The death of a business partner or fellow shareholder can create significant complications for a company if proper planning hasn't been put in place.
Understanding how share ownership transfers after death is crucial for protecting both your estate and your business relationships.
Your will isn't enough
Many shareholders assume that simply naming beneficiaries in their will is sufficient to handle their business interests after death. This approach overlooks company regulations. Even if your will clearly states that your shares should, say, go to your spouse and children, the company's own rules may dictate something completely different.
The rules governing share transfers as outlined in the company's constitutional documents (articles of association and shareholders’ agreements) will take precedence.
Company transfer rules
Company documents typically handle share transfers in several different ways. In some cases, certain defined transfers may be pre-approved within the company's articles of association, meaning the transfer can proceed smoothly without interference from other shareholders. This may allow transfers to family members or family trusts for example. It provides certainty and allows your wishes as expressed in your will to be carried out without obstruction.
In other situations, the company documents may grant existing shareholders or directors the right to block certain transfers. Or other shareholders may have a first refusal to buy shares on a member’s death. This ensures that share ownership in the company is tightly controlled but could prevent your intended beneficiaries from inheriting your shares, regardless of what your will states.
Cross-option agreements
Rather than leaving share inheritance to chance, many shareholders opt for a more structured approach through cross-option agreements. This works well when the intention is that the survivors should have ownership and control of the company, and the estate of the deceased is instead to receive an appropriate sum for the shares. These agreements establish a framework that allows surviving shareholders to purchase the deceased shareholder's shares, while the deceased's estate has the corresponding right to sell them.
This arrangement provides certainty for all parties involved. The surviving shareholders know they can maintain control of the business, while the deceased's family knows they'll receive fair compensation for the shares rather than being forced into an ongoing business relationship they may not want or understand.
Life insurance for funding
One of the biggest practical challenges with cross-option agreements is having sufficient funds available when needed. Specialist life insurance policies can address this issue by providing the necessary capital to purchase shares upon death. This prevents surviving shareholders from scrambling for financing or being forced into payment plans that could strain the business.
Important questions
When structuring these arrangements, several important questions need to be answered:
- Share valuation: How will the price of shares be determined at the time of death? Will you use a fixed sum, a predetermined formula or another independent valuation method?
- Purchase rights: Will all surviving shareholders have the right to purchase shares, or will it be limited to certain individuals? This decision can have a significant impact on the dynamics and future ownership structure of the business.
- Family member obligations: Should other family members who already hold shares be required to sell their holdings when a related shareholder dies, ensuring clean ownership transitions?
Regularly review your documents
The secret to avoiding complications is planning ahead. Start by examining what you want to happen to your shares upon death, but don't stop there. Think about how you'd feel about the same rules applying to your fellow shareholders' shares.
Once you've considered these scenarios, review your existing will to ensure it aligns with your intentions. If you don't have a will, this planning process makes it an ideal time to create one.
Carefully review your company's articles of association and any existing shareholders' agreements. These documents will ultimately govern what happens to your shares, so you must ensure they won't prevent your wishes from being carried out.
If you discover conflicts between your intended plans and the company's rules, you'll need to address these inconsistencies - either by amending your estate planning documents or working with fellow shareholders to modify the company's constitutional documents.
Don't leave it to chance
Planning for share transfers on death protects both your family's financial interests and your business partners' ability to continue operating effectively. Without proper planning, your death could trigger lengthy legal disputes, force unwanted business relationships, or create financial hardship for surviving shareholders who lack the funds to purchase shares immediately.
Taking these steps now can save your family and business partners significant stress, expense, and uncertainty during an already difficult time. The relatively small investment in proper legal advice and insurance planning pays dividends when it matters most.
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
