There is no statutory restriction on shares in companies formed and registered under the Companies Act 2006 being held by, and registered in the name of, a person under 18 years of age.
Therefore, such companies can accept a minor as a member provided that their articles of association do not prevent this. (This is somewhat curious, in that infants are not permitted under English law to own a legal interest in real estate).
There are however certain points you should consider before transferring shares to a child or setting up a new company with children amongst its subscribers, which points are considered further below.
Can the directors refuse to register share transfers?
Even if the articles of association of a company do not exclude children from holding their shares, it should be noted that articles of association often give directors a discretionary power to refuse to register a share transfer, for any reason.
Indeed, such provisions are included within the current model articles of association for private companies limited by shares.
Accordingly, it may be appropriate to seek advance assurance from the board of the relevant company that they will agree to accept a transfer made to children before seeking to effect the transfer.
Limitations on a minor's capacity to enter contracts
Under English law, a contract made with a minor is generally unenforceable against (and voidable by) the minor, unless the contract falls within very limited exceptions of beneficial contracts for an apprenticeship, education, or services, or is a contract for ‘necessities' such as food, drink, clothing, lodging, and medicine.
In the context of share transactions, this could give rise to risk and uncertainty both when transferring shares to children, and in any subsequent transfer of shares held by a minor to another person before the minor reaches the age of 18. This is because shares are not necessities and therefore any contract for them is extremely unlikely to be binding on a minor and would remain voidable at the minor’s election.
On that basis, a child would be able to relinquish any obligations placed on them in connection with owning shares (including obligations to pay up partly paid shares) or any proposed sale or purchase of shares, at any time before the minor becomes 18 years old.
When a minor reaches 18 years of age, they can ratify a contract made during their minority – and only at this point would such a contract become binding on them.
Minors may repudiate their membership
A child who becomes a member of a company will be entitled to reject or set aside a contract for shares at any time before they are 18 years old or within a reasonable period after reaching the age of 18. This act of ‘rejection’ is known as repudiation.
Prior to repudiation, a minor who is registered as the holder of shares in a company enjoys the full powers and obligations of membership. However, if the minor elects to exercise their right to repudiation, they will be relieved of all future liabilities in relation to the shares they held.
If the minor acquired their shares by a transfer from another person (rather than by an allotment of new shares directly from the company), upon the minor repudiating their membership, the transferor may be restored to the company's register as the holder of the shares (and become liable for any sums unpaid on the shares), regardless of whether the transferor was aware of the transferee's minority.
Upon attaining the age of 18, a minor's right to repudiate their membership will be lost in the following circumstances:
- if the minor fails to exercise their right to repudiate within a reasonable period after turning 18 years old;
- if the minor affirms or ratifies their membership and accepts their shares by a definite act or acquiescence; or
- on a winding up of the company, unless the liquidator otherwise agrees.
In view of the potential obstacles and risks concerning registration of transfers involving children, and a minor’s capacity to enter contracts and right to repudiate, an alternative share ownership structure sometimes adopted to confer an interest in shares on a minor is for an adult (such as a child's parent) to be registered as the legal owner of the shares, as a nominee shareholder on trust for the minor.
Under this structure, whilst the beneficial interest in the shares will reside with the minor, the adult will be registered by the company as the holder of the shares and will, therefore:
- exercise all voting rights attached to the shares;
- receive payment of any dividends on the minor's behalf; and
- be responsible for signing any transfer or other contract (such as legal charges) in relation to the shares.
This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Paramjit Sehmi or write to us using the contact form below.