Talking Business podcast: what happens to shares when a shareholder dies?

Fiona: How are you?

Sophie Brookes: I'm very well, thank you. How are you doing?

Fiona: Not too bad. Thank you. Not too bad. From my point of view, when we have someone that dies and we are dealing with their estate, any shares that they hold form part of their estate and usually pass under their will or under the intestacy rules if they don't leave a will. But I'm very aware that sometimes having shares can make the administration of the estate more complicated, or it can take a bit of time, or you're involved with other company owners who may not understand the process. What are the rules for what happens to the shares when someone dies?

Sophie Brookes: The rules would be found in the company's articles of association. It's not something that's set out in the company's act, because it's something that each company is effectively able to decide for itself what they want to happen. The first thing you would do is check the company's articles of association and see what they say.

Fiona: Where would we find those? Where would we find those?

Sophie Brookes: You can check them... The company should have its own record of them. But if you can't easily lay your hand on them, then they would be available at company's house. You can get a copy off there. And, and most company articles of associations will have provisions in them that set out who can deal with the shares of a deceased shareholder. They could be bespoke provisions that have been specifically drafted and tailored for that particular company.

But often it's the sort of provisions where companies just rely on the standard provisions that automatically apply and they don't bother changing them. For companies that are incorporated before the 1st of October 2009, that's what we call Table A. And for companies that are incorporated after that date, it's the model articles.

Fiona: Okay. If we've got someone that's administering an estate then and then they've got a copy of those, if it's a standard provision, what generally will they say about what can happen, who can deal with the shares?

Sophie Brookes: Broadly, what the standard provisions say is that, and this is the same generally, whether it's either to Table A or the model articles, but generally they say that the shareholders' personal representatives are the only persons recognized by the company as having title to a share. It's the personal representatives who have to deal with the company and tell it what's happening with the share. The company's going to want some evidence of the personal representative's position and their entitlement to deal with the shares.

Probably they're going to want to see something like the grant of probate or letters of administration so that they know that they're dealing with the right people, the people who are entitled to direct them in relation to the share.

Fiona: It seems a bit of an obvious question, but would the company also want to see a copy of the death certificate?

Sophie Brookes: Yes. Well, I was going to say yes, but presumably if they see the grant of probate, that's evidence of the person having died.

Fiona: It's evidence of a person having died that's called by that name. I'm assuming if they're in the company, they'll know that they've died.

Sophie Brookes: Yeah.

Fiona: Yeah.

Sophie Brookes: I mean, generally you're right. I think in a small private company, they would probably know. You're right that for larger companies or maybe where they've got a more disparate share holding and people aren't quite as familiar with each other, then yes, they might want some additional evidence there.

Fiona: Lovely. Personal representatives can provide evidence of their appointment to look after the estate and administer the estate, but what then happens?

Sophie Brookes: Basically the personal representatives have got a choice. They can either elect to become the holder of the share directly, or they can nominate someone else. The obvious one would be the relevant beneficiary under the will to be registered as the transferee of that share.

Basically either the personal representatives provide the company with evidence of their position and ask to be registered as the holder of that share, or they execute a stock transfer form, transferring the share to the relevant beneficiary, and then they give that to the company with the evidence of their position.

Fiona: It's important to point out there that if they are holding as personal representatives, if their name goes on the share, it doesn't belong to them. They are just holding it, ready to do something with it under the terms of the will or under the terms of the intestacy. They've got extra duties there. It just doesn't become theirs.

Sophie Brookes: Yeah. It's that kind of in limbo period as they're dealing with the estate, isn't it?

Fiona: Yeah. Once they've done that, are they considered to be a member of the company and what exactly is a member?

Sophie Brookes: We tend to use the words member and shareholder interchangeably. You could be a member of any company, which it would include a company that doesn't have a share capital. Obviously, if the company doesn't have a share capital, there are certain companies that don't, then you can't be a shareholder because the company doesn't have any shares, but you're a member of that company. For companies that have share capital, which is probably most of the ones we would be talking about and dealing with, then you're a shareholder of the company if you hold shares in it.

