Aside from the practicalities of the day to day running of the business, the remaining individuals will also need to deal with various legal issues, particularly where the deceased held shares in the company.
By having the ‘what if?’ conversation at an early stage, shareholders can be comforted that ownership issues arising on a shareholder’s death will be kept to a minimum, provided that they put into place the appropriate legal documentation reflecting their intentions. This will ordinarily be in the form of a shareholders’ agreement, which will specify what happens to the shares when a shareholder dies. Key issues which need to be considered are as follows:-
- Do the shareholders want the right to make the first claim to the shares before they can be transferred to third parties? Such rights are called pre-emption rights and they mean that shares must be offered to existing shareholders before they can be transferred to a third party.
- Do the shareholders want the option to purchase shares passing by will (or by intestate provisions) from the deceased’s personal representatives? This will involve what are referred to as ‘cross options’ and can be supported by life insurance policies which generate a lump sum to enable the continuing shareholders to fund the purchase from the deceased’s estate.
- Provisions should be made to enable one shareholder to make decisions alone in the event he is the sole shareholder by reason of death. This should include the ability to appoint directors.
Failure to deal with these points by having a valid agreement in place reflecting the shareholders’ intentions can lead to shares passing either by will or, where there is no will, by intestate provisions. This leaves the shareholders without any control over who receives the shares, which could mean they find themselves in business with a new shareholder who may not know anything about the business or with whom they cannot maintain a satisfactory relationship.
Shareholders should also consider what will happen if one or more shareholders are temporarily incapacitated, in particular consideration should be given as to whether it would be prudent to give a family member or trusted business partner a power of attorney to take action in relation to the business. This is especially relevant in companies where voting rights are split 50:50.
This is however not a only a commercial issue, legal advice in relation to wills and advice on tax planning will also be required to ensure that those running their businesses make the right decisions for them, their families and their company. It is essential when writing your will that your lawyer understands how your shareholders’ agreement works and that the two complement one another. At Steeles Law our corporate team work closely with our wills and probate colleagues to ensure that you have the appropriate protection in place.
If you wish to discuss any of the issues discussed in this article, or if you would like a shareholders’ agreement reviewed or drafted, please contact firstname.lastname@example.org.