Private Company Shares in Deceased Estates

Private Company Shares vs Listed Shares

On the face of it, a share is a share — a unit of ownership in a company that carries rights to vote, to receive dividends and to participate in any surplus on winding up. In practice, the differences between a parcel of ASX-listed shares and a parcel of shares in a private company dominate everything an executor needs to do.

Listed shares trade in a deep public market. There is a published price every second. They can be sold within minutes through a broker. Holdings are recorded on a uniform CHESS or issuer-sponsored register. Transfers are governed by the ASX listing rules and by the standard market procedures — there is essentially no commercial restriction on the executor's ability to sell. Valuation is straightforward: the market price at the relevant date is the value.

Private company shares are the opposite. There is no market. There is no published price. There is no independent register operator. The shares are usually transferable only with director consent, only after existing shareholders have exercised pre-emptive rights, and sometimes only at a price determined by a formula in a shareholders' agreement. Valuation requires an expert. The shares may be illiquid for years or decades. Whatever the deceased thought their shares were worth, what the executor can actually realise depends on the constitution, the shareholders' agreement and the appetite of the surviving shareholders or the company to buy them out.

That structural difference is why private company shares are one of the most technically difficult and commercially sensitive asset classes in estate administration. Executors who treat them like listed shares get into trouble quickly.

Shares as Estate Assets

Shares in a private company are personal property of the registered holder. Where the deceased was the sole registered holder, the shares form part of the deceased's estate on death and pass under the will (or under the intestacy rules if there is no will). Where the deceased held the shares jointly with another person as joint tenants, the survivorship rule applies and the surviving joint holder takes the shares automatically outside the estate; this is uncommon in private companies but does occur, particularly with husband-and-wife operating companies.

Shares held in the deceased's name as trustee of a trust (whether described as such on the register or not) are not estate assets — they remain trust assets and pass according to the trust deed. Shares held by a corporate trustee controlled by the deceased are not estate assets either, but the deceased's controlling parcel in the corporate trustee will be an estate asset and will need to be administered with care. Disentangling personally-held shares from trustee-held shares is one of the first jobs in any estate administration involving a private company.

The executor's job is to identify the share parcels owned by the deceased, preserve their value during the administration, deal with them in accordance with the will (or the intestacy distribution), and account to the beneficiaries. With private company shares, each of those steps is more complicated than it sounds.

Executor Authority Over the Shares

On death, the deceased's shares do not transfer automatically to the executor. The executor holds the right to be registered as the holder (or to direct the shares to a beneficiary) but is not yet registered. Until registration, the executor cannot vote the shares, attend shareholder meetings as a member, or sign written shareholder resolutions. The replaceable rules in the Corporations Act 2001 (Cth) and most company constitutions allow the executor to be recognised as the holder of the shares once probate (or letters of administration on intestacy) has been granted and a transmission application has been lodged. Section 1072A of the Corporations Act provides the default machinery and applies where the constitution is silent.

Before the grant, the executor's powers are limited. The estate's interest in the shares is real, but the executor cannot act as a member until the company's machinery recognises them. The grant of probate often takes weeks; in contested estates, months. Executors of estates with significant private-company holdings should expect a period of practical inactivity at the shareholder level while the grant is obtained and transmission is registered.

Transmission of Shares to the Legal Personal Representative

Transmission is the technical name for the process by which the executor (or administrator) replaces the deceased on the company's share register. The mechanics vary with the constitution but typically involve:

• Probate or letters of administration. The executor lodges a certified copy of the grant with the company.
• Transmission application. The executor completes a transmission form (a standard ASIC form or a form prescribed by the constitution), declaring that they are the legal personal representative and electing either to be registered as holder or to nominate a transferee.
• Surrender of the share certificate. If physical certificates were issued, the executor surrenders them and the company issues a replacement in the executor's name (or arranges direct issue to a beneficiary).
• Updated share register. The company updates its share register and lodges the change with ASIC where required.

