Question:
Hi, I’m Ronald. I have co-founded RD Jams Sdn Bhd with Danny, my partner who passed on recently due to an accident. RD Jams Sdn Bhd is a jam manufacturing company and we supply jams to grocery stores, supermarkets, cafes, and hotels all over Peninsula Malaysia. The business has RM 5 million in net assets.
Before his death, Danny held 60% shareholdings of RD Jams Sdn Bhd. He led our company’s sales & marketing department. I hold onto the remaining 40% stakes in RD Jams Sdn Bhd and I’m into running our production facility situated at Batu Kawan, Penang.
Danny carried the title of CEO of RD Jams Sdn Bhd and drew a monthly salary of RM 20,000. I’m its COO and I earn a monthly salary of RM 15,000. In addition to our salaries, as shareholders, we have adopted a dividend policy where we shall be entitled to receive an annual dividend income that amounts to 50% of profits after tax (PAT) of RD Jams Sdn Bhd.
Danny passed on without a will. Subsequent to his passing, Cherrie, his wife had demanded the following:
a. Conferment of the title of CEO of RD Jams Sdn Bhd.
b. Continuous payment of RM 20,000 a month in fixed salary.
c. I assume the role of Sales & Marketing Head without additional salary.
Cherrie said she plans to drop by our office once a month to check the accounts, citing that she is a busy housewife who is taking care of two young children and she is not familiar with our business operations. She has thanked me in advance for agreeing to the above demands and keeping the company in operation.
I have attended Danny’s funeral and had met Cherrie, his two sons and his mom and dad. I’d known Danny’s parents since childhood for they are my neighbours. Thus, I have a closer relationship with them as compared to Cherrie.
My question is, ‘Can Cherrie demand for ‘her salary’ from RD Jams Sdn Bhd?’
Answer:
First, let’s talk about the 60% shareholdings of RD Jams Sdn Bhd.
As Danny passes on intestate, his shares will be frozen and will form part of the deceased’s estates. Danny’s loved ones who are above 18 years old, comprising Cherrie and Danny’s parents would first have to choose who shall be appointed as the administrator of Danny’s estates. Let’s say, Cherrie is appointed to be the administrator. Cherrie will then need to apply for a Letter of Administration (LA) from the High Court as the value of Danny’s estates had exceeded RM 2 million.
Prior to granting the LA to Cherrie, the High Court may order Cherrie to provide two sureties for the administration bond. The two sureties must possess assets, where the value are equivalent to Danny’s estates. From above, RD Jams have a total of RM 5 million in net assets, where Danny has a 60% stake of it. Thus, she will need to convince two millionaires to become her sureties to get the LA and thus, require some time to do so.
During this period, as Cherrie has yet to obtain the LA, she would not be able to lawfully claim her ‘RM 20,000 per month in salary’ and confer herself as its CEO of RD Jams Sdn Bhd. In other words, you can choose to reject her requests until she has successfully produced the LA.
Can Cherrie Appoint Herself as CEO if she gets the LA?
Subsequent to receiving the LA, Cherrie needs to collect all Danny’s estates, pay off all of his outstanding taxes and debt and distribute them in accordance with ratios provided under the Distribution Act 1958. Thus, Danny’s interests into RD Jams Sdn Bhd will finally be distributed to:
The whole process may take somewhere between 2-5 years, depending on how fast Cherrie, the administrator is able to expedite the whole process.
Here is the tricky part:
There is a period of time between when Cherrie obtains the LA to when Cherrie should transfer to Danny’s parents and her two own sons their shareholdings in the company. That is when she will hold 60% shareholdings in RD Jams Sdn Bhd as Danny’s estate administrator.
As she has a controlling stake in the company, it is possible for Cherrie to:
a. Confer herself the title of CEO of RD Jams Sdn Bhd.
b. Pay herself a fixed monthly salary of RM 20,000.
c. Administer the company the way she wants it to be.
This could inevitably stir up conflicts between Cherrie and yourself, especially if both of you could not work hand-in-hand as business partners just like how you used to do with Danny, the original founder of RD Jams Sdn Bhd.
Hence, this could negatively impact the company in terms of productivity, sales, cash flows, management, future direction… etc, which in turn, affect the future growth and valuation of RD Jams Sdn Bhd.
If that happens, then, what is the point of owning shares of RD Jams Sdn Bhd as its business value declines over conflicts, strife and potential mismanagement?
Are You Building Sandcastles?
As I write, I have met many inspiring individuals who are ambitious, driven, and enterprising. They are business owners who work hard to start a business, grow it and as a result, achieve massive wealth from their years or decades of labour.
But, without a proper exit strategy or an estate plan, many of these enterprises or businesses had shared a similar fate of fading away like sandcastles, after the passing of even just one of the key founders. So, what took years to build could in essence evaporate in just a few years.
As such, if you wish to not let your business empire falter away like sandcastles, it is best for you to formulate an exit strategy or an estate plan to safeguard the many years or decades you spent to build your empire. If that is you today, you can conveniently book yourself a 30-minute session with our professional estate planners by first filling up the details below:
