What happens to your shares and directorship when you die?

If you own and operate a company, have you considered what would happen if you died?

For many business owners, the distinction between being a shareholder and being a director is largely academic while they are alive. They own the business, make the decisions and run its day to day operations. On death, however, the distinction becomes very important.

Your shares are an asset capable of passing through your estate, but your position as a director is not. This can create some unexpected consequences, particularly for businesses with only one or two shareholders and directors.

What happens to your shares?

The Companies Act 1993 expressly recognises shares as transferable personal property, subject to the company’s constitution.

Accordingly, your shares do not automatically pass to the remaining shareholders.

Instead, they will generally form part of your estate. Your executors will deal with the shares as part of administering your estate, with their ultimate ownership depending on your will, and any company constitution or shareholders’ agreement. 

This distinction is particularly important where the business has multiple owners.

For example, you might provide in your will that your shares are to pass to your spouse or children. However, the company’s shareholders’ agreement may contain provisions which are triggered by your death and require those shares to be offered for sale. 

We see this dealt with in a number of different ways. For example, a shareholders’ agreement might provide for the deceased shareholder’s shares to be purchased by the surviving shareholders at an agreed or independently determined value. Some arrangements are supported by life insurance to provide the surviving shareholders with funds to complete the purchase.   

The important point is that your will should not be considered in isolation. Your will, shareholders’ agreement and company constitution need to work together.

What happens if you are also a director?

A directorship is an office held personally. You cannot leave your position as a director to somebody in your will. So, while your shares can be passed to someone else, your directorship does not pass with them.

There is, however, an important connection between the two. In many companies, shareholders have the right to appoint directors. Accordingly, although a beneficiary does not simply inherit the deceased’s position as director, if they ultimately receive the deceased’s shares, they may acquire voting rights which enable them to appoint a new director. This is subject to the Companies Act 1993 and, importantly, the company’s constitution and any shareholders’ agreement.

Consider a company owned and operated by one person who is both its sole shareholder and sole director. On their death, the company continues to exist and the shares form part of their estate, but their appointment as director comes to an end. The shares can then be dealt with through the estate and, depending on the company’s governing documents, the person entitled to exercise the rights attaching to those shares may be able to appoint a new director.

If two people each own 50% of a company and are both directors, the death of one does not transfer their directorship to their spouse, children or beneficiaries. They may have pre-emptive rights to purchase each other’s shares in the event of death.  Or, their 50% shareholding may ultimately pass to the beneficiaries under their will. With that shareholding may come voting and governance rights, including rights relating to the appointment of directors.  In a small company business, it is often preferable for pre-emptive rights to prevail, rather than for one shareholder to accidentally end up in business with the spouse or children of their business partner.   

This is why succession planning needs to consider not only who receives the shares, but also who may ultimately have influence over the management and control of the company.

The shareholders’ agreement can make all the difference

A well drafted shareholders’ agreement can determine what is to happen before any issues arise. 

It can address matters such as:

• whether death triggers a compulsory sale of shares;
• whether the surviving shareholders have the first opportunity, or an obligation, to purchase the shares;
• how the shares will be valued;
• how the purchase price will be funded, and timing of any purchase;
• whether life insurance should be maintained for that purpose;
• whether beneficiaries of the deceased shareholder’s estate can retain the shares; and
• the procedure for appointing replacement directors and maintaining the governance of the company.

If there is no shareholders’ agreement then greater reliance will be placed on the Companies Act 1993, the company’s constitution (if it has one), the deceased shareholder’s will and the usual rules governing administration of estates under the Administration Act 1969 and other relevant legislation.

Don’t forget the will

Your will can determine who is to receive your shares, but it should be checked against any restrictions or compulsory sale mechanisms contained in your shareholders’ agreement or constitution.

For a business owner, simply including a gift of “my shares in XYZ Limited to my spouse” may therefore not achieve the intended result if a shareholders’ agreement requires those shares to be sold following death.

Just as importantly, think carefully about who you appoint as executor. Administering an estate that holds an interest in an operating business can involve decisions which are materially different from dealing with ordinary estate assets such as a house or bank account.

Planning now can prevent a problem later

If you own shares in a private company, particularly where you are also a director, succession planning should involve more than simply having a will.

We recommend that business owners periodically review:

1. their will, including who will administer the estate and ultimately benefit from the value of the shares;
2. the company’s constitution, to identify any relevant restrictions or procedures relating to share transfers and governance;
3. the shareholders’ agreement, particularly its death, transfer, valuation and insurance provisions;
4. the company’s directorship arrangements, including what happens if a key or sole director dies; and
5. any life or buy-sell insurance arrangements, to ensure the intended purchase of shares can be funded.

A relatively small amount of planning while everyone is alive and on good terms can avoid considerable uncertainty for both the business and the deceased owner’s family later.

If you own shares in a company or operate a business with other shareholders, our team can review your company’s constitution, shareholders’ agreement and estate planning arrangements to ensure they work together and accurately reflect what you want to happen on your death.