Transmission is generally a right, not a discretion — the directors cannot refuse to register a transmission to the executor (although they may impose conditions relating to outstanding calls, evidence of identity and similar procedural matters). The position is different for the subsequent transfer from the executor to a beneficiary or third-party purchaser, which is governed by the transfer provisions of the constitution and shareholders' agreement.

The Company Constitution — What to Look For

The company's constitution (or, if the company has none, the replaceable rules in the Corporations Act) is the foundational document. Executors should obtain a current copy from the company secretary, ASIC or the company's lawyers. Key provisions to look for include:

• Transfer restrictions. Whether transfers require director consent, whether directors have a discretion to refuse transfers, and on what grounds.
• Pre-emptive rights. Whether shares must be offered to existing shareholders before transfer, and the price and procedure for the offer.
• Compulsory transfer provisions. Whether the constitution requires the shares to be offered for sale, or transferred to a specified person, on the death of the holder.
• Permitted transferee categories. Whether the constitution allows transfers within a defined family group, to family trusts or to testamentary trusts without engaging the transfer restrictions.
• Director appointment and removal. How directors are appointed and removed (critical where the deceased was a director).
• Dividend and distribution rules. How dividends are declared and paid, and whether there are different share classes with different rights.

Old constitutions — particularly those drafted before the 1998 Corporations Law reforms — often contain anachronistic provisions, references to repealed sections and unworkable procedural rules. A constitution that has not been reviewed in fifteen or twenty years should be read with care.

Shareholders' Agreements and Buy-Sell Agreements

A shareholders' agreement is a separate contract between some or all of the shareholders. It is not part of the constitution and is not filed with ASIC. It typically covers matters that the constitution does not, including: management and governance, reserved matters that require super-majority approval, deadlock resolution, drag-along and tag-along rights, pre-emptive rights on transfer, non-compete restrictions, dividend policy and the consequences of departure events such as death, disability and resignation.

A buy-sell agreement is a specific subset of the shareholders' agreement (or a free-standing deed) that deals with what happens to a shareholder's shares on a triggering event. The classic structure provides that on the shareholder's death the shares must be sold to the surviving shareholders (or to the company) at a price set by a formula or by independent valuation, with the purchase funded by life insurance held on the deceased's life. A well-drafted buy-sell agreement:

• Gives the surviving owners certainty that they will control the company.
• Gives the estate liquidity rather than an illiquid minority parcel.
• Avoids the need for the beneficiaries and the surviving shareholders to negotiate at one of the hardest moments in family life.
• Funds itself through insurance, so the surviving owners do not have to find the cash from the business.

See our companion article on buy-sell agreements explained for the detail. The single best thing many family companies could do this year is review or implement a buy-sell agreement.

Restrictions on Transfer

Most private companies impose meaningful restrictions on the transfer of their shares. These restrictions are designed to keep ownership within a defined group — the founders, the family, an industry peer group — and to prevent shares falling into the hands of strangers, competitors or creditors. The restrictions commonly appear as: director discretion to refuse registration of a transfer; pre-emptive rights in favour of existing shareholders; permitted-transferee carve-outs for family trusts and testamentary trusts; and compulsory transfer triggers on death, bankruptcy or change of control of a corporate shareholder.

Restrictions on transfer interact with transmission in an important way. Transmission to the executor (the legal personal representative) is generally outside the transfer restrictions because it operates by force of law on death, not by voluntary transfer. The subsequent transfer from the executor to a beneficiary or to a third-party purchaser is a transfer and engages the restrictions. Executors who try to skip the transmission step and go straight to a transfer for value (for example, selling the shares directly to a co-shareholder without first being registered) can fall foul of both the constitution and the Corporations Act.

Valuation of Private Company Shares

Valuation is one of the hardest and most contested issues in private-company estate administration. Unlike listed shares, there is no market price. A formal valuation must be obtained — for the estate's CGT cost base, for any buy-out, for accounting to beneficiaries, and for any family provision claim or tax dispute.

