When a company director dies, it is usual for his shares to pass to whomever inherits his shares through his will.

The mechanism by which the deceased’s executor might implement this transfer will, unless otherwise stated, be set out in the company’s articles. Nearly all companies have Model Articles or Table A Provisions which require the deceased’s personal representative to execute a stock transfer form or alternatively, to apply to be registered by the company as a shareholder.

Of course, where a director leaves his shares to someone outside the business this might cause tremendous problems. What happens if the new shareholder doesn’t agree with the other directors on the way forward for the business? Their interests may not be aligned and even if they are, there is no prior working relationship to lean on when making business decisions.

If the shareholding is a majority one or one that has significant voting rights, the company directors might not be secure in their own business! The new shareholder may be able to insist on a dissolution and liquidation of the business and its assets.

To avoid these pitfalls, it is usual for a shareholder’s agreement to set out the procedure in the event that a shareholder and/or director should die. The agreement might allow the shares to pass directly to remaining directors, or for certain pre-emption rights to be allowed in favour of the existing shareholders. Of course, where a deceased director/shareholder’s spouse or dependents survives the deceased, this might leave them without financial support.

To rectify this potential injustice, many shareholder’s agreements will allow for a cross option agreement which allows for the beneficiaries of the will to be paid for the deceased’s shares through the arrangement of a life insurance policy taken on the shareholder / director’s lives.

In the case where a director is not a shareholder but is still key to the successful operation of the business, it may be sensible for the business to take up what is known as ‘key man cover’ which will pay the business a lump sum in the event of the director’s death. This should enable the business to continue whilst efforts are made to replace the director’s talents or liquidate the business for its real worth.

It is clear from the above that any business and its shareholders should be considering what will happen in the event that a key director or shareholder dies and planning accordingly for the worst.

In the first instance, speak to us for a confidential and discreet conversation, without obligation.

To speak to a wills and estate planning adviser contact us on 01628 507477.

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