What inheriting an interest in a regulated business really means for you
min read
Inheriting shares or a membership interest in a regulated firm brings together the practicalities of estate administration and company law with the demands of financial regulation. This poses some potentially complicated questions and possible pitfalls:
- title to shares may pass automatically on death, yet there are formalities for the company to recognise a new holder;
- executors may be treated as controllers for regulatory purposes even before they or any beneficiaries are registered as members; and
- seemingly simple transfers can require a change-in-control analysis for regulatory purposes.
In this article we consider how to navigate these questions and best address some of the practical issues which might arise, with respect to shareholders of UK companies directly authorised by the UK’s Financial Conduct Authority (FCA).
Transmission: How do shares pass on death - and what must the company do?
When a shareholder dies, title to shares passes by operation of law to their personal representatives (typically, the executors of their estate). That happens immediately on death. However, most companies’ articles of association require the personal representative to evidence their entitlement vis the shares before the company will recognise them as the registered holder. In practice, a well-advised company should ask to see the grant of probate where, until the grant is produced (which can take some time, particularly for any complex estates or in the event any will may be disputed), a company may note the personal representatives’ interest only, without them being able to exercise rights or receiving any economic benefit attaching to the shares during that time.
Whilst usually a personal representative will be entitled to be registered as a member once they can evidence their entitlement to the shares, they will be thinking about how the shares can be ultimately registered in the name of the relevant beneficiary under the deceased’s will. In particular, the personal representatives will want to know whether there are any provisions in the company’s articles or any shareholders’ agreement governing what should happen next – for example, whether there are any restrictions on a further transfer of shares to the beneficiary, such as pre-emption rights on a transfer or under any “cross-option” arrangements.
If the interest you inherit is a membership interest in a UK LLP rather than shares, there are some differences. A membership interest can be transferred, but the default position on death is that the member ceases to be a member. In practice, the LLP agreement almost always governs what happens next. Where an LLP agreement is silent (which is unusual) or where there is no LLP agreement in place, the Limited Liability Partnerships Act 2000 and the Limited Liability Partnerships Regulations 2001 provide statutory defaults.
Not to be overlooked too is being clear on the company’s regulatory status and indeed, where there is a regulatory angle, checking which entity in a company’s group may actually be regulated. Knowing where the authorisation sits – often at a trading company level, rather than a holding company level, which is where one would typically expect the inherited shares to sit – is relevant for any FCA change-in-control analysis that follows (as we will see, deciding to take ‘control’ in an unregulated parent of an FCA-authorised subsidiary can fall within the scope of the FCA’s change in control regime).
Controllers and notifications: Why do personal representatives matter to the FCA?
The FCA is rightly focused on who controls authorised firms and whether those ‘controllers’ are fit and proper. Ordinarily (and depending on the nature of the relevant firm), a person who decides to become a controller (or increase their level of control through a ‘controller band’, i.e. a certain percentage of shareholdings) must obtain prior approval from the FCA. Completing a transaction that requires approval without it can be a criminal offence.
The situation is different where shares transfer as a result of death. This is because personal representatives do not decide to acquire control; control arrives by operation of law as part of their role in administering an estate. That distinction matters and, in most cases, a personal representative who becomes a controller on death has not committed a criminal offence by failing to obtain pre-approval.
That does not mean the FCA is indifferent to these circumstances.
On any transmission of shares upon an individual’s death, personal representatives can fall within the ‘controller’ definition before the company actually updates its register of members (which might not seem intuitive and can catch people out). Therefore, a practical question arises as to whether a personal representative is a ‘controller’ if they are not yet registered as a member. The short answer is yes, if the statutory thresholds are met. The controller test is not tied to registered membership; it looks to who holds shares or voting rights (directly or indirectly) and who can exercise significant influence.
What to do in practice? If control has been acquired by operation of law, a post-acquisition notification to the FCA is the usual route, with the authorised firm taking an active role in the dialogue. The FCA expects early engagement, even where the position is temporary while the probate process moves forward. The tone to strike is practical and transparent; explaining the circumstances of the death, confirming the interim governance arrangements (for example, how voting will be exercised pending registration), and setting out the intended end-state-usually an onward transfer to one or more beneficiaries once probate is granted.