Shareholder and member is exactly the same in those circumstances. But in terms of the sort of steps we're talking about, we'd got to the stage where the personal representatives have either said to the company, "Right. We want to be registered as a holder of the share," or they've delivered a stock transfer form for the share to be transferred to someone else. But the personal representatives are beneficiary. They don't automatically become a member of the company.

They still have to have their name written up in the company's register of members before they're recognized as being a member or a shareholder of that company and entitled in particular to the rights and benefits associated with the share. For example, they wouldn't be able to exercise the voting rights attached to the shares until they have been officially registered as the holder of that share by being written up in the register of members.

And that's something that would normally be done by the company secretary, or if it's a private company without a secretary, then one of the directors would usually do that kind of thing.

Fiona: It's not uncommon now to have a bit of a delay in getting a grant of probate or grant of letters of administration. The courts have got a big backlog and these things take time. If the company wants the grant as evidence of the appointment, is there anything else that the personal representatives can do in the meantime, because there's a lot of things they need to get together before they can even get to the stage of having a grant?

They've got to liaise with the revenue. They've got to pay inheritance tax. They've got to fill in all the forms, and then they've got to wait for the court.

Sophie Brookes: Yeah, yeah, it can take a while. And you're absolutely right that there can be situations where actually action needs to be taken quickly maybe to protect the company's assets or because maybe the company's involved in a transaction. It's actually doing something and the shareholders need to approve something by exercising their voting rights. I guess how important that is could depend on the level of interest represented by the deceased's share, so Whether essentially it's a majority or a minority stake.

The relevant provisions that we've been talking about require such evidence of the personal representative's entitlement to shares as the directors may properly require. There is some leeway there, and the directors do have a discretion to accept alternative forms of evidence if they wanted. They do need to bear in mind obviously that they have duties as directors and wrongly recognizing someone as being entitled to deal with the shares could have consequences for them.

Fiona: Again with that, it's probably easier, isn't it, if it's a small company, because you all know each other. So you'll know that the people are appointed, because you probably know what's in the will as well. But in a larger company, it's much more difficult to be flexible.

Sophie Brookes: Yeah, absolutely. Exactly. There have been cases and they tend to be in those situations where you talked about there where it's a smaller company, where all the people involved know each other quite well. In those cases, the courts have been prepared to accept evidence perhaps that probates being applied for, even if it hasn't yet been granted, or there was another case where the court accepted a solicitor's undertaking that even though in that case they hadn't even applied for probate, an undertaking that the executives would not renounce probate under the will.

Fiona: Renouncing, just for the benefit of the people listening, is where an executive just says, "Thanks for appointing me, but I'm not going to do it." They can only do that before they've started to deal with the estate or get involved. And it just means that they take a step back. In that case, they were basically saying, "No, we're not going to do that, and we are going to be involved."

Sophie Brookes: Yeah, that's exactly right. They were involved in the whole process, and they were involved in the case that was before the courts trying to get their personal representatives recognized in advance. But they were in that situation where they hadn't got the grant of probate yet. They weren't in a position to do that, but they needed to take urgent action to protect the company and its business.

Fiona: Probably slightly different position, if the person who died is the sole director and the sole shareholder, that can bring about all sorts of issues, I'm guessing, with who liaises with the bank, who's entitled to deal with various things. But what happens in terms of the shares themselves?

Sophie Brookes: Yeah, so you are right and that can get really complicated. The issue is that, like I said before, someone can be a member of the company. They have to be registered as the holder of the relevant share. They have to be written up in the register of members as the holder of the share. But if the deceased is the sole director and shareholder, then you've got a problem because there's no one in office capable of registering the deceased's personal representatives as the holder of the shares.

