Very few people like talking about death; particularly their own. Most shareholders of private companies expect to sell their businesses long before death. I think it’s for this reason that very few owner managers take the time to consider what will happen to their shares if they die.
It’s not an easy topic to consider but advance planning ensures that, if the unexpected happens, the beneficiaries are looked after and the remaining directors can focus on the business.
What will happen?
Most of my new clients believe their shares will go to their family under their will (or via intestacy rules) but this may neither be correct, nor desirable.
If such is the intention, the articles of association of the Company need to allow it. The terms of the articles may trump the terms of the will. Often the articles provide that the surviving shareholders must have a right to buy the shares first. But what will the price be? Could they afford them?
If you have a co-owner, will they want your spouse or children having an interest in the business? Would you want theirs to? Would your family members want to be shareholders or would they prefer the shares to be sold so they can realise the value?
Points to consider
- The key owners of the company should jointly consider what they would want to happen to the deceased’s shares if any of them die.
- If the shares are to be sold so that the family receive the value of the shares, will there be funds available?
- Is the intention properly documented and do any of the relevant documents (articles of association, shareholder agreement, cross option agreement and will) conflict?
- What would happen in the event of critical illness or bankruptcy?
Every situation is different but some of the common solutions are:
- Ensure the articles clearly state to whom shares can and can’t be transferred;
- Put in place options which give the survivors the right to purchase the shares;
- Include a well thought through valuation provision to avoid arguments;
- Consider taking out cross option insurance which will pay out upon death and be used to buy the shares. This can ensure the surviving shareholders keep the company and the family get the value. Ensure that such insurance is backed by proper put and call share options which will need to be carefully drafted to ensure they are effective and protect any inheritance tax business property relief.
Conflicting provisions within the key documents is likely to cause significant delay and expense and, in the worst case, will mean your intentions cannot be carried out. The result is stress not only for the individuals but also for the company.
When an owner manager dies, the remaining directors and managers need to be more focussed than ever on continuing the business and protecting its value. They cannot do that if they are distracted by protracted and expensive disputes. There are relatively simple steps which can be taken to avoid such issues.
If you need to review the succession planning within your business please contact me.