What happens when a shareholder dies?

The death of a shareholder being a natural person can give rise to a host of adverse consequences for a business. In many Polish limited companies, there is a close working relationship between shareholders, so the death of a shareholder creates real issues for the business. From the point of view of the remaining shareholders, the question of who will replace the deceased shareholder could be a key issue, especially regarding what happens to their shares. Are the heirs of the deceased going to be the new shareholders? For all concerned with the company, thinking about the consequences in advance, and ensuring specific provisions are in place, will enable the business to deal with the death of a shareholder with minimal disruption.
 
When determining what happens to the shares of a deceased shareholder, the starting point is to check the most recent articles of association. If there are no specific provisions relating to the death of a shareholder, the shares will pass in accordance with the deceased’s Will or, if there is no Will, under the intestacy rules.
 
The risk with not including any specific provisions in the articles of association is that family members with no real knowledge of the business or how it operates may be required to make business decisions, sometimes with potentially huge consequences. The beneficiaries’ interests may not, necessarily, align with those of the other shareholders, or they may not have any desire to be involved with the business. This can cause tension between relatives, as well as tension between the family and the shareholders and the company. A big potential problem could arise if the new shareholders do not understand their responsibilities or, sometimes more disruptively, do not engage with the company. This could mean no decisions in relation to the business can be made because the required percentage for shareholder decisions cannot be reached without their involvement.

There are two possible solutions, with the most suitable depending on the circumstances of each company.

Including specific provisions  in the articles of association

As a general rule, there are no restrictions in Polish law which prevent an existing shareholder from transferring their shares in a Polish limited company to a third party. Shareholders are therefore free to sell their shares to anyone else, inside or outside the company, and at whatever price they choose. This applies also to the process of inheritance. If the shareholders want to keep the shareholding structure as it is, it is better to include specific provisions on the transfer of shares, for instance that a shareholders’ resolution is required for any valid transfer of shares. The transfer of shares without such a resolution will be null and void. As regards the death of a shareholder and his shares, there are two possibilities which should be considered:
 

• excluding the heirs of the deceased shareholder from inheriting the shares or
• limiting the scope of heirs who could inherit the shares by referring to certain criteria, for instance, education, age, not being involved in competitive business etc. 

The most popular solution is to include specific provisions in the articles of association that the heirs of the deceased shareholder are excluded from inheritance and that the existing shareholders have the right to buy them out.
 
A buyback of shares by the company
 
As an alternative to the purchase of the shares by surviving shareholders, the articles of association may provide for the company to buy back the shares of a deceased shareholder for the shares to be cancelled. The Polish Commercial Companies Code sets out strict procedural requirements for such a buy-back and it is important to comply with this as failure to do so will result in the buy-back acquisition being null and void.

The acquisition of the shares can be financed out of net profit and distributable reserves or - if the reserves are not sufficient - out of the decrease of the share capital. The procedure for the decrease of the share capital is complicated and may take up to several months. The outcome of the procedure is that the company acquires the shares, pays compensation to the heirs and the shares are subsequently redeemed.