What Happens to a Shareholder’s Shares When They Die in Malaysia?

Who owns the shares after the shareholder dies?

The shares belong to the deceased’s estate. The company does not recognise the spouse or children as shareholders simply because they are heirs. Under section 109 of the Companies Act 2016, where the deceased was the sole holder, the company recognises the legal personal representative as the only person with title to the shares. Where the shares were held jointly, the surviving joint holder is recognised.

Who ultimately inherits depends on the will, if there is one. Where there is no will, the estate of a non-Muslim is distributed under the Distribution Act 1958. The estate of a Muslim is distributed according to Islamic law (faraid), subject to any valid hibah or wasiat.

What documents are needed?

The company will usually ask for the death certificate and the grant that authorises the representative to deal with the estate:

• a grant of probate, where the deceased left a will appointing an executor;
• letters of administration, where there is no will or no executor able to act;
• in smaller estates, a distribution order under the Small Estates (Distribution) Act 1955, which after the 2022 amendments generally covers intestate estates of up to RM5 million in total value, including movable property such as shares.

Section 109 allows the company to accept a document that is, by law, sufficient evidence of the grant. Until a grant is obtained, no one can usually vote the shares, receive dividends on behalf of the estate or transfer them.

Should the representative be registered or transfer the shares?

Section 109 gives the representative two options. The representative may notify the company in writing that they wish to be registered as the holder, in which case the company must register them within 60 days of receiving the notification. Alternatively, the representative may transfer the shares to the beneficiaries or to a buyer, by executing a transfer.

Where the representative chooses to transfer, the ordinary rules on transfers apply as if the death had not occurred. That means any pre-emption rights and the directors’ power, if the constitution gives one, to refuse registration for stated reasons. Under section 106, a company that refuses or delays registration of a transfer must pass a resolution giving full reasons within 30 days and send notice within 7 days of the resolution.

What happens to the company in the meantime?

The company continues to exist and the remaining directors continue to manage it. Problems arise where the deceased was the only director, the only bank signatory, or held the shares needed to pass resolutions. Banks typically freeze mandates once they learn of a sole signatory’s death, and a company with no director cannot act until one is appointed.

In that situation the representative, once appointed, may need to exercise the voting rights attached to the shares to appoint a new director. Applying for the grant promptly is therefore important not only for the family but for the business, its employees and its customers.

What disputes commonly arise?

The death of a founder often exposes disagreements that were managed informally while the founder was alive. Typical disputes include:

• surviving shareholders refusing to register the estate or the beneficiaries;
• disagreement over the price at which the surviving shareholders may or must buy the shares under a pre-emption or buy-sell clause;
• the surviving directors continuing to draw salaries while declaring no dividends;
• disputes among the heirs themselves over who should hold the shares or sit on the board;
• a 50:50 deadlock between the estate and the surviving shareholder.

Where registration is wrongly refused, the court may order it. Where the affairs of the company are conducted unfairly, the estate or the registered beneficiaries may consider the remedies for oppression and, for wrongs done to the company, a derivative action. The Act extends the definition of complainant for derivative actions to a person entitled to be registered as a member (section 345). See Minority Shareholder Oppression in Malaysia and Shareholder Deadlock in Malaysia.

How are the shares valued if the surviving shareholders buy them?

If the constitution or shareholders’ agreement sets a valuation method, such as a valuation by the company’s auditors or an independent accountant, that method usually applies. If it does not, the price is a matter for negotiation, and in a court-ordered buy-out the court aims for a fair value.

Valuers may look at net assets, including intangible assets such as goodwill, or at the company’s maintainable earnings, depending on the business. In Mohamed Yahaya v MS Ally Sdn Bhd & Ors [1985] 1 MLJ 243, the court took account of net tangible assets together with intangibles. See How to Exit a Sdn Bhd as a Minority Shareholder for more on valuation.

How can shareholders plan ahead?

Most of these disputes can be avoided with planning while all the shareholders are alive:

• each shareholder makes a will that deals with the shares and appoints an executor who can act quickly;
• the shareholders’ agreement says what happens on death, including whether the survivors may or must buy the shares, at what valuation and within what time;
• the buy-out is funded, for example through key person or shareholder protection insurance;
• the company has more than one director and more than one authorised bank signatory.

See Shareholders’ Agreements: Why Every Business Needs One.