We often talk about the relationship between shareholders and partners being akin to that of a marriage. Most of us will have discussed with our spouses and partners what we want to happen once we have gone, ideally having put a will in place to deal with our estate. However, have you thought about and had the same discussion with your fellow business partners?
Whilst it’s a question that most of us would rather avoid, perhaps more so in the business context, it’s a very important discussion to have to avoid the inevitable business turmoil and upset later on down the line, if your business is not in order.
Why is it important to discuss it?
- Certainty – Putting in place an agreed procedure on what will happen after the death of a shareholder will reduce the risk of dispute arising on what should happen with that shareholder’s shares, and how the business will be managed going forward.
- Avoiding Unknown Beneficiaries – Without agreed procedures, shares in your business will transfer according to the will or intestacy rules for the departed shareholder. This means you could have a spouse, or child of your departed shareholder, becoming a shareholder in your business and that individual may not have any interest in your business, or perhaps have too much interest.
- Financial Planning – Putting in place the right type of agreement supported by a life policy for each shareholder can ensure that on death, the procedure for the transfer of the departed’s shares is supported by a financial injection under the insurance policy, meaning your business is not financially strained in the circumstances. We work with a team of trusted financial advisers to ensure you have the right policy in place.
What should you be asking yourselves?
- Do you have a Shareholders Agreement or Cross Option Agreement in place, setting out how we regulate our relationship as shareholders? If not, you need to put this in place.
- Do you have an agreement in place with provisions which match what you want to happen with shares on death? If not, you need to amend the agreement.
- Is there a mechanism in place that works in the most tax efficient way? If not, you need to rethink how you approach this.
Thought about a Power of Attorney?
Being able to continue to run a business effectively could be equally threatened by an owner becoming ill or losing physical or mental capacity on a temporary or permanent basis. To cover such an eventuality, it’s worth having Lasting Power of Attorney in place. By doing so a business owner can authorise or empower another person to make financial and business decisions on their behalf.
What Can You Do About Shareholdings on Death?
There are normally two types of share transfer provisions on the death of a shareholder:
- automatic transfer provisions; and
- discretionary transfer provisions.
Automatic transfer provisions will usually be set out in the Articles of Association or in a Shareholders Agreement.
Whilst discretionary transfer provisions can be set out in the Articles of Association or Shareholders Agreement, it’s more common to set these out in a Cross Option Agreement, depending on how you intend the discretionary transfer to operate.
Provisions in your Articles or Shareholders/Cross Option Agreement will take precedence over the shareholder’s will.
Automatic Transfer Provisions
Automatic transfer provisions provide that on the death of a shareholder, the shares will automatically be transferred by:
- Fellow shareholders pro-rata to their current shareholding; or
- By automatic transfer to an identified person (common in family-owned businesses where they pass to a child etc.); or
- Potentially a Company Buyback with the shares being cancelled.
Discretionary Transfer Provisions
Under this sort of procedure, business owners grant each other options which will come into effect on death. Both parties may then exercise the cross option which means that:
- The deceased business owner’s personal representatives can ‘force’ the surviving co-owners to buy the deceased’s interest in the business; and/or
- The surviving business owners can ‘force’ the personal representatives to sell the deceased’s interest to them.
Ensuring you have a Shareholders Agreement in place with share transfer provisions which cover off what happens on the death of a shareholder is critical to ensuring that the transfer of shares is done in a legal and orderly manner. The provisions help to avoid shareholder disputes and ensure that the shares are transferred to the appropriate parties and can often be a life saver for businesses.
Dealing with Shareholders Agreements and is one of many areas our business law solicitors and the other experts we work with do ensure you can rest assured that your business is operating at its best now and in the future.
Get in contact with our business law team today.