Child shareholders - can a minor own shares in a company?

Why do companies prohibit minors from being shareholders?

Under English law, contracts made with minors are usually unenforceable, aside from the limited exceptions of ‘beneficial’ contracts e.g. education, or contracts for ‘necessities' e.g. food or medicine.  Therefore, contracts in relation to shares are unlikely to be legally binding on a minor. This can cause issues, as minors can void their ownership at any point before their 18th birthday or within a ‘reasonable time’ thereafter. This process is called repudiation and is effectively the minor rejecting ownership of the shares, as well as any obligations placed on them as a result of owning them.

The law surrounding this causes some uncertainty as what constitutes ‘reasonable time’ is not defined, so is dependent on the nature and circumstances of each case. However, if the shareholder acts in a way which demonstrates their consent to ownership of the shares after their 18^th birthday, such as accepting dividends, their ability to repudiate will be lost, regardless of whether ‘reasonable time’ has passed.

There is an argument that in the event of a minor shareholder repudiating their share ownership, they should be required to refund any dividends or benefits received from the company as a result of being a shareholder back to the company. This argument is based on section 3 of the Minors' Contracts Act 1987, which states that the court may require a minor who repudiates a contract to transfer 'any property acquired under the contract, or any property representing it' to the other party.

 

Other risks of allocating shares to children

Aside from minors being able to repudiate at any given time, there are several other risks that could arise when allowing them to own shares in a company:

• Liability of other directors - A director who knowingly allows shares to be allotted to a minor is liable to the company for any losses as a result.
• Issues with control - Within the company itself, the minor is still a member with a level of control, so is therefore entitled to a say in company matters. Giving too many shares to minors can tip the balance of control in a business and may lead to them outvoting other shareholders. This can present issues as, dependent on their age, they may not have sufficient maturity or understanding to make educated decisions, limiting how well the company is run.
• Difficulties with transfers/sales – A well advised buyer will be concerned with the prospect of acquiring shares from a minor for the reasons discussed above which in a worst-case scenario for the buyer, could invalidate the sale and purchase agreement and would prejudice the buyer’s ownership of the company. To overcome this, buyers may request that pre-completion, the minor transfers the legal title in their shares to an adult, albeit the beneficial ownership can remain with the minor pursuant to a trust arrangement (as discussed further below). If the shareholder is no longer a minor (but was a minor at the time of receiving the shares and are within a reasonable time-frame of their minority to repudiate) they can ratify their ownership of the shares, meaning they’ve given formal consent to owning them and therefore making any contracts binding on them.

 

Solutions for child shareholders

Due to these issues, it is generally inadvisable for companies to allow a minor to directly hold shares. A common solution is a bare trust arrangement whereby an adult will hold the shares on behalf of the child, resulting in the minor only having a beneficial interest. The beneficiary still has the absolute right to the capital and assets within the trust, as well as any income generated from these assets, however, the trustee will be registered as the legal holder of the shares.

In conclusion, providing legal ownership of shares to a minor can provide some benefits to smaller, family run companies. However, it is unlikely to be favourable to larger private or public companies and trust arrangements may be more appropriate.

 

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