Deceased Shareholders Voting Rights

How should a company deal with Shareholders meetings in the event of the death of a Shareholder? Hereto a summary of the legal position regarding proxies to Shareholders.

In terms of Section 58 of the Companies Act, 2008:

“(2)  A proxy appointment—

(a)  must be in writing, dated and signed by the shareholder; and

(b)  remains valid for—

(i)  one year after the date on which it was signed; or

(ii)  any longer or shorter period expressly set out in the appointment,

unless it is revoked in a manner contemplated in subsection (4)(c), or expires earlier as contemplated in subsection (8)(d). “

The right to appoint a proxy is not limited in so far as the proxy is a valid proxy given by the Shareholder to a person in terms of the provisions of the Companies Act.

For purposes of the above, a shareholder is defined in Section 1 of the Companies Act, 2008 as:

“shareholder”, subject to section 57(1), means the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be;”

Effectively a proxy is a mandate and should be validated in terms of the legal position regarding the validity of a proper mandate. It is common knowledge that a mandate is the express consent of a rights bearer to a third party of his / her choice to act in their stead.  A mandate can also be limited or general. A deceased cannot give a mandate to any person as it is a pre-requisite that the person providing a mandate must be alive to do so.  The existing legal position is South Africa requires a mandate to be extended by the principal to their agent to exercise the vote to which the principal was entitled at a meeting. Self-evidently a deceased beneficiary is unable to extend a mandate.

Within the context of the appointment of proxies in the Companies Act, it is clear that a proxy has a limited proxy for purposes of a vote on behalf of a Shareholder, and such vote can be prescribed by the Shareholder appointing the proxy. The proxy given to any person must also comply with the provision of Section 58(7) of the Companies Act:

“58(7) a proxy is entitled to exercise, or abstain from exercising, any voting right of the Shareholder without discretion, except to the extent that the Memorandum of Incorporation, or the instrument appointing the proxy, provides otherwise.”

Clearly in light of the above, a deceased will not be able to give instruction to a proxy regarding the specific mandate to vote for or against a proposed resolution or to abstain from voting. This is further evidenced in the provisions of Section 8(b)(iii) of the Companies Act, which prescribes the form in which a proxy appointment must be.

If no term is identified in the proxy, such proxy will automatically expire within 1 (one) year from the appointment of the proxy by the Shareholder.  Further, the proxy appointment cannot be indefinite in terms of the provisions of Section 58 of the Companies Act.

The Chairperson of the Shareholders / Director’s meeting has a fiduciary responsibility to verify the authority of any proxy to vote on behalf of any Shareholder, and it is a requirement that the Chairperson must satisfy him/herself with the identification of the proxy holder and also the validity of the authority given to such proxy in terms of the signature of the proxy.  Should the proxy be invalid, the Chairperson must refuse the person alleging to have a proxy access to the meeting.

In Henochsberg on the Companies Act, commentary on the application of Section 58 of the Companies Act, it is duly noted on page 228(3) Volume 1 / Issue 14

“The proxy’s authority also terminates by operation of law (e.g. the shareholder’s death or insolvency) and a vote by the proxy notwithstanding such termination would make the proxy liable to the shareholder and the company on the basis of delict; but as between the shareholder and the company, it is submitted that the termination is ineffective unless the company becomes aware of it prior to the proxy’s acting upon the authority.”

The Shareholders may accordingly not allow proxies on behalf of deceased Shareholders to vote on any current or previous matters before the Shareholders.  Kindly note that such proxies will be invalid and the proxies may not be allowed to vote. 

This however has no effect on the validity of the decisions made at such meetings.  It is also important to note the content of Section 56(9)(b) of the Companies Act, 2008:

“56(9) A person who holds a beneficial interest in any securities may vote in a matter at the meeting of Shareholders, only to the extent that:

(b) the person’s name is on the company’s register of disclosures as the holder of the beneficial interest, OR the person holds a proxy appointment in respect of that matter from the registered holder of those securities.”

Again, the section clearly stipulates that a proxy is only valid if it was given by the individual holding the shares.

Now the question, what is the legal position in the event of the death of a Shareholder and his / her voting rights? The position is clearly set out in the reportable case in Ellis DJ v Saga Wine Farms and others 2014 WC: The court heard a dispute of voting rights in a company in which the sole Shareholder and Director passed away without a will. The heirs of the deceased had conflict regarding the management of the company and approached the court to order that a third party be appointed to manage the affairs of the company until the deceased estate was finalised.  The court held on page 10:

“(a) this act makes it clear that deceased estates are not to be liquidated without letters of executorship, or otherwise subject to the discretion of the Master of the High Court (Section 13 of the Administration of Deceased Estates Act);

(b) The Master appoints an executor in terms of this Act, to liquidate and distribute the estate of a deceased person (subject to the provisions of the Act);

(c) Even in exceptional circumstances provided for in the Act under discussion, all executors are required to conduct the administration of a deceased estate:

(i) Subject to the supervision and direction of the Master; and

(ii) After having given such security to the satisfaction of the Master for the performance of his / her functions. 

