Articles of Association, Shareholders’ Agreements and Investors’ Agreements – what’s the difference?
Serious difficulties can arise where a sole shareholder dies who is also the sole director of a company.
Where a company has a number of directors and one of the directors dies, the surviving directors can continue to manage the company.
If the sole shareholder of a company dies, the directors can continue to manage the company until the deceased shareholder’s beneficiaries have the shares transferred to them.
Uncertainty arises where a sole director is also the sole shareholder. In this situation, a Grant of Probate or Letters of Administration are required in order for the deceased’s personal representatives to be added to the company’s register of members. The personal representatives can then pass a resolution appointing a new director. This takes time and the process can be to the severe detriment of the business. Assets in the name of the company will effectively be frozen as nobody in the company has the authority to take decisions.
A company’s articles of association (see our related blog 'Articles of Association, Shareholders’ Agreements and Investors’ Agreements – what’s the difference?'), which are filed at Companies House and set out the rights attaching to shares, then come into play. They set out what should happen on the death of a shareholder and/or director of the company. It is essential that articles of association are kept under review to ensure that they suitably provide for the future and cover what should happen in the event of death.
If the company in question has adopted the latest model articles of association, (i.e. those that all companies incorporated on or after 28 April 2013 are automatically incorporated with), the position is clear. Article 17(2) allows the personal representatives of the last shareholder to have died to appoint a person to be a director, in the event that, as a result of death, the company has no shareholders and no directors. If the company has adopted bespoke articles, these would need to be checked to ensure that this situation has been provided for. In any event, if the deceased does not have a valid Will in which executors are appointed, then it is a case of waiting for a grant to confirm the appointment of the personal representatives. This can take some time and presents an issue if a director is needed to act immediately.
Any business owner or shareholder should also ensure that they have an up to date Will which stipulates what should happen to their shares on death. They should check that the Will is consistent with the company’s articles of association so there is no conflict or confusion. Note that articles will often include provisions treating the death of a shareholder as an ‘event of default’ which then triggers the automatic offering up for sale of the shareholder’s shares in the company - to the company and/or the remaining shareholders, often at market value. This type of provision is less likely to appear where the company has only one director and one shareholder, but could remain in the articles for legacy reasons.
Professional advice should be taken when updating your Will, as the inclination is often to leave company shares to family members, some of whom may not want to be involved (or may not have the right skills to be involved) in the business. In these circumstances they might prefer cash to the shares and suitable mechanisms can be put in place to provide for this in a straightforward, tax efficient manner. Always ensure that your Will and the constitutional documents of the company you run (and any companies you have shares in) work together, and don’t contradict each other.
Basic practical measures should not be overlooked when planning for the future of a business, such as making sure that key company knowledge and information is not simply held by one person in the business. Ensuring that at least one other person in the company has details of key know-how, contacts, passwords and authority to make everyday payments can help the business continue to operate following a key person’s death.
Taking a longer term view, succession planning should be considered both in the context of your business life as well as your personal one. The appointment of an additional director at an appropriate time during your lifetime will alleviate many of the problems caused by the death of a sole director and shareholder.
Many business owners work incredibly hard to build up a successful business. Planning ahead will ensure that the business can continue if the worst were to happen.
Stephanie Mooney is an Associate in our Private Client team. Stephanie advises on a broad range of matters including lifetime succession and estate planning, wills, the administration of estates (probate), the creation of and administration of trusts, powers of attorney and applications to the Court of Protection and other mental capacity issues.
Roberta Draper is a Senior Associate in the Corporate and Commercial team. Roberta advises startup founders, angel investors and established businesses on a variety of corporate and commercial legal matters. She advises on early stage investments, share option schemes, shareholder agreements, share buybacks and company sales and acquisitions.
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