What happens to shares owned in a private company when the shareholder dies depends on a number of factors. It is a potentially very complex subject and careful estate planning, as well as specialist advice, is critical. Many private companies are small and family owned, and business considerations are not always in line with emotional ones.
Even in situations where there is a Will making provision for the shares, the wishes of the deceased are subject to both the rules of the company and the legal rules applicable to share transfers. Making pre-death provision taking this account is crucial to give effect to the intentions of the deceased and to avoid conflicts where there are other shareholders remaining in the company.
Is there a Will?
As with any asset owned by the deceased, a vital first step is to establish if there is a valid Will. This may contain provisions which bequeath the shares to a particular beneficiary. The Executors will then be required to deal with that asset as part of the administration of the estate. However, even where there are clauses dealing with the passing on of shares in the Will, there are other important matters to take account of.
Factors affecting Private Company Share Transfer
The wide variety of company structures and the ways in which business shares can be owned has a significant impact on the transfer of shares following death. As a company is a separate legal entity to the people in it, the transfer of shares and ability to run it after a shareholder’s death is determined by Company Law and the rules of the company, which take priority, even over the Will.
It may be that the deceased was the only shareholder in which case the Executors (or Administrators if there is no Will) will only be able to take on the powers and responsibilities of the Director, where there is specific provision for this situation in the companies Articles of Association. Otherwise, an application to a Court will be needed to enable the Personal Representatives to be registered as shareholders.
Articles of Association
A Company will have Articles of Association, approved and adopted by the shareholders, which are written rules about how decisions affecting the running of the company are made. They usually include clauses to deal with the transfer of shares following the death of a shareholder. The Articles may be standard ‘off the shelf’ documents or tailored specifically to the company. If they are not easily located, they can be found using a public search at Companies House. The Articles of Association will usually set out procedures for the transfer of shares in the company, which must be followed for the transfer to be legally valid.
Shareholder Agreements and Options
In companies where there is more than one shareholder, there may also (though not always) be a Shareholders Agreement determining what will happen in the event of a shareholder leaving the company. The Agreement may specifically deal with what should happen on the death of a shareholder.
In many cases, there will be no difficulty in giving effect to the Will leaving the shares to a named beneficiary, but equally, there may be specific procedures which must be followed before the transfer can take place.
For example, the Shareholders Agreement might stipulate that on the death of a shareholder, the surviving shareholders have a first option on purchasing the shares. In the event that they choose not to exercise that option, they can then be transferred to a third party or beneficiary.
Other provisions may require the approval of a share transfer by a nominated shareholder, often one with a significant financial interest in the company.
There may be a ‘cross option agreement’ in place, meaning that either the remaining shareholders can require the shares of the deceased to be transferred to them or the Executors can compel the other shareholders to purchase the shares held in the estate.
These agreements and options are binding when properly executed and take precedence over the Will. Directors can also retain the power to approve share transfers, and in the absence of their consent, the share transfer cannot take effect.
In practical terms, and subject to the Articles of Association, the Executors can either become shareholders in the company themselves or transfer the shares to a third party, where the rules of the company allow. The remaining shareholders will need to be provided with evidence of the Grant of Probate.
The transfer of shares requires that a stock transfer form is completed. Ordinarily, Stamp duty is payable, but in Probate cases, it should be certified to state that no stamp duty is payable. A resolution of the company’s remaining directors approving the transfer is also usually required. A new share certificate can then be issued, and the Company Register updated to reflect the change.