Many individuals in South Africa are still members of Close Corporations. A Close Corporation (“CC”) is what is known as a juristic person – in law it is regarded as an entity separate from the individuals who are members of it. One of the features of a CC which flows from it being a separate legal person is that of “perpetual succession”. Perpetual succession means that, even if the members of the CC change from time to time, it will not affect the continued existence of the CC itself as a separate legal person. The question, however, that often arises on the death of a member is: what happens now to that member’s interest in the CC?
- GENERAL RULE ON THE DEATH OF A MEMBER OF A CC
The member’s interest in the CC held by the deceased will form an asset in the deceased’s estate. As such membership has value, the executor of the estate will need to either sell the member’s interest, transfer it to the heirs, or have the CC liquidated or deregistered (if the business is not set to continue). The executor will be guided in this decision by the Association Agreement of the CC as well as the last will and testament of the deceased. The Association Agreement is the agreement which regulates the relationship of the members of the CC. The Association Agreement can, for instance, provide for pre-emptive rights for the other members in the event of the death of a member, or it can, for instance, give the power to the members to bequeath their interest to a specific class of family members. However, in the absence of such an agreement, the Close Corporation Act 69 of 1984 (“the Act”) sets out a number of rules.
- THE CLOSE CORPORATIONS ACT
- In terms of the Act, a member of a CC may bequeath his/her member’s interest in the CC to an heir in his/her estate. However, in order for the interest to pass successfully to the named heir, the heir must qualify for membership in terms of Section 29 of the Act and the other members of the CC will need to consent to the heir becoming a member (Section 35(a) of the Act). Section 29 of the Act sets out the general requirements for membership, which will also apply to a named heir of member’s interest. In order to qualify to be a member of a CC, the heir must be one of the following:
- A natural person; or
- A natural or juristic person, nomine officii, who is a trustee of a testamentary trust entitled to a member’s interest, provided that no juristic person is a beneficiary of such trust, and if the trustee is a juristic person, such juristic person is not controlled, directly or indirectly, by a beneficiary of the trust; or
- A natural or juristic person, nomine officii, who, in the case of a member who is insolvent, deceased, mentally disordered, or otherwise incapable or incompetent to manage his affairs, is a trustee of his insolvent estate or an administrator, executor, or curator in respect of such member or is otherwise a person who is duly appointed or is an authorized legal representative.
- For a named heir therefore to replace the deceased as a member of the CC, he/she must, firstly, adhere to the requirements as set out in Section 29 of the Act and, secondly, the remaining members must consent to the appointment of the named heir as a member.
- Where an executor of the estate is not obliged or does not intend to transfer the interest of the deceased member to any other person in accordance with the provisions of the Act within 28 days of the executor assuming office, he/she must within that period, or any extended period allowed by the Registrar (now Companies and Intellectual Property Commission (“CIPC”)), on application by the executor, request the existing member(s) of the CC to lodge with the Registrar (CIPC) in accordance with Section 15 (1) of the Act, an amended Founding Statement designating the executor, nomine officii, as representative of the deceased member of the CC in question (Section 29(3)(c)).
- Further, where the remaining members of the CC do not consent to the transfer of the member’s interest within 28 days after being so requested by the executor, the executor will have no option but to sell the deceased member’s interest to the CC or any other members proportionate to their member’s interests in the CC, or as they may otherwise agree on (Section 35(b)).
- DOWNFALLS OF THE ABSENCE OF AN ASSOCIATION AGREEMENT
It is clear from the above that some sections of the Act have in certain circumstances left the members vulnerable. The Act has, for instance, left a few options available to members who wish to bequeath their member’s interest in a will and testament. Where the CC has no Association Agreement, the remaining members will need to consent to the transfer of the deceased member’s interest to his/her heir and they are free to withhold this consent, in which event the executor of the estate will be obliged to sell the member’s interest. Thus, the succession plan of the deceased, as well as his/her testamentary freedom, may be inhibited. It is therefore important to ensure that a proper Association Agreement is in place between members of the CC that explicitly states what the members’ rights are upon death.
- A DECEASED MEMBER’S INTEREST AND BUY AND SELL AGREEMENTS
- A CC can purchase an interest in itself. Therefore, on the death of a member of a CC, the CC can purchase the membership interest of the deceased member. In effect, the membership of the remaining members increases to 100%, proportionate to what they held beforehand. The CC does not continue to hold an interest in itself – what actually happens is the CC pays a pro rata share of its capital to the estate of the deceased member.
- In order to achieve the aforesaid, there must be an agreement (usually as part of the Association Agreement) in which it is determined that the CC will purchase a deceased member’s interest and that, for example, life insurance will be used to fund the purchase of the deceased member’s interest. As a result, the surviving members’ interest will increase to 100% and each remaining member will end up with a larger percentage membership in a smaller capital base. The benefits of this may include the possibility of using a key-man life policy, which may be exempt from estate duty while ensuring that the deceased member obtains value in his/her deceased estate for his/her member’s interest.
- The same principle can be applied between the members themselves – they can enter into a Buy and Sell Agreement in terms whereof the existing members agree to purchase the deceased member’s interest. Life insurance policies are often used to fund such purchase and, if the purchase is structured correctly, it can also be free from estate duty.
- An executor will be bound by these agreements and will sell the deceased member’s interest to the purchaser thereof in terms of the agreements and the proceeds will devolve as part of the estate assets upon the heirs.
When a member wishes to bequeath his/her member’s interest in a CC, he/she must keep in mind the fact that, without an Association Agreement, his/her wishes may not come to fruition, as the consent of the remaining members will have to be obtained. In such an instance, the executor of the deceased member’s estate will be forced to sell the member’s interest back to the CC, or to the members thereof, which may not be what the parties intended.
The content of this article is to provide general guidance and understanding of the subject matter and should not be construed as providing full legal advice on the topic. Detailed specialist advice should be sought for specific situations.
Anica Theunissen Ashleigh Vercuiel
BCom; LLB; LLM (Estate Planning) LLB
Director Candidate Attorney
Fiduciary and Commercial Law E-mail: Ashleigh@sstlaw.co.za
E-mail: Anica@sstlaw.co.za Phone: 012 361 9823
Phone: 012 361 9823