{"id":6896,"date":"2019-12-09T08:21:44","date_gmt":"2019-12-09T08:21:44","guid":{"rendered":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/?p=6896"},"modified":"2023-10-19T14:02:21","modified_gmt":"2023-10-19T13:02:21","slug":"what-happens-when-a-company-shareholder-dies","status":"publish","type":"post","link":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/what-happens-when-a-company-shareholder-dies\/","title":{"rendered":"What happens when a company shareholder dies?"},"content":{"rendered":"

When a company shareholder dies, ownership of their shares may be transferred to whomever inherits them under the terms of the deceased shareholder\u2019s will, if one is in place, or under the intestacy rules. However, this will be subject to provisions in the company\u2019s articles of association and shareholders\u2019 agreement (if one exists), which take precedence and may include restrictions on the transfer of shares.<\/p>\n

Dealing with such complex matters during times of grief is often very difficult and distressing, so it is important to plan ahead to ensure the correct procedures are in place.<\/p>\n

Preparing a will and including clear provisions in the company\u2019s articles and shareholders\u2019 agreement is the best way to minimise stress and potential disputes that may arise upon the death of a shareholder. This strategy will provide certainty and structure for family members, shareholders, and the company at a time when it is needed most.<\/p>\n Transfer shares in your company for only \u00a369.99<\/span><\/a>\n \n

Transmission of shares under the model articles of association<\/h3>\n

Under the default model articles<\/a>, which many companies have, beneficiaries of shares inherited under a will or intestacy rules are recognised as having titles to those shares. However, they do not have the right to attend or vote at general meetings or agree to proposed written resolutions unless they write to the company requesting to become the registered holders of the inherited shares.<\/p>\n

The transmittee (the person who inherits the shares) may make a written request to the company to have someone else registered as the holder of the inherited shares and execute an instrument of transfer in respect of it, but this can be a complex and time-consuming process that often creates uncertainty for everyone involved.<\/p>\n

To avoid having to deal with such difficulties when a company shareholder dies, it is best to alter the model articles or create bespoke articles to incorporate specific provisions regulating the transfer of shares. It is also sensible for companies with two or more shareholders to draw up a private shareholders\u2019 agreement<\/a> that sets out clear and precise share transfer rules and procedures. Furthermore, the terms of shareholders\u2019 wills in respect of their shares should be consistent with the provisions set out in the articles and shareholders\u2019 agreement.<\/p>\n What is a shareholders\u2019 agreement and why do I need one?<\/span><\/a>\n \n

Lack of planning for such eventualities could result in family members being burdened with business decisions and responsibilities beyond their understanding. Surviving shareholders and directors in the company may also feel frustrated or resentful having to deal with beneficiaries whose lack of business knowledge and\/or visions for the company could negatively impact the future of the business.<\/p>\n

Companies that do not use the model articles may have specific provisions in place to deal with the death of a shareholder. It is important that these provisions are fully understood and dealt with accordingly.<\/p>\n

Provisions in the articles and shareholders\u2019 agreement for dealing with the death of a shareholder<\/h3>\n

To minimise distress and disruption following the death of a shareholder, there are a number of specific provisions that companies can include in their articles of association and a shareholders\u2019 agreement, including permitted transfers, a compulsory offer, pre-emption rights, a compulsory transfer, and cross-option agreements.<\/p>\n

1. Permitted transfers<\/h4>\n

The provision of permitted transfers of shares is a tax-efficient strategy that allows the deceased\u2019s shares to be transferred to a restricted group of individuals, such as family members or family trusts, without the need to enforce the requirements of pre-emption rights.<\/p>\n

2. Compulsory offer<\/h4>\n

When a company shareholder dies, a compulsory offer provision would require the shares of the deceased to be offered to the remaining members. If they decline the offer, the shares may be made available to third party purchasers, such as beneficiaries named in the will or individuals of the company\u2019s choosing.<\/p>\n

3. Pre-emption rights<\/h4>\n

Pre-emption rights<\/a> is a common provision that gives the remaining shareholders the right of first refusal over new shares issued by the company or existing shares that become available for transfer. This is an effective way to protect the interests of the remaining members, enabling them to maintain their proportion of ownership and control. If the shareholders decline to buy the available shares, they can be offered to third party purchasers, including family members of the deceased.<\/p>\n Pre-emption rights – the key to maintaining your shareholdings<\/span><\/a>\n \n

4. Compulsory transfer provision<\/h4>\n

A compulsory transfer provision requires shareholders to sell their shares in certain situations, such as retirement, cessation of employment with the company, bankruptcy, incapacitation, or death. This provision allows the company to buy back the shares, sell to existing members or third parties, and protect the interests of the business.<\/p>\n

5. Cross-option agreement<\/h4>\n

To ensure control of the business remains with surviving members when a company shareholder dies, a cross-option agreement entitles shareholders to grant options to each other in the event of one of their deaths. Under this type of agreement, the existing shareholders can either \u2018force\u2019 the personal representatives of the deceased to sell the available shares to them, or the personal representatives of the deceased can \u2018force\u2019 the remaining shareholders to purchase the available shares.<\/p>\n

To support this type of agreement and avoid causing financial difficulty to surviving members, it is commonplace for each shareholder to arrange a life assurance policy that reflects the value of their shares and is held in trust for the other shareholders. In the event of death, the policy will pay out and provide sufficient funds to the remaining members, facilitating the purchase of the available shares. The proceeds of the sale will then be transferred to the beneficiary of the deceased shareholder.<\/p>\n

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Death of the sole shareholder and director in a one-person company<\/h3>\n

A number of practical issues can arise if the sole shareholder and director of a company dies<\/a>. This is because the deceased may be the only person authorised to exercise certain powers, such as the appointment of new directors, transferring shares, and paying employees, suppliers, and other creditors.<\/p>\n

In one-person companies, it is crucial to include express provision in the articles to ensure that the company is able to carry on business with minimal disruption and delay. Examples of appropriate provisions would be:<\/p>\n