Death of a shareholder in a limited liability company

This article answers the following questions:

• Does a limited liability company cease to exist after death of a shareholder?
• What does inheritance of rights attached to shares look like and what should heirs do following death of a shareholder?
• How can a shareholder secure the company in the event of his or her death?
   

Death of a shareholder in a limited liability company bears particular consequences not only for the private life of the members of his or her family, but also has an impact on the functioning of the company. Unplanned succession may seriously undermine the stability of the business activity. 

Consequences of a shareholder's death: Does it mean the liquidation of a limited liability company?

Let us make it straight: A shareholder's death does not automatically dissolve a limited liability company (as is the case with partnerships). Nor the rights attached to the shares of the deceased shareholder expire at the time of his or her death. 

As a rule, shares in a limited liability company are hereditary – they form part of the deceased's estate as property rights which he or she had during his or her lifetime. 

Shares in a limited liability company are inherited in accordance with the rules prescribed in the Civil Code. However, the Code of Commercial Companies provides for a special procedure for the exercise of shareholders' rights in a company, and also an institution for determining which shareholders may join the company in place of the deceased (cf. G. Suliński, Wyłączenie lub ograniczenie wstąpienia spadkobiercy wspólnika do spółki z o.o. – zagadnienia wybrane, STUDIA IURIDICA TORUNIENSIA, vol. XXIX, p. 369, Kraków 2021).

Requirements which must be fulfilled by a limited liability company and the heirs of the deceased shareholder

While the transmission of shares in a limited liability company to heirs occurs by the operation of law (which means that to become effective, no additional declaration made by the heirs is required), to be effective against the company, a notification of the acquisition of the estate must be presented to the company (cf. A. Kidyba [in:] M. Dumkiewicz, A. Kidyba, Komentarz aktualizowany do art. 1-300 Kodeksu spółek handlowych, LEX/el. 2023, Article 183). 

Pursuant to Article 187(1) of the Code of Commercial Companies governing the transmission of a share, its part or fraction to another person, the interested parties are obliged to notify the company of the acquisition of the estate by presenting a proof of transmission. In practice, a proof of transmission of a share is a court declaration of succession or a notarial certificate of inheritance (or a European Certificate of Succession) (cf. M. Rodzynkiewicz [in:] Kodeks spółek handlowych. Komentarz, 7th edition, WKP 2018, Article 187). 

It should be pointed out that in its judgment of 7 February 2017 (file no. V ACa 282/16, LEX no. 2329098), the Court of Appeal in Gdańsk emphasised that beneficial holders of a share or shares in a company, within the meaning of Article 184(1) of the Code of Commercial Companies, are only such heirs whose succession matters have been settled – i.e. heirs who have obtained a court declaration of succession or a notarial certificate of inheritance, as set out in Article 187(1) of the Code of Commercial Companies. On the basis of these documents, the management board is obliged to make amendments to the register of shares, apply to the National Court Register to have the amendments entered, and also, if necessary, have the entry to the Central Register of Ultimate Beneficial Owners updated.

What needs to be done if there are several shareholders in a limited liability company?

If shares in a limited liability company are inherited by several persons, then the heirs become beneficial co-holders of the share or shares, and exercise their rights attached to the shares through a common representative until the partition of the estate. A common representative of beneficial co-holders of a share or shares may be one from among them or a third party (cf. Z. Jara, Kodeks spółek handlowych. Komentarz, Legalis 2023). 

How to secure the company in the event of death of a shareholder?

Limited liability companies have corporate and personal features, which means that shareholders may decide who can become one, and may refuse to accept certain persons as shareholders (cf. judgment of the Court of Appeal in Warsaw of 28 October 2016, file no. I ACa 1727/15, LEX no. 2317751). 

The right to establish rules on excluding or limiting the accession of heirs of a deceased shareholder to the company is guaranteed by relevant provisions of the articles of association (Article 183(1) of the Code of Commercial Companies). Article 183 of the Code of Commercial Companies gives shareholders who sign the articles of association full freedom in this respect (so long as it is not in breach of Article 3531 of the Civil Code), provided that the conditions of compensating non-acceding heirs are set out in the articles of association. Nevertheless, there is nothing to prohibit the articles of association from making the accession of heirs to the company conditional on a unanimous resolution on non-redemption of the shares of the deceased shareholder adopted by the remaining shareholders (cf. judgment of the Court of Appeal in Wrocław of 19 November 2013, file no. I ACa 1129/13, LEX no. 1496539).

The limitations of the right of holders of inherited shares in a limited liability company to accede to the company may be of affirmative (e.g. having specific qualifications) and negative nature (e.g. exclusion of testamentary beneficiaries or heirs-at-law, or making becoming a shareholder conditional on the sex or net worth of a particular person – cf. A. Kidyba, Komentarz aktualizowany do art. 1–300 Kodeksu spółek handlowych, Warszawa 2021, Lex; G. Suliński, Wyłączenie lub ograniczenie wstąpienia spadkobiercy wspólnika do spółki z o.o. – zagadnienia wybrane, STUDIA IURIDICA TORUNIENSIA, vol. XXIX, p. 369, Kraków 2021), and their boundaries are set by the principles of community life (cf. Z. Jara, Kodeks spółek handlowych. Komentarz, Legalis 2023). 

Importantly, however, and in relation to the formula of all these limitations, the conditions of compensating non-acceding heirs may not be set out in an unrestricted manner. 

An heir with whom an accession agreement is not signed should be compensated according to the fair value of the deceased's shares and within reasonable time. 

Provisions of an agreement setting out extremely late time for payment or an abnormally low price as compared to the current market value, or at least the book value, of the shares (e.g. at the face value), are invalid and regarded as circumvention of law (judgment of the Court of Appeal in Białystok of 1 February 2018, file no. I AGa 23/18, LEX no. 2453703). 

Inheritance of shares in a limited liability company is something worth preparing for beforehand

Even though death of a shareholder does not jeopardize the legal existence of the company, such a situation has influence on its further functioning and carries with it specific obligations – both for the shareholders and for the company. The issues of inheritance may be left to be resolved in accordance with statutory regulations. Nevertheless, they may be insufficient in the event of a potential dispute between shareholders. Therefore, it is a good idea to adopt appropriate solutions in this respect already at the stage of drafting the articles of association.