When a shareholder dies the right to his interest in the shares will pass on to the beneficiary as mentioned in his will or intestacy. In case the deceased has a will prepared, his rights will be administered by his beneficiaries as per the will, else it will be the administrator of the estate who has to execute the rights.
What Happens if A Shareholder Dies?
Death of a shareholder is an upsetting and distressing time for both the family, the directors of the company and the shareholders and it is highly advisable to have forward planning in place to cover up and cater for an unfortunate event, usually either by means of the company’s’ Article of Association or by way of a shareholders’ agreement, if not both. It is always better to have both in order for better operations.
In case of such an event, The Articles of Association is the first reference point in deciding what happens and how the ownership of the shares needs to be transferred. It is highly imperative of the companies to have Articles of Association, which set out how decisions like this need to be taken and implemented. Most of the companies use the same default rules, which were put in place when the company was formed. The shareholder can leave his shares to the person of his choice and no shareholder can prevent another shareholder from leaving his shares to someone else in his will. Any means of controlling succession has to be and should be done through the articles of association and a shareholders’ agreement. One of the important key points to be considered in a shareholders’ agreement is an exit plan i.e. what needs to be done in case a shareholder dies and in case, you, as a company does not have a shareholders’ agreement in place, you should having one on warfooting.
Under the default rules of Articles of Association, the person, who is left the shares, i.e. either the beneficiary or the administration/representatives of the estate, is free to decide if he wants to be a shareholder himself or transfer them to someone else. In case he wishes to transfer his shares to someone else, the shareholders may or may not agree with the decision and in case of a conflict between the shareholder’s decision and what is written in the Articles of Association, it is the later which takes precedence.
In case the shareholder, to whom the shares have been passed on to as per the will, wishes to transfer the same to someone else, has the legal entitlement to the benefits of the shares such as dividends etc, however, he is not entitled to vote as a shareholder.
Apart from the Articles of Association, there may also be rules about what happens recorded in the shareholders’ agreement in an event such as death of a shareholder. Shareholders’ agreement might include terms such as right of first refusal, under which the shareholders can replace a new owner replacing a deceased one. For example, shareholder may want to prevent some people or companies from taking over the shares of the shareholder such as they may wish to prevent a husband becoming a majority shareholder in his wife’s business about which he has no idea or they may wish to stop a competitor to whom the deceased shareholder owed money becoming a shareholder. However, under any circumstance, if the shareholders’ agreement conflicts with the articles of association terms and conditions, it is what is written in the later which takes the precedence.
Apart from the set rules in the articles of association and shareholders’ agreement, it is the age of the beneficiary to whom the shares pass needs to be taken into the consideration. In case, the beneficiary of the shares is below 18 years of age, either a trust will be formed to look after the property left to those beneficiary or it will be given to the legal guardians of the beneficiary in the expectation that it will be used for the benefit of the children as per terms and conditions of the will declared by the deceased shareholder. In case, the declared beneficiary is under 18 years of age, a trust will be formed and it will be the trustees who will administer the trust for the beneficiary (ies) of the trust. The trust will own the shares however; the right to vote on matters related to the company will be carried out by one or more trustees.
If the shares do pass under a will or intestacy rules, the deceased shareholders’ personal representatives need to provide the company with evidence of probate or letters of administration to prove their right to deal with the shares and the sale process of the shares shall be governed by the company’s articles. In case the company has standard Model Articles or standard Table A Articles, both, although a bit different, effectively state that the person or the company to whom the shares are passed under a will or the intestacy rules, the person or the company to whom those shares pass will not be entitled to attend general meetings of the company or vote unless and until they write to the company expressing their wish to become the registered holder of the shares. In case the new shareholder wish to transfer his shares to someone else, he must notify the company in writing of his decision and also execute a stock transfer form, which officially transfers the shares to the person of his choice. Any transfer made or executed under this article should be treated as if it were made or executed by the person from whom the new shareholder has derived rights in respect of the share and as if the event which gave rise to the transfer has not occurred.
What are the Provisions of the Model Articles?
The main provisions of the Model Articles are as below:
1. Transmission of Shares on death of shareholder:
If title to a share passes to a transmittee, the company may only recognise the transmittee as having any title to that share.
A transmittee who produces such evidence of entitlement to shares as the directors may properly require-
A. may, subject to the articles, choose either to become the holder of those shares or to have them transferred to another person, and
B. subject to the articles, and pending any transfer of the shares to another person, has the same rights as the holder had.
But transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of shares to which they are entitled, by reason of the holder's death or bankruptcy or otherwise, unless they become the holders of those shares.
2. Exercise of transmittees’ rights:
Transmittees who wish to become the holders of shares to which they have become entitled must notify the company in writing of that wish.
If the transmittee wishes to have a share transferred to another person, the transmittee must execute an instrument of transfer in respect of it.
Any transfer made or executed under this article is to be treated as if it were made or executed by the person from whom the transmittee has derived rights in respect of the share, and as if the event which gave rise to the transmission had not occurred.
3. Transmitttees’ bound by prior notices:
If a notice is given to a shareholder in respect of shares and a transmittee is entitled to those shares, the transmittee is bound by the notice if it was given to the shareholder before the transmittee's name has been entered in the register of members.
What are the Provisions of Table A:
The main provisions of Table A are as below:
If a member dies the survivor or survivors where he was a joint holder, and his personal representatives where he was a sole holder or the only survivor of joint holders, shall be the only persons recognized by the company as having any title to his interest; but nothing herein contained shall release the estate of a deceased member from any liability in respect of any share which had been jointly held by him.
A person becoming entitled to a share in consequence of the death or bankruptcy of a member may, upon such evidence being produced as the directors may properly require, elect either to become the holder of the share or to have some person nominated by him registered as the transferee. If he elects to become the holder he shall give notice to the company to that effect. If he elects to have another person registered he shall execute an instrument of transfer of the share to that person. All the articles relating to the transfer of shares shall apply to the notice or instrument of transfer as if it were an instrument of transfer executed by the member and the death or bankruptcy of the member had not occurred.
A person becoming entitled to a share in consequence of the death or bankruptcy of a member shall have the rights to which he would be entitled if he were the holder of the share, except that he shall not, before being registered as the holder of the share, be entitled in respect of it to attend or vote at any meeting of the company or at any separate meeting of the holders of any class of shares in the company.
If the only shareholder/director of a company dies, those entitled to the shares can ask the court to call a general meeting and order that the people entitled to shares can attend and vote as if members of the company. Since the advent of the single member private company, modern articles often make provision for such eventuality.