What happens when a shareholder of a company dies?

by | Feb 2, 2024 | Blog, Legal Updates, YBL Blogs

Shareholders play a pivotal role in the governance and direction of a company. Because they have a vested interest in the company’s success, they are entitled to certain rights and privileges. These can include voting on corporate decisions, receiving dividends, and participating in shareholder meetings.

So what happens when a shareholder passes away?

In this situation, the fate of their shares becomes a critical matter. Understanding what happens to shares upon a shareholder’s death is essential for both shareholders and the company alike. When a shareholder in a business dies, his or her shares will automatically pass to their estate – either under a Will or, if there is no Will, under the rules of intestacy.

Many companies will have been set up using standard ‘Model Articles of Association’ or ‘Table A’ articles of association, which simply say that the executor of the deceased’s estate can seek to become the registered shareholder or transfer them to another person.

It’s worth knowing that private company shares usually attract 100% business property relief for inheritance tax purposes – this means that a deceased’s estate will not be subject to a charge for inheritance tax on the value of the shares. A binding contract made prior to death for the sale of the shares may well jeopardise that relief and therefore cross options have to be drafted carefully in order to avoid that risk.

The importance of a shareholders agreement

In my experience, most small owner-managed businesses prefer to have a shareholders agreement in place which states that on death of a shareholder, their shares will be automatically transferred to the remaining shareholders for a set price or a price to be determined.

This ensures that:

  1. The spouse or estate of the deceased gets a lump sum of money, rather than have to deal with the shares etc. The process can happen pretty much automatically without too much involvement from the executors.
  2. The remaining shareholders can get on with running the business and taking money out of it.
  3. Where there is shareholder protection insurance or relevant life plans in place, the remaining shareholders will have sufficient funds to pay for the shares, which means no cash flow impact on the company and no significant tax liability in drawing out profit to pay for the shares.

Other options

Cross-option agreements

A cross option agreement is a contract between the shareholders of a company in which each shareholder grants to the other shareholder the right to purchase shares on the event of death. They are linked with insurance products held in trust for each of the other shareholders.

It is another way of ensuring that, on death, the shareholders have the right to buy the shares of the deceased and that they have the cash to do so.

Personally, I do not think a cross-option agreement is absolutely necessary if you have one of my excellent shareholder agreements in place. But for smaller companies who only want to deal with shares on death, a cross option agreement is necessary.

Sometimes financial advisors providing certain types of insurance will want to put in place cross-option agreements, but a shareholders agreement is really what you want.

Next steps

It’s essential that you have put plans in place for a shareholder’s death. Doing so can save the surviving shareholders and relatives a lot of time, money and worry. The right plans for you will depend on the circumstances of your business and your personal finances.

Please reach out for some advice, as I am happy to explore the different options with you and make sure that you have the correct documentation in place to support your plans

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