The valuer will typically use one or more of the following approaches, often weighting them according to the facts:

• Net asset backing. Best for investment companies and asset-holding entities, where the value is essentially the value of the underlying assets.
• Capitalisation of future maintainable earnings. Best for established trading businesses with stable earnings, applying an industry-appropriate multiple to a normalised earnings figure.
• Discounted cash flow. Used where the business has a definable forecast cash flow but irregular earnings.
• Comparable transactions. Where there have been recent sales of similar businesses.

A series of adjustments are then made: a minority discount if the parcel does not carry control (commonly 20–40 per cent depending on the company); a control premium if the parcel does carry control; a marketability discount reflecting illiquidity; and adjustments for non-operating assets, related-party transactions and shareholder loans. Where the constitution or shareholders' agreement provides a valuation formula, that formula determines the price for the transfer among the parties but may not determine the value for tax or for a family provision claim. The estate may have to manage two values — a contractual price and a market value — and the executor needs to understand the difference.

Minority Shareholdings and Control Issues

Many private-company estates involve minority parcels. The deceased may have held 25 per cent, 33 per cent or 49 per cent of a family or operating business, with the remainder held by siblings, business partners or other family members. Minority parcels are typically illiquid and discounted on valuation. They give limited governance rights (no power to elect directors unilaterally; no power to compel dividends; no power to force a sale of the business). They produce real value only if the surviving shareholders are willing to buy them out, or if the business is sold as a whole.

Controlling parcels are different. They give the holder the power to appoint and remove directors, to pass ordinary resolutions, and (with a 75 per cent holding) to pass special resolutions. An estate that holds a controlling parcel has real power, but the executor must exercise that power consistently with their fiduciary duty to the estate and the beneficiaries. Where the beneficiaries' interests diverge — for example, some want to sell the business and some want to keep operating it — the executor needs to take advice and often needs to put the question to the court for directions.

Sole Director and Sole Shareholder Companies

Sole director and sole shareholder companies are commonplace among Australian small businesses, family investment companies, professional service entities and corporate trustees. When the sole director and sole shareholder dies, the company has no-one who can lawfully act for it. Bank accounts cannot be operated; cheques cannot be signed; contracts cannot be executed; employees cannot be paid; BAS cannot be lodged; insurance premiums cannot be paid; tenants cannot be billed. The business stops.

Section 201F of the Corporations Act 2001 (Cth) provides the only practical fix. Once probate has been granted to the executor of the deceased's estate (or letters of administration to an administrator on intestacy), the executor may appoint a new director. Until the grant, no-one can. In an uncontested estate, probate typically takes four to twelve weeks; in a contested estate, much longer. For an operating business, even four weeks can be devastating. Our companion article on what happens to a company when a director or shareholder dies covers section 201F and the related practical steps in detail.

The lesson for owners is that sole director arrangements should always have a contingency plan — typically by appointing a second director (a trusted spouse, colleague or professional adviser) so that the company can continue to function in the gap between death and the grant of probate. The lesson for executors is that sole director estates require urgent attention — the probate application should be the first priority, and interim arrangements with the bank, the landlord, the ATO and the staff should be put in place immediately.

Family Company Disputes

Disputes about private company shares in family estates are common and bitter. The classic patterns are:

• Beneficiaries want a sale; survivors want control. The beneficiaries (often children of the deceased who do not work in the business) want the shares converted to cash. The surviving shareholders (often siblings of the deceased, or children who do work in the business) want to keep operating without the new shareholders' interference. Without a buy-sell agreement, the parties are forced to negotiate at precisely the wrong moment.
• Disputes about valuation. The beneficiaries' valuer says the shares are worth one figure; the surviving shareholders' valuer says another. The constitution's formula price, if any, may be far below market. Litigation about value is expensive and slow.
• Disputes about dividend policy. The surviving directors control dividend declarations. They can starve a minority estate of dividends by accumulating profits in the company or paying them out as director salaries.
• Disputes about director appointments. The deceased's controlling parcel may carry the right to appoint a director. The estate's nominee may not be welcome on the board.
• Oppression claims. Where the surviving shareholders' conduct crosses into oppression, the estate may apply under section 232 of the Corporations Act for relief, including an order requiring the surviving shareholders to buy out the estate's shares at a fair price.

