The death of a shareholder can cause a great deal of disruption and uncertainty in a business and the transfer of a deceased shareholder’s shares may be lengthy and complicated to achieve. A lot depends on the legal documentation which is in place such as wills, the company’s articles of association and any shareholders’ agreements.
The provisions of these documents are crucial and it can make a huge difference to the surviving shareholders and relatives if those provisions have been agreed in advance, are consistent and can be easily implemented.
Contents:
- What happens to shares upon the death of a shareholder?
- What about the articles of association and shareholders’ agreements?
- What provisions can be included in the articles and shareholders’ agreement to manage the death of a shareholder?
- How do cross-option agreements work?
- What happens to jointly owned shares on the death of a joint shareholder?
- What happens on the death of a sole director and sole shareholder?
- Next steps
What happens to shares upon the death of a shareholder?
If the shares are registered in the deceased’s name alone then legal title to the shares passes automatically to the personal representatives – a transfer process known as transmission. The personal representatives' rights to deal with the shares will be subject to the provisions of the company's articles and any shareholders’ agreement which is in place.
What about the articles of association and shareholders’ agreements?
Once it is established that the personal representatives have the authority to act, the company’s articles and any shareholders’ agreements should be reviewed to determine if they contain any specific provisions relating to the death of a shareholder.
The most common articles (the model articles) recognise those who have inherited the shares as having title to the shares, but do not give them the right to attend or vote at general meetings until they are registered. Once registered, however, there is a possibility that family members with no knowledge or experience of the business could be required to make key decisions and become involved with a company in which they may have little interest or a very different vision to the surviving shareholders.
This situation can be avoided by putting in place bespoke articles and/or a shareholders’ agreement containing clear directions to be followed if a shareholder dies.
What provisions can be included in the articles and shareholders’ agreement to manage the death of a shareholder?
Pre-emption rights
These offer the surviving shareholders a right of first refusal to buy the deceased shareholder’s shares.
Permitted transfers
These allow the shares to be transferred directly on death to a restricted group of individuals (typically family members) and avoiding the pre-emption rights provisions.
Compulsory transfers
These force the shares to be sold upon death allowing the company to buy back the shares or sell to existing shareholders or other specified individuals.
Compulsory offers
These offer the deceased’s shareholder’s shares to the surviving shareholders and if they decline, the shares being offered to others.
Cross-option agreements
These grant options to the other shareholders to purchase shares in the event of the death of one of the shareholders.
How do cross-option agreements work?
Purchase by the surviving shareholders
A cross-option agreement works by each shareholder granting the right to the other shareholders to buy their shares upon their death. It also gives the personal representatives the right to require the other shareholders to buy the deceased’s shares.
The purpose of the cross-option agreement is to preserve the existing ownership of the business and provide an efficient way for the recipients under the will to receive money for the shares without the need to get involved with the business or share transfers.
To provide funding for the surviving shareholders to purchase the deceased’s shares, a life assurance policy is taken out by each shareholder which will pay out upon their death. The policy is held in trust for the remaining shareholders and will provide the funds to purchase the deceased’s shares. The money from the sale of the shares is then transferred to the recipient of the value of the shares under the will.
This is a very convenient solution as it ensures that the shareholder’s recipients under the will receive the value for their shares, without them having to get involved with the business. At the same time, the surviving shareholders can continue to run the business smoothly without worrying about new shareholders causing problems.
It is important to consider any tax planning issues when putting in place such provisions and the terms of the shareholder’s will should be reviewed at the same time.
Purchase by the company
Cross-option agreements can also be drafted so the company purchases the deceased’s shares rather than the other shareholders, with an insurance policy being put in place by the company in a similar manner.
There are very strict rules surrounding a company’s buy back of shares which if not followed correctly can result in the purchase being void and a criminal offence being committed by the company and directors. We would strongly recommend getting in touch with us to discuss these rules if you are considering a buy back of company shares.
What happens to jointly owned shares on the death of a joint shareholder?
On the death of a joint shareholder, legal title passes automatically by transmission to the surviving joint shareholder. The articles usually state that only the surviving shareholder on the register of members will be recognised as having title to the shares. The shares can typically be re-registered in the sole name of the surviving shareholder upon providing the death certificate of the deceased shareholder.
What happens on the death of a sole director and sole shareholder?
In this case, the options available will depend on the provisions in the articles of the company. We shall look below at the provisions of the Table A articles (the default articles under the Companies Act 1985) and the model articles (the default articles under the Companies Act 2006). These are the articles which will apply if bespoke articles have not been adopted by the company.
Table A articles
The personal representatives can’t appoint a new director so no-one can register them as the new owners of the shares. They will have to apply to court for an order to appoint a new director and possibly an order for rectification of the company’s register of members.
Model articles
The personal representatives can appoint a new director without the need to seek a court order.
Applying to court is usually an expensive and lengthy process which is best avoided. It is therefore really important that if you are the sole director and sole shareholder of a company, that you make appropriate provision in the company’s articles to be able to continue the business in the event of your death.
Next steps
Ensuring you have considered and put in place plans for a shareholder’s death is crucial in a business and can save the surviving shareholders and relatives a lot of time, money and worry. The right plans for you will depend on the circumstances of your business and your personal finances but we are happy to explore the different options with you and make sure that you have the correct documentation in place to support your plans.
The first steps are typically a review and amendment of the articles and any shareholders’ agreements which is especially important if your company has Table A articles or you are the sole director and sole shareholder of a company. The terms of any wills should also be reviewed at the same time to ensure that the documentation is consistent and also works for any tax planning purposes.
Our corporate team can assist you as a shareholder and prepare or amend any necessary documents to ensure your shares are dealt with in the way you, your business and your estate have agreed. Call us on 0800 689 1700 or fill out the short enquiry form below and a member of our team will be in contact.
