There are always potential dangers to a company in having a sole shareholder-director. Very often business owners fail to consider the succession aspects of their share ownership. Companies with a sole shareholder-director are in a particularly vulnerable situation if they have not given careful consideration to future control and succession. Without proper measures taken, there is a risk of loss of power and authority to manage the companies, the assets and the associated wealth of the sole shareholder-director, until the time the probate process is completed.

The risks

Under current statute, the business and affairs of a company are generally required to be conducted by or under the supervision of its directors. Those directors are usually appointed by the members or by the existing director(s). Accordingly, where a sole shareholder-director dies, the company can be left in limbo because there will be no one with power and authority to appoint a new director. There are often at least two obvious consequences for the company:

1. there is no one who is able to carry on its business and affairs; and
2. there is no one who can appoint an alternative individual to carry out that task in his place.

So the company’s functions will have to come to a standstill until probate has been granted and the shares previously held by the sole shareholder-director have been transferred to the new shareholder(s), and a new director can be appointed. In other words, until a grant of probate has been obtained from the court (Grant), it is not possible to transfer a share of a deceased person.

The solutions

The probate process is a time-consuming, expensive and public process. In order to avoid the company’s business from being frozen for what may be a significant period of time, the sole shareholder-director should consider to nominate another person as:

1. an alternate director who has the same powers, duties and also responsibilities as the appointing director. If an unforeseen event occurs such as physical incapacity, mental illness, or death, appointing an alternate director means that the day to day running of the company can continue seamlessly.

The appointment of an alternate director may be terminated at any time by the appointor even if the period of the appointment of the alternate director has not expired, and terminates in any event if the appointor ceases to be a director. Most importantly, the appointment of an alternate director terminates automatically on the death of the sole shareholder-director.

2. a reserve director to act in his/her place in the event of and only upon his/her death. Where a reserve director is nominated, his/her role as a full director automatically takes effect upon the death of the sole director, allowing him/her to immediately take on the operation and management of the company. It is a cost-effective means of ensuring that the company continues to operate immediately and without the delays of the probate process to determine who will gain control.

It is important to note that the reserve director will have no duties or responsibilities until the death of the sole shareholder-director and the appointment of the reserve director can be revoked or amended at any time.

Overseas jurisdiction

Overseas jurisdiction such as the British Virgin Islands ("BVI") is a popular jurisdiction for asset holding vehicles. Shares in a BVI company are regarded as assets situated in the BVI. Where a shareholder of a BVI company dies, his or her shares cannot validly be transferred to his or her heirs until a Grant is obtained. From the time a completed application is filed with the BVI Registry, it can take three to six months for the Grant to be issued, but may be longer if the estate is contested or if the deceased died in a jurisdiction that has a legal system differing materially from that in the BVI.

Business owners who are sole shareholder-director should take consideration on the succession planning for the additional time and additional works required if they are having shares in an overseas jurisdiction.

For more information, please contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk