Transfer of Ownership and Control When A Shareholder Dies

Losing a loved one can be painful, especially when it happens without warning. Difficult as it may be, those left behind are often put in a position where they must make crucial decisions and sometimes take over the responsibilities of the deceased. In the case of business owners and shareholders, the distribution of the deceased’s shares becomes a complicated matter if there are no existing provisions for the transfer of shares of deceased shareholders. Hence, it is essential to decide on this upon establishing the company.

What happens to the shares when a shareholder dies?

When a company shareholder dies, the ownership of their shares will be transferred to whoever inherits the shares as stated in the deceased shareholder’s will or under intestacy rules. However, the transfer will be subject to the company’s articles of association or shareholder’s agreement. Suppose the articles or shareholders’ agreements include restrictions on the transfer of shares. In that case, these will take precedence as they are often added to protect the company and the interest of the current shareholders.

Dealing with all of this while grieving can cause distress to all parties involved. Hence, business owners or shareholders are often advised to plan and produce a written document or agreement to cover these sensitive matters and ensure that procedures are in place to protect the business in case of an untimely death.

Once the company has an established process for its day-to-day operations, it is recommended that business owners or shareholders create articles of association that will determine how ownership of the company or shares will be handled if something happens to the directors or shareholders. If local and foreign investors own the company, you may consult with international law firms in Dubai on how ownership can be transferred.

Creating a shareholders’ agreement is also another good method to protect the company and the interest of its current shareholders. These documents may include more specific provisions on how shares will be distributed if a shareholder passes away. Certain conditions which prevent spouses, competitors, or certain individuals from inheriting/acquiring the shares may also be added to protect the business. Suppose you are not familiar with the legal process and regulations. In that case, you may hire an attorney in Dubai to assist you in creating shareholder agreements and other legal documents to address such issues.

If there are no specific provisions on the transfer of shares on death shareholders, Model Articles or Table A provisions will be implemented. According to these provisions,

1. The company shall recognize the transmittee as having a title to the share if it is passed to them.
2. The transmittee must produce evidence of entitlement to the shares in question as required by the directors or existing shareholders:
3. the transmittee may choose to become the shareholder or have the shares transferred to someone else. If the transmittee chooses this option, they must write to the company to express their intention to become the shareholder or transfer it to another individual.
4. the transmittee will have the same rights as the original holder had.
5. Transmittees do not have the right to attend or vote in general meetings or agree to a proposed written resolution unless they have agreed to become the holders of such shares.

If you need legal advice in creating a shareholders’ agreement or adding/changing conditions on existing articles to transfer the ownership of shares, Motei & Associates can provide you with excellent legal services to meet the requirements of your business.