incorporation – corporate

What happens to my Thai company if a shareholder passes away / dies?

Starting and running a company is a time consuming process and naturally, as a result certain things may be overlooked or pushed aside until a later time. A prime example of this being estate planning. However, taking the time to plan for things such as the unexpected death or sickness to shareholders is vital to avoid the potentially devastating side effects for a company.

When determining what happens to the shares of a deceased shareholder in a Thai company, it is good practice to check the most recent shareholders agreement and articles of association. If there are no specific provisions relating to the death of a shareholder, then an alternative solution must be sought.

Furthermore, if the nature of the business is restricted under the Foreign Business Act, a transfer may be refused if, as a result of a share transfer, foreign ownership of the business would be in excess 49 percent. If this is the case, the shares may have to be sold or transferred to a Thai person in order to keep the foreign ownership quota satisfied.

Please note that in Thailand, controlling shares and voting rights do not automatically pass on to the heirs of the deceased. Section 1132 of the Thai Civil and Commercial Code states that; ‘In the event of death or bankruptcy of any shareholder another person becomes entitled to a share, the company shall, on surrender of the share certificate when possible, and on proper evidence produced, register such other person as a shareholder’.

This means in the event of a shareholder passing away, the director of the company is required to revise the share certificate and update the share registrar book of the company.

Why do companies need to prepare for the potential death of a shareholder?

There is a big risk taken by companies who do not include any specific provisions in the shareholder’s agreement (or not having one at all) or company constitution in respect to the death of a shareholder. Failure to act could see family members of the deceased with no real knowledge of the business take ownership of the shares and become involved in business decisions. The beneficiaries’ may not have the knowledge to perform this role of their interests may not, necessarily, align with those of the other shareholders. This can lead to all kinds of issues for the company.

What can be done to avoid any issues upon the death of a shareholder?

When starting a company, it is important to pre-plan what should happen to the shares in a private company in the event that one of the shareholders should die. There are a few different options available to a company, including:

a prior agreement (usually included in a shareholders’ agreement) stating that the shares may pass to certain groups of previously agreed upon people, for example, the shareholder’s spouse, children, etc
pre-emption rights in favour of existing shareholders,
arrangements to buy out the deceased shareholder’s interest, with valuation arrangements.

Shareholders Agreement

A shareholders’ agreement (SHA) is a contract between the shareholders of the company and the company itself. A SHA clearly states the shareholders’ rights and obligations, regulates the management of the company, ownership of shares, privileges, voting and various protective provisions for shareholders. A SHA is designed to bind shareholders to rules in order to avoid any issues that could become problematic in the future.

It is common practice for smaller companies to include a clause in their shareholders’ agreement to deal with what happens to a shareholder’s shares upon their death. The usual scenario is for the company (or the surviving shareholders) to be given the right to buy the shares from the estate of the deceased shareholder for their fair market value (at the time of the shareholders death).

Pre-emptive rights

It is highly recommended that any SHA includes a pre-emptive rights clause. Pre-emptive rights clauses ensure that if a shareholder passes away, their shares, in the first instance, are offered to the remaining shareholders. This prevents new shareholders acquiring an interest in the business, and potentially disrupting the status quo of the company.

Valuation arrangements

When a shareholder passes away or is required to sell their shares to the company or the other shareholders, it is important to have a purchase price mechanism agreed upon and contained within the Shareholders’ agreement. There are a variety of methods which can be used to determine the purchase price, such as; an accountant or valuer be obtained to provide the company with a fair market value for the shares. The price calculation will consider things such as assets, liabilities, income, expenditure, past performance of the company, as well as future prospects in order to determine the fair price.

Another option is for the parties to agree on a fixed amount and state it clearly in the SHA. For example, the purchase price for a share in the company is $100 and upon death of a shareholder, their beneficiaries will receive $100 for each of the shares held.

Conclusion

Has your company implemented protection mechanisms to provide cover in the event of a shareholders death? If not, feel free to schedule a call with our corporate experts to discuss how you can achieve this. This is often a good opportunity to further analyse additional protection for your company in relation to what to do in the event of one shareholder leaving the company (in good or bad faith).

Belaws and our team of expert lawyers have been helping many startups and SMEs in Thailand start and operate their company the right way. If you would like to learn more about how our experts can help you protect your companies interests in relation to areas such as share transfers or more, please feel free to contact us.

Please note that this article is for information purposes only and does not constitute legal advice.

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