Planning for growth and investment as part of the long-term strategy of a business is important. An equally important (but often overlooked) aspect of business ownership is preparing for circumstances where an owner can no longer take part in that business.
Disruption to regular business, such as death, illness or incapacity can create uncertainty for any organisation, but the impact is often more prominent in owner-managed and family run businesses and is compounded where companies have a sole shareholder / director. Without appropriate planning, these events can require immediate, and often difficult, decisions to be made about control of the business, the ownership of shares and the financial position of the owner’s family during an inherently emotional and stressful time.
Taking time to align corporate governance arrangements with personal estate planning can significantly reduce that uncertainty. In this article, we cover the main things to keep in mind when planning the future of your business.
Taking a joined-up approach
Effective planning for business owners rarely involves a single document. Instead, it requires several arrangements to operate together, including:
Articles of Association
Shareholders’ Agreements
Cross-option arrangements
Wills
Lasting Powers of Attorney
By reviewing these arrangements together, business owners can reduce uncertainty and help ensure that both the business and their family are protected if circumstances change unexpectedly.
Reviewing the company’s constitutional documents
The starting point is usually the company’s Articles of Association and any Shareholders’ Agreement. These documents often contain provisions addressing what should happen if a shareholder dies or a director dies or becomes unable to act.
Typical provisions may cover:
restrictions on the transfer of shares
rights of existing shareholders to acquire those shares
how shares should be valued
the process for completing the transfer
appointment and removal of directors
Without clear arrangements, shares may pass to family members who have no involvement in the business, while the remaining shareholders may find themselves working alongside individuals who were not originally part of the ownership structure. A well-drafted Shareholders’ Agreement together with appropriate Articles of Association can provide a practical mechanism for dealing with these situations.
In addition, where a sole shareholder / director dies and the Articles of Association do not permit the personal representative to appoint new directors, any transfer of shares (even if permitted by the Articles of Association and/or shareholders) the company can become stagnant as there is no ability to appoint new directors and no ability to register the share transfers. In this situation, it is necessary to apply to the Court for an order to rectify the register of members, which can be time-consuming and costly.
Cross-option agreements and share protection
Cross-option agreements can be used to manage the transfer of shares on death.
Under this arrangement, surviving shareholders are given the option to buy the deceased shareholder’s shares, while the deceased’s estate has the option to require them to do so. The purchase is often funded by life insurance policies held for this purpose.
This approach can provide clarity for both sides. The remaining shareholders retain control of the business, and the deceased shareholder’s family receives fair value for the shares. However, the structure of these arrangements must be carefully considered alongside inheritance tax planning, particularly where Business Property Relief may apply.
Wills and business interests
Upon death, shares in a company form part of the individual’s estate. Where a Will exists, it may leave shares directly to individuals, or alternatively into a trust structure to build in protection and flexibility.
In the absence of a Will, the statutory intestacy rules determine who inherits the shares. This may not reflect the deceased’s intentions or the needs of the business. The recipient of the shares becomes entitled to them, but that does not necessarily mean they can freely hold or control them, e.g. if they are a minor.
A properly drafted Will for a business owner should carefully consider the nature of the business and any corporate agreements affecting it. This means that the Will should account for the testator’s shareholding, the intended beneficiaries of the business assets, as well as the Shareholders’ Agreement, Articles of Association and any cross-option agreements for the shares. The fact that a Will sets out to whom shares are to be left does not guarantee that intention will be given effect to if the Articles of Association and/or Shareholders’ Agreement prohibit the transfer. If the corporate documents contradict the intentions of the Will, this may cause issues when dealing with the deceased’s estate and considering matters holistically is always advisable.
Without proper planning, shares may pass under the intestacy rules or in a way that conflicts with the company’s governance arrangements. In some circumstances, trusts within a Will may also be beneficial to enable the position to be decided at the point of death based on the needs of the business and circumstances of the beneficiaries. Consideration of a trust structure may also be beneficial in order to preserve Business Property Relief.
Planning for incapacity
Incapacity can be just as disruptive as death, particularly where the business relies heavily on the decisions of a single individual.
A Lasting Power of Attorney (LPA) allows a person to appoint trusted individuals to manage financial affairs if they lose mental capacity. For business owners, this can include dealing with shareholdings or other financial interests connected with the business.
While LPAs do not replace corporate governance arrangements, they can form an important part of a wider business continuity plan.
Considering family circumstances
For many business owners, the company is not only a commercial asset but also part of the family’s long-term financial security. This can introduce additional considerations where relationships change. For example, divorce proceedings may require the court to consider the value of business assets when determining financial settlements.
In some cases, Pre-nuptial or Post-nuptial Agreements may help provide clarity about how business interests should be treated in the event of separation and the Articles of Association and Shareholders’ Agreement can also be tailored to set out what can or cannot happen in these situations.
How we can help
Collaboration between corporate, private wealth and family law specialists is particularly valuable when ensuring the continuity of a business in the event of death, incapacity or a relationship breakdown.
BPE have a diverse range of lawyers that can help with your business and succession planning, as well as any family law matters that you may face. Get in touch via our website and we can put you in touch with the best person to help with your unique situation.
