Shareholders who go AWOL can cause major business headaches - Vicky Ward

Companies with multiple shareholders need to know who these individuals are and have an effective means of communicating with them. Failure to do so can create problems when declaring a dividend or contemplating a transaction, which require shareholder consent, and where time is often of the essence.

Shareholders can, however, become untraceable for many reasons. They might have moved without providing new details or passed away without family members being aware of their shareholding in a particular company.

Whatever the reason, having untraceable shareholders can cause headaches, both in terms of administrative burden and costs, which can impact a company’s finances and ability to operate efficiently.

Vicky Ward is an Associate, Davidson Chalmers Stewart LLP

The fact that a shareholder is untraceable doesn’t deny them legal rights and protections. It is therefore vital that companies follow the notice provisions in their articles in respect to announcements, resolutions, etc. It could otherwise lead to court action against the company and/or its directors.

Companies are legally bound to make proportionate efforts to find missing shareholders with the cost of doing so in line with the value of the individual’s shareholding. Placing a notice online or in a local newspaper can be relatively cheap options which go a long way in demonstrating a company has made such an effort.

Companies should also put a plan in place to deal with dividend payments as these can be claimed by previously untraceable shareholders for up to 12 years after being declared. For those which have adopted the model articles, Article 33 will clearly set out the company’s position on this issue. This says directors can initially invest unclaimed dividends back into the company, but these must be paid to a shareholder if they reappear and make a claim for the funds. If, however, they remain unclaimed for 12 years, these dividends can then be unconditionally retained by the company.

Given the financial uncertainty of this situation, it’s generally advisable, where possible, for companies to put unclaimed dividends aside rather than reinvest them. These funds can accumulate over 12 years and, depending on the value of untraceable shareholdings, could create a significant financial issue if a claim is made for them.

To mitigate this financial risk, companies should start by reviewing Articles of Association ensuring they contain provisions dealing with unclaimed dividends and the forfeiture and/or sale of shares by untraceable shareholders. It’s also advisable to include a provision stating that any shareholder who fails to provide a company with up-to-date contact details will lose their right to receive notices and vote on resolutions.

There is also an option to buy back shares of an untraceable shareholder provided a company can meet all the statutory requirements and has put articles in place which allow this to happen. Because it is not possible to communicate with a missing shareholder, best practice is to put the funds required to cover their shares repurchase into a separate account on the untraceable individual’s behalf. If unclaimed for 12 years, this money can then be legally transferred to the company.

Any company with untraceable shareholders shouldn’t simply ignore this issue as they may be forced to try and locate such individuals when faced with a time-critical issue. It is therefore important for directors to do all they can to reach all shareholders on the company register, and put in place a plan to minimise potential financial impacts if any shareholders go missing in action.

Vicky Ward is an Associate, Davidson Chalmers Stewart LLP