What happens on the death of an individual who is the sole shareholder and the sole director of a company?
A company is treated as a separate and distinct legal entity. Therefore, a number of practical issues can arise if the sole shareholder and director of a company dies. Private limited companies are owned by shareholders but are usually managed on a day-to-day basis by directors. The shareholders are typically only involved in the decision-making process where required by law.
When a company shareholder dies, ownership of his or her shares may be transferred under the terms of the deceased shareholder’s Will (if one is in place) or under the intestacy rules. However, this will be subject to the provisions in the company’s articles of association and shareholders’ agreement (if one exists), which may include restrictions on the transfer of shares.
Difficulties may arise in the operation of the company because the deceased may have been the only person authorised to exercise certain powers, such as the appointment of new directors, transferring shares, and paying employees, suppliers and other creditors. In one-person companies, therefore, it is crucial to include express provision in the articles to ensure that the company is able to carry on business with minimal disruption and delay.
Examples of appropriate provisions would be permitting the executor to vote on behalf of the deceased shareholder, thus enabling the executor to appoint a new director; or allowing the personal representatives to appoint a new director without the need to first be registered as a shareholder.
Transmission of shares under the Model Articles of Association
Under the default Model Articles, which many companies have under the Companies Act 2006, a default provision addresses this issue (article 17(2) of the Model Articles) which states:
In any case where, as a result of death, the company has no shareholders and no directors, the personal representatives of the last shareholder to have died have the right, by notice in writing, to appoint a person to be a director.
Furthermore, beneficiaries of shares inherited under a Will or intestacy rules are recognised as having title to those shares. However, it should be noted they do not have the right to attend or vote at general meetings or agree to proposed written resolutions, unless they write to the company requesting to become the registered holders of the inherited shares. The person who inherits the shares may also make a written request to the company to have someone else registered as the holder of the inherited shares and execute an instrument of transfer in respect of it. However, this can be a complex and time-consuming process that often creates uncertainty for everyone involved.
Transmission of shares under Table A (Regulations for management of a company limited by shares) as their Articles of Association
It should be noted that no such automatic right is included in Table A Articles, which are still used by some companies incorporated under the Companies Act 1985.
If no specific provisions addressing this issue are included in a company’s Articles, executors and beneficiaries will not be formally recognised as shareholders, nor will they be permitted to excise any director’s powers, unless they make a court application requesting rectification of the company’s register of members.
Under regulation 31 of Table A, the personal representatives of a sole shareholder/director who has died have no voting rights until they are formally registered as shareholders of the company. Unfortunately, no such formal registration can take place where there is no director. The issue is therefore circular; there are no shareholders (or directors) to appoint a director, and there is no director to formally register the personal representatives as shareholders.
Under such circumstances, the personal representatives would need to apply for a court order to rectify the company’s register of members to enable the appointment by the personal representatives (as shareholders of the company) of one or more directors. Obtaining court orders can be both time-consuming and costly and could potentially bring business to a standstill.
To avoid such difficulties, it is best to alter the Model Articles or create bespoke Articles to incorporate specific provisions regulating the transfer of shares. It is also sensible for companies with two or more shareholders to draw up a private shareholders’ agreement which sets out clear and precise share transfer rules and procedures. Furthermore, the terms of shareholders’ Wills in respect of their shares should be consistent with the provisions set out in the Articles and shareholders’ agreement.
If you wish to discuss protecting your company with us, please do not hesitate to contact a member of our corporate and commercial team on tel: 01892 515022.
This blog is not intended as legal advice that can be relied upon and CooperBurnett does not accept any responsibility for the accuracy of its contents.