Private Company Shares in Deceased Estates

Take the Inventory First

Before deciding how to deal with the shares, gather:

• the company's register of members and any share certificates;
• the exact registered and beneficial ownership of each parcel (sole, joint, tenants in common, as trustee);
• the share class and any special rights;
• the current constitution, and the company's registration date (the replaceable rules do not govern a company registered before 1 July 1998 that has kept its original constitution);
• any shareholders agreement, buy-sell agreement, options or side arrangements;
• the deceased's Will and grant status;
• loans between the deceased and the company, including any Division 7A loan agreements, and any security affecting the shares or the company;
• director positions held by the deceased and any officeholder changes required; and
• the deceased's acquisition history for the shares (whether acquired before or after 20 September 1985, and cost-base records).

Shares owned by a family trust, a superannuation fund or another company are assets of that entity, not of the deceased, even where the deceased controlled it. They do not pass under the Will; control of those structures passes under the trust deed, fund rules or company documents, which need separate review. If share certificates cannot be found, see our guide to lost share certificates in deceased estates.

Estate Interest, Executor's Office and Company Recognition

Three concepts are often conflated and should be kept separate:

• the executor's office under the Will (which arises on the deceased's death, subject to acceptance; an administrator's authority arises only on the grant of letters of administration);
• proof of authority by grant of probate or letters of administration (which is what third parties, including the company, generally rely on); and
• recognition by the company of the personal representative and, later, registration of a transferee as a member.

These are separate steps and the timing and evidence required for each are different.

Transmission and Later Transfer

A share is personal property and is capable of devolution by will or by operation of law, subject to the company's constitution and any replaceable rules that apply (section 1070A of the Corporations Act 2001 (Cth)). On the death of a sole holder, the deceased's interest passes to the personal representative: this is transmission. A later transfer from the personal representative to a beneficiary or purchaser is a separate step.

Where it applies, section 1072A provides that the company will recognise only the personal representative as entitled to the deceased's interest. Once the personal representative gives the directors the information they reasonably require to establish the entitlement, the personal representative may elect, by signed written notice, to be registered as holder, and the company must then register them; or may transfer the shares to another person by completed transfer form. Either way, the personal representative is entitled, whether or not registered, to the same rights as the deceased shareholder. A transfer to someone else is subject to the same rules as transfers generally. Where shares were held jointly, the company recognises only the survivor, although the deceased's estate is not released from any liability in respect of the shares.

Section 1072A is a replaceable rule. It applies to companies registered after 1 July 1998 and to older companies that have since repealed their constitution, and the constitution can displace or modify it (section 135). Many private company constitutions contain their own transmission, pre-emption or compulsory-transfer clauses, so the constitution must be read first.

Some provisions apply whatever the constitution says. Production of a document that is sufficient evidence under State or Territory law of a grant of probate or letters of administration is sufficient evidence of the grant for the company's purposes (section 1071B(13)). A personal representative constituted under the law of the State or Territory where the register is kept can transfer the shares as validly as if they had been registered as holder when the transfer was signed (section 1071B(8)).

Directors' Discretion to Refuse Registration

A transfer from the personal representative to a beneficiary or purchaser may need the directors' approval. Under the replaceable rules, the directors need not register a transfer until it has been lodged with any certificate and fee and they have the information they reasonably require (section 1072F(2)); may refuse if the shares are not fully paid or the company has a lien over them (section 1072F(3)); and, in a proprietary company, may refuse to register a transfer for any reason (section 1072G). The constitution may widen or narrow these powers. By contrast, where section 1072A applies, an election by the personal representative to be registered must be registered.

Any discretion must be exercised in good faith in the best interests of the company and for a proper purpose (section 181). If the company refuses to register a transfer, it must give the transferee notice within two months after the transfer was lodged (section 1071E). A transferee or transmittee may apply to the Court, which, if satisfied that a refusal or failure was without just cause, may order registration or make other orders, including for the purchase of the shares (section 1071F).

Register of Members vs ASIC Records

The company's register of members, kept under section 169, is the company's record of its members and, in the absence of evidence to the contrary, is proof of the matters shown in it (section 176). A proprietary company must notify ASIC of changes to member particulars (section 178A), generally within 28 days after altering its register (section 178D), subject to the top-20 rule for companies with more than 20 members (section 178B). ASIC's records reflect those notifications; no ASIC form itself effects a transmission or transfer. If the register is wrong, the company or a person aggrieved may apply to the Court to have it corrected (section 175).

Sole Director and Sole Member Companies (s 201F)

If the only director and only shareholder of a proprietary company dies and a personal representative is appointed to administer the estate, the personal representative may appoint a person as director, including themselves (section 201F(2) and (4)). The appointee holds office as if appointed in the usual way (section 201F(5)), and the company must notify ASIC of the new director's details within 28 days (section 205B(1)). Section 201F is not a replaceable rule and cannot be displaced by the constitution.

ASIC's guidance confirms that the executor or administrator can make the appointment, and warns that where there is no Will it may be months before letters of administration are granted. Until an appointment is made the company has no director to operate bank accounts, pay bills or pass resolutions, so the timing of the grant matters. Where the company is trustee of a family trust, the trust deed should also be checked. For the wider governance issues, see our guide to the death of a company director and shareholder.

Voting, Information and Ongoing Governance

Where section 1072A applies, a personal representative who has given the directors the information they reasonably require is entitled to the same rights as the deceased shareholder whether or not registered (section 1072A(2)(b)). Where the constitution displaces or modifies that rule, or the company is not governed by the replaceable rules, the constitution determines the position, and a shareholders agreement may also affect voting and information rights between the parties. Holding the deceased's shares does not make the personal representative a director; board positions depend on appointment.

