When a shareholder dies, especially if they are a major shareholder and/or founding member of the company, the personal impact on the business can be immense.
Whilst dealing with personal grief, the last thing you need is confusion about transferring the deceased’s shares.
This article explains what happens after the death of a shareholder and the process you must follow to transfer their shares.
What happens to a shareholder's shares upon death?
Regardless of what is contained in your company’s Articles of Association, on the decease of a shareholder, the legal right to the deceased’s shares passes automatically to their personal representative (PR).
The PR is the person authorised to administer the deceased’s estate and will be known as an executor if the deceased had a valid will; or an administrator if they died intestate, meaning without a will.
Does a personal representative automatically become a member of the company?
No, which might be a good thing as there are many situations in which it would be highly undesirable for such a situation to occur.
To become a company member, the PR must be registered as such.
In practice, most articles provide that the deceased’s PRs can either:
- Have the deceased's shares registered in their name(s), or
- Transfer the deceased's shares (or number of shares) using a Stock Transfer form to another person
In most cases, the shares will remain in the deceased member’s name until the will is proved to be the true last testament of the deceased person. Then, the shares will be transferred to the beneficiaries (those who inherit the shares on the death of the stakeholder) or as per the rules of intestacy or sold to a third party subject to any transfer rules stated in the articles and/or the shareholders’ agreement.
How to remove shareholder’s from Companies House?
The deceased’s name will be removed from the shareholder register when officially leaving the company. Then their shares will be transferred to the PR who has been registered as a member of the company, the beneficiaries, or another person.
A company cannot have unallocated shares; therefore, you cannot notify the Companies House before the issue of where the shares will be transferred to is dealt with.
What is a Cross Option Agreement?
A Cross Option Agreement can be included in the Articles of Association along with any other amendments that can be required.
It states the following:
- Shareholders grant tho the remaining shareholders' options, which will only come into effect when one of them dies
- Each shareholder gives pre-emption rights to their fellow shareholders and agrees that upon their death, they have the option to buy their shares at market value
In addition, the shareholders agree that their personal representatives have the option on their death to sell the deceased’s shares to the surviving shareholders
Along with the cross-option agreement, each shareholder would take out a term life insurance under which any amount payable under the policy is held in trust by the surviving shareholders to pay for the deceased’s shares.
Following this process will ensure the PR will receive the shareholding value without the hassle of receiving shares they might not want.
The key considerations when a shareholder dies
With business owners and beneficiaries in mind, here is a summary of the key considerations when transferring the shares of a shareholder who has died:
- Check the will, Articles of Association and any Shareholders Agreement
- Consider conflict and check if the Articles or Shareholders Agreement impact the wishes expressed in the deceased's will
- Check any Cross Option Agreements
Get legal assistance from LawBite
Dealing with shares following the death of a shareholder is complex. Having a professionally drafted Shareholders Agreement sets out the processes and procedures of what happens when a shareholder dies is vital.
If you’re just starting your business, you can download LawBite’s free Shareholders Agreement template, which contains the detail you need to protect shareholders and directors.
LawBite has helped thousands of limited companies achieve their commercial ambitions and regulatory compliance. To find out how we can help support you with shareholder management and drafting the correct documentation, book a free 15 minute consultation or call us on 020 3808 8314.