Inheriting a Business Share: Legal Essentials for Successors

What happens to a business share when the memorandum of association is silent

Upon the death of a shareholder, their share passes to their heir or legal successor, unless the memorandum of association prohibits or restricts the transfer (Section 42 of the Czech Business Corporations Act). If the agreement is silent on death, the default rule of law applies: the heir becomes a shareholder. The other shareholders do not vote on this, have no right of veto, and cannot reject the heir.

This consequence is often the biggest surprise for the company. The decedent may have been a key managing director and shareholder, while the heir may be a teenage grandchild or a spouse with no knowledge of the industry. Along with the share, the heir acquires voting rights, the right to information, and the right to a share of the profits to the extent of the decedent's share. A company that does not want them has no tool at that moment to reject them because the agreement did not anticipate this.

Who the ultimate heir is will only be confirmed by the court in the estate proceedings. Until then, the rights associated with the share are exercised by the estate administrator or the executor of the will, if appointed by the decedent, and otherwise by all the heirs jointly, unless they agree otherwise (Section 1677 of the Civil Code). If they fail to agree and an administrator of this part of the estate is not appointed, the court will appoint one at the request of the company or one of the heirs, and the administrator will then exercise all rights associated with the share. The company should therefore know who it is dealing with in the interim.

If there are multiple heirs, they may inherit the share jointly. Co-owners of a share act as a single joint shareholder towards the company, and the share is managed by a common property administrator (Section 32, Paragraph 3). A share in an s.r.o. (limited liability company) can be divided in connection with its transfer or transition, unless the memorandum of association provides otherwise, and the consent of the company's supreme body is required for such division.

The practical consequence is that an s.r.o. shareholder should know what the agreement says about their share before circumstances force them to. Reading the agreement after a death is too late, as the share passes at the very moment of death. A company that wants to maintain control over the composition of its shareholders must resolve this issue in the agreement in advance.

A broader view of what happens to the company as a whole after the death of a shareholder—meaning the management, probate proceedings, and assets—is summarized in the text on what happens to a company after the owner dies. This article focuses on just one question: how to determine in advance in the memorandum of association who is allowed to inherit the share and under what conditions.

Prohibition, restriction, or nothing: three models of regulation

The memorandum of association may prohibit the transfer of the share, restrict it, or leave it unrestricted. The law refers to these options with the words "prohibits or restricts" and does not elaborate further. The specific form is therefore a matter of the agreement, and each variant has a different impact on the heir, the company, and the other shareholders. If the agreement is silent, the share may fall to a person whom no one anticipated, such as the funeral arranger or the state, if the estate proceedings are discontinued due to the negligible value of the property; the memorandum of association alone decides whether and who can be excluded from acquiring the share (Resolution of the Supreme Court, Case No. 24 Cdo 1310/2023).

Prohibiting the transfer is the strictest option. The share does not pass to the heir; it becomes a released share, and the heir acquires the right to a settlement payment. Thus, they do not become a shareholder by way of transfer; they could only enter the company by purchasing the released share, to which the existing shareholders have a pre-emption right. For the company, this means certainty; for the heir, a financial claim. A prohibition is suitable where the personal involvement of the shareholder is the essence of their participation and where the others do not want a new partner.

Restricting the transfer is a compromise. The agreement can specify that the share will only pass to defined persons, such as a spouse or children, or that it will pass only if certain conditions are met. Such an arrangement preserves the family character of the company but requires very precise formulation, as an ambiguous condition will trigger a dispute over whether the heir has met it. The boundary of the validity of the restriction is assessed according to the wording of the specific clause.

The third option is to allow the transfer of the share and set the rules for the heir differently, for example, through a shareholder agreement on voting, pre-emptive rights, or the heir's obligation to offer the share to others. A shareholder agreement (SHA) for an s.r.o. beyond the scope of the memorandum of association serves this purpose. For a joint-stock company, the law explicitly prohibits both the prohibition and restriction of the transfer of shares, and an undesirable change of shareholders must therefore be resolved through other contractual or corporate mechanisms.

What the heir receives instead of the share: sales proceeds or a payout

If the memorandum of association prohibits the transfer, the decedent's participation terminates without a legal successor, and their share becomes a released share, the rights and obligations associated with which cannot be exercised. The heir therefore does not acquire the share, but the right to a settlement payment. Its amount, timing, and method of determination are the most important part of the entire regulation, as this is what heirs and the company most frequently litigate over.

