Questions about what should happen to the assets of a shareholder after death and how they should be distributed to beneficiaries will inevitably arise.
Here, we detail four helpful actions to take into account when transferring the shares of a deceased shareholder who has passed away, with business owners and executors in mind.
Step 1: Verify the will, the articles of association, and any shareholders’ agreements.
Perhaps the most obvious first port of call when dealing with a deceased shareholder’s shares is the deceased’s will. Assuming the deceased shareholder has a will, any wishes therein as to how the deceased’s business assets should be distributed will be subject to any contracts made before the death, like a shareholder agreement. In the corporate context, this requires the executors of deceased shareholder to check:
The articles of association
If the deceased had a will, any instructions regarding the distribution of the deceased’s company assets would be subject to any agreements signed before the death. This calls for the executors to verify the following in the corporate context:
The articles of association for the corporation where the deceased’s shares were held should be consulted by the executors. The articles of association for a corporation are available to the public in the Companies House.
Agreement of the shareholder
The executors should also enquire as to 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, usually regulating how the company will be run, and how certain key decisions will be made. Given that a shareholders’ agreement is a private document, it will not be available on Companies House. The executors should check the deceased’s papers and make inquiries with the remaining shareholders.
Step 2: Do the shareholders’ agreement or articles of incorporation conflict with the deceased person’s wishes as stated in their 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 well be the case that these provisions of the shareholder agreement accord with the deceased shareholder’s will, and transfer to the intended beneficiary presents no difficulty. However, it may also be the case that the provisions in the shareholder agreement conflict with the wishes expressed in the deceased shareholder’s will, making the transfer of shares problematic. In such cases, the provisions of the bespoke articles or shareholders’ agreement will take precedence over the deceased shareholder’s will and frustrate the deceased’s wishes.
Transfer provisions also commonly require a procedure to be followed before the transfer can be made. Some non-exhaustive examples of such transfer provisions might be that:
- The death of a shareholder automatically triggers a compulsory offer round of the deceased’s shares to the remaining shareholders. If the remaining shareholders decline to take up the offer, the shares can be transferred to a third party;
- Directors can refuse, in their absolute discretion, to register a transfer of shares;
- Share transfers to family members or family trusts are “permitted transfers”. All other proposed share transfers are prohibited unless existing members have been offered the shares first and declined.
Step 3: Check if there is any cross-option agreement
Executors should also check whether the deceased entered into any other agreements which may affect the treatment of shares on death.
An example of such an agreement considering the transfer of shares in the event of the death of a sole shareholder is a ‘cross option agreement’ which may be funded through a life insurance policy. This kind of agreement provides 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 the agreement.
Step 4: Keep in mind the practicalities of transferring shares by a personal representative
Again, the particular 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:
- To become a shareholder themselves; or
- To transfer the shares directly to a surviving shareholder of their choice (subject to any right of first refusal or other restrictions on transfer as discussed above).
In either case, the articles will normally require the executors to provide the company’s directors with “such evidence of entitlement as to shares as the directors may properly require”. Typically, such evidence will be the grant of confirmation in Scotland or probate in England.
Once confirmation (or probate, as the case may be) has been granted, the first practical step in transferring the shares of a deceased shareholder is the completion of a stock transfer form, completed by the executors. In the normal course, the executors will certify on the back of the form that no stamp duty is payable.
The second practical step in transferring the shares of a deceased shareholder 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.
Solicitors to help you after a shareholder dies
Are you looking for guidance on what to do with the deceased shareholder’s shares? Contact us to know more in-depth about how we can help you.