Shareholder Agreement and Case

The recent case of Lane -v- Lane [2024] EWHC 2616 has again highlighted the importance of company shareholders entering into a properly structured shareholders’ agreement.

In the case of Lane -v- Lane, the High Court has held that a verbal agreement between a father and son to transfer their shares in a family company to each other on their death overrode the father’s earlier Will, under which the father’s shares had been left to his wife.

Background facts

In 2001, the father made a will under which his wife was the sole executor and beneficiary of his entire estate. In 2003, the father and son decided to set up a construction company together. On the advice of the company accountant, the shares in the company were held 40% each by the father and the son, and 10% each by the father’s wife and the son’s wife.

The son alleged that at a meeting between the four family members and the company accountant, it was verbally agreed that if the father died, then his shares would go to the son and vice versa. However, the wife later maintained that no such agreement was ever reached.

On the basis that the shareholders were all close family members and trusted one another, they also declined the accountant’s suggestion at the time to enter into a shareholders’ agreement to formally document matters between them.

The father died in 2009 and the accountant subsequently filed documents at Companies House recording the transfer of the father’s shares to the son. However, following a breakdown in family relations in 2017, the wife brought proceedings against the son arguing that the late father’s shares should have passed to her under the 2001 will.

Judgement in the case

Despite the lack of any formal documentation between the four shareholders, the judge held that there was an oral agreement between them that on the death of the father or the son, the deceased shareholder’s shares would be transferred to the survivor of the two of them.

In reaching this decision, the judge took account of the testimony of the accountant regarding the verbal agreement reached at the above meeting and concluded that the accountant had no reason to lie about his recollection of events. The judge also noted that the wife had not raised any objection to the transfer of the father’s shares to his son at the time of the father’s death and had only objected following the breakdown in family relations in 2017.

The judge further noted that if the shares had been registered to the wife under the terms of her late husband’s will, then the Court would have required the wife to transfer the shares to the son in accordance with the terms of the verbal agreement. Because the verbal agreement was one entered into by the deceased father, the judge also held that his executor (the wife) was bound by it, although no further action was required because the shares had already been transferred into the son’s name by the accountant at the time of the father’s death.

Comments

This case is especially important because the judge held that the father’s 2001 will had been effectively overridden by the oral agreement between the four shareholders over what would happen to the shares held by the father and the son on the death of either of them.

The key message for shareholders to be taken away from this case is that if the family had followed the accountant’s suggestion and entered into a shareholders’ agreement to formalise their verbal agreement at the time, then no dispute would have arisen and protracted, expensive and unnecessary litigation would have been avoided.

As is all too often the case, shareholders who assume that they trust and will never fall out with one another can find themselves in difficulty when things go wrong if their intended arrangements are merely verbal and have been left undocumented.

Contact us

The Corporate and Commercial team at Wilson Browne Solicitors is ideally placed to advise on all legal aspects of the contractual arrangements between shareholders, including the preparation and implementation of formal shareholders’ agreements.

For a confidential and no obligation initial discussion about how we may be able to help, please contact the Corporate and Commercial team at 0800 088 6004.