There are a variety of methods and purposes for which shares can be transferred or issued
from one person to another. Oftentimes, participants in these transactions are companies or
trusts. However, many company shares structures still comprise natural persons. While most
married businesspeople have antenuptial agreements in place, there is still the risk that some
individuals are married in community of property. Advisors in corporate transactions must
always consider the martial regime of natural person participants so as to help clients avoid
unintended consequences which come with shares falling into the joint estate of such a married
shareholder.
It is an accepted principle of our law that, in the absence of an antenuptial agreement, assets,
and liabilities of two individuals vest in their joint estate when such persons are married in
community of property. This includes shares and business interests acquired before or during
the subsistence of the marriage.
This inadvertently means that once shares or assets of a business are transferred to a natural
person married in community of property, such shares form part of the joint estate of their
spouse.
- The repercussions can be far reaching – as a non-exhaustive list:
1.1. Sequestration: Should the estate of the non-shareholding spouse be
sequestrated; this may cause the shares in the business to fall into the
sequestrated joint estate and under the control of a liquidator.
1.2. Sale Blocking: If the affected shareholder must sell his/her shares and exit the company for any reason, this may not be possible without the written consent of the spouse to whom he/she is married in community of property unless the sale is in the ordinary course of business (Section 15(2)(c) and 15(6) of the Matrimonial Property Act, 1989 (“MPA”)). In most cases, a sale of shares and complete exit from the business will not constitute a transaction “in the ordinary course of business”. Where such shareholders have acrimonious marriages, such consent may therefore be impossible to obtain and cause a transaction to fail. While a court order approving the transaction in terms of Section 16 (1) of the MPA may be possible, the delay in obtaining such is unpredictable, especially if opposed.
*it should be noted that apart from Section 15(6) “ordinary course of business” requirement, there are additional exemptions to the prohibition against alienating shares in the joint estate. See section 15(7).
1.3. Divorce and Division of Estate: in the event of divorce, a Court could order that joint estate, including the shares, be divided between the shareholder and his/her spouse. Alternatively, the Court could order that the spouse be “bought out” for their value of the shares. The first instance may bring in an unwanted shareholder, while the other may create cash flow problems for the shareholder and/or business.
1.4. Death: upon death of a shareholder, and in the absence of a valid buy-and-sell agreement, 50% of the shareholder’s holding could potentially fall into the estate of his/her spouse and the remaining portion transferred to his/her heirs. - To guard against these consequences, companies and their advisors should, at the time of any share transfer, investigate the marital status and regime of any natural persons who will take transfer of shares in such transaction:
2.1. If the shares can be held through an alternative vehicle such as a trust, that method can be pursued with a well drafted shareholder’s agreement and MOI to accommodate for the death, dismissal, resignation, etc of the natural beneficial holder. Affected shareholders and their spouses may benefit from this option due to the long-term decrease in estate duty and estate administration costs.
2.2. If the shares must be held by a natural person married in COP, companies should ensure that there is a valid shareholder’s agreement in place with appropriate involuntary sale provisions covering the shareholder’s divorce, death or sequestration with his/her spouse. The written consent in respect of such sale provisions should also be obtained from the shareholder’s spouse.
2.3. Unmarried natural persons or persons married out of community of property should be required to warrant their marital status in the shareholder’s agreement and/or share transfer agreement, together with providing proof thereof. Furthermore, provision should be made for the company to be notified of future marriages and the property regime thereof.
**whether married or unmarried, every shareholder should be covered by a shareholder’s agreement and/or MOI with involuntary transfer provisions for death, sequestration, dismissal, resignation, etc.
Failure to take note of and accommodate for these eventualities may prove costly and burdensome both to the company and all the shareholders. Furthermore, facilitating a change in structure after the fact may, depending on how it is implemented, come with attorney fees, capital gains tax, dividends tax, securities transfer tax – and perhaps even divorce proceedings against one or more shareholders.
Do not hesitate to contact Viren and Company for any advice and assistance in any matters pertaining to your company’s share base protection.
DISCLAIMER:
This publication is intended for general information purposes and does not constitute legal advice or establish any attorney-client relationship with the reader. Specific, tailored legal advice should always be obtained in relation to your situation. Viren and Company does not accept any liability for any losses suffered in connection with your reliance on this publication.
