This blog is aimed at company owners and those involved in dealing with the estate of a deceased shareholder. It looks at the key corporate considerations for transferring shares when a shareholder dies.

A second blog will consider broader succession planning issues for business owners.

In this blog, we assume that the executors have obtained confirmation (in Scotland) or probate (in England).

First steps – check the will, articles of association and any shareholders’ agreement

Executors will naturally check the terms of the deceased’s will to find out the beneficiary to whom the deceased wished to leave their shares. The deceased’s wish, however, is subject to any contracts made prior to death. In the corporate context, this requires executors to check:

• The company’s articles of association – this is the company’s constitution and is publicly available from Companies House

• Whether there is any shareholders’ agreement – potentially relevant if the company had two or more shareholders. This is a private agreement between some or all of the shareholders. It normally regulates between them how the company will be run and managed, and how certain key decisions are to be made. Shareholders’ agreements are private documents (not filed at Companies House). There won’t always be such an agreement so the executors would need to look for this amongst the deceased’s papers and ask the other shareholders whether one existed.

Second step – consider whether the articles (and any shareholders’ agreement) impact the deceased’s wishes regarding the shares

Articles and shareholders’ agreements often contain provisions regulating share transfers and these must be followed for the transfer to take effect.

In some cases, depending on the identity of the beneficiary, these provisions may be consistent with the will and there may be no difficulty or delay in giving effect to the terms of the will. In other cases, these provisions on share transfer could conflict with the terms of the will.

In yet other cases, these provisions may require a procedure to be followed before the shares can lawfully be transferred to the intended beneficiary.

Non-exhaustive examples of possible share transfer provisions are:

• 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.

• If a shareholder wishes to transfer shares to a third party (regardless of how that situation arises), the shares must first be offered round to existing shareholders. Only if the existing shareholders decline to take up the offer can the shares be transferred to the third party.

• The directors of the company can, at their absolute discretion, refuse to register a share transfer.

• 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.

• Any proposed share transfer must first be approved by a particular shareholder.

Third step – check for cross option agreements

Executors should check whether the deceased was party to any other agreements affecting the treatment of shares on death.

Sometimes shareholders enter into a “cross option agreement”. This kind of agreement provides that, if a shareholder dies, the existing shareholders can require the deceased’s shares to be transferred to them or while the executors could require the remaining shareholders to buy the shares held by the estate.

Like articles and shareholders’ agreements, this agreement would take precedence over the terms of the will if the will were inconsistent.

Fourth step – practicalities of transferring shares by executors

This is subject to the articles of association which need to be checked carefully.

Articles commonly provide that executors have two options:

• choose to become a shareholder themselves; or

• transfer the shares directly to a nominated person of their choice (subject, of course, to any restrictions on transfer as discussed above).

In both cases, articles would normally require the executors to provide the company’s directors with “such evidence of entitlement as to shares as the directors may properly require”. That would typically be the grant of confirmation (or probate).

Where the executors are transferring shares, a stock transfer form, completed by the executors, will be required. The executors would certify on the back of the form that no stamp duty is payable.

A resolution of the company’s directors approving the share transfer would be required. The deceased’s share certificate would then be cancelled, a new one issued in the name of the executors or transferee, and the company’s registers would be updated.