How Business Shares Pass on Death
When a shareholder dies, what happens to their shares depends on a combination of: the company's articles of association, any shareholders agreement in place, and the deceased's will.
The critical point is that a shareholders agreement — particularly one containing pre-emption rights, compulsory transfer provisions or other restrictions on share transfers — can prevent or significantly limit the ability of a deceased shareholder's estate to pass shares to beneficiaries named in their will.
The shareholders agreement is a binding contract between the shareholders. It generally takes precedence over what a will says about shares in that company. A will cannot override a contract that the testator entered into during their lifetime.
Pre-Emption Rights and Death
Most well-drafted shareholders agreements include pre-emption rights on transfer. These give existing shareholders the first right to buy shares before they can be transferred to a third party. In many agreements, the death of a shareholder triggers these rights.
What this means in practice: if you die and leave your shares to your spouse in your will, but your shareholders agreement requires the shares to be offered to the other shareholders first, the other shareholders may have the right to purchase those shares at an agreed or independently determined price. Your spouse may receive cash instead of shares — not the business interest you intended to leave them.
In some agreements the provisions are even more restrictive — requiring shares to be transferred back to the company or to the remaining shareholders regardless of what the will says.
Leaver Provisions on Death
Some shareholders agreements treat death as a leaver event — meaning the deceased shareholder's shares are dealt with under the leaver provisions. Good leaver provisions generally allow the estate to receive fair market value. However the shares themselves must be transferred to the remaining shareholders or the company, not retained by the estate or passed to beneficiaries under the will.
The interaction between a shareholders agreement and a will must be considered carefully when preparing either document. They need to be consistent and work together — not pull in opposite directions.
Why Business Owners Need Both Documents
A shareholders agreement and a will serve different but complementary purposes for a business owner, and both are essential.
The shareholders agreement governs what happens to your shares within the company — who can buy them, at what price, and under what conditions. It protects the business and the remaining shareholders from having an unknown third party imposed on them as a shareholder.
Your will governs what happens to any proceeds from those shares — if the shareholders agreement requires a compulsory transfer, the cash received passes through your estate under your will to your chosen beneficiaries.
Your will also covers everything else you own — your personal assets, your home, your savings, your personal possessions — none of which are affected by the shareholders agreement.
The most important practical step is to review your shareholders agreement before making your will, and to ensure your will is drafted with that agreement in mind. We strongly recommend taking independent legal advice if you own business shares, and speaking to your accountant about the tax implications of your business succession arrangements.
Business Property Relief
If you own shares in a qualifying unlisted trading company, those shares may attract Business Property Relief for inheritance tax purposes — potentially at 100%. This is a significant tax benefit that applies under certain conditions and is subject to complex rules.
We do not provide tax advice and do not prepare Business Property Relief trusts. If Business Property Relief is relevant to your estate planning, you should seek specialist advice from a qualified accountant or tax advisor, and consider instructing a solicitor with expertise in business succession. We can refer you to an independent financial adviser if helpful.
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