The basic mechanism for an s.r.o. is the sale of the released share. The company, acting as an agent, sells it without undue delay for at least a reasonable price; the other shareholders have a pre-emptive right to it, and the proceeds from the sale form the settlement payment (Section 213 of the Czech Business Corporations Act). Before payout, the company may deduct reasonably incurred sales costs and offset its due receivables. The sale can be excluded by the memorandum of association.

The general calculation under Section 36 applies only if the share cannot be sold within 3 months, if it is non-transferable, or if the memorandum of association so determines. For reasons worthy of special consideration, the period can be extended by agreement with the heir by up to 1 year. Unless the agreement specifies another suitable method, the settlement payment is determined as of the date of termination of participation from the equity capital based on the financial statements prepared as of that date. The real value of the assets reduced by liabilities is used only if it differs substantially from the book valuation.

If the settlement payment was determined by the statutory calculation, the general meeting must, without undue delay after its amount has been determined, decide whether the released share will pass, for consideration at least equal to the paid settlement payment, to the remaining shareholders in proportion to their shares, to some of them, or to only one of them; otherwise it must reduce the registered capital by the deceased's contribution (Section 215 of the Business Corporations Act). If the company fails to fulfill this obligation, the court will dissolve it even without a petition and order its liquidation. The agreement should therefore also anticipate what happens to the share after settlement.

This means that the company can choose in advance whether it wants to sell the share or settle it directly using its own method, and agree on the method of payment and maturity, for example, in installments. When selling a released share, the buyer finances the settlement. Under the statutory calculation, the company bears the payout, and it must account for its own liquidity precisely at the moment when it has lost a key person.

On the heir's side, the settlement payment replaces the share, so the heir has no right to enter the company or exercise voting rights. The dispute is then mainly about whether the sale took place for at least a reasonable price, or whether the method in the agreement is indeed "another suitable method" of determination. Therefore, it is advisable for the valuation to be carried out by an independent expert and for the method to be described in the agreement in such a way that it can be verified retrospectively.

The valuation method determines the result more than the number itself. Net book value can differ significantly from market value, especially for companies with real estate, inventory, or valuable know-how, and the heir and the company therefore often claim different amounts. The agreement should determine who commissions the valuation, under what rules, and how a dispute over the result is resolved, preferably by reference to an independent expert. Which method stands up depends on where the value of the specific company comes from, which is why the Czech legal team at the Prague-based ARROWS law firm designs it only after analyzing the company's balance sheet and cash flows.

Settlement upon the termination of a shareholder's participation in general is also discussed in the text on settlement between shareholders. From this, one can identify which issues are most frequently associated with disputes during settlement and incorporate them into the agreement before a death occurs, rather than during negotiations with heirs.

How to change the memorandum of association when the share is already in the family

Amending the agreement retroactively is possible, but not easy. The memorandum of association of an s.r.o. can be amended by agreement of all shareholders in the form of a public instrument (notarial deed), and by a decision of the general meeting only if the agreement allows it (Section 147 of the Czech Business Corporations Act). If the general meeting decides, at least a two-thirds majority of the votes of all shareholders is required. In addition, it is necessary to assess whether the change affects the rights or obligations of some or all shareholders; if so, their consent is also required.

In practice, this often means that the prohibition must also be approved by the person it affects the most. A founder who wants their children to inherit the share will not agree to an amendment that excludes heirs. Conversely, a shareholder who wants to protect the company from an outside heir needs the consent of the others, even if they would have to give up the opportunity to pass the share to their own heirs. Negotiations are therefore usually about reciprocity: no shareholder gets an advantage that their heir would not also have.

The decision of the general meeting to amend the agreement is certified by a public instrument, which contains the text of the amendment and the names of the shareholders who voted for the amendment, and a public instrument is also required for the agreement of all shareholders. This is a formal step, but also an important protection, as it shows who approved the change. A retroactive amendment of the agreement cannot, however, reverse a transfer of a share that has already occurred due to the death of a shareholder.

Adjustment is easiest at a time when no one feels directly threatened. Young shareholders and healthy founders approach it objectively because it affects everyone equally. Waiting for the right moment, on the other hand, leads to the topic being opened only during illness or after a death, when a specific heir and specific money must already be dealt with. Whether the general meeting approves the change or the consent of each shareholder is required depends on the wording of the existing agreement and the distribution of shares, which is why the Czech legal team at the Prague-based ARROWS law firm first assesses whose consent is needed for the clause.

