How to prepare for the death of a sole director and shareholder

How to prepare for the death of a sole director and shareholder

Ilott v Blue Cross - The Final Curtain

Whilst a difficult topic to consider, the sudden death of a company’s sole director who is also the sole shareholder can be very problematic for the business’ succession arrangements.

With no other directors in place, there is nobody else with power and legal authority to make decisions about the business, the company’s assets could be frozen with creditors and employees unpaid, and the company’s continued operation could be under threat. This can be compounded if the sole director/shareholder is the only key person with the knowledge of the business.

Potential problems

If the sole director/shareholder has a Will, title to the shares will vest in the personal representatives (“PRs” – also known as executors) on death, but the PRs will not become shareholders until they are registered in the company’s register of members.

This typically only occurs once they have obtained the Grant of Probate, but this can take some months after death (and has taken longer recently due to delays caused by the pandemic).

However, if the sole director/shareholder has no valid Will in place, the position is more complicated as the next of kin will need to apply for a Grant of Letters of Administration, which will confirm who will act as PRs. In the meantime, there is no one with immediate authority to act as PRs.

Until the PRs are registered as shareholders in the company’s register of members, they will be unable to attend general meetings and to exercise voting rights attaching to the shares. Moreover, as there will be no director in place, the PRs will need to appoint a replacement director as soon as possible to ensure that the business can continue to operate. However, their ability to do this depends on the provisions in the company’s Articles of Association.

For companies incorporated from 1st October 2009, this power is contained in the Model Articles of Association and provides that the PRs of the last shareholder to have died can appoint a director without having to be registered as shareholder.

However, if the company adopted bespoke Articles or was incorporated before October 2009, the Articles may not contain such a provision. This can lead to a real problem as, with no director, the register of members cannot be updated, and the PRs cannot be registered as shareholders to make the necessary appointment of a replacement director.

The PRs may then be forced to go down the route of a costly application to the courts for an order to enable them to be registered as shareholders so they can appoint a new director. While there is case law to support such orders, it should very much be a last resort and the emphasis should instead be on taking adequate steps before death.

The importance of Wills

Putting a Will in place or reviewing an existing Will is fundamental for succession planning. The sole director/shareholder should have a Will in place appointing suitable individuals to act as PRs and stating who the company shares should pass to on death. If there is already an existing Will, this should be reviewed to ensure that it reflects the sole director/shareholder’s latest wishes.

It is also vital that the Will contains adequate powers to enable the PRs to make decisions about the company and to transfer the shares to the beneficiaries named in the Will or to sell them. A letter of wishes is also helpful for setting out how the sole director/shareholder would like the company to be run after death and providing guidance to the PRs on who they could consider selling the shares to if necessary and who they could consider appointing as replacement director.

Constitutional documents

The company’s Articles of Association should also be reviewed and if necessary, amended to ensure that they give the PRs power to appoint a new director where, as a result of death, the company is left with no directors and no shareholders.

The provisions in the Articles on what happens to the shares on the sole shareholder’s death should also be checked to ensure they are consistent with the wishes of the sole shareholder and do not contradict what is in the Will.

Thought could also be given as to whether it would be useful to include provisions in the Articles enabling the PRs to exercise the voting and other rights attaching to the deceased’s shares while they remain registered in the deceased’s name.

Lasting Power of Attorney

Incapacity of a sole director/shareholder is just as important to consider as death. This risk can be addressed by the sole director/shareholder putting in place a Lasting Power of Attorney (“LPA”) covering their business assets and nominating one or two trusted individuals as attorneys to make management decisions in the case of incapacity.

Practical considerations

There are also a number of other practical tools available to sole directors/ shareholders. This includes appointing an additional director, transferring some shares to a family member as well as training staff to pass on key knowledge about the business.

With appropriate lifetime planning, the complex problems that can arise on the death of a sole director/shareholder can be avoided. Sole directors/shareholders should review the arrangements they have in place in the event of their death or incapacity in order to avoid the risk of their PRs having to make costly applications to court to save the business.

There are also simple practical steps that can be taken now to remove the risk of the business being entirely dependent on one individual.

This article was first published in SME Magazine, read here

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