Legal Question in Business Law in California
Deceased Corporation Share Holder
Three of us formed an S Corporation a few months ago ourselves. We issued 10,000 shares with 4000 going to the President & 3000 each going to 2 others (Secretary & Treasurer). Unexpectly the President died. The 3rd shareholder now wants to resign his position and relinquish his shares for the amount of his original investment. Can I as the remaining investor accept the resignation and refund his investment? Will the 4000 shares which were assets of the deceased shareholder have to be a part of the estate and go to the surviving spouse? Will the Corporation need to be dissolved?
4 Answers from Attorneys
Re: Deceased Corporation Share Holder
What you want and need can be done, but there is a fair amount of paperwork necessary to do it right and avoid future problems. You will need to have a board and shareholder meeting to do so, and you will have to do it all in compliance with the Articles and ByLaws of the corporation, and state law. Contact me if interested.
Re: Deceased Corporation Share Holder
To start with the easy part, no, the corporation doesn't need to be dissolved.
You may be the "remaining investor" in a sense, but you are not the "remaining shareholder." The deceased president's heir(s) or estate are now holders. Whether and how they can assert their views on your proposed transaction is dependent upon your Articles of Incorporation, bylaws and, importantly, any buy-sell or share repurchase contracts the three of you may have entered into. A typical restriction would allow all remaining shareholders to buy pro-rata, so as to preserve the percentages.
If there are no restrictions, then you can buy the third shareholder's shares.
The manner of tendering and accepting resignations is set out in the Corporations Code, at Section 312 as to officers and Section 305 as to directors. The corporation may need to elect an additional director - check its bylaws and Corporations Code sections 212 re minimum number and 305 re replacing directors. (The corporation would have at least two shareholders after you buy the stock - you and the estate, so you'll need at least two directors to satisfy 212.)
You probably can't refund the investment of the guy who wants out. Remember, it's not your money, it's the corporation's, and any decision on how to use its money must be made by, or pursuant to authority from, the board of directors - and presumably there are three directors, or should be. You can buy the shares for whatever price you can negotiate with the seller, but you have to pay with your own money.
Another possibility is for the corporation to authorize the repurchase of the shares. Then, the corporation could use its money - but then it, and not you, would own the shares. They would become so-called "treasury stock." This action would require corporate approval, and the method for obtaining that depends (probably) on what your bylaws say - e.g., whether shareholder approval is necessary or whether the directors can authorize the repurchase, whether a simple majority is sufficient or whether a supermajority is required, and so forth.
Be very careful to learn and understand the basic principles of corporate governance, and to separate your money, stock, authority, etc. from the corporation's money, stock and authority in your thinking.
Re: Deceased Corporation Share Holder
Since I assume you did not have what is known as a buy-sell agreement, the President's 4000 shares would be part of the estate of the President and would be held by his heirs unless they sell their shares to a third party. As to the other shares to be sold, this would require: (a) a meeting of the Board to accept the buy-back of the shares and replace the President; and (b) an election of a new director by the shareholders, including the estate of the deceased President. All of this involves paperwork to do properly. If you would like some help, give me call. I am licensed in both California and Colorado and would be happy to assist you.
Richard Gee
Re: Deceased Corporation Share Holder
To try and put it more simply, the terms of any repurchase of shares has to be put up for a vote. And since this ain't Chicago, dead people can't vote. Seems to me, depending of course on your by-laws yada yada yada, you would need to call a shareholders meeting and give notice to the executor or administrator of the dead guy's estate. It would be up to the widow to have an executor or administrator appointed by the probate court (unless the deceased was smart enough to put his shares in a living trust, but I digress.) Then at the meeting... oh my brain hurts. Since you all probably never bothered to enact by-laws or do any of the other corporate-formalities paperwork in the fancy loose-leaf notebook that accompanied the $300 corporate-seal nutcracker you bought (otherwise you would have a lawyer by now) maybe an agreement signed by the three of you to just divvy up the corporation would hold up. If you can agree.