Negotiations to amend the agreement usually involve three steps. First, the shareholders agree on the principle, i.e., whether to prohibit or restrict the transfer, and on how the settlement will be calculated. Then, the lawyer prepares the wording and valuations of model situations. Only at the end is an agreement concluded or a vote taken, and the change is certified by a public instrument. Skipping the first step means that the dispute over the principle is fought out only during the voting.

An agreement on the principle is easier to reach when shareholders calculate what the rule would mean for each of them. A model calculation of the settlement payment upon the death of one shareholder will show how much money the company would have to pay out and where to get it. A shareholder who sees a specific number argues objectively and does not defend a general principle just because it affects them.

When a transfer restriction is a red flag

Standard practice in established companies combines a prohibition or restriction of transfer with a precise settlement. Thus, instead of participating in the company, the heir acquires the right to a settlement, and the company retains its shareholder structure. A red flag is an agreement that prohibits transfer but says nothing about the sale of the released share or the settlement, or sets it up in such a way that it is practically worthless.

Such an arrangement triggers a dispute that will delay the company precisely when it needs it most. The heir will defend themselves, the other shareholders will argue using the agreement, and the company will be dealing with a lawsuit instead of operations. Furthermore, a dispute over settlement ties up management's time and money precisely during the period when the company is looking for a replacement for a key person. It is wiser to set up the settlement fairly than to risk the agreement not standing up in court.

Another signal is a disproportion between the restriction and the payout. If the released share cannot be sold and the company does not have the resources for a statutory settlement, there is a risk that no one will pay the settlement payment on time and the heir will seek their rights in another way. The agreement should therefore account for liquidity, such as a reserve, resources from operations, or a payment schedule, and not just the right itself.

Also worth noting is the difference between a prohibition and an offering obligation. A prohibition means the heir does not acquire the share at all. An offering obligation means they acquire the share but must offer it to the other shareholders under pre-determined conditions. Each solution has different impacts on valuation, taxes, and family relationships, so it is advisable to compare them before they are written into the agreement.

A prohibition of transfer does not always make sense. In a family business where shares are meant to be passed to the next generation, a prohibition on inheritance would defeat the very purpose of the company. There, a restriction that allows the heir to enter under conditions, or an agreement on the exercise of voting rights that protects established management, is more appropriate. The decision depends on whether the company is personal or capital-based, and who is to bear the main risk of death.

Legal boundaries: what the heir or the company can reverse

An heir to whom a share has passed does not have to remain in the company. They may seek the termination of their participation by a court if there are reasons for which they cannot reasonably be required to remain in the company, and any right exercised after three months from the legal force of the court's decision on inheritance is disregarded (Section 211 of the Czech Business Corporations Act). If the heir is the sole shareholder, their participation cannot be terminated.

For the company, this means that the transfer of the share is not final until the three-month period has expired, and if the heir files a petition, until the court decides on it. An heir who seeks the termination of participation must not participate in the company's activities, even if this obligation is specified in the memorandum of association, unless otherwise agreed in writing with the other shareholders. The company thus faces a situation for several months where the share exists, but its holder does not participate in management.

If the heir succeeds in terminating their participation, their participation ends during the existence of the company, and the rules on released shares apply to their share. The company then proceeds in the same way as with a prohibition of transfer, i.e., it sells the share, or settles the heir using the statutory calculation, and decides on the further fate of the share. An agreement that regulates this procedure in advance will save the company months of uncertainty.

An individual assessment always determines whether the chosen clause is valid and enforceable. For every memorandum of association, the lawyers of the Prague-based ARROWS law firm assess how the transfer clause coexists with other provisions, the settlement, and the protection of minority shareholders, because a small inaccuracy will only manifest itself upon death.

Risks of an unresolved share transfer

Final Summary

The inheritance of a share in an s.r.o. is automatic under Czech legislation unless the memorandum of association provides otherwise, and therefore an heir can become a shareholder even against the will of the others. The article showed that the transfer can be prohibited or restricted, that the heir then receives a settlement payment—standardly the proceeds from the sale of the released share—and that the conditions can be set in advance.

For a business owner, this means a clear task: review the memorandum of association, decide whether the share should be inherited, and set up the settlement while the shareholders can still agree on the change. After a death, a retroactive amendment of the agreement can no longer reverse the transfer of the share that has occurred, the heir has no reason to back down, and the company enters a dispute at the least convenient moment, having also lost a key person.

The lawyers of the Prague-based ARROWS law firm amend memoranda of association and shareholder agreements, set up share transfers and heir settlements, and represent companies in negotiations with heirs and in disputes over the amount of settlement, including preparing valuations and communicating with other shareholders. Write to us at consultation@arws.cz or review our service for contracts and negotiations.