Untraceable shareholders can cause administrative issues for a company for all sorts of reasons, such as increased paperwork in relation to the distribution of dividends and notices to shareholders, and problems down the line if a company looks to restructure, expand or sell.
Shareholders can become untraceable for many reasons, those that have moved and not updated their details with the company, or there are those who are deceased, and family members/executors are unaware that shares are held by that person in the company.
Shareholder rights
The principal right of a shareholder is to receive a dividend (essentially a distribution of the company's profits) where a company is a going concern and the right to vote on matters affecting the company.
As these are shareholder rights, it is not the case that a company can stop paying dividends or proceed to make decisions without the missing shareholder's input simply because the company is unable to contact them. Where there are a large proportion of untraceable shareholders this can cause particular issues if a company is trying to make changes or take actions which require a requisite proportion of shareholder consent.
Failure to observe these rights can result in significant adverse consequences for the company in the event of the shareholder or their representatives subsequently identifying themselves to the company. Consequences can include resolutions and actions taken by the company being challenged and actions for damages.
What can a company do with dividends…
The starting point is to consider the company's articles of association; each company will have different articles affecting how they treat untraceable shareholders. The model articles for a private company limited by shares provide for the forfeiture of any dividends which remain unclaimed, if a substantial 12 years have passed from the date on which the dividend became due for payment. During that time the dividend payments should be kept aside in case the shareholder comes forward to claim this, as it is considered a debt by the company to the shareholder.
If there is no provision in the articles, then a company may wish to consider the options below.
What can a company do with shares….
- Endeavor to trace shareholders one final time.
In all cases we would suggest the first course of action is to try and trace shareholders. Shareholders can be traced a variety of ways such as by placing a notice in a national newspaper or the Gazette which provides a permanent, official public record of important statutory and non-statutory notices. This does provide a useful evidential trail to protect the company in the event of the shareholder subsequently identifying themselves. Where articles provide for lost shareholders, there tends to be a provision saying the amount expended on finding them should not be disproportionate to the holding.
- Continue to issue notices.
The Companies Act does make express provision for companies unable to trace shareholders to use a suitable address for notices. It allows documents and information to be sent to the recipients' last address known to the company, as stated in the register of members. That can then be treated as effective notice of meetings and is important in the event of any other steps being taken such as the change of articles mentioned here, which requires a shareholders' resolution.
- Share buyback.
A company could arrange for the buyback of the shares held by untraceable shareholders and then cancel them. The money paid for the shares needs to be placed into a separate account and the debt to the shareholders acknowledged in the company's accounts. There is no specific time period laid down for retaining buyback funds for untraceable shareholders, but convention seems to be that proceeds are kept for up to 12 years. The buyback agreement would be signed by a person authorised by the company as agent for the untraceable shareholder(s) with such person likely to be a director of the company. Where a company's articles permit the sale of the shares of untraceable shareholders but do not necessarily provide authority for a person authorised by the company to affect the sale, arguably such authority could be implied.
- Amend articles.
A company could seek to amend their articles to include provisions allowing the company to deal with unclaimed dividends and forfeiting/selling shares where the shareholder has lost contact with the company.
A company can generally amend their articles by special resolution (but subject to entrenched provisions/ need for class consent). Inclusion of an article relating to failure by shareholders to notify the company of contact details would also be a worthwhile inclusion as this would relieve the administrative burden of sending notices to untraceable shareholders.
Conclusion
It is worth keeping in mind this provides only a broad summary of the processes open to companies when dealing with untraceable shareholders. Invariably a company's situation is more complex so if you have any questions in relation to the matters discussed in this article, please get in contact with your usual Brodies contact or one of the contacts listed below who will be happy to assist.
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