Deceased Shareholders – What Are The Problems?

When a shareholder dies, this can cause several issues if appropriate documentation is not in place or lined up with one another.

The death of a shareholder in a private company limited by shares can lead to concerns from the surviving shareholders and directors regarding the ownership of the shares and the ability of the personal representatives (PRs) to deal with the shares going forward in that period between death and the transfer of the shares to a beneficiary.

The death of a shareholder can be difficult enough personally, but that, coupled with the issues that arise professionally when determining how to run a company can add to the pain.

The ability of the PRs to be able to run the company, and exercise the rights of the deceased shareholder’s shares will depending on several factors, but some are:

• Whether or not the deceased shareholder had a valid will;
• Any applicable shareholder’s agreement or what the terms of the company’s articles of association state;
• If the shares were jointly owned;
• If there is an cross-option agreement in place relating to the shares of the company;
• If the deceased was the sole director of the company; or
• What, if any, interests the PRs or beneficiaries have in the deceased’s shares.

How can a company’s articles affect the PRs legal title to shares?

A company’s articles of association can have several provisions that affect the PRs legal title to the shares. When it has been concluded that the PRs have proper authority to act in the estate, the articles must be checked to conclude whether or not the following have been affected:

• The ability or restriction of the PRs from being registered as members in the company’s register (which in turn is what is required to pass legal title of the shares);
• Any restrictions of the onward transfer of the shares to the beneficiaries.

As the deceased shareholder’s shares pass to the PRs under the process of transmission, this doesn’t make them members of the company, and it cannot compel them to be one. This will only occur if the PR agrees to be registered as a member, and the proper process or registration takes place.

Death of a joint shareholder

If shares are jointly held by more than one person, these are always held as joint tenants, rather than joint tenants or tenants in common as you might have with land. You can hold the beneficial interest on another basis, but the legal title must be held as joint tenants. As the legal title to the shares are held as joint tenants, the legal title to the shares will pass by transmission to the surviving joint tenant.

PRs and beneficiaries’ interest in the deceased’s shares

The beneficiaries have no legal or beneficial interest in the shares until the shares have been vested in the beneficiary.

Rights of the PRs before the grant is issued

If the PR desires to be registered as the holder of the shares, which may be appropriate if they are the beneficiary, then the articles of the company may require them to prove their entitlement to the deceased shares. This evidence is usually in the form of a grant of probate or letters of administration.

Furthermore, the articles of association should determine the rights of PRs when it comes to either voting in relating to the shares, or attending general meetings of the company before such grant has been issued. It is usual that the rights cannot be exercised until the PRs have been registered as a member, but if you are unsure, this is something that we can check.

Rights of the PRs after the grant has been issued

PRs are not required to be registered as members in order to transfer the deceased shares to a beneficiary, they can transfer the shares without being a member themselves, but it is vital to note that any transfer will be subject to any restrictions in the company’s articles, such as pre-emption rights. This is why it is imperative that the articles of the company do not conflict with any wills. In essence, the PRs have the right to transfer the shares.

PRs have the right to be entered onto the register of members, provided that no article prevents them from doing so. A company’s articles of association or shareholders’ agreement may contain provisions excluding or interfering with a PRs right to be registered as the holders of the deceased shares, such as:

• Pre-emption rights on transmission;
• An express power for the directors to refuse to register the PRs as holders of the shares following transmissions; or
• Provisions that require the PRs to provide evidence of their entitlement to the shares prior to entry on the register.

In practice, it is not always necessary for the PRs to be included on a company’s register of members in order to deal with the shares anyway.

If a PR has been added to the register of members, then they will be entitled to vote on shareholder resolutions, or sign written resolutions. If the deceased shareholder remains as the member of the company, and the PR is not added to the register, then this ability to vote is not conferred on the PR. If required, the articles of the company can be updated to allow PRs to exercise voting rights.

PRs may have a right to receive dividends, but this ultimately depends on the terms of the company’s articles of association.

Cross-option agreement

These agreements are usually entered into by all shareholders of a private company, whereby each grants the others the right to buy their shares following their death, while also giving the PRs the right to require the surviving shareholders to buy those shares. Its aim is to ensure that the ownership of a business remains with the surviving shareholders following the death of any given shareholder.

Where a deceased shareholder had transferred shares to a family member, usually defined as a ‘Permitted Transferee’, rights may also be given to a surviving shareholder to purchase the shares held by the Permitted Transferees. These transferees are usually close members of a shareholder’s family where the articles allow transfer free of pre-emption rights.

Cross-options may also be structured so that the company itself, rather than a surviving shareholder, has the option to buy back the shares. If so, the company must ensure that the strict rules under the Companies Act 2006 are met in relation to the buyback.

Death of a sole or majority shareholder and sole director

If a sole director dies, their appointment will terminate on death and the business of the company will be interrupted. The articles of the company must be checked to see how the appointment of a new director can be dealt with, sometimes the PRs of the last surviving shareholder has the ability to appoint a director, sometimes they do not. If not, the process of the appointment of a new director can be complicated and challenging.

If there is the case that a sole director dies but a shareholder survives, the options available will depend on the company’s articles, whether a company secretary has been appointed and on the percentage voting shareholder that they have. In this case, legal advice should be sought.

It is vital that you know exactly what will happen to the shares in your company when you pass away, otherwise, your wishes may not be achieved, or worse still, you may leave a headache for your loved ones. The death of a shareholder can bring with it roadblocks and hurdles to the running of the company, and the executors or personal representatives of the deceased shareholder may not be able to make the decisions that can move things forward, which may put the company at risk.

The Wilson Browne Corporate and Commercial Team can work closely with the Private Client team to ensure that your wishes are reflected in both your personal documents, as well as company documents.