But no one can be appointed as a director to do that until the shares are registered, and then the personal representative are the people who've got the capacity to pass a shareholder resolution appointing a new director. You're kind of in a chicken and egg scenario, where you've got neither a chicken nor an egg. There's a kind of practical stalemate. The company can find itself stuck in limbo, unable to act.

And that can be a real problem where the company needs to take action, where maybe it needs to pay staff wages, it needs to pay creditors, that kind of a thing

Fiona: I'm assuming then as soon as the grant comes through, the pressure comes off a little bit because the banks and everybody else would accept that the executors or personal representatives are then the people that can access the bank account and pay wages, et cetera. To that point, it's tricky.

Sophie Brookes: That's right. Once you've got the grant, it does get easier. But even so, because even once you've got the grant, you still haven't got a director in office to register the personal representatives. You can resolve it, but you would still need to go to court in order to do that. What you do is you can apply to court for an order basically to rectify the company's register of members by writing in the personal representatives as the holder of the deceased shares.

There's a discretion for the court to make that kind of order, where either a person's name is included or omitted from the register, or whether there's default or unnecessary delay in recording in the register the fact that a person has ceased to be a member. The personal representatives can ask the court to effectively perform that task of writing up their name in the register of member as the holder of the deceased shares.

Then once that's been done, they can then pass resolutions to appoint new directors and that would ensure that the company can then continue to act until either the beneficiaries take over or a buyer is found or whatever.

Fiona: All sounds horrifically complicated. It adds an awful lot of stress at a time when people are mourning.

Sophie Brookes: Absolutely.

Fiona: And just not having a good time anyway. Is there anything that a sole director shareholder can do to stop this from happening?

Sophie Brookes: The good news is yes, there is. Absolutely. What they need to do is basically make sure that there's a provision in the company's articles that allows the personal representatives of the last shareholder to die to step in and appoint a director directly, where as a result of that last death, the company has no shareholders or directors left. Then once they're appointed, like I say, that director would then be able to register the personal representatives or a beneficiary as the holder of the deceased shares without the need for a court order.

Because that obviously having to go to court to get the order, you can do that, but it adds another layer of complexity and hassle and cost when you probably don't want all of that. The even better news is that the model articles that are mentioned earlier, they already maintain that kind of a provision. As long as that hasn't been excluded in the company's bespoke articles, then the issue shouldn't arise for a company that has adopted the model articles that has them as its default articles. That's companies incorporated after the 1st of October 2009.

If the company was incorporated before that date and still relies on Table A, so it hasn't voluntarily switched over to the model articles, then they might need to amend their articles to include that kind of provision, because it isn't there in Table A at the moment. That was one of the things that was sort of rectified, if you like, one of those gaps that was rectified when the model articles come in.

Sophie Brookes: But an awful lot of companies incorporated before October 2009 do still rely on Table A. They haven't switched to the model articles, so it could potentially be a problem for them.

Fiona: And is it easy to actually change?

Sophie Brookes: Yes. We're talking here sort of before there's been a death in the company. But yeah, it's a special resolution of the shareholders would be needed to amend the articles. And like I say, it should just be a question of slotting in that extra provision, giving the personal representatives of the last shareholder to die that additional power. So basically they can step in and act immediately and stop that stalemate that I was talking about from occurring.

Fiona: Okay, lovely. Sometimes, particularly in smaller companies, beneficiaries that inherit are ideally suited to having the money or the income from the shares, but perhaps not necessarily suited to running the company. Sometimes it's the sole owner. Everything's in that person's head and their death then makes it very difficult for the company to carry on. Where you've got a case where perhaps the beneficiary isn't the right person to run the company or actually doesn't want to be involved because they've got their own career, can you do anything about that?

Sophie Brookes: Yeah. I think you're right, that often the deceased... What the deceased really wants it for the beneficiaries to have the financial benefit of their shareholding, but it is often not appropriate for them to continue in the business as a shareholder. Like you say, they might not have the skills. They might not have the inclination. They might not have the time. What you can do is in the articles of association, you can say that on the death of the shareholder, the deceased's shares are offered for sale to the other existing shareholders under preemption rights.

