An oral agreement among shareholders regarding the transfer of shares upon death can be valid and binding, the England and Wales High Court (EWHC) has ruled.
The court determined that such an agreement may not only supersede a company’s articles of association but also override the terms of a deceased person’s will.
STEP reported that the case involved a father and son who, in 2003, established a construction business through their company, AGM. Shares were distributed as 40 shares each to Alan Lane (the deceased) and his son, Mark Lane (the claimant), with ten shares each allocated to their wives for tax planning purposes.
Upon Alan Lane’s death in 2009, his 40 shares were recorded at Companies House as being transferred to his son, Mark. Mark asserted that an oral agreement had been made between the four shareholders at the company’s inception. This agreement, he claimed, stipulated that upon the death of either the father or the son, the deceased’s shares would pass to the surviving shareholder. He based his entitlement on three grounds: contract, proprietary estoppel, and constructive trust.
The deceased’s widow (the defendant), however, denied the existence of such an agreement. She contended that the matter of share transfers in the event of death was never discussed at the initial shareholder meeting. As such, she claimed entitlement to the shares under AGM’s articles of association, which provided that shares should pass according to the terms of the deceased’s will. Alan Lane’s will, dated December 2001, had appointed her as the sole executrix and left his residuary estate, including the shares, on trust for her absolutely.
The EWHC faced a lack of contemporaneous documentation and could not rely heavily on the witnesses’ demeanour or presentation. Instead, it assessed the probabilities based on all the evidence presented.
The court ultimately favoured the testimony of the claimant and the company’s accountant. It found that the oral agreement claimed by Mark Lane was likely genuine. This agreement was underpinned by the necessity for either the father or son to possess the skills required to continue the business upon the other’s death. The agreement was deemed a binding contract, involving mutual promises among the four shareholders regarding the disposition of the shares. These mutual promises, made with the intent to create legal obligations, constituted sufficient consideration to form a valid contract.
Alternatively, the court ruled that even if the contract was not established, the claimant would still be entitled to the shares based on proprietary estoppel. This doctrine was supported by the promise and the reliance placed on it (Lane v Lane, 2024 EWHC 2616 Ch). Commenting on the case, law firm Macfarlanes said:
“The decision is a useful reminder of how contractual arrangements can interact, and potentially conflict, with testamentary stipulations in a will. A deceased’s personal representatives will generally be obliged to perform a contract entered into by the deceased, which may impact the assets available for distribution under the will or rules of intestacy.”
