Friday May 27, 2022
What should you do upon the death of a shareholder?
The death of a shareholder will inevitably raise questions about what should happen to the deceased’s assets, and how they should be passed on to beneficiaries.
With business owners and executors in mind, here we outline four useful steps to consider when transferring the shares of a shareholder who has died.
We assume here that the executors have obtained or probate (in England).
Step 1: Check the will, Articles of Association and any Shareholders’ Agreement
Perhaps the most obvious first port of call when dealing with a deceased shareholder’s shares is the deceased’s will. Assuming the deceased has a will, any wishes as to how the deceased’s business assets should be distributed will be subject to any contracts made prior to the death. In the corporate context, this will require the executors to check:
The articles of association
The executors should look at the articles of association for the company in which the deceased’s shares are held. Articles of association are publicly available on Companies House.
Any shareholders’ agreements
The executors should also ask whether a shareholders’ agreement was documented if the relevant company has two or more shareholders. A shareholders’ agreement is a private agreement between some or all of the shareholders, regulating how the company will be run, and how certain key decisions will be made. As a shareholders’ agreement is a private document, it is not available on Companies House. The executors should check amongst the deceased’s papers and make enquiries with the remaining shareholders.
Step 2: Consider conflicts – do the articles or shareholders’ agreement impact the wishes expressed in the deceased’s will?
Articles and shareholders’ agreements will commonly contain provisions dealing with how shares can be transferred. These provisions must be followed for the transfer to take effect.
It may be the case that these provisions align with the deceased’s will, and transfer to the intended beneficiary raises no difficulties. However, it may be the case that the provisions conflict with the wishes expressed in the deceased’s will, making the proposed transfer problematic. In such cases, the provisions of the articles or shareholders’ agreement will take precedence over the deceased’s will and therefore frustrate the deceased’s wishes.
Transfer provisions within shareholders agreements and/or articles of association commonly require a procedure to be followed before a transfer can be made. Examples of such transfer provisions might be:
Step 3: Check any cross option agreements
Executors should also check whether the deceased entered into any other agreements which may affect the treatment of shares upon death.
One example is a ‘cross option agreement’. This is an agreement that, if a shareholder dies, the existing shareholders can require the deceased’s shares to be transferred to them, while the executors could require the remaining shareholders to buy the shares held by the estate.
In the same way as articles and shareholders’ agreements, a cross option agreement would also take precedence over the terms of the will if the terms of the will were inconsistent with that agreement.
Step 4: Consider the practicalities of transferring shares by executors
The practicalities to be followed will be dictated by the company’s articles of association, which will need to be checked carefully.
Generally, however, articles will commonly provide that executors have two options when transferring the deceased’s shares:
In either case, articles will normally require the executors to provide the company’s directors with evidence of entitlement as to shares as the directors may properly require. Typically, such evidence will be the grant of probate itself.
Once probate has been granted, the first practical step in transferring the shares is the completion of a stock transfer form, completed by the executors. In normal course, the executors will certify on the back of the form that no stamp duty is payable.
The second step in transferring the shares is a resolution of the company’s directors approving the share transfer. The deceased’s share certificate will then be cancelled, and a new certificate will be issued in the name of the executors, or the transferee, and the company’s registers will be updated.
For further information or to discuss your own situation, please email email@example.com