What happens if a shareholder dies?
When a shareholder dies the right to his interest in the shares will pass to whoever inherits them under his will or intestacy. The deceased shareholder's rights will be administered by his or her executors (if there is a will) or administrators of the estate if the shareholder has died intestate. (Executors and administrators are collectively known as 'personal representatives'.) The company has to accept evidence of probate of the will or letters of administration to establish the rights of the personal representatives in respect of the shares: CA 2006 sec774. The personal representatives' rights to deal with the shares are subject to the provisions of the company's articles. Nearly all companies have either the Model Articles or the Table A provisions (both set out below) which require the personal representatives to choose either to execute a stock transfer form, transferring the shares to the appropriate person, or to apply by letter to be registered by the company as the shareholder.
This will, however, be subject to any restrictions on transmission in the company's articles. Restrictions on the transfer of shares will generally apply also to transmission on death. Many companies have restrictions on the transfer of shares in their articles, which may allow the directors to refuse registration of the shares, or impose pre-emptive rights, etc.
Planning in advance what should happen to the shares in a private company in the event that one of the shareholders should die is an essential matter that company directors and owners should resolve and have properly documented. It is not something that grieving relatives and co-directors should have to deal with after a death. Many different arrangements are possible, including:
- a prior agreement (perhaps in a shareholders' agreement) that the shares may pass to particular people, such as the shareholder's spouse, children, etc
- pre-emption rights in favour of existing shareholders (or some of them),
- arrangements to buy out the dead shareholder's interest, with valuation arrangements and perhaps time to pay,
- a cross option agreement (a contract between the shareholders for the sale and purchase of a deceased shareholder's shares, and sometimes those of his family members) combined with life insurance policies to provide the money to pay for the shares if the situation arises.
The worst possible case is for the situation to be unresolved when a shareholder dies, and especially where there are conflicting provisions in the deceased shareholder's will and the company's articles. Company Law Solutions can provide appropriate provisions for company articles or in a shareholders' agreement to ensure that such problems are resolved before they arise.
Transmission of shares
27. (1) If title to a share passes to a transmittee, the company may only recognise the transmittee as having any title to that share.
(2) A transmittee who produces such evidence of entitlement to shares as the directors may properly require-
(a) may, subject to the articles, choose either to become the holder of those shares or to have them transferred to another person, and
(b) subject to the articles, and pending any transfer of the shares to another person, has the same rights as the holder had.
(3) But transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of shares to which they are entitled, by reason of the holder's death or bankruptcy or otherwise, unless they become the holders of those shares.
Exercise of transmittees' rights
28. (1) Transmittees who wish to become the holders of shares to which they have become entitled must notify the company in writing of that wish.
(2) If the transmittee wishes to have a share transferred to another person, the transmittee must execute an instrument of transfer in respect of it.
(3) Any transfer made or executed under this article is to be treated as if it were made or executed by the person from whom the transmittee has derived rights in respect of the share, and as if the event which gave rise to the transmission had not occurred.
Transmittees bound by prior notices
29. If a notice is given to a shareholder in respect of shares and a transmittee is entitled to those shares, the transmittee is bound by the notice if it was given to the shareholder before the transmittee's name has been entered in the register of members.
Table A provisions:
29: If a member dies the survivor or survivors where he was a joint holder, and his personal representatives where he was a sole holder or the only survivor of joint holders, shall be the only persons recognized by the company as having any title to his interest; but nothing herein contained shall release the estate of a deceased member from any liability in respect of any share which had been jointly held by him.
30: A person becoming entitled to a share in consequence of the death or bankruptcy of a member may, upon such evidence being produced as the directors may properly require, elect either to become the holder of the share or to have some person nominated by him registered as the transferee. If he elects to become the holder he shall give notice to the company to that effect. If he elects to have another person registered he shall execute an instrument of transfer of the share to that person. All the articles relating to the transfer of shares shall apply to the notice or instrument of transfer as if it were an instrument of transfer executed by the member and the death or bankruptcy of the member had not occurred.
31: A person becoming entitled to a share in consequence of the death or bankruptcy of a member shall have the rights to which he would be entitled if he were the holder of the share, except that he shall not, before being registered as the holder of the share, be entitled in respect of it to attend or vote at any meeting of the company or at any separate meeting of the holders of any class of shares in the company.
If the only shareholder/director of a company dies, those entitled to the shares can ask the court to call a general meeting and order that the people entitled to shares can attend and vote as if members of the company. Since the advent of the single member private company, modern articles often make provision for such eventuality.