A family business owner who has never separated what happens to the company from what happens to their estate is planning for only half the problem. When a shareholder dies, two bodies of law reach for the same set of facts at once: the Companies Act, 2015 and the company’s own articles of association, which govern who can hold and vote the shares, and the Law of Succession Act, Cap 160, which governs how the deceased’s estate, including those shares, passes to their heirs. Where these two frameworks are not deliberately aligned in advance, the result is not a gap in the law; it is a collision that plays out in front of family members at the worst possible time.
What actually passes on death, and what does not
The starting point, and the one that surprises people most often, is that a deceased shareholder’s estate is entitled only to their shares, not to the company’s underlying assets. Kenyan courts have confirmed this directly in a succession dispute: in Pacific Frontier Seas Ltd v Kyengo & another, the Court of Appeal held that what the estate of a deceased shareholder is entitled to are only the shares of the deceased in the company, and not to the property of the company, which remains owned by the company as a separate legal person. A family patriarch who built a business from nothing does not leave the business itself to his children through his will; he leaves them his shares, and the business continues to be owned by whoever holds the shares afterward, subject to whatever the company’s articles say about how those shares may be held and transferred.
Under section 4 of the Law of Succession Act, succession to a deceased person’s movable property, which includes company shares, is regulated by the law of the country of that person’s domicile at death. For a Kenyan-domiciled shareholder, that means the Law of Succession Act and the Companies Act operate together: the Law of Succession Act determines who inherits the shares and under what process, while the company’s articles determine whether, and on what terms, the inheriting party can actually hold and exercise rights over them.
How shares actually move on death
Shares do not transfer to an heir the way a car or a bank account does. The process is called transmission, the automatic passing of the deceased’s rights by operation of law, and it requires the personal representative appointed under the Law of Succession Act, typically holding a grant of probate where there is a valid will or letters of administration where there is not, to be recognised by the company before anything else can happen. In the absence of a bespoke provision in the company’s own articles, Regulation 8(2) of the Companies (General) Regulations, 2015 supplies the Model Articles for Private Companies Limited by Shares, whose clause 65 provides that on a member’s death the company may recognise only the surviving joint holder, where the shares were jointly held, or the deceased’s personal representative, where the deceased was the sole holder. The personal representative can then choose either to be registered as the holder themselves or to transfer the shares on to a beneficiary, but in either case the company’s board retains its ordinary approval role over the registration, and the articles’ pre-emption rights, if any, still apply to that transfer in the same way they would to a sale during the shareholder’s lifetime.
Where shares were held jointly, the principle of survivorship applies instead: the surviving joint holder acquires full ownership automatically, without needing to go through the succession process at all, a point Kenyan courts have confirmed directly. This makes joint shareholding a meaningful, if blunt, succession planning tool in its own right, though one that only works cleanly between the specific joint holders named and does not, by itself, address what happens on the second death.
Why the articles matter as much as the will
A will can leave shares to whichever family members the testator chooses, but it cannot override what the company’s articles say about who is entitled to hold them. If the articles impose pre-emption rights requiring shares to be offered to existing shareholders before any outside party, including an heir who was never active in the business, can hold them, that provision continues to bind the estate after death just as it bound the shareholder in life. A founder who wants a particular child to inherit voting control, and other children to receive value without governance rights, needs the company’s articles and any shareholders’ agreement to say so explicitly; leaving it to the will alone, without aligning the corporate documents first, invites a dispute between the family members left holding conflicting expectations.
The Law of Succession Act adds another layer that a business owner cannot draft around: the court’s power, on application by a dependant, to override the terms of a will or the ordinary rules of intestacy where the disposition does not make reasonable provision for that dependant. A succession plan that assumes a will is the final word on who controls the family business should account for the real possibility that a dependant left out, or under-provided for, can ask the court to revisit that outcome.
Building a succession plan that actually holds together
A defensible family business succession plan treats the will and the company’s constitutional documents as two halves of the same instruction, not as separate projects. In practice that means a shareholders’ agreement that specifies what happens to a deceased shareholder’s shares before the death occurs, rather than leaving the default Model Articles or a generic pre-emption clause to answer the question after the fact; a considered choice about whether governance and economic value should pass to the same people, particularly where some heirs are active in the business and others are not; and a will that is drafted with the shareholders’ agreement in hand, so that what the testator intends to leave is actually consistent with what the articles will allow the estate to do with it. Where the founder wants continuity of management regardless of who inherits, a trust structure holding the shares, with the founder’s chosen successor as trustee, is often a cleaner mechanism than relying on testamentary gifts of shares directly to multiple heirs with different levels of involvement in the business.
How We Can Help
Clay & Associates Advocates advises family business owners on aligning their shareholders’ agreements, articles of association, and wills so that succession happens the way the founder intends rather than the way the default rules happen to produce, and represents estates and beneficiaries in disputes over the transmission of shares. Contact our corporate and commercial practice to review your business’s current succession exposure before it becomes a live dispute.
Sources: Law of Succession Act, Cap 160, section 4; Companies (General) Regulations, 2015, Model Articles for Private Companies Limited by Shares, clause 65; Pacific Frontier Seas Ltd v Kyengo & another, Civil Appeal 32 of 2018, [2022] KECA 396 (KLR).
Frequently asked questions
Does a deceased shareholder’s estate inherit the company’s assets?
No. The estate is entitled only to the shares the deceased actually held, not to the company’s underlying property, which remains owned by the company as a separate legal entity.
Who does the company recognise after a sole shareholder dies?
Under the default Model Articles, the company recognises the deceased’s personal representative, holding a grant of probate or letters of administration, who can then choose to be registered as the holder or transfer the shares to a beneficiary.
What happens to jointly held shares when one joint holder dies?
The surviving joint holder acquires full ownership automatically under the principle of survivorship, without going through the succession process.
Can a will override a company’s pre-emption rights?
No. Pre-emption rights and other restrictions in the company’s articles continue to bind the shares after the shareholder’s death in the same way they applied during their lifetime.