For executors facing any of these scenarios, an early commercial conversation — supported by independent valuation and structured around the constitution and any shareholders' agreement — is almost always cheaper than litigation. Where the relationships have broken down, court-supervised mediation is the next step; litigation is the last resort. See our article on beneficiary rights in estate administration for the related framework.

Dividends During Estate Administration

Once the executor has been registered by transmission as the holder of the deceased's shares, the executor is entitled to receive dividends declared on those shares. Dividends received before transmission may be paid to the executor by the company (most companies will accept a copy of the death certificate and probate for that purpose) but are otherwise held by the company until the transmission is complete.

Dividends received between the date of death and the date the estate is fully administered are income of the estate and are taxed under the deceased estate income tax rules in Division 6 of the Income Tax Assessment Act 1936. Whether the trustee of the estate is taxed on the dividends, or whether the beneficiaries are presently entitled to the dividends and pay tax on them in their own returns, depends on the terms of the will and the stage of the administration. See our articles on who pays tax on estate income in Australia and when is an estate income tax return required for the detail.

Franking credits attached to dividends from a private company flow through to the estate (and ultimately to the beneficiaries) in the usual way, subject to the holding period rule and related-payment rules. For a family company that pays substantial franked dividends, the franking credits can be a significant component of the estate's income.

Capital Gains Tax — A High-Level Overview

The death of a shareholder is not itself a CGT event for private company shares. Under Division 128 of the Income Tax Assessment Act 1997, the shares pass to the executor (and then to the beneficiary) at the deceased's cost base and the holding period is preserved. For shares acquired on or after 20 September 1985, the original cost base carries over. For pre-CGT shares (acquired before that date), the executor takes them at their market value at the date of death and the pre-CGT status is generally lost.

CGT becomes relevant at the next disposal — for example, when the executor sells the shares under a buy-sell, when the company redeems them, or when a beneficiary later sells them. The CGT consequences differ depending on the mechanism:

• Sale to surviving shareholders. Standard CGT event. The capital proceeds are the sale price; the cost base is the deceased's cost base (with the date-of-death uplift for pre-CGT shares); the capital gain or loss is the difference.
• Buy-back by the company. The buy-back price may include a deemed dividend component (with franking credits) and a capital component. The characterisation depends on whether the buy-back is an off-market or on-market buy-back and on the company's available franking account.
• Liquidation of the company. Cash and in-specie distributions on liquidation may include deemed dividend, return of capital and capital gain components, depending on the company's retained earnings, paid-up capital and CGT cost-base history.
• Distribution in specie to a beneficiary. Generally a CGT-free transfer under Division 128 to the beneficiary at the deceased's cost base, provided the transfer is in satisfaction of the beneficiary's entitlement under the will.

For the broader CGT framework — and the common executor mistakes — see our articles on CGT in deceased estates: common executor mistakes. Specialist tax advice is essential before executing any sale, buy-back or restructure of private company shares.

Business Succession Planning — Before Death

The best time to deal with private company shares in an estate is long before the shareholder dies. Effective business succession planning typically involves:

• Reviewing and (where needed) updating the company constitution to provide modern, workable transfer and transmission machinery.
• Putting a comprehensive shareholders' agreement in place with clear buy-sell triggers, valuation mechanisms and funding arrangements.
• Implementing key person and buy-sell insurance to fund the buy-out on death or permanent incapacity.
• Coordinating the will with the shareholders' agreement so that the will does not gift shares that must, in fact, be sold under the buy-sell.
• Considering testamentary trusts to receive the shares (or the buy-sell proceeds) for the benefit of the beneficiaries with tax and asset protection advantages.
• Avoiding sole director arrangements where possible by appointing a second director.
• Documenting director succession, signature authorities and operational contingencies so that the business can continue uninterrupted.

