There are a number of factors that can make administering an estate more complicated. This can be the case if the person who has died was a shareholder in a private limited company.
In this post we cover what happens to shares when a shareholder dies, and whether or not a Grant of Probate will be required to transfer or sell them.
Of course, the shareholder who has died may also have been a company director with day-to-day responsibilities in the company. We’ll cover the more practical aspects of what happens to a business when a director dies – as well as what happens when a sole director dies – in a future blog post.
Do you know what to do when someone dies?
Download our handy guide which explains all the legal responsibilities you will encounter when someone close to you dies.
Are there any restrictions on what happens to shares after a death?
When we talk about the transfer of assets after a death, what happens to those assets is usually dependent on a Will or intestacy rules. This is not always the case with shares in a company, as there can be restrictions on what can happen to them.
In some cases, a company may have restrictions on the transfer of business interests. These restrictions, if they exist, will be recorded in the company’s governing documents, such as the Articles of Association or Shareholders Agreement. These governing documents might give the surviving shareholders the right of first refusal to purchase the shares on the death of the shareholder (either at a fixed price or at market value). These types of rights are usually called ‘pre-emption rights’.
You might also find that there is a cross-option agreement in place, which is a clause in a shareholders’ agreement. This says that one or more of the remaining shareholders will buy the shares of the person who has died. This arrangement will often be backed by a life insurance policy which will be structured to pay out to the remaining shareholders, to provide them with the funds to buy the shares from the estate.
It therefore follows that if there are pre-emption rights in place, or a cross option agreement between shareholders, a shareholder who dies would not always be able to leave their shares to someone else in their Will. Even if they had bequeathed shares in their Will, these company rights would overrule this and the company would have the right of first refusal. Instead therefore, it would be the proceeds of the sale of the shares that would pass to the beneficiaries, not the shares themselves.
Where there are no pre-emption rights, the company’s governing documents, may give the board a discretion to register the transmission of shares on death. Often that means presenting the right documents to the directors to show that a beneficiary is entitled to the shares (such as the will and grant of probate).
What responsibilities will the personal representative have?
If you are acting as a personal representative (an executor or administrator) for a shareholder who has died, you will have certain responsibilities regarding the shares.
Not only will you be required to formally notify the limited company of the death of the shareholder, you will also need to consult the company’s governing documents to determine whether there are pre-emption rules or other requirements in place.
It’s worth noting that the governing documents may include other requirements to be followed in the event of the death of a shareholder. For example, if the shareholder who has died had the right to appoint someone as a company director, the governing documents should make clear if this right survives death and the requirements to appoint the desired beneficiary under the Will.
If there are pre-emption rules in place, the personal representative will need to manage the sale of the shares back to the company or other shareholders. They will then need to ensure the proceeds of that sale are distributed according to the shareholder’s Will or intestacy rules.
If there are not pre-emption rules in place, the personal representative will need to manage the transfer of the shares to the rightful beneficiary, subject to any agreement between the beneficiary and the board of directors.
In either scenario, the personal representative will need to carefully determine what inheritance tax (if any) is due on the value of the shares. Some types of shareholdings qualify for business relief.
How are shares sold or transferred?
There are typically four steps to a sales or transfer process:
The first stage in the sale or transfer of any shares is for the personal representative to prove to the directors of the limited company that they have the authority to manage the sale/transfer.
In most cases this is done with a Grant of Probate, which is a legal document that clearly names the rightful personal representatives. This will be straight forward when personal representatives have had to apply for probate in order to administer other assets, such as bank accounts or property sales.
However, in the case of simpler or lower value estates, the personal representatives may not have had to apply for probate. In these cases, it is usually up to the board of directors to decide whether or not they will require a Grant of Probate to be issued before actioning a sale or transfer. They may be agreeable to accepting other evidence instead, such as a certified copy of the Will.
If the directors decide they are prepared to proceed without a Grant of Probate, they may ask the personal representatives to enter into an indemnity agreement. This is a legal document in which the personal representative would confirm that they are the rightful personal representative for the estate and agree to indemnify the company against any losses should this turn out not to be the case. This sort of agreement should be prepared by a solicitor and all parties will want to take legal advice before signing it.
At this stage, the personal representative will also generally need to produce the share certificate belonging to the person who has died. If they do not have the certificate, there may be a charge for a replacement.
Once the directors are satisfied with the evidence that they are dealing with the rightful person, the personal representative will then need to complete a stock transfer form. The personal representative may need to confirm at this stage that no stamp duty is payable on the transfer of shares.
Once the stock transfer form is complete, the company directors will need to approve it. Once they have done so, the original share certificate belonging to the person who has died will be cancelled and a replacement certificate will be issued in the name of the new shareholder. The company will then update its records.
The final stage is for the company directors to notify Companies House about the death of the previous shareholder, the sale/transfer and the appointment of the new shareholder. Companies House will need a completed J30 form and a confirmation statement to be submitted online. If the estate is valued at over £1,000, these documents will also need to be sent to HMRC. Companies House do not need to see a Grant of Probate in order to update their records.
Managing this process
The process of transferring or selling shares can be complicated, especially if a personal representative hasn’t previously had any dealings with limited companies. Many personal representatives choose to seek support from an experienced solicitor during this process.
How Roche Legal can help
We are reassuring experts who can help you with a wide range of legal matters. Please get in touch if you need legal support with: