If you own or co-own a company in Malaysia, you may want to think about what’s going to happen to your portion after you are no longer around. When you have passed away, your ownership of your shares may be transferred to whoever inherits them under your terms of your will. That only applies if you have one in place. Otherwise it will be subjected to intestacy rules.
Besides all of that, it will all be subjected to provisions in the company’s articles of association and shareholder’s agreement. Such documents will take precedence and include restrictions on the transfer of shares.
It may be a complicated matter during emotional difficult times and can be distressing. Having said that, it means it’s good to plan ahead to make sure that the correct procedures are in place.
Preparing a will is especially paramount in these cases. Provide clear necessities in the company’s articles and shareholder’s agreement is the best way to avoid or minimize stress and disputes that may occur upon the death of a shareholder. Such strategy can help provide certainty and structure for family members, shareholders, and the company when it is needed the most.
What happens to the deceased’s portion of the shares?
As long as there are beneficiaries listed under the deceased’s will, then the deceased’s shares will go to those beneficiaries. Intestacy rules will also apply in this case and are also recognized as having titles to those shares.
However, when the portion of shares go to the beneficiaries, the beneficiaries will not have the right to attend or vote at the general meetings. They also cannot agree to propose written solutions unless they write to the company to become the registered holders of the inherited shares.
The beneficiary can make a written request to the company to appoint someone registered as the holder of the inherited shares. The very same appointed person can also execute an instrument or transfer in respect of it. However, this can be a complicated and time-consuming process. It can create uncertainty for everyone involved.
To avoid such difficulties and similar issues, when a company shareholder passes away it is best to change the model articles or create tailored articles to fit specific provisions amendable to the transfer of shares. If there are 2 or more shareholders in the company, it is best to create a private shareholder’s agreement to set clear boundaries of the transfer rules and procedures. These shareholders’ wills have to be consistent with the provisions outlined in the articles and shareholders’ agreement.
What should you include in a shareholder’s agreement?
Of all things there are to include in a shareholder’s agreement, make sure you have these in yours. Having these in your shareholder’s agreement will minimize distress and disagreements between company’s parties.
1. Permitted transfers
Permitted transfers are permissible transfers of shares. It is a tax-efficient strategy allowing the deceased’s shares to be transferred to a restricted party of individuals. These individuals are often family members, family trusts, and whatnot without the need to enforce the requirements of pre-emption rights.
2. Compulsory offer
When any of the company shareholder passes away, a compulsory offer provision will need the deceased’s shares to be offered to the remaining members who are still alive. If they decline the offer, the shares will be made available to 3rd party purchasers such as the beneficiaries named in the wills. Or it can be made available to the individuals of the company’s choosing.
3. Pre-emption rights
This is a common provision that provides the remaining shareholders the right of 1st refusal over new shares given by the company or existing share that are available for transfer. This is an effective way to protect the interests of the surviving members. It can help them to maintain their portion of their ownership and control. If the shareholders do not wish to purchase the available shares, they can offer it to 3rd party purchasers including family members of the deceased shareholder.
4. Compulsory transfer provision
A compulsory transfer provision is a clause or provision that requires the shareholders to sell off their shares in certain situations. For example, when they have retired, ceased employment with the company, bankruptcy, incapacitation, or death. This clause allows the company to buy back the shares and sell it to existing members or 3rd parties in order to protect the interests of the business.
5. Cross-option agreement
Cross-option agreement is when surviving shareholders grant other shareholders the options to the shares to each other if one of them dies. These types of agreements are where surviving shareholders can either force the personal representatives (beneficiaries) of the deceased shareholder to sell the available shares to them. Or the personal representatives (beneficiaries) may force the remaining shareholders to buy the available shares.
In support of such agreements and avoid any financial difficulties to surviving members, it is common for shareholders to arrange a life assurance policy that reflects the value of their shares and hold it in trust for other shareholders. If any of the shareholder passes away, the policy will pay out and provide enough funds to the remaining members.
What if the company is a one person company?
If the company only has one shareholder or a director, then things can be as complicated as a company that has multiple shareholders and directors. Different situations have their own issues and problems. The deceased may be the one and only person to authorize and exercise powers – such as:
- Appointment of new directors
- Transferring shares
- Paying employees, suppliers, and other creditors
If you run a company as a 1-man show, then it is important to include express provisions in the articles to make sure your company is able to carry on its business with minimal impact and delay. You may permit an executor to vote on behalf of you when you have passed away, hence enabling the executor to appoint a new director. You may allow a personal representative to appoint a new director without having the need to first be registered as a shareholder.
Bottom Line
In order to be prudent about your business as a company director or shareholder, you will certainly need to take into consideration where you want your company to head for in the future. If you need any help with your company’s life in the future, feel free to talk to us today.
