When a shareholder dies: what happens to certificated and book-entry shares

In a smaller joint-stock company, a shareholder holding a controlling block of shares dies. The family is dealing with the funeral and the inheritance proceedings, while the other shareholders are dealing with the question of who will vote at the next general meeting and to whom the dividend will be paid. The answer depends on whether the company issued certificated registered shares or book-entry shares, and on how quickly the outcome of the inheritance proceedings can be carried through into the records.

The heir is the owner from the moment of death, but for the company only once entered

From the perspective of succession law, the rule is simple:

An estate is acquired on the death of the deceased.

— Section 460 of Act No. 40/1964 Zb. (unofficial English translation)

The company, however, is not guided by who the heir is but by who is entered in the records. For certificated registered shares, the person entered in the shareholder list is entitled to exercise the rights attached to the share as against the company (Section 156(6) of the Commercial Code). For book-entry shares, the central securities depository’s records replace the shareholder list (Section 107(8) of the Securities Act) and, where the Act specifies a record date, shareholder rights may be exercised only by the person entitled as at that date (Section 156a(1)). Between the shareholder’s death and the entry of the heir there is therefore a period in which the deceased’s shares generally cannot be voted as against the company. If important general meetings fall within that period, this must be taken into account both in preparing them and in calculating the quorum.

Certificated shares: no endorsement needed, but an entry in the list is

Endorsement and delivery of a share are the means of transferring a certificated registered share (Section 156(4)). An heir, however, does not acquire the shares by transfer, that is, under an agreement (Section 19(1) of the Securities Act), but by transmission on the basis of a final inheritance decision (Section 18(1)). They therefore prove the change to the company by means of that decision and should submit, together with it, the certificated shares themselves, which form part of the estate.

The shareholder list is maintained by the central securities depository, but it makes changes to it only on the company’s instruction (Section 107(8)). The duty to give that instruction rests with the company:

The company must arrange for the entry in the shareholder list to be amended without delay after a change in the person of the shareholder has been proved to it.

— Section 156(7) of Act No. 513/1991 Zb. (unofficial English translation)

A restriction on transferability in the articles of association, such as a requirement for the company’s consent, is, on the wording of Section 156(9), tied to a transfer of shares. The Securities Act expressly distinguishes transmission from transfer, and the Commercial Code permits the articles of association to exclude inheritance of shares only in the case of a simple joint-stock company (Section 220q(1)). It can be inferred from this that consent to a transfer is not a condition of entry where shares in a joint-stock company are inherited; the Act, however, does not say so expressly. If the articles of association or a shareholder agreement contain specific rules for the death of a shareholder, they should be assessed before the heirs agree on how to divide the shares. If the company delays making the entry, the procedure is described in the company will not record a change of shareholder.

Book-entry shares: registering the transmission at the depository

With book-entry shares, the company does nothing. The instruction to register the transmission is submitted by the acquirer of the security, enclosing the original or an officially certified copy of the document on the basis of which the transmission occurred (Section 18(4) and (5) of the Securities Act). An individual submits it through an authorised participant or a member of the depository, including where the deceased’s account was maintained directly at the central securities depository. The deceased’s account, statements and sales directly from that account are dealt with in more detail in we have inherited securities. Until the transmission is registered, the shares remain in the deceased’s account in the records and the heir will not appear when the list of holders as at the record date is drawn up.

Several heirs and one share

Where there are several heirs, they settle the estate by agreement, which the court approves if it is not contrary to law or good morals (Section 482 of the Civil Code). If no agreement is reached, the court confirms acquisition of the estate by those whose right of succession has been proved (Section 483), and the shares then belong to the heirs jointly. The Commercial Code allows for this: a registered share may also be issued in the names of two or more persons, and the rights attached to it may be exercised by any of them or by a person authorised by them (Section 156(5)). The central securities depository and a member also record a security in co-ownership on the basis of a final inheritance decision (Section 105(9)(b) of the Securities Act).

Co-ownership of shares is impractical when running a company, particularly where the heirs cannot agree on how to vote. Where a block comprises several shares, it is therefore often better to divide whole units between individual heirs in the inheritance agreement.

A procedure that saves time

Tell the notary conducting the inheritance proceedings that the deceased held shares and in what form. For certificated shares, locate them and check whether they are pledged; for book-entry shares, establish the account in which they are held. Once the inheritance decision is final, submit the decision and the certificated shares to the company, or file the instruction to register the transmission through a member of the depository. Finally, verify by means of an extract that the entry has indeed been made.

We handle this whole chain through our inheritance of securities service. Where we act for the company, we arrange the entry of the heir in the list through our shareholder lists for certificated shares service, and other filings with the depository through representation before CDCP.