Avoiding disputes: the importance of formalising what happens to your shares when you die

In a recent decision, the High Court upheld the validity of a verbal agreement between a father and son regarding the transfer of shares in a family-run construction company on the death of a shareholder, ruling that it would be unconscionable to dishonour the verbal agreement entered before death.

The case of Lane v Lane [2024] EWHC 2616 (Ch) addressed issues in corporate governance, family succession, and enforceability of informal agreements.

What are the facts?

This case concerns a construction company founded in 2003 by a father and his son. They each held 40% of the shares and transferred 10% to the father’s wife (the “mother”) and 10% to the son’s wife (the “daughter-in-law”) for tax planning. The father died in 2009. His will (prepared in 2001) stated his entire estate should pass to the mother. That estate would commonly include the company shares held by the deceased on death. However, in 2010, the company’s accountant filed an annual return showing the father’s 40% shareholding had been transferred to the son in accordance with a verbal agreement made between father and son in 2003 whereby it had been agreed that if either of them died, the deceased’s shares would pass to the other.

The mother challenged this, asserting the father’s shares should have passed by transmission to her as stated in the will. The rules of transmission set out in a company’s articles of association usually state that on a shareholder’s death, legal title to their shares will automatically pass to the executor of the estate to then be dealt with in accordance with the terms of the will.

The son argued that the verbal agreement made at a meeting in 2003 constituted a valid shareholder agreement, which entitled him to the shares on his father’s death.

What did the court rule?

The court ruled in favour of the son, finding that the verbal agreement was valid and enforceable because the parties involved had exchanged promises that constituted the necessary consideration for a binding contract under the contract law principles of mutual intent and consideration.

The judge asserted that the family’s longstanding relationship of trust gave credibility to the son’s version of events and highlighted that the son’s continued involvement in the company was integral, given the mother and daughter-in-law had minimal involvement in day-to-day operations. It was noted that neither possessed the requisite skills to manage the company effectively and their respective 10% shareholdings had been for tax purposes only, making the transfer of the 40% shareholding not only a contractual right, but necessary for the company’s continuity.

Key takeaways

Lane v Lane highlights the complexities of share transfers upon a shareholder’s death and the risks of relying on verbal agreements. While we have seen that such agreements can be enforceable, the risks involved by relying on informal arrangements are significant. The court assessed the credibility of the family’s relationships within the context of the company to determine the validity of the verbal agreement.

Shareholders should formalise arrangements, such as shareholders’ agreements, in writing because verbal agreements alone are unlikely to provide the clarity necessary to avoid potential disputes.

Further, the court’s decision to uphold the verbal agreement underscores the importance of ensuring that succession plans, especially where family-owned companies are concerned, are clearly articulated. Those plans would ideally be recorded in writing and the will of any shareholder reviewed to ensure consistency and provide clarity over the inheritance of shares.

The ruling also reiterates that a deceased’s executors are bound by legally enforceable contracts entered by the deceased prior to death. This highlights the importance of reviewing your will and estate planning if you enter an agreement which may not be satisfied before death and could therefore, impact the extent of assets available for distribution under the terms of your will.

Well-drafted documents can act as a safeguard, ensuring that the transfer of shares after the death of a shareholder is handled smoothly. In the event of a dispute, clear, written provisions will provide certainty and mitigate the potential for protracted litigation.

How we can help

If you would like to learn more and find out how we may be able to help you with your options, then please do not hesitate to get in touch.