Q&A - What is the best way to pass on shares in a private limited company?

Q: I am thinking about setting up a business with my brother. Whilst we get on, our wives sadly don’t. We are however planning to make our wives shareholders in the business, for financial reasons. Obviously setting up the business changes a lot of things in our lives and we will need to make new Wills to take these into account. If we leave our shares to our wives and something happens to one of us, the other one’s widow would effectively become a majority shareholder, which worries me.  Can we protect ourselves against this happening?

A: Firstly you need to take legal advice that takes into account both the setting up of the business and also your private affairs. There are different terms on which the shares of the business can be granted. These will be set out in the company’s articles of association and in the shareholders agreement, if there is one in place. In the case of private companies there will often be a shareholders agreement drawn up, which includes what a shareholder is allowed to do with their shares in the event that they should die.

The terms of a shareholders agreement might permit the company’s directors to block a transfer of shares to anyone else, or it may demand that the shares are first offered to the other shareholders. Another common clause would permit the shares to be transferred under the shareholder’s Will, provided they go to a family member or family trust – something which it would appear you want to avoid. 

Where restrictions prevent the transfer of shares to a spouse or other beneficiary, the beneficiary is usually entitled to receive a cash equivalent. This does need to be made clear in your Will to ensure that the ‘gift’ is valid.

Article 14/01/2019