26/11/2025
SHAREHOLDERS’ AGREEMENTS MAKING PROVISION FOR THE DEATH OF A SHAREHOLDER; PARTICULARLY REGARDING THE SO-CALLED “BUY-AND-SELL AGREEMENT”
Shareholders’ agreements are contracts that regulate the relationship between shareholders of a company. There are several reasons why shareholders’ agreements are desirable. They include, but are not limited to, prescribing what will happen if certain events come to pass. For example, there could be provisions dealing with the scenario where one shareholder wants to sell their shares or what will happen to the shares of a shareholder who dies or becomes disabled. If there is no shareholders’ agreement, the results flowing from such events could be problematic. This article focuses on a particular term to consider including in a shareholders’ agreement: the so-called “buy-and-sell agreement”.
To illustrate this, an example is apposite. Peter and Jane each hold 50% of the issued shares in a company. Peter and Jane did not conclude a shareholders’ agreement. Peter passes away unexpectedly. In terms of South African law, Peter’s shares fall into his deceased estate. In summary, this means that Peter’s shares must be distributed to his heirs according to the law of succession. If Peter left a will, then his shares will be transferred to whomever he elected in his will. If he did not leave a will, then the shares will be transferred to his beneficiaries in terms of intestate law. For the purposes of the example, let us assume that Peter did have a will and that he bequeathed his shares to his son, James. James has no experience in the business operations of the company, yet now Jane is forced to work with James as a co-owner of the company.
One can think of many scenarios where it would be detrimental to the surviving shareholders to have a third party unexpectedly forced upon them as the new shareholder. It is not sufficient to try and require a shareholder to bequeath his estate in a particular manner. Using the above example, even if Peter initially tells Jane that he will make her the beneficiary of his shares should he pass away, nothing stops Peter from changing his will later on. The better option would be for Peter and Jane to enter into a shareholders’ agreement that caters for what will happen should one of them pass away.
One way of doing this is to specify in the shareholders’ agreement that in the event of one of the shareholders passing away, then the surviving shareholders will obtain the right and obligation to purchase the shares of the one who dies. This will, accordingly, ensure that the surviving shareholders will be entitled to buy the shares of the deceased, thus avoiding the issues described above. If structured correctly, it will also ensure that the deceased shareholder’s estate will receive adequate compensation for those shares, and it may potentially even speed up the administration of the deceased estate. There are, however, other matters to consider when including such a clause. One obvious example is how the purchase price will be determined.
In many instances, the surviving shareholders may not have the cash on hand to pay for the shares should another shareholder pass away. Accordingly, an option to consider is for insurance to be taken out on the life of each shareholder to provide for this eventuality. This will ensure that the survivors have the financial capacity to purchase the shares in the event of the death of another shareholder.
Another aspect to bear in mind in this regard relates to estate duty. Section 3(3)(a)(iA) of the Estate Duty Act 45 of 1955 will need to be complied with if one wants to ensure that the policy proceeds are not deemed property in the deceased estate for purposes of estate duty.
There are many other aspects that should be considered when entering into a shareholders’ agreement. Care should therefore be taken to ensure that these agreements are properly considered and drafted according to the needs of the parties.
If you have any queries regarding this issue or its implications please feel free to contact us on [email protected] so that we can assist you!
Disclaimer: the information contained in this article is made available for general purposes only. It does not constitute legal advice. It is also subject to change depending on, amongst other things, legal developments. Accordingly, we do not accept responsibility for any loss or damage (whether direct, consequential or otherwise) which may arise from reliance on the information.
