Death of a company partner

What happens to a company after a shareholder's death and where the problem arises

The death of a shareholder does not mean that the company loses its capacity to act. The statutory body, i.e., the managing directors, continues to function: signing contracts, paying invoices, and managing operations just as before. The problem arises elsewhere, with decisions that typically belong to the general meeting, such as approving financial statements, distributing profits, amending the memorandum of association, or removing a managing director. In those cases, voting is done by shareholding, where it may not be immediately clear who is authorized to vote.

The reason is that the share passes upon the death of the shareholder, but who acquired it is only confirmed by the court. Inheritance rights arise upon the death of the deceased (Section 1479 of the Civil Code under Czech legislation) and the share in the business corporation passes to the heirs, unless the memorandum of association prohibits or restricts the transfer. Who specifically acquired the share is only established with certainty by a court decision in the probate proceedings. If the memorandum of association excludes the transfer of the share, the share becomes vacant and the rights associated with it cannot be exercised; this article addresses the more common situation where the share passes to the heirs.

For the company, this means two separate issues. The first is day-to-day operations, which are managed by the managing directors and do not change with the death of a shareholder, unless the deceased was also a managing director. The second is shareholder decision-making, which depends on the size of the deceased's share and whether those managing it can agree. The larger the share and the more heirs there are, the greater the risk that the general meeting will stall just when the company needs stability.

If the deceased shareholder was also a managing director, this is a different and more urgent situation, as the company loses the person authorized to act on its behalf externally. The bank, suppliers, and authorities then deal with who is authorized to sign, and the issue of voting at the general meeting becomes secondary. This situation is therefore addressed in a separate text on who can run a company and sign contracts when a managing director dies.

It is useful for the company to distinguish between what is urgent and what can wait. Operations and signatures are handled by the managing directors immediately, whereas strategic decisions of the general meeting can usually be postponed for a few weeks. Urgency arises when a deadline approaches, such as the approval of financial statements or a financing decision requiring shareholder consent, and these specific deadlines must be mapped out immediately after a shareholder's death.

Everything that needs to be addressed after the death of a business owner—namely inheritance, corporate governance, and the fate of the share—is summarized in the text on what happens to a company after the owner's death. This article focuses on one specific question: who is allowed to vote on behalf of the share during the period when it is not yet confirmed who inherited it, and what to do if those managing the share cannot agree.

Who exercises the rights associated with the share before the probate proceedings end

The answer depends on who administers the estate, and the law determines the order of priority. Priority is given to an administrator of the estate appointed by the deceased, and if there is none, the executor of the will. If the deceased appointed neither, the estate is administered by the heir; if there are multiple heirs and they have not agreed otherwise, they administer it jointly (Section 1677 of the Civil Code). Thus, the share does not remain unadministered after the shareholder's death. The difficulty usually lies in the fact that there are multiple administrators who must reach an agreement.

A special rule applies to a share in a company, as joint administration by several heirs could easily paralyze the company's decision-making. If the heirs do not agree on the exercise of the rights associated with the share during the probate proceedings and no administrator of this part of the estate has been appointed, the court handling the estate will appoint one upon the petition of the business corporation or any of the heirs. The petition can therefore be filed by the company itself, without having to wait for the heirs to agree. Other shareholders as individuals do not have this right under the law.

A court-appointed administrator is authorized to exercise all rights associated with the share (Section 42 of the Business Corporations Act), i.e., to attend the general meeting, vote, and challenge resolutions. However, this sentence must be read together with the rules on estate administration. Whoever administers the estate performs its simple administration, and an act exceeding simple administration may only be performed by the administrator or executor of the will with the consent of the heirs; if they do not agree or if an heir is a person under special protection, court consent is required (Sections 1678 and 1679 of the Civil Code).

Ordinary voting that keeps the company running generally falls under simple administration, whereas fundamental interventions may not. Approving ordinary financial statements or filling a vacant managing director position can usually be understood as care to preserve the value of the share. Voting on the sale of a business plant, transformation, dissolution of the company, or a fundamental amendment to the memorandum of association may exceed simple administration. The law does not explicitly define this boundary for shares, which is why for such decisions it is safer to obtain the prior consent of the heirs or, if applicable, the court.

An executor of a will can be appointed by the deceased in their will, which also defines their duties (Section 1553 of the Civil Code). If the deceased did not appoint an administrator of the estate, the executor is also in charge of administering the estate until the court decides on another measure (Section 1554, Paragraph 2). The executor can thus be the person who votes on behalf of the share immediately after the shareholder's death, without waiting for the heirs to agree. The company usually learns about their appointment from the family or from the probate proceedings, which is why it should ask about it immediately.

