The death of a company's sole director-shareholder can have a severe impact on the running of the company and leave the business in limbo with no one in place with the authority to operate it.
In the event of the death of a sole director where there are surviving shareholders, it may be possible for a new director to be appointed by the remaining shareholders.
Where a sole shareholder dies, the company directors may continue to run the business until the deceased shareholder's shares have been transferred to a new shareholder.
Substantial issues can arise upon the death of a sole director-shareholder which could be extremely detrimental to the business.
Upon the death of a sole shareholder, their shares must be transferred into the ownership of a new shareholder. In this event, the deceased's shares are usually passed to their personal representative who will have the right to be registered as the new shareholder. The problem that occurs is that the authority of a director is required to appoint a new shareholder. Where the deceased sole shareholder was also the sole director, there remains no one to register the new shareholder. The company is then essentially frozen without anyone with the authority to run it.
What action can be taken to protect the business?
Articles of Association
In the event of the death of a sole director-shareholder, a company's articles of association are key in ensuring the continued running of the business.
If the company has been incorporated under the Companies Act 2006 and adopted the model articles of association, then the death of a sole director-shareholder will be accounted for under Article 17(2). Article 17(2) stipulates that where a company is left with no shareholders or directors as a result of death, the personal representatives of the last shareholder to have died have the right to appoint a new director. The new director may then register the new shareholder.
If the company has adopted bespoke articles, these should be reviewed to ensure this event has been accounted for.
Where a company was incorporated under an earlier act and adopted Table A articles it may be necessary to update the companies articles as Table A articles contain no provision for the appointment of a director in this situation.
Another step that can be taken to ensure a smooth transition in the event of the death of a sole director-shareholder is keeping an up to date will which contains provisions for the passing of shares to another upon death. This can help to reduce uncertainty so long as the Will is in line with the companies articles.
As a sole director-shareholder it is vitally important that you take steps the necessary steps to account for your death and ensure the running of your business for the future.