CHANCES are you haven’t decided to go into business with your business partner on a whim. Either you have a previous relationship or you value their experience and expertise. In the UK 99.9 per cent of companies are SMEs and of those SMEs more often than not the shareholders (owners) are also the directors (managers).
If your company is owned and managed by the same group of people it is imperative, for the continued success of your business, that there is cohesion. So, what should happen to the shares in your company if your fellow shareholder dies or becomes incapacitated?
If your fellow shareholder dies, their interest in the shares in your company will pass to whoever inherits them under the will or under intestacy, just like any other asset they may have. What this means for you as joint owner of the company is that you may suddenly find yourself in business with your business partner’s spouse or child (or other beneficiary), who may not have any knowledge of the area your business specialises in or may want to sell their interest in the shares to a third party (or competitor).
Similarly, if your business partner becomes incapacitated it is possible that their spouse or child will have power of attorney over their financial and personal matters, including their shares in your company.
So what can you do to protect the shares in your business from falling into the wrong hands?
Shareholders agreement – as the name suggests a shareholders agreement is a contractual agreement between the shareholders. It can be prior agreed that upon death or incapacity of another shareholder that the shares will pass to specific people (although the shareholder’s will also needs to reflect this).
Pre-emption rights – the general framework for governing your company is found within its articles of association. This may include a right of first refusal (pre-emption) for the remaining shareholders when shares are available to purchase. This may be particularly useful when the beneficiaries of an estate wish to sell their interest in the shares in order to pay inheritance tax and you do not want the shares in your company being sold to a third party.
Cross option agreement – in some circumstances it may have been agreed that the remaining shareholders will purchase the deceased shareholders shares but no one has the funds available to do so. A cross option agreement addresses this issue and combines the provisions of the shareholders agreement with life insurance policies so that sufficient funds are in place.
Alternatively, you may choose the try to remove the new shareholder. Provided that the remaining shareholders have 75 per cent or more of the shareholding, you may pass a special resolution to amend the articles of association to allow for the forced sale of shares in certain circumstances.
If push comes to shove, if the majority hold 75 per cent of the shares, then you could consider winding up the company. If a solvent company is wound up through a member’s voluntary liquidation, the company’s assets can be transferred to a new company which would not issue shares to the minority shareholder.
The death or incapacity of your fellow shareholder is likely to be a distressing time for all involved. Forward planning is always advised to avoid an uncomfortable conversation later down the line and to avoid business disruption.
Georgia Jones is a commercial solicitor at Borneo Martell Turner Coulston, for more information on any of the issues raised in this articles please call 01604 622101.
