Succession issues for individual shareholders of companies

Individual owners of wealth hold a great variety of assets. Often these assets are held via limited liability companies (or the asset itself is shares in such companies).

In Hong Kong and much of the surrounding region the primary jurisdictions for such companies are Hong Kong and the British Virgin Islands (“BVI”). In many cases, such individual shareholders have done little or no planning in respect of their death. Furthermore, many regard the use of the company itself as “planning”.

In addition certain other attempted planning may not work and / or the individual’s understanding of what will happen in the event of their death is incorrect.

This note will highlight some of these issues.

What is the process to transfer shares following the death of a registered shareholder?

The only person(s) entitled to deal with shares in a BVI or Hong Kong company are the persons named in a valid grant of representation (“Grant”) relevant to such jurisdiction. A Grant is needed whether or not there is a will naming executors ( called a grant of probate) or where there is no will or a will with no executors appointed over the relevant assets (a grant of letters of administration). There does not need to be a separate will for each jurisdiction although this is commonly seen in practice. All that is needed in respect of shares is a will (in basic terms, a will must be in writing, deal with the specific assets and be testamentary) which is valid under the domicile (domicile to be determined under the rules in either Hong Kong, per the Domicile Ordinance (Cap596), or the BVI common law test respectively) of the deceased at death (this is primarily a concern for clients whose domicile is in a territory with a system of forced heirship). Grants obtained in one jurisdiction may in certain cases be “resealed” for use in another (presently a grant obtained in Hong Kong or BVI is not capable of being resealed for use in the other).

Obtaining a Grant can take several months (assuming no complications) and during such time the deceased’s shares are paralysed. Furthermore in many cases the same person is the sole director and sole shareholder of the company so there is no mechanism to appoint a new director to run the company. It is important to note that in such cases both Hong Kong and BVI allow a “reserve director” to be appointed.

Having obtained a Grant, the administrators of the deceased’s estate can deal with the shares. Subject to debts and other similar restrictions, the shares will pass (assuming the recipients are over 18 – otherwise they will be held on trust) in accordance with a valid will or under the laws of intestacy of the deceased’s domicile.

What if the registered shareholder is a nominee for the deceased?

In this case, the beneficial interest under the nomineeship is part of the estate of the deceased and the personal representatives (holding a valid Grant) are the only persons who can direct the nominee in respect of the shares held by the nominee.

Planning which does not work

The use of powers of attorney, nominees (with letters of wishes given to the nominee) and signed undated share transfer forms do not (save in the case of certain security arrangements) work for succession purposes. In such cases the authority of the attorney/nominee/ holder of the signed undated share transfer form ceases on death and any documents executed by such person are invalid.

Were the directors to approve a transfer of shares based on such process, they would run the risk of being personally liable.

Use of joint tenancies (with rights of survivorship)

This is a limited option which may be suitable in simple cases or as a stop-gap. In this instance, on the death of the first of the joint owners to die, the survivor will become the absolute owner of the shares. The main drawback of such a strategy is that joint owners are concurrent owners and have immediate rights as shareholders.

Other corporate vehicles

In certain cases and with bespoke drafting, succession issues can be dealt with using multiple share classes, companies limited by guarantee, foundation companies and LLCs. However these are not all available in Hong Kong and the BVI. The authors would be happy to give further details.

Lifetime trusts

A lifetime trust can remove the need for a Grant. It can also deal with the shareholder’s mental incapacity. Furthermore lifetime trusts can be set up to give the settlor a certain degree of control.

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