The difficult task of managing what happens when a shareholder passes away, including the management of the deceased’s shares and estate, is often overlooked by company members (shareholders). Perhaps this is because of its morbid nature, or that it is just not a priority amongst all the other day-to-day needs of the company.
When a shareholder dies and if there is a valid will, the shares of the deceased person are dealt with by the executors of their estate. If there is no valid will, the administrators under the Intestacy rules will deal with the shares. Executors and administrators are referred to as ‘personal representatives’ (‘PRs’).
The subsequent handling of the shares then depends on the terms outlined in a shareholders’ agreement (if there is one), the company’s articles of association, and the ages of the beneficiaries who inherit the shares.
Shareholders’ agreement
The first reference point in determining the next steps, is if a shareholders’ agreement exists which relates to the shares in question. If there is an agreement, it may include rules about what happens to those shares in the event of a shareholder’s death, including rights of first refusal for existing shareholders. Shareholders may have included provisions to prevent family members from becoming shareholders in a business they know nothing about or to stop the sale of a deceased shareholder’s shares to third parties, thus protecting the interests of the surviving shareholders. The shareholders’ agreement may include rights (known as ‘pre-emption rights’) that entitle the remaining/existing shareholders to purchase the deceased shareholder’s shares before anyone else. There may also be an option agreement triggered on death, which allows the beneficiaries to buy out the remaining shareholders.
Ultimately, a well drafted shareholders’ agreement that includes specific provisions can be the difference between a smooth transition of shares and a whole host of rings to jump through.
Articles of association (‘articles’)
The company’s articles must be reviewed concurrently with any shareholders’ agreement that exists. Articles outline the rules and regulations governing a company’s affairs, including the rights and responsibilities of the shareholders as well as the procedures for meetings and share transfers.
Model Articles (a standard template of articles which provides a default set of rules for the company) are often used in many English incorporated companies. It is also not uncommon for a company to have bespoke articles that have special clauses.
PRs must therefore review any articles for provisions relating to shares. The Articles, along with any shareholders’ agreement, will set out the procedure for dealing with such shares. If the shareholders’ agreement and articles contradict each other, the PRs must check which one will prevail (often the shareholders’ agreement will). If the shareholders’ agreement does not address what happens with the shares on death, the articles will determine what is next.
It is clear from the above that close attention should be paid to specific provisions when drafting articles or a shareholders’ agreement.
Ages of beneficiaries
PRs should consider the ages of the beneficiaries to whom the shares are going to. If the beneficiaries are under 18 years of age, then there are a couple of options regarding the transfer process as to where the shares will be held such as in a trust or by the beneficiaries’ guardians.
Business lasting power of attorney (‘LPA’)
A business LPA is a document which can set out who is able to make business decisions regarding your business dealings on your behalf if you are unable to make such decisions yourself if you were to lose capacity. If you wish, a business LPA can also be used if you are overseas and you cannot be physically present, or if there is a medical condition making it preferable for someone else on your behalf.
Business LPAs can be used for a whole host of businesses such as sole-traders, sole-director companies and even partnerships.
Overall, a business LPA can be a helpful planning tool to ensure that your business does not suffer in the event you become incapacitated. If you lose capacity and do not have a valid LPA, it would then be down to somebody to apply to the Court of Protection to manage your affairs on your behalf. It is likely that this application would be made by a family member who may not be the best person to make decisions about your business.
How we can help
Thinking about the death of a shareholder is a morbid topic but not one that should be avoided. It is critical that the legal documents mentioned in this article, work for you in the way that you intended.
At RFB, our experienced corporate commercial team along with our private client team work together to ensure you have the necessary specialist advice for the documents required. If you need a shareholders’ agreement, bespoke articles, or a business LPA, we are here to help.
We can also advise you on the terms of an existing shareholders’ agreement or articles to help ensure that the appropriate provisions regarding a shareholders’ death/incapacity, are dealt with in the right manner.
Please reach out to Sam Glascow for more information at s.glascow@rfblegal.co.uk, or 020 3961 3116.
Samuel Glascow
Associate Solicitor