Importantly, provision is made in the Act for a situation in which no executor has yet been appointed to the estate of a deceased person, and in those circumstances the Master may appoint a person as interim Curator to the estate to deal with the estate of a deceased person until Letters of Executorship have been granted or signed and sealed as provided for in Section 12 of the Act.”

In light of the above, it is clear that no person may be allowed to act as proxy in Shareholders Meetings on behalf of a deceased Shareholder without being duly authorised as such by the appointed Executor in the deceased estate of the Shareholder.  For an Executor to be properly appointed by the Master, a Letter of Executorship must be issued under the hand of the Master of the High Court.

It is also important to note that the Master should appoint an independent person to administer the estate.  It is not advised that a person be appointed if such person can be influenced by parties other than the heirs regarding the distribution of the estate. When there is a dispute relating to the distribution of the estate assets, it is also advisable to request the Master of the High Court to appoint an independent person as executor of the deceased estate.  An executor should not:

1.    be involved in any personal litigation against any members of the Company or the Company itself;

2.    be affiliated to any existing Shareholder / Director or Employee in the Company;

3.  be mandated on behalf of any existing Shareholder / Director to act as their personal representative for any purposes.

The above would cause a possible conflict for such an executor and such appointment should be objected to by the Shareholders of the Company as it may cause an undue benefit to a Shareholder or Director of the company.  This could cause that the Executor is influenced in the decision making and voting capabilities in the Company, which representative capability is afforded to such executor by the Master of High Court.

How are votes calculted in the event of a deceased Shareholder not being represented at a meeting? In this regard I refer you to the contents of Section 65(7) of the Companies Act, 2008:

“65(7) For an ordinary resolution to be approved by shareholders, it must be supported by more than 50% of voting rights exercised on the resolution”.

Also note the explanation of the “voting rights exercised” as per the contents of the commentary on page 247 (issue 19) of volume 1 of Henochsberg on the Companies Act:

“Although the percentages of the different resolutions (eg sub-ss (7) and (9)) refer to “voting rights”, which can imply that these percentages must be calculated in respect of all the voting rights in the company, the qualification of voting rights by “exercised” clearly indicates that the computation in respect of votes “exercised” in person, by proxy or in any manner as defined in Section 1 and not in respect of all voting rights”.

The above makes the position regarding calculation of votes cast in any meeting of Shareholders clear.  Accordingly only votes cast by attendees of any meeting of Shareholders will be taken into consideration in determining whether the resolution can be passed or not.  Voting percentages are thus calculated on votes exercised and not votes present.  In example, should only 70% of the Shareholders having the right to vote at a meeting be present and vote on the resolution proposed, the calculation of the for / against / abstaining shall be calculated as a percentage of 70% and not of 100% of voting rights.

For the sake of clarity, also refer to the contents of Section 65(4) of the Companies Act, 2008 which stipulates the requirements for putting a matter to the Shareholders to vote:

“65(4) A proposed resolution is not subject to the requirements of section 6(4), but must be:

(a)  expressed with sufficient clarity and specificity; and

(b)  accompanied by sufficient information or explanatory material,

to enable a Shareholder who is entitled to vote on the resolution to determine whether to participate in the meeting and to seek to influence the outcome of the vote on the resolution.”

Accordingly, any matter placed before the Shareholders for a vote must be clearly explained to enable the Shareholders to make an informed decision. 

It is also interesting to note that any meeting called for purposes of Section 71(1) of the Companies Act, 2008 is not exempted from the requirements contained in Section 65(4) relating to the specificity of the resolution to be made.

IN SUMMARY:

1.    Proxies must be awarded their authority by a living Shareholder;

2.    The only exception hereto is when a deceased Shareholder is represented by the Executor in his / her deceased estate, which executor must be duly appointed as such by the Master of the High Court. The mere nomination of an executor is insufficient for purposes of a vote at a meeting on behalf of a deceased shareholder;

3.    Votes are calculated on votes exercised and not on percentage of votes available in the company;

4.    Any proposed resolution to Shareholders must be sufficiently explained.

Note however, that the quorum requirement for a meeting to proceed must be met. This can be determined by having regard to the Memorandum of Incorporation of the company and whether it determines a different percentage as is determined in the Companies Act.