Untraceable shareholders

The issue

Untraceable shareholders present a significant challenge for companies, both in terms of administrative burden and legal compliance. Shareholders can become untraceable for various reasons, such as failing to update their contact details after moving or dying without their family being aware of their shareholding. This article looks at this issue from the perspective of a private limited company.

The ability of the company to effectively make decisions may be hampered by untraceable shareholders. For example, where a company cannot trace shareholders who hold an important percentage shareholding (say 25% or more) then its ability to pass a resolution will be affected. There are hurdles to be overcome whether the proposed resolution is due to be proposed at a general meeting or by written resolution. If a general meeting, notice must be given to every member of the company; if a written resolution, a copy of the resolution must be sent to every “eligible member” (those entitled to vote on the resolution as at its circulation date). In terms of voting, on a show of hands at a general meeting, each member present in person has one vote, which is in contrast to a written resolution where each member has one vote per share (in each case subject to the articles of association). Therefore, in some circumstances it may be preferable to call a general meeting, rather than using the written resolution process, in order to maximise the chances of passing the resolution (with the attendant delay and cost of holding such meetings).

Legislation contains some protective provisions in relation to companies facing the problem of untraceable shareholders. The company communication provisions in the Companies Act 2006 provide that a company may send documents such as a notice of meeting or written resolution to a shareholder by posting a hard copy of the document to the shareholder’s address as it appears in the register of members or, failing that, to the last known address. However, especially where contentious matters are being voted on, the optimal position for the directors is to have up to date address details for all shareholders to minimise the risk of subsequent challenge to any vote on the grounds of lack of notice of the resolution. 

The reason that untraceable shareholders may cause problems for a company is that, despite their untraceable status, these shareholders retain their rights, including the right to receive dividends and vote on company matters:

• The usual position (under the model articles) is to ringfence accrued dividends for the shareholder. If the shareholder reappears within 12 years then they are entitled to be paid the dividend(s), whereas after 12 years an unclaimed dividend(s) will unconditionally belong to the company. Keeping the money ringfenced is a prudent approach (rather than investing it within the business) to ensure that the funds are available if the shareholder reappears. Where there are bespoke articles, then these should be adhered to instead. Subject to legislation around unfair terms, the default period for forfeiture of the dividend(s) could be much less than 12 years.
• It is possible that a company’s articles may contain a provision that a shareholder’s failure to provide the company with up-to-date contact details means that notices do not need to be sent to that shareholder and failure to do so will not invalidate any resolutions passed. However, if there is no such provision in the articles, then the company should continue to send notices of meetings etc to the last known address for the shareholder (as recorded in the shareholder register).

Failure to respect the rights to dividends and to receive notices of meetings or copies of resolutions can lead to legal consequences, including challenges to company resolutions and potential claims for damages.

Steps to avoid a shareholder becoming untraceable

As with many things in life, prevention is better than cure! Keeping records that include multiple means for contacting a shareholder is prudent - reliance only on a home address is poor practice given modern methods of communication. These days the records should ideally consist of a home address as well as telephone number(s) (ideally a mobile and not just a landline number which are becoming less common) and an email address (perhaps a personal one as well as a business one depending upon the circumstances).

Ultimately, dealing with untraceable shareholders requires a proactive approach by a company. It is strongly advised that every company should regularly update its shareholder records and include multiple contact methods to minimise the likelihood of shareholders becoming untraceable.

By taking these steps and ensuring compliance with legal requirements, companies can effectively manage the challenges posed by untraceable shareholders and maintain smooth operations.

What is an untraceable shareholder and how is this established?

Before any action can be taken to transfer the shares of an untraceable shareholder, the company must make reasonable efforts to locate the shareholder. In general, a company’s articles will govern what a company can do with the shares of untraceable shareholders. Typically, this will involve placing notices in relevant publications, such as the London Gazette or local newspapers, to demonstrate that every attempt has been made to find the missing shareholder. The London Gazette provides the company with a useful evidential trail as it provides an official public record of important statutory and non-statutory notices. These days a social medial search could also be prudent as many people have an online profile of some description.

The costs associated with the effort to trace the shareholder should not be disproportionate to the value of the shareholding.

Only after these efforts have been exhausted can the company consider further steps.

How might a company deal with an untraceable shareholder’s shares?