And that way, the deceased's beneficiaries get the value of the shares, but the other people currently involved in the business get to retain ownership without having a new part owner of the business in there who perhaps isn't suited to it. The preemption provisions can specify the relevant price to be paid for the shares. Quite often it's fair value at the date of the deceased's death. You might agree the fair value, or you might go through a process of perhaps getting the auditors to certify what that would be.

And then once buyers had been found among the existing shareholders, then the personal representatives would execute stock transfer forms, transferring the shares to the buyers. The buyers get registered as the holder of the shares transferred to them, and they pay the agreed price to the personal representatives. The personal representatives would then deal the shares as part of the deceased's estate, assuming they go to the personal representatives and not directly to the beneficiaries.

Fiona: Some smaller companies aren't particularly cash rich. Or if they have a lot of cash around, it's because they need to buy machinery, plant, buildings, whatever it is. If the other shareholders can't afford to make that money available to buy the shares from the PRs, is there anything else that can be planned or put in place so that that doesn't become a problem?

Sophie Brookes: Yeah. Again, there are things that can be done. It's probably only relevant for companies with sort of just a few shareholders where the likely value of the shares means that buying them out at fair value when someone dies could be difficult. What you can do is you can put in place cross options, so that when a shareholder dies, the surviving shareholders have the option to acquire their shares. And then similarly, the personal representatives of the deceased shareholders have the option to require the surviving shareholders to buy those shares.

They can both kind of push a sale through, if you like, whether they're the buyer or the seller. And then you back those options up with life insurance policies on the lives of the shareholders. So that when one of them dies, it's the life insurance policy that provides the proceeds to fund the purchase of the shares. You need to make sure, obviously, you sort of have to keep the policies under review. You make sure that the level of cover matches the valuation of the shares as the business grows.

Hopefully the business is going to grow, expand, become more valuable. But therefore, you may need to increase the level of life cover so that the proceeds are still sufficient to buy the shares out. But again, what that does is make sure that the deceased's estate gets the value of the shares, but not the hassle of being involved in the company going forward and the surviving shareholders get to retain control of the company, but without a new shareholder who, like we've said, perhaps lacks the relevant skills or will to be involved in that business as it progresses.

Fiona: Again, that highlights the importance of having a good professional team around you. And it's why you, for instance, would work together with an IFA or a broker so that the cross options are put in place, but so that the insurance is in place as well.

Sophie Brookes: Yeah, exactly. That's right. Yeah.

Fiona: Yeah, okay. Well, thank you very much, Sophie. It shows what a minefield it is.

Sophie Brookes: Yeah. I think it falls into another of those categories of things people would rather not think about. It's all connected with their own mortalities. A lot of us would rather not think about that and bury our heads in the sand. But actually by taking a few steps, you can make sure of that the process is much easier for those people who are the survivors, the continuing parties, and who might be dealing with difficult decisions at a time when, as you say, they're mourning and they're grieving.

Therefore, actually facing up to it and putting in place the relevant things to make it smooth should it happen, then actually obviously that's always a good idea.

Fiona: It requires a bit of honesty, doesn't it? Because it requires someone to actually sit down, look at what they've got and say, "Yes, I would like to pass that down the generations." But actually, A, do they want it, B, can they do it, and C, if they can do it and come in, do they really want to?

Sophie Brookes: Yeah, absolutely.

Fiona: Yeah, okay. Well, thank you very much for your time. It goes to show that we do work together as lawyers. Hopefully if someone ends up in this position and just doesn't know what to do, they'll know to contact us and we can help them out.

Sophie Brookes: Thank you for listening to Talking Business. To find out more about the series, please visit gateleyplc.com/podcast/talking-business/. From there, you can subscribe for all updates, meet our speakers, and get more information on all of the topics being discussed.