When a shareholder dies his shares will pass to whoever inherits them under his will or the Intestacy Rules. These are then dealt with by the executors of his estate (if there is a will), or by the administrators under the Intestacy Rules (if there is no valid will). Both executors and administrators are known as ‘personal representatives’ (PRs).
To establish the rights of PRs over any shares, the company concerned needs to accept the evidence of probate of the will, or letters of administration.
A fact which is not well known, is that the PRs’ rights to deal with the shares are subject to the provisions of the company’s articles of association. This can wreak havoc if not dealt with prior to death.
Nearly all companies have either the Model Articles or articles as amended, which require the PRs to either:
- execute a stock transfer form, transferring the shares to the appropriate person, or
- register as a shareholder by applying to the company in writing (by letter).
Under the articles, any share transfer restrictions will generally apply to any transfer of shares on death. Many companies have restrictions on the transfer of shares, which may allow the directors to refuse registration, or impose pre-emptive rights, etc.
Planning what should happen to the shares in the event of a death is essential and should be resolved and documented by the company. It is not something that grieving relatives or co-directors should have to worry about on top of a coping with a death.
Various arrangements are available, for example:
- shareholders’ agreements;
- pre-emption rights;
- buy out arrangements;
- cross-option agreements;
- share option agreements;
- contracts between shareholders for the sale and purchase of shares; or
- life insurance policies.
As you can see there are many options available, all of which should be discussed with a lawyer in order to find the most appropriate option. At the same time, you should discuss the funding of any purchase of shares.
The worst possible case scenario is for the situation to be unresolved. You can nip this in the bud by discussing your current articles, shareholders’ agreement and/or will with a lawyer.
On the death of a shareholder, consider the following issues:
- Who do the shares transfer to?
- Do the deceased’s family members have a claim over his estate?
- Could the deceased have changed their will recently?
- Would you know if they had?
- If there is no will, or the will is invalid, who would the shares pass to under the Intestacy Rules?
- If there is a shareholders’ agreement in place, does it stipulate that the PRs are to hold the shares?
- Would the transfer of shares imply a form of sale?
The answers to these questions are vital and will affect items such as Business Property Relief and the Inheritance (Provision for Family and Dependants) Act 1975.
Lastly, you must consider the rights attaching to any shares.
The Model Articles make provision for the transfer of shares. However, be warned that voting rights, the right to attend general meetings and to agree proposed resolutions may all be affected.
As you can tell this is a complex area, but with the right guidance, easy to navigate.
