Generational change in companies, unfortunately, is not only due to the retirement of the owners and the transfer of the business tеo their children, but also to the death of a shareholder. Below we examine the key issues, the consequence of the event, actions to take upon its occurrence, as well as the tax effect.
The death of the shareholder. Termination of his membership in the company. Non-inheritance of membership relationships.
The limited liability company (“Ltd.”) has some features of a personal company and therefore the death of a shareholder does not automatically lead to the inclusion of his successor in the composition of the shareholder. The death of a shareholder terminates his membership in the company by virtue of the law – Art. 125, para. 1, item 1 of the Commercial Act, without the need for the general meeting of the company to decide on this. And this is so because the remaining shareholders cannot be forced to accept as their partner a person with whom they have not signed the founding agreement and whom they do not wish to subsequently include in the composition of their partnership.
If the heirs of the deceased partner are not accepted by the general meeting of the company, the settlement of the property relations between the company and the heirs is of a subsequent nature, without affecting the termination of the membership relations that have already occurred.
The death of a shareholder in an Ltd. is an objective ground for terminating his membership relationship. With it, universal succession occurs according to the Inheritance Act, which does not extend to the membership relationship as a whole. That is, the heirs inherit the ownership of the shares, but do not enter into a membership relationship with the other shareholders in the company, do not have the right to vote at a general meeting of the shareholders, etc. The reasons are that the membership relationship also includes personal rights of the shareholder, such as those related to the right to be elected to management and control bodies, which in this capacity are non-heritable .
Due to the above, if not accepted as a shareholder, only a right to claim the equivalent of the share of the testator arises against the company. The company effectively buys out the inherited share of the deceased shareholder, with the other shareholders taking it in proportion to their shares.
More than one heir of the deceased partner
Often, the deceased shareholder has more than one heir. In this case, the heirs of the deceased acquire co-ownership of the inherited company share. This happens by accepting the inheritance, in a proportion determined by the inherited shares. Co-ownership means that the heirs do not acquire individual shares. Each of the heirs becomes the owner of ideal parts of each inherited company share. That is, if four heirs inherit 100 company shares, each of them is the owner of ¼ of all 100 company shares.
This co-ownership can be terminated by the heirs by signing an agreement for voluntary division of company shares.
In the event that the heirs are accepted by the other partners in the company and an agreement for voluntary division is concluded, then each heir is the sole owner of the shares that he received through the division and will exercise their rights individually.
If the shares are not divided and the heirs are accepted by the other partners in the company, then in Art. 132 of the Commerce Act examines the special hypothesis of joint ownership of a share. First of all, the exercise of the rights on the shares by all co-owners must be unanimous.
The exercise of the right to vote implies the formation of a sole vote, through an internal vote by each co-owner, proportional to the size of the joint share. The formation of a sole vote is possible only if the co-owners have reached an agreement. The agreement can be reached unanimously or by a majority – according to the internal agreements between them. Otherwise, if no agreement has been reached between the co-owners of the share on the method of voting, the individual votes of the partners will be irrelevant for the company and will not form a sole vote corresponding to the company share. In this case, the individual votes of the co-owners of the share should not be taken into account, but it should be assumed that the voting right corresponding to the joint share has not been exercised with the consequences arising from it.
Consequences arising from the termination of shareholding of the deceased partner, if the heirs have no been accepted in the company.
According to Art. 125, para. 3 of the Commercial Act, the termination of participation in an Ltd. results in the right of the shareholder to receive the monetary equivalent of his share based on the accounting balance sheet as of the end of the month in which the termination of membership occurred.
The share contribution is not returned to the heirs. For Ltd. with a high amount of capital, it should be noted that the provision of Art. 125, para. 3 of the Commerce Act provides for the settlement of the property consequences upon termination of the shareholder’s participation, but not for the return of the amount of his share contribution.
“Property consequences”, according to Art. 125, para. 3 of the Commerce Act, should be understood as the possibility for the sharehodler who has terminated his participation to receive part of the company’s capital at the time of termination. This part of the capital, called the equity of the company’s share, corresponds to his share under Art. 127 of the Commerce Act, regardless of the type of contribution – monetary or non-monetary and its amount at the time of the emergence of the membership relationship of this shareholder.
Payment of the equivalent of the company share is made when the amount of the assets exceeds the amount of that part of the liability that is included in the formation of the capital at the time of termination of shareholding. In the event that the amount of the assets is lower than the amount of the liability, there is no capital from which the partner who has terminated his shareholding can be paid his share.
The payment of the deceased shareholder’s share is not a condition for termination of participation in an Ltd. The law does not set as a condition the presence of a decision of the general meeting to release the shareholder. The literal and systematic interpretation of the norm of Art. 125, para. 2 of the Commerce Act excludes the possibility of the termination being made dependent on other legal facts, including the settlement of the property relations between the departing shareholder and the company and the fate of the company shares. The settlement of the property relations is regulated as a natural consequence of the termination of the membership relationship, and is not declared a necessary condition for its occurrence.
It is possible to include the settlement of the property consequences in the articles of association of an Ltd. By agreeing in the articles, the settlement of the property consequences, upon termination of membership based on the share contribution, the Ltd. partners do not violate either a mandatory legal provision or the right of the departing/excluded shareholder.
Accounting balance sheet and property share. Tax effect.
The determination of the equivalence of a company share is based on a special (interim) balance sheet prepared by the company, reflecting the company’s assets as of the end of the month in which the termination of the partner’s participation occurs.
The law does not allow the calculation of the size of the company share to be based on the market price of the assets, and this can only be done in the event of liquidation of the company, when the available assets will be liquidated at their market value and each partner will be paid his corresponding liquidation share, but the right of the latter is associated with the termination of the company. The company share is different from the liquidation share.
The relevant factor for determining the value of the share of a shareholder who has terminated his participation in a parent company is the individual balance sheet, and not the consolidated balance sheet of the economic group. The value of the share of a deceased partner in a company with the status of a parent company should be determined in accordance with Art. 125, para. 3 of the Commerce Act on the basis of the individual balance sheet of that company as of the end of the month in which his membership was terminated.
The question is often raised as to what the tax effect of settling property relations is. In view of the legal definition of § 1, item 6, letter b) of the Personal Income Tax Act (“PITA”), it should be assumed that for the purposes of taxation, a liquidation share is the share of the terminated shareholder of a commercial company, which is, however, determined in accordance with Art. 125, para. 3 of the Commercial Act. The tax is charged on the value of the liquidation share, reduced by the acquisition price. The amount of the tax, according to Art. 46, para. 3 in connection with Art. 38, para. 1, item 2, letter a) of PITA for a local individual from a source in Bulgaria, is 5% on the tax base. The taxable person is the enterprise paying the income. It withholds the tax, transfers it to the National Revenue Agency account and pays the company share to the entitled persons.
