Shares and shareholders form the building blocks of a firm’s ownership and governance structure.
A share is a unit of ownership in a firm, conferring on the holder a proportional right to the firm’s profits, assets, and votes. Firms issue shares to raise capital from investors, who then become shareholders, the true owners of the firm.
Shareholders might be individuals, institutions, or corporations and are defined under the Companies Act, 2013, the Articles of Association of the company, and the shareholder agreements. Shareholders’ rights and obligations, as well as their influence and entitlements, could differ according to the nature of shares held by them, such as equity or preference shares. Shareholders not only get returns on investment through dividends and capital gains, but they also have a vital role in major business choices.
Understanding the notion of shares and the shareholders’ role is important to comprehend the legal and financial complexities of companies.
What Happens When a Shareholder Dies?
Upon the death of a company’s shareholder, the shares do not go out of existence; rather, they are transferred according to legal procedures. The fate of the shares is determined by the nature of the corporation, the shareholders’ will or succession laws, and the articles of association of the company.
In the event of a shareholder’s death, the shares are transferred to the nominee or legal heirs through a process called transmission, not a transfer. After submitting the right documents, the company will help execute the process. While transmission is a statutory right, the outcome is determined by corporate laws, internal articles, and laws of succession. Early nomination and estate planning can help in the effortless and conflict-free transmission process.
1. Transfer of Shares
The process of transferring shares on the death of a shareholder is called “transmission of shares,” as distinguished from transfer (voluntary). Transmission is involuntary and operates by operation of law.
2. Legal Heirs or Nominees
Shares can be given to a nominee registered with the company under Section 72 of the Companies Act, 2013. If there is no such nominee or if the nominee has also expired, the shares shall be dealt with by the legal heirs.
- Where a Nominee is Registered: Once the death certificate and nominee details are confirmed, the company will direct the shares to the nominee. The nominee then becomes the registered shareholder and is entitled to all rights belonging to the shares.
- If No Nominee: The legal heirs (as per the will or the laws of succession) have to apply to the company for transmission. If there is a probated will, the executor named in the will will apply for transmission. In the event of intestate death (i.e., in the absence of a will), a legal heir certificate or succession certificate is required.
3. Documents Required for Transmission
The following are usually required:
- Shareholder’s death certificate
- Original share certificates
- PAN and KYC documents of the nominee/legal heir
- Succession certificate or probate of will (if required)
- Indemnity bond and affidavit (as per company requirement)
- Board resolution for transmission (if a company is the nominee/legal heir)
4. Company Responsibilities
The company Board of Directors shall scrutinise the documents and, being satisfied, shall approve the transmission through a board resolution. The legal heir or nominee’s name is recorded in the membership register.
5. Rights of Legal Heirs/Nominees
The transferee of the shares is entitled to hold, sell, transfer, vote, and receive dividends and benefits.
6. Tax and Legal Considerations
Transfers of shares are not subject to capital gains tax. If the successor sells the shares in the future, capital gains tax will be levied on the original cost of acquisition of the deceased. Shares form part of the deceased’s estate and can lead to inheritance conflicts if the succession is not well defined.
7. For Private or Closely Held Companies
The Articles of Association (AoA) can impose limitations. Shares cannot be transferred without limitations if AoA restricts membership. Any other shareholders can have a right of first refusal before the legal heirs receive shares.
What if the Shareholder Who Dies was the Sole Shareholder?
If a sole shareholder of a company dies, especially in the case of a private limited company or a One Person Company (OPC), the situation becomes even more complex. The scenario raises significant considerations in terms of not just the shareholding but also the management and running of the company. The legal and administrative implications vary depending on the nature of the corporation, whether there is a nominated person, and the provision made in the Articles of Association.
Where there is only one shareholder who dies, then the very existence of the company becomes threatened, particularly if such a person is also the sole director. Transferring the shares to the legal heir or nominee is required; yet, in the latter’s absence, the business of the company can be legally suspended. Active planning in the form of nominations, wills, and the appointment of more directors is imperative to ensure smooth succession and continuity of business.
1. The Nature of the Company Matters
a.One Person Company (OPC)
According to Section 3(1)(c) of the Companies Act, 2013, an OPC must have a nominee at the time of incorporation. On the demise of the sole member, the nominee takes control. The nominee has to give written consent within 180 days to become the sole member. In case the nominee does not accept, the legal heir can be chosen, or the business can be converted into a two or more-member private limited company.
b. Where there is no Nominee:
The legal heirs must:
- Obtain a succession certificate or a probate of the will.
- Produce the legal documents necessary in order to make an application for the transmission of shares.
- As soon as the shares are transmitted, the heirs become members and may enforce their rights as shareholders.
2. Absence of Directors
If the deceased person was also the single director, the company is without someone legally empowered to run or make decisions.
In these situations:
- Legal heirs or nominees need to approach the Registrar of Companies (RoC) under Section 167(3) of the Companies Act to appoint a new director.
- The RoC can act to secure the continuance of business.
3. Transmission of Shares
If the sole shareholder (in an OPC or a private limited company) dies:
- When a Nominee has been Appointed: The shares will pass to the nominee (if registered under Section 72) and the nominee becomes the sole shareholder and will have the power to appoint directors, conduct business, hold shareholder meetings, and ensure continuity of business.
- If No Nominee: The legal successors have to apply for a succession certificate or probate of the will. Such legal documents as are necessary for the passing on of shares need to be filed. After the transfer of shares, the successors become members and get shareholder rights.
4. Bank Operations and Accounts can be frozen
Shareholders’ bank accounts can be frozen in case of their death. Operations can be put on hold until a new director is appointed and the transmission process is effected. Disbursement of salaries, payment to vendors, and statutory compliance (e.g., GST, TDS, ROC filings) could be disrupted.
5. Failure to Nominate
- Succession and corporate governance delays
- Legal heirs’ conflicts
- Disruptions to business from a lack of authorised signatory signatures
- Enhanced compliance expenses and litigation
6. Preventive Measures
In order to prevent these challenges, the following steps are recommended:
- Appoint a nominee under Section 72 of the Companies Act, 2013.
- Establish a succession plan or will.
- Even in closely-held businesses, they have at least two directors.
- Make provisions in the Articles of Association to govern succession and the election of directors.
Landmark Cases
1. World Wide Agencies Pvt. Ltd. v. Margaret T. Desor (1990)
Court: Supreme Court of India.
Citation: AIR 1990, SC 737
It is important to realise that the rights of a shareholder remain after his death. The nominee does not become the absolute proprietor; instead, they take the shares in trust for the legal heirs, unless there is a valid will.
On death, legal heirs obtain beneficial ownership, despite a nominee. The shares fall into the estate of the deceased.
2. Pushpa Devi v. Income Tax Officer, 1980
Court: Supreme Court of India.
Citation: (1980), 4 SCC 103
Property, including shares, automatically devolves on legal heirs at death, regardless of formal transfer, under relevant personal law.
Shares pass under the law, and ownership does not terminate with death.
Conclusion
When a shareholder dies, his shares do not become void but pass to his nominee or legal heirs under the Companies Act, 2013, and the applicable succession laws. While the registered nominee may hold the shares temporarily, the legal heirs have title to them unless an effective will is provided otherwise. The company facilitates this transfer on verification of documents of necessity. Appropriate nomination, estate planning, and compliance with legal procedures are crucial to facilitate the smooth transfer of shareholding and continued business operations. A timely action is necessary to prevent conflicts and maintain corporate governance and shareholder rights.
