Introduction
Succession in a limited liability company is the transfer of a shareholder’s rights and obligations to their legal successors. The company, as a separate legal entity, continues to operate, but the death of a shareholder, like an illness that prevents them from acting, very often triggers mechanisms that can lead to serious decision-making and operational disruptions.
Succession procedures are time-consuming, and company agreements are often not prepared for the passing of a shareholder or their temporary inability to act. As a result, between the death of a shareholder and the actual takeover of control of the shares, or during a period of temporary incapacity of a shareholder due to illness, an interim gap arises which may pose a real threat to the value of the company and even its continued existence.
What happens to the shares upon the death of a shareholder
Upon death, the property rights and obligations of a shareholder, including shares in a limited liability company, pass by operation of law to the heirs. However, until the estate has been finally divided among the heirs, the exercise of corporate rights attached to the shares in the company requires the unanimous cooperation of all entitled persons and the completion of a number of formalities.
The first formal stage of succession
In order for the heirs to exercise their rights arising from the shares in the company, it is necessary to:
• obtain a court decision confirming the acquisition of the inheritance, or
• draw up a notarial certificate of inheritance.
The notarial procedure for certifying inheritance is much faster than court proceedings, but is only possible with the full consent of all heirs. In the event of a conflict or lack of cooperation, court proceedings become necessary, which may take years, if only because of the possibility of inheritance renunciation proceedings or possible disputes over the circle of heirs or the basis for inheritance.
Only upon delivery to the company of one of the above documents, constituting evidence of inheritance from a shareholder, together with a statement on the selection of a joint representative of the co-owners of the shares (if there are multiple heirs), can the heirs exercise their rights attached to the shares in the company.
Neither the court nor the notary decides who will receive specific assets, including who will receive shares in the company and in what amount. The decision confirming the acquisition of the inheritance and the notarial certificate of inheritance, in the absence of appropriate testamentary provisions, only confirm the fractional share of each heir in the total inheritance. The final division can only take place in the course of inheritance partition proceedings, which may be conducted either before a court or, if the heirs are in agreement, before a notary.
Representation of heirs in the company
After obtaining a court decision on acquisition of inheritance or notarial certificate specifying the heirs and the size of each of their shares, it is necessary to appoint one representative of the co-owners of shares. This representative will exercise the rights attached to the shares in relation to the company, i.e., exercise the right to vote at shareholders’ meetings, among other things. This may be one of the co-owners of the shares or a third party – a natural person or a legal entity. Importantly, the consent of all co-beneficiaries, i.e., all heirs, is required to appoint such a person, and the withdrawal of consent already given by even one of the co-beneficiaries results in the termination of the representative’s appointment. If no representative is designated and notified to the company, the company will be able to make statements to one of the co-owners with effect on all of them, while the heirs will not be able to exercise their rights attached to the shares. In the absence of a representative, the co-owners of the shares will not participate in shareholders’ meetings, vote at shareholders’ meetings or outside them, for example, to adopt a resolution on the continued existence of the company, approve the financial statements or incur a liability by the company. It is also possible that the court will appoint a court-appointed curator who will perform certain actions on their behalf.
In practice, therefore, the lack of a unanimous choice of representative means that the voting rights of the heirs remain unexercised or, in the absence of the necessary quorum for the shares subject to inheritance, resolutions of shareholders’ meetings cannot be adopted. The company may find itself in a state of decision-making paralysis.
At the same time, co-owners of shares also have certain rights in relation to their shares that are not strictly related to the exercise of their rights in the company. An important right is the right of each co-owner to dispose of their fractional share without the consent of the others, for example, by selling it to third parties, which may lead, for example, to a significant fragmentation of the ownership structure. However, the consent of all co-owners is required for the sale of the entire joint share and other activities exceeding ordinary management. The co-owners are jointly and severally liable for payments to the company related to their share.
A situation preventing the company from functioning may also arise if the deceased was also a member of the management board or if the management board included persons from outside the group of shareholders. In the first case, the co-owners of the shares should take action as soon as possible to appoint a new management board, while in the second case, the loss of control over decision-making in the company results in the loss of control over the “external” management board, which may act contrary to the interests of the company or the heirs of the deceased shareholder.
