The death of a shareholder, particularly in the case of a family business, can be a difficult time for the company and, of course, the family. The importance of having both a well drafted Will and a clear company constitution in place to deal with succession cannot be understated.
On the death of a shareholder, their shares will vest in their personal representative or, in the case of intestacy, in the administrator. The shares will then pass under the deceased’s Will or, if there is no Will, under the intestacy rules. The shareholder can leave the shares to anyone they wish under a Will; the best way to control succession is through the companies’ Articles of Association and/or a shareholders agreement.
Who do the shares pass to under the intestacy rules?
This will be dependent on what family survive the deceased. If the deceased is survived by a spouse and children, then the spouse will receive a legacy of £250,000. Anything above that will be split equally with one half going to the surviving spouse and the remainder going equally between any children of the deceased. If there is no surviving spouse then the deceased’s children will receive the entire estate. Where the deceased is not survived by a spouse or children then the estate will pass in an order of priority, which starts with the deceased’s parents and ends with the Crown if no family survive.
The importance of properly drafted articles and shareholders’ agreement
Without these there is a risk that you could end up in business with someone unexpected. For example, if you set up your company with your sister, would you be comfortable running that company with your brother-in-law or a niece or nephew should the unthinkable happen?
There is a high possibility that if a shareholder dies without a Will, the intestacy rules will not accord with the provisions of the articles of association or shareholders agreement.
To protect against this eventuality, it is possible to include provisions in your articles of association or a shareholders’ agreement whereby, upon death, shares cannot be transferred to a third party and instead are transferred to the remaining shareholders or be bought back by the company. This would mean that the legal title to the shares could not be transferred, under the intestacy rules, without the consent of the surviving shareholders.
These pre-emption rights can, in some circumstances, be backed by an insurance policy so that the surviving shareholders have funds available to purchase the deceased’s shares. This means that the inheriting party, under the intestacy rules, receives some value for those shares but not the shares themselves.