The death of a shareholder can trigger a number of concerns for the surviving shareholders and directors of a company, particularly in relation to the ownership and control over the deceased’s shares and how a change in that ownership and control can impact on the dynamics of how that business is run.
The absence of any set mechanism to deal with a deceased’s shares could prove harmful to the company and its surviving shareholders in that it may lead to:
What might happen to the shares of a deceased shareholder will depend on many factors, and some of these are addressed below.
Where a deceased shareholder left a valid Will appointing one or more executors, the executor(s) will become the deceased’s personal representative (PRs), once a grant of probate is issued to them.
Provided the shares were registered in the sole name of the deceased shareholder, the legal title of the shares will automatically pass to the PRs. This will effectively allow the PRs to act on behalf of the deceased shareholder in respect of these shares.
Where the deceased shareholder left no Will or had not appointed any executor(s), those who may administer the deceased’s estate (including the deceased’s shares), will not have authority to do so until they also receive the grant of probate.
The process whereby the control over the deceased shareholder’s shares is transferred to the deceased shareholder’s PRs or administrator is known as transmission.
Articles of Association
The articles of association of the company may contain provisions that deal with the transmission of shares, especially where the company’s articles of association are based on the Model Articles (default articles of association).
The default position in the Model Articles is that the PRs will have the right to request the company to formally register them as the holder of the deceased’s shares, provided they have evidence of entitlement to the shares. Usually, PRs will not be able to attend or vote at any general meeting, approve any written resolution, or receive dividends until they become the holder of those shares. Once registered as the holder of shares the PRs become the legal owner of the deceased’s shares and members of the Company in their own right. However, they also become liable for all the obligations which the shares may carry, such as any unpaid amounts on those shares and their liability is not limited to the extent of the assets in the deceased’s estate. As such a deceased shareholder’s PRs should think carefully and check the potential liability position before seeking to be registered as the holder of the shares.
Unless these provisions are tailored to the company’s and shareholder’s specific needs, they may only prove helpful to the PRs (to a certain extent), but not so much for the surviving shareholders.
The absence of any such restrictions on transmission of shares could leave the surviving shareholders without any options. To prevent this, it is important to tailor the company’s articles of association to include certain restrictions so that the surviving shareholders have a number of options in respect of such shares, including the option to buy some or all of the deceased’s shares.
Where the deceased shareholder was party to a shareholders’ agreement, the terms of such agreement should also be checked for any restrictions.
There are many provisions that can be included to deal with transmission of shares, some of the most common provisions in this respect are:
Whilst PRs of a deceased shareholder are entitled to be registered as members, if they so choose, any transfer of the shares to the ultimate beneficiaries of the deceased remain subject to any existing pre-emption rights under the articles of association. This requires the shares of a deceased shareholder to be offered to the surviving shareholders before they can be offered to another individual/entity (including the ultimate beneficiary of the deceased’s estate).
It is important to note that should the wishes in the deceased’s Will contradict in any way with the company’s articles of association or any shareholders’ agreement, the provisions in the latter two documents will take priority. This is particularly beneficial to the surviving shareholders.
This allows the company to buy the shares of the deceased shareholder by way of a share buyback, provided the company complies with the relevant provisions under Part 18 of the CA 2006.
Although there is no requirement to have a shareholders’ agreement in place, it is generally advised that shareholders do so, particularly because it will provide the shareholders with a clear plan should certain issues/events arise.
Whilst a company’s articles of association can be tailored to include specific provisions dealing with its shares in the same way as a shareholders’ agreement, there are certain advantages of implementing these provisions via a shareholders’ agreement, such as flexibility and privacy of its terms.
To protect the longevity of your business, succession planning in a business context is highly important.
If you would like to speak to someone about business succession planning contact Cristine Schneider in our Corporate Team on 0121 716 3692 or email email@example.com
If you would like to be kept up to date with Ansons news please follow us on Facebook, LinkedIn or Twitter