Serious difficulties may arise where a sole shareholder dies who is also a sole director of a company.
Where a company has number of directors and one of the director dies, the surviving directors can continue to manage the company in accordance to the articles of association and other governing documents.
If the sole shareholder of a company dies the surviving directors can continue to manage the company until the deceased shareholders beneficiaries have the shares transferred to them.
Uncertainty however arises where a sole director is also the sole shareholder. In that situation, a grant of probate or letters of administration are required in order for the deceased persons representatives to be added to the companies register of members. The personal representatives can then pass a resolution appointing a new director. This will take time and the process may be to the detriment of the business. Assets in the name of the company will effectively be frozen as nobody in the company has authority to make decisions.
A company’s articles of association (filed at Companies House) set out the rights attaching to shares. They should set out what should happen on the death of the shareholder and the director of the company. It is essential that articles of association are kept under review to ensure that they suitably provide for the future and cover what should happen in the event of death.
If a company has adopted the latest model articles of association, the position is clear. Article 17 (2) allows the personal representatives of the last shareholder to have died to appoint a person to be director, in the event that, as a result of death, the company has no shareholders and no directors. If the company has adopted bespoke articles these need to be checked to ensure that the situation has been provided for.
If the deceased does not have a valid will in which in executors are appointed it is a case of waiting for letters of administration to confirm the appointment of the personal representatives. This can take some time and present an issue if a director is needed to act immediately.
Any business owner or shareholder should also ensure that they have an updated will which stipulates what should happen to their shares. They should check that their will is consistent with the company’s articles of association to avoid any conflict or confusion. Articles will often contain a provision treating the death of shareholder as an event of default which then triggers the automatic offering for sale of the shareholders shares in the company (to the company and all the remaining shareholders) often at a predetermined value.
Professional advice should be obtained when updating your will as often company shares are left to family members, some of who may not want to be involved (or may not have the right skills to be involved) in the company. They may prefer cash to the shares and suitable mechanisms can be put in place to provide for this in a straight forward, tax sufficient manner.
Always ensure that your will and the constitutional documents of the company that you run, (and any companies that you have shares in) work together and don’t contradict each other.
If you need to speak a specialist solicitor who deals with director/shareholder matters, please contact Aaron Marshall on 01204 377600. Alternatively, you can send an email with your name, contact information and brief details as to the nature of your issue to firstname.lastname@example.org and one of our team will be able to help you.
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