What happens when a shareholder dies?

A shareholder death is often an upsetting and distressing time for the family, the directors and fellow shareholders. Forward planning is always advised to cover this unfortunate event, usually by means of the company’s articles of association or by way of a shareholders agreement (if not both), which affords the process certainty and structure when it is needed most.

If specific provisions have not been included in either the articles of association or a shareholders agreement, the shares will pass to whomever inherits them in accordance with the deceased’s will or under the intestacy rules. Although this may be preferable in certain circumstances, surviving directors and shareholders may wish to have control over what happens to shares on the death of one of their colleagues.

Furthermore, if the shares do pass under a will or intestacy rules, the deceased shareholder’s personal representatives must provide the company with evidence of probate or letters of administration to prove their right to deal with the shares. Again, the sale process will be governed by the company’s articles.

If the company has standard Model Articles or standard Table A Articles, although there are slight differences between each, both effectively state that when shares pass under a will or the intestacy rules, the person or entity to whom those shares pass (the transmittee) will not be entitled to attend general meetings of the company or vote unless and until that transmittee writes to the company expressing their wish to become the registered holder of the shares.

If the transmittee chooses to have a different person registered as the holder of the shares, the transmittee must notify the company in writing of their decision and also execute a stock transfer form which officially transfers the shares to whomever they have chosen. This can be a slow, drawn out process with a lack of certainty for all parties involved.

It is therefore sensible to incorporate specific provisions into bespoke articles of association or a shareholders agreement which set out the procedure to be followed if a shareholder dies. This may include compulsory transfer provisions, rights of pre-emption (i.e. the deceased’s shares must be offered to the remaining shareholders or the company before they can be offered to anyone else) and also introduce a method of valuing the shares when sold.