An agreement among the heirs is the fastest path, but also the most fragile. If a share has multiple heirs, they administer it jointly until an agreement is reached, and therefore one of them cannot exercise the rights for the entire share on their own without the consent of the others or another legal title. The agreement should be in writing and specific: who votes on behalf of the share, whether they vote according to the instructions of the other heirs, which decisions they can vote on independently, and what happens if the circle of heirs changes during the proceedings.

It is important for the company to be able to present the agreement at the general meeting, so it makes sense to request a copy of it, or a written power of attorney for the person voting, and keep it with the minutes. Whether the agreement covers fundamental decisions or just ordinary administration depends on its wording and who the heirs are; this is why the Czech legal team at ARROWS reviews it before any voting takes place at the general meeting based on it.

Procedure in the first weeks: what the company does and what the heirs do

The first step is to find out who is authorized to administer the estate and exercise the rights associated with the share: whether the deceased appointed an estate administrator or an executor of the will, and if not, who the likely heirs are. The company usually learns this from the family or from the participants in the probate proceedings. Until it knows this, it cannot reasonably plan a general meeting, which is why it is sensible to ask immediately, not just when the deadline for approving the financial statements is approaching.

The second step is to assess what company decisions are imminent in the near future. The list includes approving financial statements, distributing profits, removing or appointing a managing director, amending the memorandum of association, and financing decisions. For each of these, it must be determined what majority is required and whether it can be achieved without the votes of the deceased's share. Only then is it clear how urgent the appointment of an administrator is and how much time remains to reach an agreement with the heirs.

The third step is negotiations with the heirs. Until an administrator is appointed, the heirs themselves administer the estate by operation of law and do not need a court decision for this, as confirmed by the Supreme Court in its resolution Case No. 24 Cdo 2330/2023. Thus, the company has someone to negotiate with from day one: it can convene the heirs, explain what decisions are approaching, and propose a written mechanism for who will vote on behalf of the share.

The fourth step is to file a petition with the court as soon as it is clear that no agreement will be reached. A late petition means the company will miss the deadline for an important decision. Therefore, the company does not delay filing until the vote can no longer be postponed, but files it before an acute need arises, allowing the court time to appoint an administrator. How long this will take depends on the specific court and the status of the probate proceedings.

The fifth step is documentation. The company keeps a copy of the court decision appointing the administrator, the heirs' agreement or power of attorney, and proof of the executor's appointment, if presented, and notes in the minutes of the general meeting who voted on behalf of the share and on what basis. Such a record will later prove that the voting was conducted correctly and facilitate defense if anyone challenges the decision.

Voting and majorities: why the size of the share matters

Unless the memorandum of association provides otherwise, a general meeting of a limited liability company is quorate if shareholders holding at least half of all votes are present, and votes of shareholders who cannot exercise their voting rights are not taken into account (Section 169 of the Business Corporations Act). Decisions are made by a simple majority of the votes of the present shareholders, unless the memorandum of association provides otherwise (Section 170).

It follows that the larger the deceased's share, the greater the risk that the general meeting will fail to make a decision. If no authorized person attends the general meeting on behalf of the share, the remaining shareholders may not reach half of all votes. For decisions requiring the consent of at least a two-thirds majority of all shareholders' votes, such as amending the content of the memorandum of association, the situation is even more sensitive because all votes are counted, not just those present (Section 171).

The law does not explicitly state whether the deceased's share, for which no authorized person votes, is taken into account when assessing the quorum, or whether these are votes that cannot be exercised. Yet, this situation does not fall under the statutory reasons for which a shareholder does not exercise their voting rights. The absence of a person authorized to exercise the rights associated with the share can therefore trigger a dispute over the quorum as well as the required majorities, and the company should not rely on an interpretation favorable to itself.

A decision adopted under an incorrect exercise of share rights may be challengeable, especially if the defect affected attendance at the general meeting, the quorum, or the voting result. Details on the invalidity of general meeting resolutions and who can object to them are discussed in the text on the invalidity of general meeting resolutions. For the company, this means that any doubt about who voted on behalf of the share is a risk that is cheaper to eliminate before the general meeting than after it.

A practical example illustrates the difference. In a company with three shareholders, the founder holds fifty percent of the votes and two others hold twenty-five percent each. The founder dies, and no authorized person votes on behalf of their share at the general meeting. The remaining two shareholders together hold half of all votes, which may be sufficient for a quorum, but is not enough to amend the memorandum of association. With a twenty percent share, the risk of blockage is usually smaller, but it always depends on the distribution of the other votes, the required majority, and the memorandum of association.

A plan for the period after a death must therefore be based on specific figures. The company must determine what majority is required for individual decisions, which decisions are approaching, and whether they can be adopted without the deceased's share. The outcome depends on how the memorandum of association regulates quorums and majorities and how the votes of the other shareholders are distributed; this is why the Czech legal team at ARROWS recalculates this for each general meeting individually, before the company even convenes it.

