Death of a Shareholder - Succession of shares By: N. Pirilides & Associates LLC

On the death of a shareholder/member of a Cyprus company, various consequences/issues might arise (at times serious and adverse) if the shareholders fail to put some succession plans in place to counter these.

In the absence of any agreement providing otherwise, any shares held by the deceased member will pass under the terms of his will (assuming he has a will) to his named beneficiaries. This could mean the surviving shareholders find themselves with the deceased’s spouse or children holding a significant shareholding in the company, entitled to dividends.

Shares in a Cyprus company are treated as being located for legal purposes in Cyprus. Consequently, in case of the death of a shareholder/member of a Cyprus company, the shares cannot be transmitted to her/his heirs until, in the case of a will, a grant of probate or, in the case of no will, grant of letters of administration has been granted from the Cyprus Courts.

It should be noted here that the Wills and Estate Law, Cap 195, as amended, allows individuals to regulate the way a portion of their estate will be distributed after their death via the use of a will (depending on whether the deceased has heirs or not). Thus a shareholder may arrange for the disposition of his shares to other parties or in different percentages than those stipulated by the intestacy rules.

The Companies Law, Cap. 113, as amended (the “Law”) does not specifically provide for rules that will be binding upon the shareholders’ heirs. That being said, Article 29 of the Law provides the meaning of “private company” as a company which by its Articles-

(a) Restricts the right to transfer its shares;
(b) Thus, the Company’s Articles must contain various restrictions in relation to the transfer of the shares, including possibility the transfer of the shares to the heirs. Indicatively, many different arrangements are possible, including:

i. a prior agreement (perhaps in a Shareholders' agreement whereby shareholders are free to establish rules that will be binding upon all current and future members of the company) that the shares may pass to particular people, such as the shareholder's spouse and children,
ii. pre-emption rights in favour of existing shareholders (or some of them),
iii. arrangements to buy out the deceased shareholder's interest, with valuation arrangements and perhaps time to pay,
iv. a Cross-Option agreement (a contract between the shareholders for the sale and purchase of a deceased shareholder's shares, and sometimes those of his family members) combined with life insurance policies to provide the money to pay for the shares if the situation arises.

It is therefore advisable that the shareholders of a company should enter into an agreement, which should address what will happen in the event of such death. A shareholders’ agreement, for example, is a confidential legal document between the shareholders of a company and is drafted in order to regulate and specify the obligations and/or liabilities shareholders have to each other. As such the agreement is not accessible to third parties unless disclosed.

It is normal to find provisions in a shareholders’ agreement which specify and regulate, amongst other matters, the following:

i. the decision making procedures (voting powers at board level or shareholder level);
ii. the rights and obligations of shareholders;
iii. detailing who can constitute the Board of Directors ;
iv. right to a shareholder to nominate a Director;
v. provisions for the death of a of shareholders;
vi. restrictions regarding issue, transfer and sale of shares in the company;
vii. providing for pre-emption rights;
viii. provisions regarding the appointment and removal of directors;
ix. provisions regarding protection for minority shareholders;
x. dividend payment procedures;
xi. provide competition restrictions;
xii. dispute resolution and deadlock provisions;
xiii. dispute resolution procedures’;
xiv. protection and promotion of the interests of the company.

It is therefore prudent that provisions should be made in such an agreement for beneficiaries to have the option of selling their shares to the surviving shareholders who will be obligated to buy the shares from the beneficiaries; provision should also be made for the surviving shareholders the option to request the beneficiaries to sell their shares to the surviving shareholders.

A shareholders’ agreement must be consistent with both the Articles of Association of the company and with the Law. A breach of the shareholders’ agreement will entitle the innocent party to seek legal redress and claim, amongst other remedies and measures, damages, court injunctions and court orders.

N. Pirilides & Associates LLC may assist you with the drafting of shareholders’ agreements and any other relevant agreement and also provide legal advice and litigation representation in the event of any dispute arising.