Estate Settlement of Substantial Shareholder of a Business
Peter took over his father’s family business in the 1960s. Over the years, the business has thrived, and today, it is a listed company worth $10B in market capitalisation. Peter, who is in his 80s, personally still holds 10% of the shares. This is a classic example of an individual holding substantial share in a company. If Peter dies, the treatment of the shares needs special attention.
In order to settle an estate appropriately, we need to understand the legal rights of a shareholder. (1) The share entitles the shareholder of dividends when the business is profitable; (2) the share entitles the shareholder to right issues declared by the company; (3) the share entitles the shareholder to vote on the company’s direction during AGM (Annual General Meeting) or EGM (Emergency General Meeting); (4) the share also gives the right for shareholders to scrutinise the minutes of AGM or EMG; (5) the share also entitles the shareholder to accept or reject company buy-out proposals.
When Peter dies, the considerations of the estate settlement for the substantial shares are as follows:
Regulatory Reporting Obligation
The legal representative has the statutory reporting obligation to the regulator, especially if the shares involve a public company. Major shareholding transfers to beneficiaries need to be reported to the relevant regulator.
Representation in AGM or EGM
The legal representative of the deceased person’s estate has the legal rights to attend the company’s AGM or EGM, and exercise his voting rights (on behalf of the estate) accordingly. If the legal representative has assumed the role of the trustee of the shares, then he has the responsibility to exercise the voting rights according to what he/she deems the best interests of the estate beneficiary.
It is good practice for the legal representative to file a copy of all the AGMs’ or EGMs’ minutes, until his duties as legal representative are discharged.
Administration of Estate Income Tax
There is a difference between Estate Duty and Estate Income Tax. Singapore has since abolished Estate Duty, but Estate Income Tax still exists. According to IRAS, income derived during the period from one day after death until the end of the administration period is termed as estate income. The rate (liable by the legal representative) is taxed at a flat rate of 17% from the year of assessment 2010 onwards.
In Peter’s case, his substantial shareholding dividends declared after death are taxable, as well as share options (if any) exercised after death. The legal representative has to manage the estate cash flow wisely.
Points to pay attention to:
- It would be wise to set up a holding company while the shareholder is alive to hold the substantial shareholding. It would ease the shares succession and estate settlement issues.
- In view of the intense statutory responsibility, it is preferable to have a corporate legal representative or trustee to deal with such estate settlement issues professionally.
- With the obvious financial benefits of holding the shares, the beneficiaries should also be briefed on the legal rights and responsibilities of holding the shares.
