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Shares in a private company belong to the individual shareholders. Unless the articles of association of a company or other company documentation say otherwise then when the owner of the shares dies, they pass – like all other property – under the terms of his or her will. (Or under the laws of intestacy if there’s no will.) From the company’s perspective this might not be an ideal situation. Losing control of the destination of a shareholding can lead to:

  • Instability within the company
  • An increased likelihood of disputes over the day-to-day running of the company
  • Uncertainty over the company’s future direction

All of this can be avoided. But it’s essential for members of a company to pre-empt the threat of instability. Specialist legal advice is key –preferably upon formation of the company  – on how to deal with the holdings of a deceased shareholder (called ‘transmission of shares’).

Here we look at some of the typical ways to deal with shares when a shareholder dies.

Are There Any Restrictions On Share Transfer?

It’s common for the articles of association to specify certain restrictions on how shares can be transferred (when a shareholder wishes to sell shares for example, or when a shareholder gets divorced and the shares form part of the financial settlement).  These same restrictions will also usually apply when a shareholder dies – unless the opposite is stated. Common restrictions include pre-emption rights (where shares that become available for purchase must be offered to existing shareholders before any outside parties) and the right of directors to refuse a share transfer.

What Do The Articles Of Association Say About Shares Of A Deceased Shareholder?

Your company articles will often be the first port of call when deciding on how to deal with a deceased shareholder’s holdings. While transmission of shares is covered in most standard articles, the provisions tend only to go so far, and can prove unwieldy to apply in practice. The articles should also be read in conjunction with other company documents, such as a shareholder agreement if there is one.

Is There A Shareholder’s Agreement?

To ensure you aren’t restricted by any limitations in what the articles say, the issue of where shares pass when a shareholder dies should be comprehensively dealt with in a shareholder’s agreement. Some of the ways you can arrange for the shares to be dealt with include:

  • Agreeing that the shares should pass to particular classes of individual, for example the spouse or children of the deceased
  • Pre-emption rights (mentioned above) where the shares are offered to existing shareholders first
  • Buy-Out Agreements – Where there is a mechanism for the existing shareholders to buy out the interest of the deceased. The agreement should include a method of valuing the shares and specify a period in which the buy-out must take place
  • Cross-Option Agreements – In the buy-out scenario above the process can be frustrated if the remaining shareholders don’t have the cash to buy the shares that have become available. Under a cross-option agreement shareholders take out life insurance policies that they hold on trust for the other shareholders. When one dies the proceeds of the policy will facilitate the sale of the shares.

These are just some of the ways shareholders can take control of where the shares of a deceased shareholder end up.  Failing to anticipate the repercussions of the unexpected death of a shareholder could mean you and the remaining shareholders find yourselves having to work with a new shareholder who is completely unfamiliar with how your business operates.  Or you could find that you have to deal with executors who want to sell shares to someone the company doesn’t approve of.

So you need to think carefully about what you want to happen when a shareholder dies. Your wishes should be accurately reflected in a bespoke shareholder’s agreement. You should also ensure that there is no conflict between what your shareholder agreement states in relation to the transmission of shares and the provisions of your articles. Any ambiguity may lead to a shareholder dispute.

Contact Nath Solicitors

If you would like to discuss these issues or need advice on the structure of your company contact Shubha Nath at Nath Solicitors on 0203 983 8278 or contact the firm online.


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