Buy-Backs, Pre-emption and Buy-Sell Arrangements

A company may buy back its own shares only if the buy-back does not materially prejudice its ability to pay its creditors and it follows the procedures in the Corporations Act (section 257A); the constitution may restrict or exclude buy-backs. Pre-emption and compulsory-transfer clauses in a constitution or shareholders agreement, and buy-sell agreements (often insurance-funded and sometimes structured as put and call options), operate according to their terms. Surviving shareholders have no automatic right to buy the deceased's shares unless the documents give one, and the estate is bound to sell only if the documents bind it. Enforceability, the valuation mechanism, who owns any insurance policy and the estate's position all depend on the drafting. See buy-sell agreements explained.

Executor Conflicts and Distribution in Specie

Executors often also hold roles in the company, as director, continuing shareholder or prospective buyer. An executor must not allow a personal interest to conflict with the duty owed to the estate. Buying estate shares, setting their price or exercising director discretions that affect the estate can raise a conflict that may require the informed consent of the beneficiaries or the Court's directions. Shares may be transferred in specie to a beneficiary where the Will and the beneficiaries' entitlements allow it, subject to the company's transfer requirements. The CGT treatment differs depending on whether the shares pass to the beneficiary or are sold by the executor (see below).

Valuation

Valuation is purpose-, date- and fact-specific, and no single method is mandatory for every purpose. Values may be needed for the estate's statement of assets and liabilities and its accounts, for distributing or equalising entitlements between beneficiaries, for a transfer price under a constitution or agreement, and for tax. For CGT, market value at the date of death matters mainly where the shares were acquired before 20 September 1985 or CGT event K3 applies; for shares acquired later, the estate or beneficiary generally inherits the deceased's cost base. A price fixed by agreement between shareholders may bind the parties but does not of itself establish market value for tax purposes. Whether a formal independent valuation is warranted, and whether minority or marketability discounts or a control premium are appropriate, depends on the shareholding, the rights attached, the purpose and the evidence; fixed percentage rules of thumb should not be relied on.

Division 128 and CGT on Inherited Shares

Under Division 128 of the Income Tax Assessment Act 1997, a capital gain or loss arising on death is disregarded (section 128-10), subject to CGT event K3. The personal representative or beneficiary is taken to have acquired the shares on the day of death (section 128-15(2)). For shares the deceased acquired on or after 20 September 1985, the first element of the cost base is the deceased's cost base on the day of death; for shares acquired before that date, it is their market value on the day of death (section 128-15(4)). For the CGT discount, post-CGT shares are treated as acquired when the deceased acquired them (section 115-30).

A gain or loss the personal representative makes when shares pass to a beneficiary is disregarded (section 128-15(3)). Shares pass to a beneficiary if the beneficiary becomes the owner under the Will, under an intestacy, by appropriation in satisfaction of an entitlement, or under certain deeds of arrangement settling a claim (section 128-20(1)). A sale by the personal representative under a power of sale is not a passing (section 128-20(2)), so a gain on that sale is made by the estate.

CGT event K3 happens just before death if shares pass to an exempt entity, the trustee of a complying superannuation entity or, where the deceased was an Australian resident and the shares are not taxable Australian property in the beneficiary's hands, a foreign resident. Any gain is calculated by reference to market value on the day of death and is included in the deceased's date-of-death return, except for shares acquired before 20 September 1985 (section 104-215). If the deceased would have qualified for the small business CGT concessions, the personal representative or beneficiary may be able to use them on a CGT event within two years of death, which the Commissioner may extend (section 152-80). See also CGT mistakes executors make.

Dividends, Franking and Present Entitlement

The tax treatment of dividends declared after death, franking credits, present entitlement of the estate or a beneficiary, and the timing of income tax returns for the deceased and the estate depend on the terms of the dividend, when entitlement arises and the estate's stage of administration.

Where Parties Disagree

Where shareholders, directors and beneficiaries disagree, the starting points are the constitution, any shareholders or buy-sell agreement, the register of members and the estate's authority. A person to whom a share has been transmitted by will or by operation of law is treated as a member for the oppression remedy and can apply for relief where the company's affairs are conducted in a way that is oppressive, unfairly prejudicial or contrary to the interests of the members as a whole (sections 232 and 234). The Court's orders can include the purchase of shares (section 233). Relief is discretionary, and outcomes depend on the evidence.

Primary Sources

• Corporations Act 2001 (Cth), sections 135, 169, 175, 176, 178A–178D, 181, 201F, 205B, 232–234, 257A, 1070A, 1071B, 1071E, 1071F and 1072A–1072G
• Income Tax Assessment Act 1997 (Cth), Division 128 and sections 104-215, 115-30 and 152-80
• ASIC, Having a will as a sole director and sole shareholder

Related Guides

See what happens when a business owner dies, executor duties in Victoria and probate in Victoria.

Frequently Asked Questions

How Parke Lawyers Can Help

Parke Lawyers advises personal representatives, beneficiaries and continuing shareholders on the transfer, valuation and buy-out of private-company shares in a deceased estate, and on the interaction with shareholder agreements and buy-sell arrangements, through our Wills & Estate Planning and Probate & Estate Administration teams. Speak with our team early — the treatment of company shares in the estate is much easier to resolve when the constitution and shareholder documents are analysed at the start.