What happens to your company shares following death

It is well known that anybody can make a will to decide how their assets are distributed following death. For anybody holding assets, they are strongly advised to make one. Most of the time, the transfer of an asset to a beneficiary under the terms of a will is straightforward and will take the form of an absolute gift. However, it can be more complex when the assets forming part of an estate consist of shares in a limited company, especially if that company is part owned by someone else or has been run by business partners during the testator’s lifetime. It may not be appropriate for an independent party to hold a significant stake in a privately held small to medium sized enterprise. Further still, in some circumstances, the board of directors may have the power to “block” a transfer of shares to a beneficiary.

This article considers the complexities in leaving shares as part of your inheritance and specifically considers whether an alteration to the articles of association of a company may be necessary as part of your succession planning .

Companies formed on or after 1 October 2009

For any company formed on or after 1 October 2009, the model articles apply for private companies limited by shares (‘the Model Articles’) (unless bespoke articles have been adopted by the Company). Model Articles allow for succession of shares following death. The relevant provisions can be found under Article 27 and Article 17(2).

17. Methods of appointing directors

—(1) Any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director—
(a) by ordinary resolution, or
(b) by a decision of the directors.
(2) In any case where, as a result of death, the company has no shareholders and no directors, the personal representatives of the last shareholder to have died have the right, by notice in writing, to appoint a person to be a director.
(3) For the purposes of paragraph (2), where 2 or more shareholders die in circumstances
rendering it uncertain who was the last to die, a younger shareholder is deemed to have survived an older shareholder.

27. Transmission of shares

—(1) If title to a share passes to a transmittee, the company may only recognise the
transmittee as having any title to that share.
(2) A transmittee who produces such evidence of entitlement to shares as the directors may properly require—
(a) may, subject to the articles, choose either to become the holder of those shares or to have them transferred to another person, and
(b) subject to the articles, and pending any transfer of the shares to another person, has the same rights as the holder had.
(3) But transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of shares to which they are entitled, by reason of the holder’s death or bankruptcy or otherwise, unless they become the holders of those shares.

Under Article 27(1), where title to shares passes to a “transmittee”, the company may only recognise the transmittee as having title to those shares. A “transmittee” is defined in the Articles as “a person entitled to a share by reason of the death or bankruptcy of a shareholder or otherwise by operation of law”. This definition includes Executors appointed by a testator under the terms of a will. This is important when read in conjunction with Article 27(2) as it will be the executor’s job to deal with the deceased’s estate assets in a way that gives effect to the wishes set out in the will.

Article 27(2) provides that a “transmittee” may choose either to become the holder of those shares, or to transfer the shares to another person (for example, to a beneficiary under the terms of a will).

Article 27(3) makes it clear that a “transmittee” does not have the right to vote at a general meeting, nor can they agree to a proposed written resolution, unless of course, they becomes the holder of those shares.

The position becomes more complex when you are dealing with a sole shareholder/director who has passed away. It would be impossible for the company to be run as there would be no director steering the company and the “transmittee” who has acquired title to the shares is unable to vote or to make decisions on behalf of the company. This is where Article 17(2) comes into play.

Article 17(2) provides that where, as a result of death, the company has no shareholders and no directors, the Personal Representative of the last shareholder to have died has the right, by notice in writing, to appoint a person to be a director.

Therefore, if a sole director/shareholder dies leaving his shares to a beneficiary under his will, title in these shares will vest temporarily in the executors. The executors may exercise their powers under Article 17(2) to appoint a director to steer the company in the interim.

In a company with more than one director/shareholder, any decision by the board to “block” a transfer of shares in accordance with Article 27 would therefore be a decision made in contravention to the company’s articles and would be open to challenge.

Companies formed before 1 October 2009

For companies formed before 1 October 2009, or for Companies that have adopted bespoke articles of association, the articles may not contain such provision. The Articles will need to be reviewed and amended accordingly.

Without changes being made to the company’s Articles, the executors may be forced to go down the route of a costly application to the courts for an order to enable them to appoint a new director before the Grant of Probate is issued.

The provisions in the Articles on what happens to the shares on the sole shareholder’s death should also be checked to ensure they are consistent with the wishes of the sole director/shareholder and do not contradict what is in the Will.

Another problem with bespoke or Pre- 1 October 2009 Articles is the possibility for directors to “block” a transfer of shares.

Any attempted transfer of shares to an intended beneficiary could be “blocked” by a decision of the board of director acting collectively. Crucially, if the articles do not make reference to transfers of shares following death, the directors will not be acting in contravention of the articles by blocking the transfer.

Conclusion

Will drafting becomes more complex when shares in a limited company are involved. Specialist legal advice should be sought to ensure that your company allows for the smooth succession of shares following death. When planning your succession involving shares in a company you should always check the Articles of Association to ensure that they provide for what you want to happen following your passing.

Where pre-emption rights apply to a Company articles, you may find that the articles expressly provide for “death” as a compulsory transfer event in which your shares will be automatically transferred for a pre-determined price (e.g. market value) back to the Company.

Aside from whatever the articles may say, it must be remembered that what happens to your shares depends on what it says in your will, or if no will in accordance with statute, which may not be in accordance with your wishes. Therefore, if you hold assets, making a will and succession planning is crucial. If you need more information please click here or wish to speak to somebody please do not hesitate to get in touch.