If somebody dies unexpectedly, it’s not only a terrible loss for the grieving family and friends, but can also be a tragedy for the company of which the deceased was a member. At such times, the company can find itself unable to make decisions, even if the deceased only held a small share in the business. However, solutions do exist to enable the testator not only to make provisions for family members in the event of his or her death, but also to make sure that the company can continue to make decisions.

The shares of a private-individual member are passed on to his or her heirs upon the member’s death. Precisely who those heirs are, however, is not decided until the notary public presiding over the probate procedure makes a decision on the transfer of the estate. But this can take a long time, which may cause an impasse in the affairs of a company that operated with the participation of the deceased person. As invitations to a members’ meeting cannot be delivered to the member (or his or her heirs) at such times, it is not possible to convene the members’ meeting, and thus it cannot make any valid decisions. This, in turn, could profoundly disrupt the operation of the company, as it will be incapable of approving the balance sheet, paying dividends or appointing senior officers.

The situation is even worse if the deceased also happened to be the company’s sole managing director. In this case, the company is effectively paralysed until the end of probate when the estate is transferred, as there is no person with the authority to make legal declarations on behalf of the company. And because the members’ meeting cannot be validly convened for the reasons described above, a new managing director cannot be appointed either. What can be done in this situation?

What we can do while the testator is still alive…

Trusts

The concept of trusts, introduced by the new Civil Code, may still sound unfamiliar to many, but it offers excellent solutions for avoiding certain inheritance problems. If the testator places his or her membership share into a trust, i.e. transfers it to a trustee while still alive, then after his or her death the company can continue to operate normally, as the trustee will continue to be able to exercise the relevant membership rights. What’s more, if the trust contract so provides, the named beneficiary can terminate the trust contract at any time after the testator’s death and take over the company share, thus avoiding the difficulties associated with the probate procedure.

Trust is also a rational solution for those who do not wish to relinquish control over the company during their lifetime. In the trust contract, the trustee may be instructed in detail on how, and along what lines, the ownership rights should be exercised, and if these instructions are breached, the contract may be terminated.

Restructuring of company holdings

From a tax perspective, the interposition of a ‘holding company’ between the private individual and the operative company often proves a favourable solution, as it can allow the tax-free withdrawal and reinvestment of income from the company performing the actual business activity. The use of a holding company can also remedy the problem of inheritance. This is because if other persons in addition to the deceased are registered as directors of the holding company, then the operative company is able to continue its business without interruption after the testator’s death. Of course, the matter of who inherits the shares in the holding company still needs to be settled in such cases, but at least it does not obstruct the continuity of the business.

… and after that

A relatively little-known option is to appoint an asset manager (“ügygondnok”), even though it is a good way of solving the problem of the company’s inability to make decisions until the official transfer of the estate. In a probate procedure, the notary or notary public may appoint an asset manager at the request of persons with an interest in the probate, if this is necessary to safeguard the company shareholding or to ensure the company’s continued operation. In such cases the asset manager is entitled to exercise the membership rights that are associated with the company shareholding, for example by attending and voting at members’ meetings or general meetings.

The appointment of an asset manager can be requested immediately after the death of a company member, and what’s more, the authorities that appoint the asset managers usually act with urgency in such cases. And although the asset manager is restricted in the making of certain decisions – for example, he or she may not vote in favour of a decision that endangers the company’s assets – simply having an appointed asset manager makes it possible for members’ meetings to be validly held, and thus for the company to continue operating smoothly.

Summary

The death of a company member is not only a loss in human and business terms, but can also represent considerable legal risks. However, there are ways to prepare for such risks and to take steps to mitigate then. This, in turn, may also shorten the ‘grieving period’ for the company as well.