Right of pre-emption in a shareholder agreement vs provision in the will

The right of pre-emption is a contractual arrangement, usually between shareholders, granting each other the right to acquire each other’s shares. A question posed to us recently was, what happens upon death where the agreement does not specifically provide that the pre-emptive rights apply on the death of a shareholder – is the Executor bound to sell the shares to the remaining shareholders?

Our response

There is no conclusive answer and it depends to a large extent on the wording in the shareholder agreement or the Memorandum of Incorporation (“MOI”). If it remains silent on what happens on the death of a shareholder and only deals with a ‘sale of shares’ or a ‘disposal’ as the trigger for pre-emption then it will come down to the meaning of these words i.e. does it include death of a shareholder?

It is accepted that the death of a person does not put an end to contracts entered into by him unless they are of a personal nature, e.g. where they required his personal services or skill. Except in such cases they are binding on the executor.

Company Law Expert Opinion

In the absence of clarity in the shareholder agreement, the shares will pass in terms of the Will. But there is also a strong argument that the pre-emptive rights are binding and that there is a disposal and transfer of rights upon death which trigger the surviving shareholder’s pre-emptive rights.

It is a moot point and will certainly come down to the meaning of the words. The only practical solution (but expensive) where this issue is material between the parties is for them to go to the High Court and get a declaratory order.

Review Shareholder Agreements & MOIs

Check your clients’ shareholder agreements and make sure pre-emptive rights deal with the death of a shareholder. If the agreement is silent then a dispute could arise between the Executor and the shareholders causing delays at best and legal costs to resolve at worst.

Contributor: Arno Goebel, Director

Email: arno@pgpslaw.co.za

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