Transmission of shares

When I die, what happens to my shares?

The death of a shareholder can be a difficult time for family businesses, as it will raise issues for the remaining shareholders of a company, especially around who will control the deceased’s shares, and how that shift in ownership might affect the business.

If there is no understanding of how a deceased shareholder’s shares should be handled, this may lead to shareholder disputes and raise doubts about the company’s future direction

What ultimately happens to a deceased shareholder’s shares will depend on several factors, the most common of which are explained in this article.

Is there a Will?

If the deceased did not leave a valid Will or left a Will failing to appoint executors, those seeking to manage the estate (usually the next of kin) will not have authority to act until a Grant of Probate is obtained.

If the deceased shareholder named one or more executors in a Will, those individuals become the deceased’s personal representatives (PRs) once the Will is validated and a grant of probate is issued.

If the shares were held solely in the name of the deceased, legal ownership of those shares transfers automatically to the PRs. This enables them to manage the shares on the deceased’s estate’s behalf.

This process, by which shares pass to a deceased shareholder’s PRs, is called transmission.

What do the articles say?

A company’s articles of association set out the rules for how shareholders can deal with their shares and forms a contract between the company and its shareholders. The articles often include specific provisions on how shares are to be transmitted, especially if the company uses the model articles (the default set of rules for companies when they are incorporated).

Under the model articles, PRs are entitled to request that they be registered as the legal holder of the deceased’s shares, as long as they can prove their entitlement. This is usually evidenced by a Grant of Probate.

Once registered, the PRs become the legal owners of the deceased’s shares. However, they also take on any associated liabilities, such as unpaid amounts on those shares, and their liability is not limited to the value of the deceased’s estate. Therefore, PRs should consider their position carefully and consider any liabilities before applying to be registered as shareholders.

Until they are registered as shareholders, PRs are generally not allowed to vote or receive dividends. However, any dividends accruing to the deceased’s shares will be withheld and paid to them later once they have proved their entitlement.

Without appropriate restrictions in the articles, the surviving shareholders may have limited control over what happens to the deceased’s shares. To prevent this, companies often have special provisions in their articles to give surviving shareholders certain rights, such as an option to purchase some or all of the deceased’s shares. These are called pre-emption rights and can also be in a shareholders’ agreement (see below).

What does the shareholders’ agreement say?

A shareholders’ agreement is a contract between the shareholders of a company, and outlines the rules for how the shareholders should deal with their shares.

If the deceased was a party to a shareholders’ agreement, its terms should be reviewed to see if the shareholders’ agreement applies to any subsequent holder of the deceased’s shares. This is a standard provision and results in the new shareholder being bound by the shareholders’ agreement.

Pre-emption rights are commonly included in a shareholders’ agreement. While PRs can become members if they wish, any eventual transfer of shares to the beneficiaries of the deceased’s estate remains subject to pre-emption rights in the shareholders’ agreement. This typically means that before being transferred to someone else, the shares must first be offered to the surviving shareholders at an agreed price calculated by a formula in the shareholders’ agreement.

PRs must bear in mind that if there is a conflict between the deceased’s Will and the provisions of the articles or shareholders’ agreement, the articles or shareholders’ agreement will take precedence.

Summing-up

PRs of a deceased shareholder should give careful thought to how they:

• Establish evidence of their entitlement to be registered as the holder of the deceased’s shares;
• Transfer the deceased’s shares to the ultimate beneficiaries; and
• Otherwise deal with the deceased’s shares (including selling the deceased’s shares).

It is also worth noting the importance of shareholders putting in place a Lasting Power of Attorney (LPA) relating to financial decisions so their trusted attorneys can manage their personal financial affairs when they are unavailable or they lack mental capacity. Shareholders may also put in place a separate business LPA authorising their attorneys to make decisions specifically concerning their business affairs.

How we can help

Cripps’ experienced private wealth and corporate teams are well versed in dealing with such situations and can offer appropriate support to PRs as they navigate these issues.