The Inheritance of the Shares in a Limited Liability Company

Lee, the shareholder of a limited liability company was dead. He did not make a will. His successors included his wife and son. Both wanted to be listed as the shareholder of the company, and recommended Lee’s wife to take over the chairman of the board, which was Lee’s position. The other shareholders did not willing to accept their requests. But they did not know whether they had the right to refuse such requests.
This is not rare in practice. Such cases shall be regulated in accordance with the “Law of Successor” and the “Company Law”.
The share is a special right, which has both the attribute of property and identity. In accordance with the legislative intent and the relevant provisions of the “Law of Successor”, the successor shall be entitled to inherit the property rights of the share (i.e., Self-benefit right). Then whether the attribute of identity (i.e., Co-benefit right) could be inherited? According to Article 75 of the “Company Law”, after a natural person shareholder dies, his legal successors may inherit his shareholder status, except where the articles of association of the company stipulate otherwise. In view of this, if the articles of association did not stipulate such articles on successor, then the legal successors shall be entitled to inherit the Co-benefit right.
Some people hold the view that the first paragraph of Article 75 of the “Company Law” could be interpreted as, while the legal successors would like to inherit the Co-benefit right, then they shall obtain the consent of other shareholders. However, currently, the prevailing view in the judicial practice is that the legal successors do not have to obtain the consent of the majority shareholders by referring the restrictions on the transfer of the shares as stipulated in the “Company Law”. (e.g. (2009) Hu Yi Zhong Min Wu (Shang) Zhong No.7 and so on.)
In view of this, if the articles of association did not stipulate such articles on successor, then the company could not refuse the legal successors to get the Co-benefit right. While a major shareholder is dead, or a shareholder has several successors, there might be many disputes, which will affect the business direction and stability of the company. Therefore, it is necessary to specify the provisions on the inheritance of shares, especially on the Co-benefit rights. We recommend the company to pay attention to the following aspects while designing the relevant provisions in the articles of association.
Firstly, to describe whether the identity of the shareholder could be inherited. If it could be inherited, then preconditions could be set forth. For example, if the shareholders want to keep the mutual trust among them, then the articles of association could state that after a natural person shareholder dies, his legal successors may inherit the property value of the shares which belongs to the shareholder; or, his legal successors may inherit the shareholder’s status if the majority shareholders have agreed.
Secondly, to describe the methods and procedures on defining the value of the inherited shares. For example, the value of the shares could be defined in accordance with the amount of the investment, the net assets, or the assessment value assessed by an assessment institution.
Thirdly, to describe the procedures on transferring such shares. Such as the due time for the notification and reply, the methods for the notification and reply, the consequences of the overdue reply and so on.
Fourthly, there might be disputes related to the inheritance of the position of the nature person shareholder, just like the request of Lee’s wife in the opening case. It is also recommended to describe that the successors shall not inherit the position of the nature person shareholder, and the candidates for such position shall be decided in accordance with the conditions and procedures prescribed in the articles of association.