What happens to shares on the death of a shareholder?
On death, two, possibly competing, sets of provisions will apply, under the will or under the articles of association of the company (and possibly a separate shareholders’ agreement). The position often achieved under ‘standard articles’2 is summarised by the diagram opposite.
Terminology is important here. A lifetime share disposition is a ‘transfer’. A disposition of shares on death is a ‘transmission’: shares pass automatically (by operation of law) to a deceased’s personal representatives (PRs).
A ‘transmittee’ (in the terminology of articles) is a person entitled to the shares on the death of a shareholder or otherwise by operation of law. In the normal course, the transmittees will be the PRs of the deceased, rather than the ultimate beneficiaries under the will. There will, thus, be a transmission to the PRs on death with, potentially, the need for separate transfers from the transmittee to the will beneficiaries in due course.
The standard articles aim to provide some certainty on the effect of transmission and as to whom the company should recognise as the shareholder on death. Broadly, the position is as follows:
- When title to a share passes to a transmittee, the company may only recognise the transmittee (and not any other person) as having any title to that share, so the company need not take account of beneficial interests under the will.
- The right of a transmittee to elect to transfer shares to another person is specifically subject to any other provisions of the articles. It is common in private companies to include restrictions on the transferability of shares: either absolutely, only with the consent of all or a stated percentage of shareholders, or following a pre-emption process.3 If the transfer of shares to the will beneficiaries is prevented under the articles, the transfer cannot happen.
- A transmittee, after providing evidence of their entitlement to the shares (usually the grant of probate or letters of administration), may elect to be entered into the company’s register of members as a registered holder of shares or have the shares transferred to another person.
- If a transmittee does elect to become a shareholder, they may incur personal liability on the shares (e.g. they may be liable to pay any calls made by the company on the shares if the shares are not fully paid up).4
- Unless the articles provide otherwise, a transmittee does 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, unless they elect to become a registered shareholder.
- A transmittee will have the same economic rights (in respect of dividends and other financial entitlements deriving from the shares) as the deceased shareholder had.
- Any transfer will be treated as if it were made by the deceased shareholder. If, for example, the articles only permit a transfer to family members and one of the will beneficiaries is not a family member, a transfer from the PRs to that will beneficiary will not be permitted.
It is important that a draftsman specifically considers the provisions on transmission and how they relate to any provisions on share transfers, bespoke or standard. Where any transfer provisions are included, it would be prudent to point out to a client their application on death and this may lead to a discussion about the terms of that client’s will.
What to do?
There is, from a company law perspective, almost entire freedom to draft the articles to reflect an individual’s intention on the transfer or transmission of shares, provided this is commercially acceptable to other shareholders. The articles should, therefore, address what will happen to shares of a shareholder on death. The following might be useful as a starting point:
- The right of the PRs to become the registered holder of the shares and to receive the benefits of the shareholding should not be limited.
- Specifically retain the right for the PRs to make the same transfers as the original shareholder could – for example, to permitted transferees of the original shareholder.
- Ensure any restrictions on the transfer of shares and any pre-emption rights bind the PRs. Given that the standard articles provide that a transmittee’s ability to transfer shares to another person is specifically subject to other provisions of the articles, it is key to make sure such restrictions are contained in the articles.
- It is entirely permissible for the other shareholders to seek to control the treatment of shares on death. For example, the articles may state that the death of an individual shareholder will automatically trigger a transfer of shares in accordance with any existing pre-emption provisions.
- Consider whether rights attaching to shares should fall away on death. For example, consider whether any right for a shareholder to appoint a director should remain following death – it may not be appropriate for PRs to be able to determine board representation.
- The word ‘transfer’ will be taken to mean a transfer of the legal title to the share, rather than a beneficial interest. Thus, in at least one case, the PRs held shares as a result of a transmission of shares but any subsequent transfers of the shares to the will beneficiaries would have triggered the pre-emption provisions under the articles. To prevent this, the PRs, on the winding up of the estate, declared they held the shares on trust for the will beneficiaries, and the hope of the remaining shareholders that they would be offered the shares under the pre-emption provisions was defeated.Pennington v Crampton and Others  BCC 611/
- Consider preventing PRs from holding shares on trust indefinitely. Specifically address the position where the shares have remained in the hands of the PRs for some time. For example, if the shares remain in their hands 18 months after the death, either require a transfer to a permitted transferee or trigger a forced transfer of the shares.
There may be reasons why an individual’s will and the documents controlling the shareholding cannot work together. These reasons may be commercial or personal but they are not usually legal, and the worlds of probate and corporate can operate together, provided that they are considered together.