The death of a director, whether they are also a shareholder or not is a significant event in the life of a company. It can trigger a number of legal consequences, including how the deceased’s estate is distributed, how the company is structured and how it is run in the future. It’s important to remember that any potential disruption following the unexpected death of a director can be minimised if shareholder agreements and the company Articles of Association are reviewed regularly. At Nath Solicitors in London, we offer a comprehensive company law advice service to businesses across a wide range of sectors. For advice please call us on 020 4538 6307. Below we highlight some of the main things to consider when a director/shareholder dies.
Transfer of shares
Legally, shares of a deceased shareholder automatically transfer to their personal representatives (PRs) appointed under the deceased’s will or in accordance with the intestacy rules if there is no will. This initial transfer or ‘transmission’ of shares to PRs is necessary even if the deceased shareholder has left their shares to a particular person. Only with a legal title to the shares can the PRs manage the shareholding on behalf of the deceased director/shareholder. (If the shares were held jointly by the deceased and another individual ownership passes to the survivor automatically under the right of survivorship.)
What About the Company Articles?
The Articles of Association play an important role in governing the transfer of shares. Articles will usually contain provisions outlining the rights and powers of transferees (PRs) in the event of the death of a shareholder. The PRs are typically granted the authority to transfer the shares without being registered as shareholders themselves or to be registered as shareholders before making a transfer. This exceptional transfer of shares is in line with Section 770 of the Companies Act 2006, which allows for such transfers without the need for a formal instrument.
Legal rights and compliance
The legal right of PRs to the shares of a deceased shareholder is a fundamental principle of company law, and compliance with the company articles and relevant laws is essential. The articles should be followed unless amended, waived or removed. Shareholder agreements and other related agreements, especially those governing the rights of the transferors, should also be carefully considered when the death of a shareholder occurs. This comprehensive approach to all legal agreements affecting the shareholding ensures that the share transfer complies with legal standards and any specific agreements.
What Are Cross Option Agreements?
To reduce the risks and uncertainties that can arise when a shareholder dies, shareholders often enter into cross option agreements or contracts with each other. These agreements provide each shareholder with options over the other shareholders’ shares to be exercised in the event of death. Usually, shareholders will agree that when one dies the others have the option to buy their shares at market value. We would often advise shareholders to take out some form of insurance to pay for the cost of acquiring the shares in this scenario. In short, this procedure facilitates the systematic transfer of legal and beneficial ownership of the shares of the deceased so that they do not pass to persons who do not have an involvement in the company.
Comment
When a shareholder and director dies, it is important to carefully consider the legal complications that may arise. The automatic transfer of shares to the PRs, which is governed by the company’s articles and relevant laws, is an important part of this process. Shareholders and companies need to be aware of these legal considerations, especially the role of the company’s articles and the potential benefits of cross option agreements. It’s always worth regularly reviewing articles and shareholder agreements to ensure that potential uncertainty caused by the death of a shareholder-director is minimised. Careful planning and drafting of the relevant legal instruments can ensure that on the death of a shareholder, their shareholding remains with those who understand the business. This helps pave the way for a smooth and stable transition following the death of a key figure. At the same time, any beneficiaries of the deceased’s estate will be properly compensated.
Contact us
Navigating the intricate landscape of shareholder agreements requires expert legal insight. At Nath Solicitors, we deliver comprehensive guidance in this specialist area. Our highly experienced team is well-versed in the nuances of shareholder matters, ensuring tailored solutions that align with your goals. If you require assistance or wish to discuss your case, contact us today. Call 020 4538 6307 or contact us online to explore your options and secure sound legal advice and guidance.
