Dealing with shares in a public limited company (plc) when acting as an executor, is relatively straightforward. These types of shares are publicly traded and the value at the date of death can be readily ascertained. However, if the deceased held shares in a private limited company, dealing with these is not entirely straightforward.
In addition to establishing the value of the shares, further investigation may be required to determine if there is anything that might affect the executor’s ability to realise the value of the shares.
How do you value the shareholding?
Valuing shares in a private limited company can be challenging. Factors you need to take into account include:
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- Whether the shareholding is a majority or minority shareholding
- If the deceased is the sole shareholder, will the company be able to continue as a going concern without the deceased’s presence?
- Should the valuation be based on trading profits over a number of years or on the value of the assets?
- Is there anything else that affects how the shares might be valued?
- To what extent might other shareholders be prepared to pay a premium to buy the shares?
- Whether the shareholding is a majority or minority shareholding
All these factors, and more, will come into play when trying to work out the value of the shareholding. There is no definitive answer because each situation will be different. Of course, the shares will have a nominal value, set when the company was originally incorporated. However, that usually bears no relation to the actual value of the shares. They might be worth many times their face value or they might be worthless.
You will need to consult with your professional advisors to determine the value of the shares. An executor must be able to vouch that proper investigation has been carried out to assess the value of all assets in an estate when submitting the inventory for Confirmation in Scotland (known as Probate in England) and completing the Inheritance Tax Return.
What other documents might affect the value?
The value of shares can also be affected by other documentation. For instance, the Articles of Association of the company will contain provisions regarding the shares. Some of these provisions might affect how the shares are dealt with on the death of the shareholder. There may be pre-emption provisions which will have an impact not only on the value of the shares but who can acquire them. There may also be other restrictions on the disposal of the shares with a process that must be followed before the shares can be transferred and their value realised.
The deceased may also have pledged the shares to a lender in support of a loan or other obligation. This will affect how the shares are disposed of because the pledge may have to be replaced with another security to ensure the loan or other obligation can continue.
The deceased may also have entered into a Shareholders Agreement with the other shareholders in the company and this may have an impact not only on the value of the shares but the means of their disposal.
Shareholders Agreements and realisation of shares
If the deceased had entered into a shareholders agreement, that agreement will contain provisions as to what should happen when a shareholder dies. It is likely to include a mechanism on which to base the value of the shares. The shareholders agreement will certainly deal with the mechanism for disposal of the deceased’s shares.
As with mechanisms built into the Articles of Association of the Company, there are no hard and fast rules as to the provisions of shareholders agreements. Provided they are lawful, they are enforceable. That means the terms of the shareholders agreement may be unfavourable when arranging the valuation of the shares and may restrict the ability of the executor to dispose of the shares and realise their value.
Estate planning specialist solicitors, Edinburgh
Murray Beith Murray Partner, Peter Shand heads our Asset Protection Group and specialises in estate planning and tax. As part of the estate planning process, we will discuss questions surrounding valuation of the shares you hold in any private limited company and assess the impact of any documentation that might affect their value.
There is no substitute for being prepared in advance. If this article has raised any questions or you would like to discuss your affairs, then please complete our contact form or call us on 0131 225 1200.
Murray Beith Murray LLP was established in 1849, as advisors for generations of clients, committed to our values of integrity, expertise and trust. This aim and these values continue to this day as does our commitment to be here when you need us.