The death of a sole director-shareholder
Updated: Dec 23, 2021
The shares in a limited company are just another asset of your estate. However, unlike most assets within an estate, there are people that own and manage the assets [shares] in a company.
Just because you die, as a shareholder, does not mean that the company does not continue. Furthermore, as the shareholders and directors can be different people, the directors would normally continue to run the company on the death of a shareholder.
With a private limited company, as opposed to a public limited company (plc), one of the main restrictions and differences is that the shares in a private limited company can only be transferred if the directors of the company approve the transfer. This creates some practical and legal issues where you run a small private limited company, and especially if you are a director and/or shareholder.
It is the practical and legal issues that we will explain below. In theory, the company directors could refuse to transfer the shares in a private limited company to the new beneficiaries, especially if they are an outside shareholder or have nothing to do with the business. Furthermore, if you are the sole director then there would be no directors to approve or disapprove the transfer of the shares. You therefore have a stalemate and some legal issues to address.
If you are the sole director and sole shareholder of the company then nobody else has an interest in the company, whether that is through management or ownership. The shareholders of the company own it, but the directors manage it.
When you formed the company, like any other limited company, the company filed incorporation documents at Companies House. These are known as the Memorandum & Articles of Association. These represent the external and internal rule-book/constitution of the company.
We must therefore turn to the Articles of Association (the internal rulebook) to establish what the position is regarding the death of a shareholder and/or director. Different companies have different rules & Articles of Association.
There is a standard set of Articles of Association, set out under the Companies Act, known as Table A. If your company does not file its own Articles of Association, like many new companies do not, then by default Table A will be adopted.
If you have a modern limited company, incorporated under the Companies Act 2006, then you may be in luck. Unlike earlier legislation e.g. Companies Act 1985 and before, the Companies Act 2006 provides specific clauses (articles) to cover the death of shareholders/directors, and particularly sole director shareholders or very small groups of the same.
Sole director-shareholders where the company was incorporated under the Companies Act 1985 or earlier may wish to consider updating their Articles of Association.
Articles of Association
Article 1 refers to the definition of ‘transmittee’ i.e. a person entitled to a share by reason of the death of a shareholder.
Article 17, sets out the methods of appointing directors.
Article 17(2) states the following: ‘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.’
Personal representatives are the people that deal with an Intestacy (if you have no valid Will) or executors (if you have a valid Will). Therefore, personal representatives, executors appoint under a Will, will either appoint themselves or somebody else to be the director(s) of the company. The newly appointed director(s) can deal with the practicalities of the transfer of shares in a company to the appointed beneficiaries under the Will.
Article 27 sets out the position for transmission of shares, on death of a shareholder.
Article 27(2) states that ‘a transmittee may either become the holder of those shares or have them transferred to another person’.
As can be seen, if a person dies whilst still a sole director and/or shareholder of a limited company, legal provisions within the company’s Articles of Association exist so that the directorship and/or shares and/or the transfer of the shares can be passed to another person e.g. the beneficiaries under a Will.
The company continues to exist in law, even after the death of a shareholder and/or director, as the two are completely separate legal entities.
Once the new director(s) and shareholder(s) have been appointed it is up to them to decide what happens to the future of the company and how the assets of the company are distributed.