When someone who owns shares in a company dies, those shares, like all property, are put into trust for the beneficiaries until all the property in the estate is determined, debts are repaid and the remaining property can be distributed. The trust is managed by the executors of the will, if there is one, or by administrators if there is not.
What happens next with shares depends on the articles of association of the company, the shareholders' agreement (if there is one) and the ages of the beneficiaries of the shares.
The articles of association determine how ownership is transferred
The articles of association are the first reference point in deciding what happens.
All companies have articles of association, which set out how decisions are made by shareholders and directors. Most companies use the same default rules, put in place when the company was formed. These are called Model Articles or Table A depending on when the company was formed.
Under the default rules, the person who is left the shares can decide to become a shareholder or transfer them to someone else. During the period the person who has been left the shares is entitled to the benefits of those shares, such as dividends, but is not entitled to vote as a shareholder.
However, a company can change its articles at any time (and is advised to do so). So you should refer to the articles first, to see if they set out what should happen.
The shareholders' agreement may give other shareholders rights to acquire the shares first
There may also be rules about what happens recorded in the shareholders' agreement.
Shareholders may want to prevent some people or companies becoming shareholders. For example, they may wish to prevent a husband becoming a majority shareholder in his wife's business about which he knows nothing. Or they may wish to stop a competitor to whom the deceased shareholder owed money becoming an owner.
By including certain terms in the shareholders' agreement, such as right of first refusal, shareholders can prevent a new owner replacing a deceased one.
Or the shareholders' agreement might include arrangements for the buying out of the interest, with an extended time to pay, and a set method of valuation.
Or there may be additionally an option agreement that is triggered on death and that allows the beneficiaries to buy out the remaining shareholders. Such an option agreement can be backed by a life insurance policy to provide the money required to do so.
In the event that the shareholders' agreement conflicts with the articles of association, what is written in the articles of association takes precedence.
The ages of the beneficiaries are also important
Lastly, the ages of the beneficiaries to whom the shares pass is a consideration.
If any of the beneficiaries are under 18 years old, depending on the will, either a trust will be formed to look after the property left to those beneficiaries, or the property will be given to the guardians of the children in the expectation that it will be used for the benefit of the children.
If a trust is formed, the trustees, who may the executors of the will, or who may be other people, will administer the trust for the beneficiaries of the trust. The trust will own the shares, but voting on company issues will be carried out by one or more trustees.
If the guardians are left the shares, then the guardians become the shareholders. They own the shares and the rights associated with the shares.
Other shareholders cannot change a will
Shareholders cannot prevent another shareholder from leaving his shares to someone else in his will. Any means of controlling succession must be done through the articles of association and a shareholders' agreement.
You should plan for 'what-if a shareholder dies'
Since exit is one of the most important things to consider in a shareholders agreement, planning for what happens if one of the owners dies is very important. If you don't have a shareholders' agreement in place, you should consider one. Net Lawman have a number of shareholder agreement templates to suit different types of businesses.
We also recommend replacing standard articles of association with company articles tailored for your business and that reflects how you want it to be run. This is best done in conjunction with putting a shareholders' agreement in place. Templates for company articles are available from our website.
Lastly, you will should set out who receives your business when you die. If you don't have a will, your business may not be passed on to the person best able to manage it. You can make or update your will using one of our last will and testament templates.