Our article on business succession planning sets out the broader framework. The cost of a properly structured plan is trivial compared with the cost of sorting out the consequences of an unplanned death.

Practical Steps for Executors

For executors faced with private company shares in an estate, a disciplined sequence helps to manage the complexity and reduce the risk of personal liability:

1. Identify all share parcels. Review the deceased's records, the ASIC company extract, the share register, and any share certificates. Confirm whether shares are held personally, jointly, or as trustee.
2. Obtain the governance documents. Get current copies of the constitution and any shareholders' agreement or buy-sell agreement. Read them carefully before taking any action.
3. Address urgent director vacancies. Where the deceased was the sole director, prioritise the probate application and act on section 201F as soon as the grant issues. Where the deceased was one of several directors, confirm the remaining directors can continue to operate the company.
4. Preserve company records and value. Liaise with the surviving directors, the company accountant and any business managers to ensure the company continues to operate, the records are preserved and the value is not eroded.
5. Apply for probate or letters of administration. Without a grant, the executor cannot complete a transmission and cannot exercise any shareholder rights.
6. Lodge the transmission application. Once the grant has issued, lodge the transmission application, surrender any share certificates and ensure the share register and the ASIC record are updated.
7. Obtain a formal valuation. Engage an independent valuer to value the shares as at the date of death. The valuation is needed for the estate's CGT cost base, for any buy-out, for accounting to beneficiaries and for any family provision claim.
8. Account for dividends and income. Receive dividends, account for them as estate income, and lodge the estate's tax returns as required.
9. Negotiate any buy-out or transfer. Engage with the surviving shareholders and the company about any buy-sell triggers, pre-emptive rights and proposed transfers. Document everything.
10. Take tax and CGT advice before executing any disposal. The CGT consequences of a sale, a buy-back, a liquidation and an in-specie transfer all differ. The executor's choice of structure can significantly affect the estate's after-tax return.
11. Communicate with beneficiaries. Keep the beneficiaries informed throughout. Many disputes start when beneficiaries feel that the executor is acting opaquely.
12. Distribute and finalise. Once the shares (or the buy-out proceeds) have been collected and the tax position is settled, distribute to the beneficiaries in accordance with the will and obtain releases.

When to Get Advice

Executors should obtain legal advice as soon as it becomes clear that the estate includes private company shares. The earlier the advice, the lower the risk and the cost. Specific triggers for advice include: the deceased was a sole director or controlling shareholder; the company has a complex constitution or shareholders' agreement; there is no buy-sell agreement in place; relationships between the beneficiaries and the surviving shareholders are strained; there is a substantial value at stake; or there is a real risk of a family provision or oppression claim. For the executor's broader duties and risk profile see our article on executor duties in Victoria.

Conclusion

Private company shares are one of the most legally and commercially complex asset classes that an executor will ever administer. The combination of restrictive constitutions, contractual shareholders' agreements, valuation difficulty, illiquidity, family dynamics and tax sensitivity makes them entirely unlike listed shares. The deceased's careful estate planning — or the absence of it — will largely determine whether the administration is straightforward or becomes a long, expensive dispute.

For shareholders reading this article during their lifetime, the message is to plan: review your constitution, put a proper shareholders' agreement and buy-sell agreement in place, avoid sole-director arrangements where possible, and coordinate your will with the company's governance documents. For executors already in the administration, the message is to slow down, read the constitution and shareholders' agreement before acting, obtain a proper valuation, take tax advice, and document each step. Specialist legal advice, engaged early, is almost always cheaper than the alternatives.