Directors' Share Protection

updated: January 21, 2010

This section is specifically designed to be of interest to the shareholding directors of private limited companies and smaller public limited companies.  Most small private companies have an ownership pattern not dissimilar to a partnership in that the controlling shareholding are in the hands of the executive directors who run the business.  The parallel, however, ends there.

Remembering that the company is an entity in its own right, the death of a shareholder, irrespective of the proportion of shares held, makes no difference to the company itself; the problem is one faced by the surviving shareholders and the estate of the deceased shareholder.

As control of the company goes with the shareholding, the surviving directors have a vital interest in retaining control by obtaining the deceased director’s share.  Similarly, the widow or other beneficiary, would normally have little interest in retaining the shareholding and would normally prefer to sell to the highest bidder.

The articles of many private companies provide for the purchase of such shares by surviving shareholders, such provision being either in the form of an option or an obligation. 

Whatever it is, the intention cannot be implemented unless the surviving shareholders have the cash to make the purchase.  If there is no cash available, the widow or other beneficiary is left with a virtually unmarketable security since the scope for transfers of shares in a private company is very restricted.

To obtain further information please click here for our pdf Guide to Directors' Share Protection.