Untraceable Shareholders – What Can a Company Do?
Date: 26/09/2024 | Corporate
Shareholders can become untraceable for lots of reasons; they may have moved without providing their new details, they have maybe passed away and their family members may not be aware of the shareholding, or their colleagues at the company may have moved on without passing on contact details.
Regardless of the reason why, having an untraceable shareholder can cause headaches, both in terms of administrative burden and costs which can also have an impact on the company’s ability to operate efficiently.
Often you will only become aware that you cannot trace a shareholder when you are declaring dividends or if you are contemplating a transaction which requires shareholder consent and, in these cases, time is of the essence. A review of your shareholder list before you reach that point is recommended and if you find out you have an untraceable shareholder, you can then deal with issue. So, what are the problems untraceable shareholders cause?
Shareholder Rights and Protections Remain
Firstly, just because a shareholder is untraceable, it doesn’t mean that they lose any of their shareholder rights and protections so the company will need to treat them in the same way as all the other shareholders i.e. you must follow the notice provisions in your articles in respect to all announcements, resolutions etc. Failure to do so could have serious consequences, including court action against the company or its directors.
You Must Try to Find the Missing Shareholder
Secondly, before taking any action to deal with an untraceable shareholder you need to make sure that the shareholder is truly untraceable. The general rule of thumb is that the costs in locating the shareholder should not be disproportionate to the value of their shareholding, so while we are not suggesting a billboard in Times Square (albeit it wouldn’t be much use to a UK based company anyway), placing a notice in the Gazette or local newspaper are relatively cheap options and go a long way to show that you have made every attempt to find the missing shareholder. All this takes time which can be an issue.
You Need a Plan for Dividend Payments
Thirdly, you need a plan in place to deal with dividend payments. If you can’t find a shareholder, what do you do with their dividends? If your company has adopted the model articles, then article 33 sets out the position clearly. If the dividends are unclaimed then the directors can invest the money for the benefit of the company until the sums are claimed. If the dividends remain unclaimed for 12 years, then the shareholder is no longer entitled to the money, and it unconditionally belongs to the company. If the shareholder reappears to claim their dividends within the 12-year period, then the company must pay all the sums which are owed. So, due to the prospect of possibly having to make a big payment in a hurry, many companies take the approach of putting the money aside rather than reinvesting it in the business. Dividends can accumulate over 12 years; you don’t want to be left without the cash to pay out.
How Can You Avoid or Minimise Problems Caused by Untraceable Shareholders?
Articles of Association should be reviewed and if necessary amended. They should have provisions dealing with unclaimed dividend and forfeiture/sale of shares by untraceable shareholders. They should also include a provision that states that failing to provide the company with up-to-date contact details means that notices do not need to be sent to that shareholder and failure to do so will not invalidate any resolutions passed.
The company could consider buying back the shares of an untraceable shareholder, if it can meet all the statutory requirements and the articles have been drafted to allow this. Typically, on a buyback the company sends the seller the purchase price, but with a shareholder who is MIA, this will not be possible. Best practice is to put the monies in a separate account and the shareholder is accounted for as a debtor. If you do go down this route, you may ask how long you will need to hold the money for. Although there is no set rule, the rule of thumb is 12 years (to tie in with the dividend rules).
Conclusion
Dealing with untraceable shareholders can be time consuming. It usually becomes an issue when something time critical is going on so doing all you can to make sure you have no untraceable shareholders on your register well before that point is a good plan.
If we can help with tracing a shareholder, advising on articles of association or how best to deal with the shares in question, contact Vicky Ward in our Corporate department.
Disclaimer
The matter in this publication is based on our current understanding of the law. The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.
