Exercise of rights to shares acquired through inheritance

Shareholding by inheritance

When shares are included in the inheritance property and there is no provision in the will, the shares are co-owned by the heirs upon the commencement of inheritance. The share of each heir is determined by the legal inheritance share.

Designation of the person who exercises rights

When exercising rights over shares that have not yet been divided, “Heirs who are co-owners may not exercise their rights over such shares unless they designate one person to exercise the rights over such shares and notify the stock company of the name or title of such person. (Article 106 of the Companies Act). In other words, in principle, a shareholder cannot exercise his/her rights as a shareholder, including the exercise of voting rights, unless he/she designates a person who exercises rights with respect to the shares held in co-ownership. However, if the company agrees to the exercise of rights, the exercise of rights by co-owners may be permitted even if no rights exerciser is designated (proviso to Article 106 of the Companies Act).

Undivided shares

In the case of shares held in co-ownership without a designated person exercising rights, the provisions of the Civil Code regarding the act of administration over co-owned property will apply to the exercise of rights over such shares. In other words, “the decision shall be made by a majority of the co-owners in accordance with the price of their respective shares (Civil Code Article 252). (Civil Code Article 252).

Example of Exercise of Rights over Undivided Shares

For example, if the decedent X dies and his 900 shares are inherited by his three children, A, B, and C, all 900 shares are co-owned by the estate. In the state where the estate has not been divided, A, B, and C will not be able to exercise their rights to 300 shares each, but the right holders will collectively exercise their voting rights for all 900 shares. If the exerciser is not designated, he/she will not be able to exercise his/her rights against the company, but if the company allows him/her to exercise his/her rights, he/she will be able to exercise his/her rights. In such a case, the person who has a majority of the rights can exercise all of them. For example, if A and B form a group, A and B have a 66% co-ownership interest, so they can exercise all 900 shares. However, the dividend is divisible, so A, B, and C would need to divide it into thirds.

When the estate has been divided

If a division of property is agreed upon, the division will take effect retroactively, especially from the beginning of inheritance (Civil Code Article 909). In principle, the acquisition of shares in a company with restrictions on the transfer of shares must be approved by the board of directors (or the general meeting of shareholders in the case of a company with no board of directors) (Article 909). However, in the case of acquisition of shares by inheritance, the acquisition is not an acquisition by transfer but an acquisition by comprehensive succession, and thus does not require a resolution of the board of directors (or general meeting of shareholders) (Article 134, Paragraph 1, Item 4 of the Companies Act).

Acquisition of shares by bequest and approval resolution of the Board of Directors

If a company acquires shares through a comprehensive bequest, it is considered to have acquired the shares “through inheritance or other general succession,” and thus does not require a resolution of the Board of Directors to approve the transfer of shares. In the case of a specific bequest, the shares are not acquired through general succession, and a resolution of the Board of Directors to approve the transfer of shares is required (Article 137 of the Companies Act).

Transfer of shareholder’s name in the register of shareholders

Heirs who acquire shares as a result of a division of the estate are required to request the company to transfer the name in the shareholders’ register (Companies Act, Article 130). In order to file a request for transfer of ownership in the shareholders’ register, the following documents must be submitted: (1) a copy of the deceased’s removal from the register, (2) a copy of the family register of all heirs, (3) a diagram of relations among heirs, (4) a written agreement on division of property, and (5) certificates of seal registration of all heirs. Unless the company can confirm that all legal heirs participated in the inheritance division agreement, it cannot rule out the possibility that other heirs may exercise their rights as shareholders in the future, claiming that the inheritance division agreement is invalid.

Acquisition of Shares by Inheritance and Delivery of Share Certificates

Acquisition of shares by inheritance is a comprehensive succession and does not constitute a “transfer” of shares, so there is no need to issue share certificates for such transfer (see Article 128, Paragraph 1 of the Companies Act). It is not necessary to show possession of the share certificates when making a request for renaming of the shareholder register.

Request for Sale to Heirs

If the articles of incorporation of a stock company so stipulate, the stock company may demand that the heirs sell the inherited shares to the company by resolution of a general meeting of shareholders only within one year from the time when the stock company learned of the inheritance (Articles 174-176 of the Companies Act). The purchase price is to be determined by mutual agreement between the company and the heirs, but if no agreement is reached, a petition shall be filed with the court, and the court shall determine the purchase price by its decision (Companies Act, Article 177). Since financial resource regulations also apply to sales claims against heirs, the purchase can only be made within the range of distributable profits.