Often, small businesses will be set up as a private company limited by shares with a sole shareholder who is also the sole director. When the owner of such a business decides to make a will, care needs to be taken to ensure that their wishes can be carried out in the event of their death and, from a practical point of view, that the day to day running of the business can continue, even if the longer term intention is to wind the business up.
The difficulty arises in the short term because there is no one in place to make important ownership or management decisions and although there may be people capable of ensuring the business continues to run effectively and efficiently, the memorandum and articles of association which govern the company are likely to provide that a number of key decisions are only taken by it's registered shareholders (members) or directors.
The circumstances will be individual to each company depending on the terms of their memorandum and articles of association which provide how shares may be transferred and new directors appointed. In the case of private companies limited by shares incorporated after 1 October 2009, model articles will automatically apply unless specifically excluded or modified and if we look at these model articles it will highlight potential issues.
On death of a shareholder, unless there are specific provisions in the constitutional documents of the company, their shares will pass in accordance with the deceased's will or, if there is no will, the rules of intestacy.
Legal title to their registered shares passes automatically by operation of law (known as 'transmission') to their personal representatives ('PR's'). However, until the name of the new shareholder has been entered into the company's register of member, the new shareholder will be unable to attend or vote at general meetings. In order to be registered, a grant of probate or letters of administration needs to be obtained, evidencing the PR's right to be entered into the register, and the PR's themselves need to agree to become registered members.
This gives rise to two issues: the first being the length of time it may take to obtain the grant (which can be 6 months or more); and the second being whether or not the PR's are willing to have their name entered into the register of members.
Under the model articles, PR's have the option to have the shares registered in their own name or to transfer the shares to another person. Where a company which has more than one shareholder or director, PR's will often elect not to register the shares in their own names, but to wait until such time as they are able to transfer the shares directly to the ultimate beneficiary. This is the preferred option for PR's since registration of the shares in their own name gives rise to personal liability for the burdens of membership of the company which is not limited to the value of the deceased's estate. So if, for example, the shares are not fully paid up and there is a call on the shares, the PR's will be required to pay up the shares even if there is not sufficient money available from the estate.
If the PR's elect not to register the shares in their own name, director's authority is required to register the new shareholder. In the case of a sole shareholder who is also sole director, this is obviously problematic.
New directors may normally be appointed by ordinary resolution of the members or by a decision of the directors. So, the articles of association of the company in question need to be reviewed to see if there any other methods for the appointment of a new director. The model articles have been written to ensure continuity of the business in the event of the death of a sole director who is also the sole shareholder and provide that the PR's have the right (but not the obligation) to appoint another director without first having to become members. However, the PR's still need to obtain a grant of probate or letters of administration in order to do so, which means there will be some delay; and if the PR's do not elect to appoint a director, an application will need to be made to the Secretary of State to give the company a direction to appoint directors under s156 of the Companies Act 2006, which takes time and expense.
If a company is left without anyone in a position to make management and ownership decisions it will, at the very least, have a serious impact on the business and could mean it comes to a grinding halt.
In order to ensure a smooth transition and effect the owner's wishes upon their death, both the articles and the effect of company law need to be considered at the outset when drafting the will. Each company's situation will be different, but there are many possible solutions and these issues can normally be resolved by amending the articles of association or ensuring there is more than one director in place.