Acquiring shares from a personal representative; the possible complications


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How can a share transfer complete if the owner dies before the transfer takes place? 

Victoria Dorman of Trowers & Hamlins explores this further, bringing experience from a recent transaction. 

On the death of a shareholder, title to shares will automatically transfer to the deceased's personal representative.  For a personal representative to be able to subsequently sell or transfer those shares, the register of members must be updated to reflect the transmission of shares, unless the articles of association allow a personal representative to transfer the shares without registering the transfer to the personal representative.  

A company's articles of association will often contain express provisions relating to the death of a shareholder but, if the articles of association have not been tailored for the specific situation, the provisions may not reflect the real wishes of the shareholders at that time.  In an ideal world, the deceased's will should also contain specific details surrounding the treatment of shares in the event of death.  If not, or when there is no will in place, delays and complications can arise if the deceased's estate is large and complex or the will is not clear on intention for the shares and who they should be transferred to.  

Where a company is part-way through a sale process, or has even exchanged agreements but not legally completed, a purchaser may be reluctant to acquire shares from a personal representative.  From a purchaser's perspective, the three key issues need to be worked through are typically:

  • What is the risk that the will is subsequently challenged and probate is granted to new executors, thus making any transfer by the initial executors invalid, or a newer, later will comes to light with new provisions?
  • What if the personal representatives do not act as executors under the final will?
  • What happens if the will states that the shares are to be transferred to a named beneficiary, not to the purchaser?

If the deceased dies intestate, the process may be more complex as the distribution of assets on intestacy will be governed by the intestacy rules and depend on the value of the deceased's estate and which members of the deceased's family are surviving.

The risk with proceeding without evidence of the authority of the personal representatives, or considering the key issues above, is that the purchaser could transfer funds to someone who has no authority to sell the shares.  Further, the purchaser could face a claim from the new executors who subsequently receive grant of probate. 

There are ways to mitigate the risk for a purchaser.  In a recent transaction, where acting for a purchaser and the majority shareholder passed away shortly before the deal exchanged, we agreed that the deceased's element of the purchase price was held in retention until probate had been granted, with the funds to be returned if probate was granted to someone other than the purported personal representatives.  The personal representatives also agreed to indemnify the purchaser for any losses, costs or penalties suffered or imposed if the personal representatives act without appropriate authority.  

Of course, the facts will differ in every case and the most appropriate way to deal with the death of a shareholder under one set of circumstances may not be appropriate under another.  

For owner managed businesses, it is important for directors and shareholders to plan their affairs carefully and think through different scenarios, not just in the event of a sale but to ensure that a company can continue to operate as normally as possible following the death of a key shareholder.

The corporate and private wealth teams at Trowers & Hamlins work closely with clients to ensure that shareholders' intentions are properly documented, whether that is in the articles of association, separate arrangements between shareholders, cross-option agreements or under a shareholder's will.  Often, it is a combination of all these things.

Similarly, Trowers & Hamlins can support both purchasers and targets and help navigate a transaction to conclusion whilst allowing key parties to focus on the commercial issues driving value for them, even when the unexpected occurs.

For more information, contact Victoria Dorman, Mathew Harvey.

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