In the event that a shareholder or director dies within a company, there are inevitable questions about what happens to the nature and structure of the organisation. After all, it will impact a wide range of stakeholders, from fellow shareholders to beneficiaries and employees.
Such questions may revolve around what happens to the shares upon the death of a shareholder, how the Shareholders Agreement and Articles of Association are affected, and what the potential solutions are.
With this in mind, this guide will explore what will happen to your company when a shareholder or director dies, and what your potential options are moving forward.
What Happens to Shares When a Shareholder Dies?
To begin with, when a shareholder dies, their shares automatically become part of the estate.
Should the shares have been held solely in the deceased’s name, legal ownership passes to their personal representatives once probate or letters of administration have been granted. This is a process known as transmission.
Here, the personal representatives can exercise rights in relation to the shares, but only within the limits set out in the company’s Articles of Association and any Shareholders Agreement.
If the shares are held jointly, however, the surviving shareholder immediately acquires full ownership through the right of survivorship, which means it bypasses the estate entirely.
The exact process of how this process will be carried out depends on the company’s constitutional documents, and, importantly, whether the deceased left a valid Will.
Without a Will, the rules of intestacy apply, which can delay the administration of the estate and potentially complicate company decision-making.
What if the Sole Shareholder or Director Dies?
If the deceased was a sole shareholder, the picture may be slightly more complicated than in the case of joint ownership.
For, in addition to their shares, the deceased may also have been the sole director, which can leave the company temporarily without anyone authorised to manage it.
While the Model Articles under the Companies Act 2006 allow the personal representatives to appoint a new director, older companies incorporated before 2009 with Table A articles may not provide this option, meaning a court application could be necessary.
It’s worth noting that even in cases where a personal representative can be appointed, this individual may not be familiar with the business. As such, delays or disagreements can arise if the deceased’s estate includes beneficiaries with no interest or experience in managing the company.
For this reason, planning ahead through bespoke Articles of Association and a Shareholders Agreement is always wise.
What Happens to the Shareholders Agreement and Articles of Association?
The Shareholders Agreement and Articles of Association are two key documents that will guide the direction of travel upon the event of a shareholder passing away. Respectively, they will set out how shares are transferred, who makes the key decisions and what rights the different representatives have.
However, it’s important to note that both the Shareholders Agreement and Articles will be unique to your company’s situation. This means you’ll need to know exactly what each document contains and how it will affect you.
Shareholders Agreement
If one is present, the Shareholders Agreement will often contain rules about what happens in the eventuality of death.
Many agreements include provisions such as pre-emption rights, compulsory transfer clauses, or other mechanisms that allow the remaining shareholders or the company to purchase the shares before they pass to a beneficiary.
Where such provisions exist, the agreement will usually take priority over the default legal position. This means the personal representatives cannot simply retain or transfer the shares as they wish.
If a company does not have a Shareholders Agreement in place, the shares will pass under the deceased’s Will or the intestacy rules.
Common provisions include:
Permitted Transfers
This means that shares can be transferred without restriction. These might include transfers to family members, trusts, or associated companies.
Cross Option Agreements
This gives the remaining shareholders or the company the right to buy the shares of a deceased shareholder, while giving the personal representatives the right to sell.
Compulsory Transfers
This requires that shares be sold to either the company or the remaining shareholders upon the death of a shareholder.
Compulsory Offers
This obliges the deceased shareholder’s estate to offer their shares to the company or remaining shareholders before selling them to anyone else.
Articles of Association
Unlike Shareholders Agreements, Articles of Association are a legal requirement for limited companies under the Companies Act 2006. In the case of death, Articles often include baseline rules on the transfer and transmission of shares.
This will typically be less detailed than what you would find in a Shareholders Agreement, but nevertheless the Articles may still contain important rules regarding succession planning.
Importantly, the Articles will also dictate what rights personal representatives have when a shareholder dies. These rights could involve whether they can vote or receive dividends before the shares are officially transferred.
Contact Our Shareholders Agreement Solicitors for Expert Advice
The death of a shareholder or director can have serious implications for your company. From shares passing to managing director appointments, every scenario is unique.
At Talbots Law, our Corporate & Commercial Team specialises in Shareholders Agreement and Articles of Association. We can review your company’s documents, help you plan for succession, and ensure your business is protected in the event of a shareholder or director passing away.
Contact us today on 0800 118 1500 or get in touch online to arrange a consultation. Let us help you safeguard your company and make sure your agreements work for you when it matters most.