I am dealing with an estate where the deceased shareholder has settled his private company shares into a discretionary trust in his Will. The gift takes place regardless of whether the shares attract BPR (which they should). Residue to spouse.
I have seen the shareholders’ agreement - there are plenty of rules about the transfer of shares / pre-emption rights etc…, but it is silent on matters regarding the transmission of shares on death.
I am looking ahead to a situation whereby the surviving shareholders and directors do not consent to the transmission of shares to the trustees.
In this case, has the legacy failed or do the PRs simply satisfy the trust with other assets (such as the share sale proceeds)?
What about BPR? If assets other than the BPR shares end up in the Will trust, does the estate still enjoy BPR over this legacy?
A company’s Articles’ pre-emption provisions are usually only about legal ownership and transfer of legal title. If there is no specific transmission provision it means that the executors cannot demand transfer of the legal title as of right and so the pre-emption provisions will apply unless varied ad hoc by the other members/parties to the SHA. If as you indicate their consent is required and is unlikely to be forthcoming then no legal transfer of the shares will be possible in the absence of a future change of heart.
It is most unusual for Articles to expropriate the shares of a deceased member, either unconditionally on death or if a transfer of equitable/“beneficial” ownership is later attempted. In the latter case it would be disastrous to attempt that. But if the deceased was a party to an SHA it is likely to be binding on his PRs and plainly what is says is critical. If the deceased was not party to it the 1999 Act may be relevant. Interpretation of the extant documents is vital but it is to be hoped, since it would be so rare, that death does not result in automatic deprivation of all interest in the shares, legal as well as equitable. This might be so if the other members have contributed to a fund e.g. a mutual life policy to compensate the estate on legally binding terms.
The IHT transfer takes place at the moment before death so if BPR is available on the facts it will not be affected even if the shares are later sold/expropriated by a compulsory or voluntary transfer of equitable ownership, with or without price/compensation. Similarly for CGT the shares should be entitled to the CGT tax-free revalorisation on death as comprising property of which the deceased was then competent to dispose.
Even if expropriation or mandatory transfer is the order of the day it is likely to follow on from death which therefore must logically precede it, if only scintilla temporis, so that the deceased will have been equitable owner (or “beneficial owner” for tax purposes), and doubtless also legal owner, immediately before the expropriation event. So the legacy will not fail but may in effect only in practical terms amount to the sale proceeds or equivalent rather than the shares in specie. It is common to find that the shares in closely owned companies are subject to legally binding contractual options, within the Articles/SHA/a stand alone arrangement. These will not affect BPR entitlement on death but may well feed into their open market value before BPR of the shares involved on death; and as regards IHT and CGT possible charges on their later disposal by the PRs/trustees of the DT, if the actual value received is displaced by open market value.