Death of a sole director shareholder
Private limited companies are often led by a single director who is also sole shareholder. However, without a succession plan, problems could arise if that sole director shareholder dies.
When a corporation has several directors and one dies, the surviving director(s) can continue to run the company as before.
If a company's sole shareholder dies, the directors could continue to administer it until the deceased's shares are transferred to their beneficiaries.
Both circumstances facilitate 'business as usual,' but without a director, assets may be frozen, company accounts become unavailable, and business critical transactions become impossible.
But how will the shares of a solitary director shareholder be allocated upon their death, and how would a new director be nominated?
If there’s a Will, shares will likely transfer to the deceased’s personal representatives (PRs), who may be added to the company's register of members.
However, director permission is necessary to register a shareholder, and when a sole director shareholder dies, there will be no director. Depending on whether Table A articles, Model Articles, or bespoke Articles were used, the firm's Articles of Association may address the issue.
Articles of Association
Whether a PR can appoint a new director after a sole director shareholder dies depends on when the company was formed and if its Articles have been reviewed since.
Those formed under the Companies Act 1985 (or earlier), for example, are likely to have adopted Table A articles, which include no provision for a PR to select a director.
A court application may be required to add a PR as a shareholder on the Register of Members. This is a lengthy procedure that may end in assets being frozen.
Companies formed under the Companies Act 2006 with Model Articles could give PRs authority to appoint a new director. This negates lengthy legal processes, enabling the business to continue operations while the new director registers the PR as a shareholder.
Companies having Custom Articles should have their Articles analysed to see whether such actions are permissible.
Sole director shareholders should have valid Wills, consistent with the company’s Articles of Association. This reduces the possibility of disagreement or confusion with regards to the transferal of shares upon a single shareholder’s death.
This applies to all shareholders, as leaving shares to a specified beneficiary may be prohibited under the Articles of Association.
A High Court Judge recently held that because a corporation's Articles of Association required two directors to make decisions, a single director could not act on the firm's behalf. This unexpected judgement put into doubt the legality of decisions made by single directors of many firms.
However, another High Court Judge has since found that the Model Articles' requirement for at least two directors to make decisions did not replace the decision-making powers of a single director in circumstances where there was only ever one director.
Because these judgements are not binding, this has caused confusion regarding the legitimacy of lone director decisions when Model Articles have not been modified, and it adds ambiguity to the situation of corporations that had more than one director but were reduced to one.
If a company has changed its Model Articles or previously had numerous directors, there is still the risk that a provision in those Articles would demand multiple directors to make decisions, rendering the judgements taken by a sole director invalid.
Another director may need appointing or the Articles amending to clarify the decision-making powers of a sole director. Shareholder resolutions may be required to validate a sole director's historic choices in order for them not to be ruled untenable.
In summary, it’s sensible to have Article provisions and Wills examined frequently to ensure consistency and remove confusion.