As a result of the ongoing coronavirus lockdown measures, we have been helping a large number of clients to put in place or review and update their existing Wills and Lasting Powers of Attorney. Whilst we always advise that these important documents are considered and implemented as soon as possible, it is proving more important than ever for individuals and families to receive professional advice to ensure their loved ones are protected and that their wishes are carefully documented. Sophie Haskins from our Private Client team has recently explained the benefits of having a Will and Lasting Power of Attorney in her recent article.
For business owners, it is also important to consider and record what should happen to the business in the event of an owner or the owners being unable to perform their duties. Where a business trades as a private limited company, it will be a separate legal entity, distinct from its owners. It is therefore imperative that provision should be made in the Company’s constitution on how the Company will act if the directors and owners are ill or worse still, should die.
How to regulate how the shareholders work together
A Company’s internal affairs are regulated by the Companies Act 2006 and the Company’s Articles of Association. In addition to this, the directors can be required to enter into director service agreements and the shareholders can put in place a shareholders’ agreement.
A shareholders’ agreement is a private agreement between the shareholders and a flexible way of regulating the company’s affairs. Small companies with two equal shareholders who are also directors, may only need a simple agreement whereas companies with several shareholders, some of whom may be investors with no or little control at board level, may need a much more detailed agreement.
Some of the areas that are typically considered within a shareholders’ agreement include:
The default position is that directors have control of the day to day business of the Company save for certain decisions that require shareholder consent as prescribed by the Companies Act 2006. A shareholders’ agreement can reserve certain key decisions for the shareholders, other than just those required by statute. For example, investors with only a financial stake in the company (who do not have a seat on the board and only have a minority shareholding), may want to ensure protection against certain decisions that could affect their investment or dilute their share percentage.
It will also be necessary to consider how the decision-making provisions should apply if a director or shareholder becomes incapacitated or dies. A Lasting Power of Attorney enables appointed attorneys to deal with the donor’s property and finances and/or health and welfare in the event they do not have capacity to make decisions about such matters. The LPA will therefore enable decisions to be made on behalf of a shareholder (in the event of incapacity or death) but further considerations are needed when planning for the incapacity or death of a director.
For a sole trader business, on the death of the sole owner, orders, documents and transactions may still need to be completed. If provision has not been made for who will run the business on the death of the owner, delays and losses may occur unless the third party is satisfied that instructions can be given or documents signed by someone other than the owner. A Business LPA will allow a third party to ensure continuity of the sole trader business in the event of the owner’s death or incapacity.
For multiple director companies, there are additional options, for example a detailed share transfer mechanism in the shareholders’ agreement can provide for what will happen on the death or incapacity of a director or provision could be made for appointing alternate directors.
- Share transfers
Whilst most businesses start with a common interest and a plan for growth, things can change along the road. A shareholder may wish to start a family and reduce their involvement, personal circumstances may restrict contributions, financial commitments can change and the shareholders can simply fall out. This is why it is imperative to document the agreed terms between the shareholders at the earliest opportunity, when the shareholders are on the same page! Once objectives change and shareholders have competing interests, it is much harder to meet in the middle.
For example, a shareholder who is not bound by a pre-emption clause in relation to the transfer of shares could be free to sell to a third party. Whilst it may not always be possible to sell to a third party, if a buyer could be found, it could leave the remaining shareholder in business with someone they had not chosen to work with.
A shareholders’ agreement can balance these objectives by providing a clear procedure for share transfers, for example by requiring the selling shareholder to offer his or her shares to the remaining shareholders first before they can be transferred to a third party.
- Incapacity or death
A shareholders’ agreement can also specify what will happen to a shareholder’s shares in the event of their incapacity or death. Shareholders may have to hold frank conversations about how they can best balance the interests of the remaining shareholders and the incapacitated or deceased shareholder’s family members. For example, should the family members be able to exercise voting rights and receive dividends in place of the incapacitated or deceased shareholder? Should the remaining shareholders have the option to acquire the incapacitated or deceased shareholder’s shares? How will the shares be valued and how should the purchase be financed?
In some circumstances, it may be appropriate for the shareholders to take out life policies, the proceeds of which can be used on death to purchase the deceased shareholder’s shares. A cross-option agreement can then be put in place to ensure that the deceased shareholder’s beneficiaries will ultimately receive the benefit of the insurance proceeds while making sure that the deceased shareholders’ shares can be purchased by the surviving shareholders or the company. This is not always a viable option, however, and the parties should seek financial and legal advice on the best structure that is appropriate to their specific circumstances.
While there is no legal requirement to have a shareholders’ agreement, companies with two or more shareholders should consider putting one in place. There is less potential for serious conflict between shareholders when their roles and responsibilities have been discussed and clearly recorded at the outset. This is perhaps even more pertinent in circumstances where a shareholder has died or lost capacity and emotions are likely to be running high, both with the deceased shareholder’s family members and with his or her business partners.
Although our offices are temporarily closed due to government restrictions, our Commercial Solicitors are working as usual remotely. For further advice and assistance on company matters, please do not hesitate to contact Anna Sivula, Commercial Solicitor at firstname.lastname@example.org or fill out a contact form and we will get in touch as soon as we can.