Market standard: how established companies prepare for a death

Companies with multiple shareholders address the period of probate proceedings in advance. The memorandum of association or shareholder agreement typically regulates how voting is conducted, which decisions are postponed until the inheritance is resolved, and whether the share passes to the heirs at all. Such agreements do not replace the law, but supplement the rules where the law is silent, shortening the period of uncertainty that the company would otherwise experience for months.

The second element is making a disposition mortis causa with an executor or administrator. A shareholder who does not want their share to block the company can appoint an executor of the will, or, by public instrument, an administrator of the estate or just a part of it, such as the share in the company (Section 1556 of the Civil Code). The executor ensures the fulfillment of the last will with the care of a professional. A well-chosen person knows the company and is able to make decisions quickly.

A warning sign is a company where the key shareholder is also a managing director, has no disposition mortis causa prepared, and the other shareholders do not have the votes necessary to make decisions. Upon a death, such a company loses both the ability to act and make decisions simultaneously, remaining in uncertainty for months. Prevention is cheaper than a solution, which is why it is worth opening this topic during any major change in the shareholder structure.

Another warning sign is relying on an informal family agreement. The circle of heirs may turn out to be different than expected after the death, and the heirs may argue. A company that relied on an oral promise from the deceased will then be left unprotected. A written rule in the memorandum of association and the deceased's disposition are more reliable than assurances that no one may respect after their death.

A shareholder agreement may also include a temporary representation mechanism, where shareholders designate in advance a person who will vote on behalf of their share after the death of one of them. However, on its own, it does not override the statutory regime of estate administration: it may not bind heirs who did not sign it, and it does not grant a third party the authority to vote on behalf of the share. It is more reliable to link it with the memorandum of association and the deceased's disposition, typically by appointing an estate administrator for the share.

Typical mistakes and their cost

The most common mistake is waiting. The company hopes that the heirs will agree, while a general meeting to approve the financial statements is approaching. When it turns out there is no agreement, there is little time left to file a petition with the court, and the decision is either postponed or adopted with risk. The cost is delay, litigation expenses, and, in the worst-case scenario, a resolution whose validity is successfully challenged.

The second mistake is making decisions as if the deceased's share did not exist. The company convenes a general meeting, does not invite anyone administering the estate, only the other shareholders vote, and the share is simply ignored. If it later turns out that the heirs or the administrator should have been invited and their votes could have affected the quorum or the outcome, the resolution may be challengeable. The same risk exists in reverse, when one of the heirs votes on behalf of the entire share without the consent of the others.

The third mistake is confusing the administration of the estate with the decision on inheritance. The administrator exercises the rights associated with the share but does not determine who will ultimately inherit the share. If the company expects the administrator to also secure a permanent decision on the shareholder structure, it will be disappointed, as this is only decided by the court in the probate proceedings. Disputes arising from ambiguities surrounding inheritance are described in the text on litigation over entrepreneurs' inheritance.

The fourth mistake is forgetting to communicate with the environment. The bank, business partners, and employees perceive the death of a key shareholder as a risk and want to know who is making decisions. A company that has a prepared communication about who acts on behalf of the company and who exercises the rights associated with the share will reassure partners before questions and uncertainty arise, which are then difficult to reverse.

The Czech legal team at ARROWS assesses for each company what decisions are imminent during the probate proceedings and who should vote on behalf of the share. Only then do they choose whether an agreement among the heirs is sufficient or if a petition to appoint an administrator is necessary, as time, the number of heirs, and the size of the share determine how urgent the solution is.

Risks after a shareholder's death

Final summary

After a shareholder's death, the company continues to function, and the deceased's share has its administration by operation of law: an estate administrator or an executor of the will appointed by the deceased, otherwise the heirs. The article showed that the problem mainly arises when multiple heirs disagree, that blockage threatens general meeting decisions, and that the size of the share and the setup of the memorandum of association are decisive.

For the company's management, this implies a clear task: find out who administers the share, compile a list of upcoming decisions, and file a petition with the court before the deadline is missed. Postponing these steps leads to the company making decisions at the risk of being challenged, or not making decisions at all. Furthermore, for fundamental decisions, it must be taken into account that the administrator cannot exceed the boundaries of simple administration on their own.

For shareholders wishing to prevent such a situation, the article showed that prevention is the cheapest solution. Rules in the memorandum of association, a shareholder agreement, and a disposition mortis causa with an executor or administrator will shorten the period of uncertainty and give the company assurance that there will be someone to vote on behalf of the share.

The Czech legal team at ARROWS represents companies in negotiations with heirs, prepares petitions to appoint a share administrator, and sets up rules so that the company can make decisions after a shareholder's death. Write to us at consultation@arws.cz or explore our service for commercial and court disputes.