When minors inherit, their rights are represented by their legal representatives. As regards decisions exceeding the ordinary management of a minor’s property, the consent of a family court is required, which must be obtained before the action is taken, for example, disposing of the inheritance share on behalf of the minor. In the case law of the common courts, it is accepted that where shares in a company form part of an estate and devolve upon minors, the exercise of corporate rights by their statutory representative may constitute an act exceeding the ordinary management of the child’s property within the meaning of Article 101 § 3 of the Polish Family and Guardianship Code, and therefore requires prior approval of the guardianship court. This applies in particular to decisions concerning the allocation of profit, payment of dividends, coverage of losses, or the imposition of additional contributions, as such actions may affect the financial situation of the minor shareholder.
Many articles of association do not provide for the death or illness of a shareholder in a way that would ensure the continuity of the company’s operations. It is common to find provisions protecting the position of the majority shareholder by requiring that the percentage of share capital held by them must be represented at a shareholders’ meeting in order for it to take a decision. The same applies when the shareholders, when determining the content of the founding act want to ensure that each of them is present at the meeting at which resolutions are adopted. It is also not uncommon for the company to have had a sole management board member, who was the deceased shareholder. Well-structured, multi-member corporate bodies, the appointment of proxies or the granting of appropriate powers of attorney, as well as provisions in the articles of association regulating the procedure for appointing the management board, enable decisions to be made on behalf of the company even in the event of the death of a shareholder, temporary incapacity of management board members, or other unforeseen circumstances preventing normal operations.
Provisions of the articles of association
In addition to well-functioning internal organizational structures, it is also possible for the shareholders to draft appropriate provisions regulating the entry of heirs into the company. The articles of association of a limited liability company may regulate the entry of heirs into the company. The agreement may provide that the share of the deceased shareholder shall be acquired by a specific shareholder or shareholders (e.g., in proportion to their existing share in the share capital), a third party specified in the articles of association, or that the share of the deceased shareholder shall be redeemed. The principle of freedom of contract provides ample opportunity to regulate these issues both in the memorandum of association and by amending the agreement. For example, it may be decided that the shares of the deceased shareholder may only be acquired by heirs with specific qualifications, that they may not be acquired by heirs who conduct business competitive to the company. The articles of association may also regulate the distribution of shares among the heirs entering the company. The shares may be divided equally, remain in co-ownership, or be allocated to one or several of the heirs.
The regulations require that the articles of association – under pain of invalidity of the provision – specify the terms of repayment to heirs who do not join the company. These terms cannot be adopted arbitrarily. An heir who does not join the company should be repaid according to the fair value of the testator’s shares and within a reasonable time. Contractual provisions providing, for example, for a grossly distant repayment date or repayment at a value grossly lower than the current market value or at least the book value of the shares (e.g., at nominal value) may be deemed invalid if they as considered to be circumventing the law. The articles of association may also regulate the distribution of shares among heirs.
Wills
Shareholders may also dispose of their shares in the event of death in a will. The content of the will should be consistent with the provisions of the company’s articles of association regulating succession matters, in order to avoid doubts and disputes over who becomes the shareholder after the death of a shareholder.
Appropriate provisions in the articles of association, together with a will containing a general or specific or future legacy enable faster obtaining of a notarial certificate of inheritance or a court decision confirming the acquisition of inheritance, which, after submission to the company, constitutes the basis for the company to submit an application for entry of changes in the register of entrepreneurs as well as constitutes the basis for the exercise of share rights by the persons indicated and selected by the testator. Well-considered provisions can complete the most important stages of succession in a significantly shorter time.
Tax issues
It is worth mentioning that the manner of regulating joining the company after the death of a shareholder will also have tax implications. If the heirs join the company by way of inheritance, they will benefit from the possibility of exemption from inheritance and gift tax for the immediate family. On the same basis, heirs who are immediate family members and who do not join the company but receive payments in returnwill also be eligible for tax exemptions. It may be less advantageous from a tax perspective to leave the decision on the fate of the shares in the company to the heirs, through actions that may be taken outside the inheritance process, which may lead to the obligation to apply less favourable tax rates.