There are multiple ways in which a company may deal with the shares of an untraceable shareholder. These include:

• transferring the shares
• the company purchasing its own shares
• using the statutory "squeeze-out" provisions if the company in question is the subject of a takeover

Each of these routes will vary by cost and complexity and not all will necessarily be successful in a particular scenario so early legal advice is desirable. The most common way to obtain the shares of an untraceable shareholder is for them to be purchased, whether by an existing shareholder, the company itself or a third party. A brief overview of what may be possible is set out below.

The transfer of shares

The question of whether a company can transfer shares of an untraceable shareholder is a matter of considerable legal complexity and requires careful consideration of both statutory requirements and the company’s articles of association. Getting this wrong and failing to observe the ongoing rights of shareholders could result in significant adverse consequences for the company, including potential legal challenges and actions for damages. 

The company’s articles of association may provide guidance on how to proceed. Many companies adopt model articles which include provisions for dealing with unclaimed dividends and the forfeiture or sale of shares held by untraceable shareholders. For instance, if dividends remain unclaimed for a specified period, typically 12 years, the shareholder may lose entitlement to the money, which then unconditionally belongs to the company. This is an important mechanism to ensure that the company can manage its financial obligations without undue burden.

Similarly, the articles would likely also provide for consideration to be paid for the shares purchased which will then need to be held separately in trust for the benefit of the untraceable shareholder.

The purchase by the company of its own shares

Again, this may already be permitted by the articles. However, if the articles do not already provide for this, then a company may consider amending its articles to include specific provisions for dealing with untraceable shareholders. A special resolution (i.e. 75% shareholder approval) is generally needed to amend the articles (subject to any entrenched provision within the articles and/or any requirement for class consent).

Such an amendment might include allowing for the buyback of shares held by untraceable shareholders, with the purchase price placed in a separate account and the shareholder accounted for as a debtor in the company’s accounts.

This approach helps streamline the shareholder register and mitigate administrative challenges. However, it is crucial to comply with strict requirements to avoid the acquisition of shares being held to be void or committing an offence.

There is no set time period for retaining buyback funds for untraceable shareholders. Convention seems to be that proceeds are kept for up to 12 years. The ability of the company to execute the buyback agreement on behalf of the untraceable shareholder might be set out in the articles, but if it is not then such authority could be implied depending on the facts and the context.

Using the statutory "squeeze-out" provisions if the company in question is the subject of a takeover

A statutory squeeze-out can be an effective mechanism for dealing with untraceable shareholders during a takeover bid. It is useful where the untraceable shareholder holds 10% or less of the company’s shares.

Under the Companies Act 2006, a squeeze-out allows the offeror to compulsorily acquire the shares of minority shareholders if certain conditions are met. Specifically, the offeror must have acquired or unconditionally contracted to acquire at least 90% in value of the shares to which the offer relates and 90% of the voting rights carried by those shares.

Once this threshold is met the offeror can force the transfer of the remaining shares, including those held by untraceable shareholders, at the same price offered in the takeover bid. This ensures that the offeror can gain full control of the target company irrespective of whether there are untraceable shareholders.

The consideration for the shares is deposited in a separate account for the benefit of the untraceable shareholders. This ensures that the rights of the untraceable shareholders are preserved, and they can claim their consideration if they come forward at a later date.

This mechanism allows the streamlining of the shareholder register and avoids the administrative burden and legal risks associated with untraceable shareholders. The statutory requirements must be followed meticulously to ensure the validity of the process and avoid potential future challenges.

Other methods of dealing with an untraceable shareholders’ shares

There are other less common methods of dealing with an untraceable shareholder’s shares which may apply in prescribed limited circumstances. These might include:

• the redemption of shares (only if the shares in question have a right of redemption attached to them)
• the forfeiture or acceptance of a surrender of shares in lieu where there has been a failure to pay any sum payable in respect of the shares
• a scheme of arrangement to restructure the company’s share capital and cancel the shares held by the untraceable shareholder

Conclusion

Dealing with untraceable shareholders need not always be a burden and it is possible to navigate a way through the difficulties they present.

We at Stevens & Bolton are able to advise on all matters related to corporate governance and corporate disputes. We regularly advise on the pros and cons of proposed actions and help clients navigate difficult corporate issues and corporate litigation. We also offer clients a dedicated company secretarial service which can be of assistance in maintaining the shareholder register and keeping track of your shareholders - so do get in touch if you are seeking support with company issues.