When a sole director-shareholder dies, title to their shares vests in their personal representatives (PRs) by operation of law via a process known as transmission. For individuals with a will, their PRs will be the executors appointed under their will.
However, although the deceased’s shares will vest in their PRs on death, in fact the PRs won’t officially become shareholders of the company until they are registered in the company’s register of members.
For both private limited companies registered under the Companies Act 2006 (CA 2006) with model articles (Model Articles), and private limited companies registered under the Companies Act 1985 with Table A articles (Table A), registration of the PRs as shareholders can only occur once they have evidence of their entitlement to the deceased’s shares, that is, grant of probate (where the deceased had a will) or letters of administration (where the deceased did not have a will). Consequently, in the absence of any amendments to the Model Articles/Table A to override these provisions, the PRs will have to wait months to be registered as the new shareholders of the company.
In the interim period, the company will face a power vacuum, with the PRs unable to exercise the voting rights attaching to the deceased’s shares.
The Model Articles (which are the default articles for companies incorporated after 1 October 2009) go some way to overcome this issue by allowing the PRs to appoint a new director to replace the deceased, who can run the company and (once the PRs have grant of probate) register them as shareholders.
However, companies incorporated before 1 October 2009 are governed by Table A, which does not grant the PRs the right to appoint a new director. Without a director capable of taking decisions on behalf of the company, wages may be left unpaid, contracts unfulfilled and opportunities missed, ultimately leading to a collapse of the business.
Table A also requires that the evidence of entitlement to the deceased’s shares (which allows the PRs to be registered as shareholders) is produced “as the directors may properly require” – an outcome that will be impossible to achieve where (i) the deceased was the sole director, (ii) there are no living directors and (iii) the PRs do not have the right to appoint a new director under Table A.
The case of Williams v Russell Price Farm Services, 2020 EWHC 1088 Ch neatly highlights the issues. As sole director-shareholder, Mr Price’s death resulted in the company having no living directors or shareholders. The company’s articles of association had adopted Table A. Accordingly, pending grant of probate, his executors had the ability neither to exercise the voting rights attaching to Mr Price’s shares nor to appoint a new director. The company’s bank accounts were effectively frozen, leaving the executors unable to draw funds to pay creditors. Day-to-day running of the company quickly ground to a halt.
To save the business from failing, the executors were forced to make an urgent application to court under section 125 of the CA 2006, requesting permission (which was granted) to amend the company’s register of members to remove Mr Price and enter themselves as holder of the shares – thus enabling them to appoint a new director to take up the reins of the company.
As this case demonstrates, in exceptional circumstances such as these, the court may be willing to exercise its discretion to order rectification of a company’s register of members, allowing registration of the PRs as shareholders prior to the grant of probate.
Succession planning tips
Although an application to court can be made by PRs in urgent circumstances to avoid the collapse of a business, such applications are generally time-consuming, stressful and expensive (the costs would likely be paid for out of the deceased’s estate or by the company).
For a sole director-shareholder the better approach is to plan ahead to ensure there is no potential for a power vacuum to arise in the event of their death. The following steps may be considered.
- Make a will appointing two or more trusted individuals as your executors, and a (non-legally binding) letter of wishes addressed to those executors, setting out your wishes about how the company is run after your death and noting any individuals you would like your executors to appoint as director(s).
- Amend the company’s articles of association to:
- confirm your executors’ entitlement to your shares on death by way of transmission;
- permit your executors, on your death and prior to receipt of grant of probate, to exercise all the rights attaching to your shares (including the voting rights); and
- permit your executors, on your death and prior to receipt of grant of probate, to appoint a new director to run the company (and update the register of members to add the PRs as shareholders once grant of probate has been obtained).