What happens when a shareholder of a company dies? - Kuits Solicitors Manchester
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What happens when a shareholder of a company dies?

What happens when a shareholder of a company dies?

2nd November 2021 - Published by Kuits Corporate team

The death of a shareholder can be an extremely challenging time for a business. In the absence of any specific provisions in the company’s articles of association or any shareholders agreement/cross option agreement, the shares of a deceased shareholder would pass in accordance with their will or, in the absence of a will, in accordance with the intestacy rules. For many businesses, this scenario could be far from ideal for a number of reasons, including that those inheriting the shares do not have the requisite business experience or desire to hold the shares. Such issues can be compounded when the deceased was also a director of the company.

Planning ahead of time and having contingency steps in place can prevent stress, uncertainty and unnecessary costs in what will already be a difficult time, offering peace of mind to the company’s shareholders.

What can be done ahead of time?

The company’s articles of association or a shareholders agreement could be drafted to include the following:

  1. Pre-emption rights – that stipulate the deceased’s shares must first be offered to the remaining shareholders, usually in proportion to their current holdings, before they can be transferred to a third party, i.e. a beneficiary under their will/the intestacy rules. These can also include a mechanism for determining the value of the shares. Pre-emption rights are common as they provide shareholders with the comfort that other shares in the company cannot be transferred without them first being offered at least a proportion of such shares.

 

  1. Restrictions on transfers – these could be tailored to suit the circumstances of the business. For example, it may be that a certain shareholder should have to consent before any shares are transferred, or that a majority or indeed all other shareholders need to approve such a transfer. In the absence of such approval, the shares simply would not be transferred.

 

  1. Permitted transfers – clauses could be included that enable shareholders to transfer their shares to certain classes of transferees, but not others. For example, transfers of shares to certain family members or family trusts may be permitted but transfers to any other third party would require the approval of the other shareholders or are subject to pre-emption rights. Again, these can be highly bespoke to fit the circumstances of the business.

Other options to consider

The shareholders could also enter into a cross-option agreement. This is an agreement between the shareholders of a company that enables or, failing them choosing to do so, requires the surviving shareholders to purchase the deceased’s shares at market value. These are often backed by life insurance policies in favour of the remaining shareholders to ensure that they can afford to pay for the deceased’s shares. The insurance policies must be kept under review to ensure they will cover the cost of purchasing the shares at the current value from time to time. Such agreements can provide shareholders with comfort that (a) should any of the other shareholders die, the deceased’s shares shall be transferred to the remaining shareholders and not fall into the hands of an unknown third party and (b) should they die, the beneficiaries of their estate would receive market value for their shares. Again, such agreements can set out how the shares are to be valued to avoid unnecessary negotiation and/or arguments between the surviving shareholders and the deceased’s estate.

It is also important for the company to consider having key man insurance to assist the business to replace a deceased director to ensure business continuity.

Shareholders should also ensure that they carry out estate planning in order to tie in with what should happen and who should be entitled to any shares, or the value associated with them, on death, including ensuring they have up to date wills and have in place any family or other trust or family company arrangements accordingly.

Get in touch with a Corporate lawyer today

If you would like more information on how we can assist you in the case of planning ahead or when a shareholder has died, please contact Corporate Solicitor John O’Dwyer on 0161 838 7989 or email johnodwyer@kuits.com

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