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Major Dilemma for Minor Shareholders
Acis, current as of: 27 February 2018.
While it may satisfy the King Midas in all of us to turn wealth into gold for younger family members and friends, there are obstacles that may potentially trip up clients planning to issue company shares to minors. You’d be surprised at how often this issue comes up, often involving extremely young children.
While the Corporations Act 2001 dictates that a company director must be at least 18 years of age, it does not have a similar requirement regarding the holding of company shares. In the absence of any requirement in a company’s constitution, there appears to be no legal reason why shares cannot be registered in the name of a minor.
There are, however, some very good legal reasons why shares should be registered in the name of a parent or guardian as trustee for the minor holding those shares.
Contracts a no-go zone for minors
Minors are not considered to have legal capacity. This is the primary reason why they are not able to enter into contracts, with some limited exceptions. This can present some significant difficulties where minors are the registered owners of company shares (or units in a unit trust), including:
- The minor is not bound by the company’s constitution, which is a form of contract;
- Minors are unlikely to be able to enter a binding contract to sell or transfer shares;
- Minors cannot vote at meetings of shareholders;
- Minors cannot make a binding proxy to enable a vote at company meetings;
- The contract to acquire the shares may not be valid;
- Where shares held by a minor are partly paid, calls for payment of part of the price of the shares are not enforceable;
- Minors may not be able to open bank accounts, resulting in difficulties cashing a dividend payment;
- Minors may not be able to enforce the company constitution against other shareholders or directors;
- Minors cannot enter into legally binding shareholder agreements;
- ABN applications may require the TFN of each shareholder;
- The Corporations Act 2001 requires that shareholders provide their consent to becoming a shareholder, which minors are not legally able to do; and
- Minors can repudiate the allotment of shares at any time during their minority or before they ratify the allotment on turning 18.
Finally, for any contract involving a minor to be binding, it must be legally ratified or affirmed once they turn 18. In the absence of ratification or affirmation, the contract remains unenforceable even after the minor acquires legal capacity.
What CHESS has to say
CHESS procedures also recommend against a minor holding shares in listed companies for all the above reasons. Additionally, brokers processing transfers of listed shares are obliged to indemnify the relevant company against any loss associated with a share transfer from a minor. Potentially, where a minor transfers shares and then challenges the transfer once coming of age, the broker may be liable for damages as a result.
We always recommend that shares are held for a minor by a parent or guardian, using a declaration of trust which makes it clear that the shares are held non-beneficially. Of course, once the minor turns 18, the shares can be transferred by the “trustee” into the name of the child without any duty or CGT consequences.
If you require further information or have questions, please contact us.