Register the personal representative or transfer to the beneficiaries?
After probate is granted, the personal representative will need to decide whether to have themselves registered as the legal member of the shares, or to transfer the shares straight to the intended beneficiary.
Where the deceased’s will is straightforward and beneficiaries are clearly identified, a direct transfer can be efficient and avoids registering a second change of legal title. In more complex instances, it can be preferable for the personal representative to be registered temporarily. Registration allows the personal representative to receive notices and dividends and to vote the shares, ensuring the company can continue to function while the estate is administered (which can help if needing to finance any inheritance taxes). However commonly we would expect the personal representative to be required to adhere to the terms of any shareholders’ agreement before their interest is registered.
The company’s constitutional documents will again be important here. Before transferring shares to a beneficiary the following need to be checked:
- Do the articles or any shareholders' agreement contain pre-emption rights requiring the deceased’s shares to be offered to existing shareholders first?
- Are there any minimum or maximum holding provisions?
- Is the transfer a "permitted transfer", and if so, are there any conditions attaching to the transfer? For example, does it require the beneficiary to adhere to the shareholders' agreement before registration?
From a regulatory perspective, the onward transfer to the beneficiary is frequently the moment that requires FCA approval and the identification as to whether a beneficiary may be a ‘controller’ and any regulatory timetable should be built into the process. If the beneficiary is a ‘controller’, FCA consent should be obtained before the transfer to the beneficiary takes place. If there are multiple beneficiaries, an assessment will be required as to whether they will be treated as ‘acting in concert’. If they are, the ‘controller’ analysis proceeds on the basis of their aggregated voting rights, and FCA approval may be needed for the concert party as a whole rather than for each individual in isolation.
Could you trigger an indirect change in control? Watch the FCA controller bands
Not every change in control requiring FCA consent is obvious. In group structures, the shares one inherits may be in an unregulated parent or holding company, with the FCA regulatory authorisations or permissions held by a trading subsidiary. A transmission or transfer at the parent level can therefore trigger an indirect change in control of the FCA regulated subsidiary. A similar analysis can apply when the parent is outside the UK but owns a UK FCA authorised firm.
Further, a beneficiary who already holds shares in their own name may, as a result of inheriting more shares, move up to a new ‘controller band’ requiring separate notifications to the FCA and/or FCA consents.
For UK regulated LLPs, the death of a member can lead to indirect changes in control of a regulated entity within the group, or can move remaining members through a controller band (as on death/ retirement of a member, other members’ percentage interest typically increases). For instance, in a three-member LLP where each member holds a one-third interest, the death of one member automatically increases the remaining members' percentage interests - potentially moving them through a controller band even though they have not decided to acquire additional control. This is most likely in smaller LLPs where individual members’ interests tend to be larger. Where an indirect change in control has occurred, or where a band movement happens without anyone having decided to acquire control, the LLP should contact the FCA promptly and submit a post-notification as needed.
Needless to say, careful analysis is required, which will inevitably involve the company themselves, and it will be important that the practical steps are agreed between the appropriate stakeholders.
What happens if you proceed without FCA approval?
Proceeding with a change in control without approval required from the FCA can expose parties to serious risk. In circumstances where someone has decided to acquire or increase control (directly or indirectly) and goes ahead without obtaining the FCA’s prior consent, there can be criminal liability. Separately, the FCA has a suite of tools it can deploy even where no offence has been committed, including imposing conditions on a transfer or directing that shares be disposed of to a third party.
Beyond formal action sit the practical consequences: damage to the relationship with the regulator, reputational harm for the business and its owners, and avoidable friction at board level.
Engaging early and being transparent with the FCA will be key to avoiding any pitfalls.
Bringing it together
Inheriting an interest connected with a UK regulated business involves running multiple workstreams in parallel: making sure the estate administration and company law elements are right and sequencing the regulatory steps sensibly. Whilst there are potential pitfalls, ultimately these can be navigated in a straightforward manner and indeed it is important to get them right especially with the potential regulatory consequences. As always though, having the right adviser at hand who understands the complex legal landscape from a personal, corporate and regulatory perspective will be key to making that navigation a successful one for all involved.
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