Shareholder and director deaths: What happens and how to plan for them

In this article, we briefly consider the implications of a shareholder and a director of a UK company limited by shares dying, from both an English company law and an estate administration perspective.

In this piece, Articles mean the articles of association of a company limited by shares, Table A Articles is the prescribed format for articles under the Companies Act 1985 and earlier legislation, Model Articles means the default articles prescribed under the Companies Act 2006, Shareholders’ Agreement means an agreement between a company’s shareholders outlining their rights/obligations as well as how the company should be run, and PR means the personal representative(s), either executors or administrators, administering the estate of a deceased person.

What happens when a director dies, and the company has more than one director?

Where the company has surviving directors, and if the number of remaining directors complies with the provisions regarding minimum directors and quorum for meetings in the Articles, the company can still run as usual, and the remaining directors can share the deceased’s responsibilities between themselves.

If the number of directors is in breach of any minimum in the Articles as a result of the death of the director, arrangements should be made for a new director to be appointed.

What happens when a sole director dies and there are surviving shareholders?

Under company law, a private company must have at least one director and at least one director must be a natural person. This means the surviving shareholders should hold a meeting or pass a written resolution to appoint a new company director.

What happens when a sole director and sole shareholder dies and so there are no surviving directors or shareholders?

This will have a greater impact on business continuity as directors are responsible for the day to day running of a business and will generally have their name(s) on bank mandates. Under Table A Articles, the PR must seek a court order to appoint a new director (often a lengthy and costly process). Under Model Articles, the PR can appoint a new director of the company. In both cases this should be done as soon as possible.

Are there any other company law formalities regarding deceased directors?

The company should record the vacation of office by a director in a board resolution/board minute. Companies House must be informed of any changes to directors’ details within 14 days, which includes where a director has died. A company’s register of directors and register of director’s residential addresses should also be updated as soon as possible after the change.

What happens when a shareholder dies?

The Articles and any Shareholders’ Agreement should be checked. If they do not contain provisions concerning the death of a shareholder, the deceased’s shares will pass in accordance with their Will or under the intestacy rules (if there is no Will). It is risky to rely on the terms of the Will, as this could result in family members, who may have no understanding of the business or interest in engaging in business decisions, inheriting the shares.

In terms of practicalities, the PRs are usually (unless the Articles state otherwise) able to administer the deceased’s shares, either selling them or transferring them to a beneficiary, without registering themselves as members. This is often the preferred approach as it avoids personal liability for the PRs. However, there are occasions where the PR may need to register themselves as members, for example Table A Articles allow the directors of the company to serve a notice on the deceased’s PRs requiring them to make an election within 90 days either to be registered themselves as members or transfer the deceased’s shares to another person.  If the PR has not yet obtained the Grant of Probate, they may have no choice but to register.

If the deceased left a Will, the power to act vests in the PRs from the date of death and the PRs may be able to take some steps to deal with the shares without obtaining a grant of probate. By contrast, PRs acting under intestacy have no authority to act until they obtain a grant of letters of administration. The directors must satisfy themselves that the PR has authority to act before the PR can sell or transfer shares.  In practical terms, whether there is a Will or intestacy usually makes little difference as in both cases, the grant (of probate or letters of administration) will serve as this authority. In some cases, directors may choose to accept a copy of the Will as proof of authority, together with an indemnity from the PR but whether this is an appropriate alternative is situation specific and advice should be sought, on the risks, before taking this approach.

Are there any other company law formalities regarding deceased shareholders?

The register of members (and transfers, if a company has one) should be updated as soon as possible after any transfer of the deceased’s shares.

If the deceased was a person with significant control (PSC), the PSC register will need to be updated within 14 days of any transfer of the deceased’s shares (not for the transmission). Within 14 days of any change to a company’s PSC register, Companies House must be informed of that change.

When the next Confirmation Statement of the company is filed at Companies House any transfer of shares will also be recorded in that filing. There is no requirement to file a Confirmation Statement earlier than it is due to be filed, but you may wish to do so, so that the shareholders of the company are shown correctly at Companies House and there is no confusion in relation to the deceased shareholder.

Planning – prevention is better than cure

It is always better for directors and shareholders to get their affairs in order prior to a death occurring to ensure business continuity. Set out below are some steps a company and its shareholders can take to ensure effective management of their business affairs either on loss of capacity during lifetime or on the death of a director or shareholder.

1. Review the Articles. Check the provisions concerning the death of a shareholder or director and whether they are future proof or can be improved e.g. to allow easy transfers to family.
2. Ensure shareholders have executed Wills. Not much to add, save that the provisions regarding shares must be consistent with the Articles and any Shareholders’ Agreement.
3. Consider entering into a Shareholders’ Agreement. It is beneficial to consider the process for transferring shares (valuation, pre-emption rights, etc.) when the interests of the company and shareholders are aligned.
4. Consider including a cross option agreement in any Shareholders’ Agreement. Either forcing a PR to sell the deceased’s shares to the surviving shareholders or the company and/or obligating the shareholder or company to buy the shares from the PR. Caution should be taken and advice sought if the company is given the option to buy back the shares, as there are strict rules surrounding this.
5. Consider taking out insurance to enable the shareholders/company to buy shares from the estate. Note again that there are strict rules about company buybacks.
6. Consider availability of Business Relief. Make sure that the structure of any Will allows the utilisation of this exemption from inheritance tax and consider how the relief might be impacted by the succession provisions in the Articles, Shareholders’ Agreement or Will.
7. Lasting Power of Attorney (LPA). A financial decisions LPA can be invaluable if a person become mentally incapacitated (either temporarily or permanently). It is important to consider whether the attorneys chosen have the knowledge to make decisions about a business, or whether a separate business LPA is required appointing different attorneys and containing instructions and guidance on how the business should operate if a business owner becomes unable to make decisions about it themselves.
8. Key man insurance. Life insurance for a business’s key players, paying out to the business and providing what could be a critical lump sum to bide it through what may be a turbulent time.
9. Consider succession planning. Is knowledge for a business area held by one person? Who will run the business in the future? Consider operational and legal steps to assist with any handover/knowledge transfer.

For personalised support following a death in the business or a review of your current arrangements, reach out to our dedicated Corporate & Commercial or Wealth Preservation teams. Our experts collaborate seamlessly to provide you with a comprehensive and cohesive approach.