Updated 01/09/2023
Do you and your business know what happens when a shareholder dies?
The loss of a loved one is a difficult time for their family.
When the deceased is also a shareholder, it’s tough for their business too. They’ll be missed, along with the knowledge, experience and decision-making they brought to the business.
It also means uncertainty when you least need it.
What happens to their share of the business will depend on what you agree beforehand. So unless you plan ahead, the deceased’s shares could bring more challenges for the company.
However, there are steps you can take now to protect the future of your business.
Two key factors affect what happens when a shareholder dies when it comes to their shares. Both of these depend on what is put in place before their death.
The first is what was written into the shareholder’s will about who inherits their shares.
The other is the internal rules of the company, the articles of association. These determine how shares should be sold or transferred.
A common situation is that the deceased’s family inherits their share of the business. In which case they will decide the future of the shares – whether to sell them or hold onto them.
As a result, you’re likely to face three possible scenarios:
If the family decide to hold onto the shares, they’ll be able to have a say in company decisions.
However, if the family does not want to engage with the business, this may make it harder to make key decisions. Otherwise, if the shareholder’s family choose to take an active role in running the business they could have different ideas about its future. As a result, this could cause disagreements with the other owners.
The family could decide they do not want to hold onto the shares and so sell them to a third party.
This may cause difficulties if the shares are sold to one of your competitors or someone else you do not wish to be involved in the company. This could take your business in a different direction to what you wish or it may cause conflicts amongst the owners.
To avoid the challenge of working with new shareholders, an alternative approach is for the other shareholders to buy the deceased’s shares.
This allows you to keep control of the business you’ve built up. In addition, you’ll know who you’re dealing with to run the company. What’s more, the deceased’s family are free from making company decisions at their most difficult time.
However, for this approach to work you need to have the funds available to buy up the shares.
How to Protect the Future of Your Business
A shareholder’s death creates uncertainty for your business.
To prevent uncertainty and protect your business, you need a plan for how to handle this event. One way to do this is with insurance to buy the shares of a deceased shareholder.
A shareholder protection insurance plan funds the purchase of a deceased owner’s share of the business.
Whether you’re a private limited company or a partnership, a shareholder protection plan means that:
- Your company stays in the hands of the existing owners
- The deceased’s relatives are free from business responsibilities
- You’ll have peace of mind about the future of your company
The plan can also be adapted to cover critical or serious illness.
If one of your shareholders becomes unable to work and run the business due to severe illness they can sell their shares to the other owners. This enables the business to keep going and frees up the shareholder from decision-making.
Shareholder protection is an insurance plan agreed by the company and its shareholders.
It covers the purchase of shares if one of the shareholders dies. The plan pays out a lump sum to cover the value of their share of the business. The other shareholders use this to buy the shares of the deceased co-owner.
Different plans are available to provide life cover for each shareholder. A key factor is agreeing the value of each owner’s share of the business so that the payout amount is appropriate compensation for the shares.
In addition to the shareholder protection plan, each shareholder should also write a will. This is so their family or beneficiaries receive the value of their shares.
Protect the Future of Your Business
You never know what’s around the corner, in business or in life.
Whilst you never wish it to happen, death and illness is a fact of life. The loss of one of your business partners or shareholders could have a major impact on your business though.
As you’ve built the business together, now’s the time to decide how to handle this situation in the best interests of your business and yourselves.
A shareholder protection plan gives you the chance to protect the future of your business.
Call us on 0345 224 3175 or email admin@visionifas.co.uk to book an appointment. We’ll talk through how a shareholder protection plan could work for your business and what happens when a shareholder dies.
Frequently Asked Questions
The voting rights of the deceased shareholder typically pass to the beneficiary or beneficiaries who inherit the shares.
In most cases, shareholders have the freedom to will their shares to whomever they choose, but this may be subject to certain legal restrictions.
The impact on company operations varies depending on the shareholder’s level of involvement and the size of their ownership stake. In some cases, it may lead to significant changes in management and strategy.
Yes, the company has legal obligations to address the transfer of shares, reconstitution of the board, and communication with stakeholders, among other things.
If a shareholder dies without a will, their shares may be subject to intestate succession laws, which vary by jurisdiction.
In some scenarios, the death of a major shareholder can create an opportunity for a hostile takeover, particularly if the shares are sold to external parties.
Please note: tax reliefs referred to, are those currently applying, and are liable to change.
