of the loan.

Proactive Planning Checklist

1. Review the company constitution: Identify death-triggered share changes and possible complications if the total number of issued shares can not be divided equally between the intended beneficiaries
2. Review Directorship structure: Ensure there are multiple decision-makers
3. Review Loan documentation: Formalise repayment terms
4. Review Executor selection: Choose Executors aligned with business interests
5. Review the provisions of the Will: Align estate plans with corporate governance rules.

Conclusion
Effective succession planning requires understanding share structures, the provisions of the company constitution and other matters. Regular reviews with legal and financial advisors can prevent operational disruptions and ensure the interests of your beneficiaries are protected.

Liability limited by a scheme approved under Professional Standards Legislation

Disclaimer: This post contains information of a general nature only and is not intended to be used as advice in relation to a specific matter. Although every care has been taken in preparing the document, it may not be accurate or complete, particularly in the context of specific circumstances. MJM Lawyers disclaims responsibility for any errors or omissions.