The High Court has held that two individuals – a father and son – entered into a legally valid and binding oral agreement that, if one of them were to die, their shares would transfer to the other of them, and that agreement applied notwithstanding the father’s will.

What happened?

Lane v Lane [2024] EWHC 2616 (Ch) concerned a construction company established by a father and one of his sons in 2003. For tax-planning purposes, the father and son each took 40% of the shares in the company, with the father’s wife (the “mother”) taking 10% and the son’s wife (the daughter-in-law) taking the remaining 10%.

The father had previously made a will in 2001, in which he stated that, on his death, all his property should pass to the mother, unless she died within 28 days of his death (which did not in fact happen).

The father died in November 2009. In October 2010, the company’s accountant filed its annual return showing that the father’s 40% shareholding had been transferred to his son.

The mother brought legal proceedings, claiming that the father’s shares should have passed to her under his will and by transmission under the company’s articles of association. (For more information on transmission, see the box titled “What is transmission of shares?” below.) 

The son claimed that, at a meeting in September 2003 between the four initial shareholders and the accountant (when the company was being set up), the shareholders had made an oral agreement to the effect, if either the father or the son were to die, the deceased’s shares would pass to the other of them. As a result, he argued, he had become entitled to his father’s shares on his father’s death.

What did the court say?

The court found that the shareholders had entered into an oral agreement. As a result, the son was entitled to the father’s shares. If, for any reason, the shares were to be registered in the mother’s name, the court would order her to transfer them to the son.

The court was shown little in the way of documentary evidence, so the judge effectively had to reach a conclusion based on the likelihood of each party’s version of events being true.

In the circumstances, the court placed significant weight on the fact that the father and son were both in the same trade and had established the company to continue that trade, and that neither the mother nor the daughter-in-law realistically had the skills or experience to continue the business themselves.

As the judge put it, if either the father or the son died, “the other would be (so to speak) the last man standing and the sole means of keeping the business going”.

This was underscored by the fact that the mother and daughter-in-law had each taken a 10% stake principally for the purposes of making the structure more tax-efficient and not per se as a means of exerting any influence in the company.

The court also considered whether the oral agreement was supported by consideration. The judge concluded that the parties – including the mother – had exchanged mutual promises and had intended those promises to have legal effect. This was enough to provide consideration and so create a legally valid contract.

The fact that there had been no agreement in writing reflected the fact the family was (at the time) close and placed a substantial degree of emphasis on their mutual trust for each other. It did not, however, mean that they had declined to set out a legal framework to deal with the shares on death.

What does this mean for me?

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, and this may impact the assets available to distribute in accordance with the will or rules of intestacy.

In this case, the oral agreement effectively overrode the deceased shareholder’s will, placing his shares with his son, rather than his wife.

The fact that there was a valid contract to which the deceased’s widow (the mother) had also agreed avoided issues of enforceability or the appropriate remedy. But that will not always be the case, as the question of when exactly a promise should override a person’s will is highly complicated (and, indeed, divided the Supreme Court in 2022). It is, therefore, always safer to update a will than to rely on an external agreement.

It seems that the agreement did not have the effect of automatically transferring the shares to the deceased’s son, as it was not found to form part of the company’s constitution. It is possible that the shares ought to have passed by transmission to the mother, but the court made it clear that, if that had happened, she would have been required to transfer them to the son.

In the event, the shares had already been re-registered in the son’s name, and so no action was required.

Although the fact pattern is different, the case is reminiscent of the recent judgment in Colicci v Grinberg [2023] EWHC 1177 (Ch), in which a divorced couple entered into a binding promise, via a deed of mutual wills, to bequeath their shares in a company to their two shared biological children. In that case, the deed was not revoked or amended by a subsequent shareholders’ agreement (in part because the two documents related to different subjects, namely the parties’ obligations as testators versus their rights and obligations as shareholders). You can read more about the court’s decision that a mutual will was not revoked by a shareholders’ agreement in our in-depth piece.

The decision also raises three other important points.

First, provided the requirements for a contract are satisfied, it is perfectly possible to enter into an oral agreement to transfer shares in a UK company. The transferor will need to sign a written instrument of transfer to effect the transfer, but the contract for sale can be entirely oral and the court will enforce a sale under a binding oral agreement.

However, allowing constitutional matters such as this to be governed by an oral arrangement is never satisfactory. The terms of oral agreements are inherently more difficult to pin down and rely heavily on the factual context.

Second, therefore, it is always advisable to put any arrangements for the governance or constitution of a company in writing. In a family context, this can often seem overly formal and provoke strong reactions from family members, who may have strong convictions that the strength of their enduring personal relationships is worth more than a written contract.

However, and sadly, often the most protracted and acrimonious disputes that come before the courts feature family relationships that have broken down, in some cases dramatically, and that acrimony is often prolonged or fuelled by the lack of any clear written arrangements.

In many cases, a written shareholders’ agreement or similar contract will never need to be used and will, indeed, be a mere formality. But, where families fall out, a written agreement can at least serve to minimise cost and collateral damage.

Family members embarking on a venture together may wish to regard such an agreement as a sensible insurance policy for a worst-case scenario that hopefully never comes about, rather than a sign of mistrust.

Third, although a difficult subject to broach, it is always worth considering what should happen if an individual shareholder dies. The transmission provisions in a company’s articles provide a starting point, but they are usually very basic and can produce results that do not accord with the shareholders’ commercial intentions.

In addition, it can often take some time for personal representatives to complete the necessary formalities to obtain a grant of representation and take action with a deceased’s estate. This is particularly the case where a shareholder dies intestate, there are competing wills, or there is uncertainty over whether the deceased’s shares fall within the scope of their will.

Although this case featured a family-owned company, it is common to see individual shareholders in a variety of situations. A common scenario we encounter involves managers who take shares in a private-equity backed business, either as an investment or as part of an incentive plan (so-called sweet equity).

In this context, it is important to ensure that the company’s constitution and any contractual arrangements cater for a situation where an individual shareholder dies. In particular, it should be clear how any leaver and compulsory transfer provisions, pre-emption or right of first offer provisions, drag-along and tag-along are to operate if an individual shareholder dies.

Access the High Court’s decision that a shareholder had entered into an oral agreement to transfer his shares on his death