Shareholders are for life, not just for Christmas

We have all seen the adverts depicting dogs, abandoned and unloved, once the novelty of a cute Christmas puppy has worn off. Now I’m not suggesting that any one of you would like to abandon your fellow shareholders in a cardboard box by the canal, but have you ever thought what might happen to your company if the fondness for a fellow shareholder wears off?

I recently received an enquiry from a gentleman wanting to understand the options in relation to shares where a shareholder had deceased, or simply fallen out with the company. I gave the advice he requested and he failed to hide the shock in his voice when he exclaimed “So we would be stuck with him…for life?!”

So here they are, the truths you may not want to hear:

If a Shareholder dies:

Assuming that you have no special provisions within your Articles of Association, when a shareholder dies, their shares will be held in transmission by their personal representative. This individual will not have the power to vote in respect of the shares but they will be able to elect to either become registered as the holder of the shares; or transfer the shares to another individual, perhaps in line with the Will of the deceased.

Whilst the directors of the company will have limited powers in relation to approval of any transfer, the shareholders do not have any rights and no one is able to dictate where the shares are ultimately transferred to.

When a Shareholder is disruptive or uncooperative:

Again, assuming that you have no special provisions within your Articles of Association, there is really very little that you can do here. It is possible that one or a number of individuals could offer to purchase the shares of the problem shareholder, but there is no guarantee that he or she will agree to sell. The level of difficulty that this will cause the business depends greatly on the number of share that the individual holds but nevertheless, no company will function well if all parties are not working toward the same goal.

What is the answer?

Take the time to think about the ‘what if’ and ensure that you put in place the safeguards that you need in the event of death or disruption. This could take the form of bespoke drafting within your Articles of Association or, a Shareholder Agreement that has the added advantage of not being in the public domain – an element that is important to many shareholders that we work with. Long-term planning is key.

Anthony Young
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