Have you paid much thought to what might happen to your company if you or one of your partners were suddenly not around or incapable of managing your business due to health problems?
It is a typical scenario: two business partners start up a company each holding 50% of the shares and the company is successful. Business owners are often too busy with the day job concentrating on the success of the company to plan for events like a falling-out, or a health scare that could affect the very foundations of the business.
While shareholders or directors do disagree from time to time, unexpected events can add extra pressure onto a business operation if its managers don’t have a succession plan in place in the event of death or shareholder’s dispute.
Ask yourself these questions…what happens if one of your shareholders passes away and their shares in the company pass to their spouse or their children who are unrelated to the business?
Do you and the remaining shareholders want to do business with them and continue to put in a lot of effort to make the firm successful just to have to split the earnings with them?
These circumstances frequently result in shareholder disputes, where usually one shareholder seeks to purchase the shares of the other party without an agreed approach. These disputes can be extremely expensive and emotionally disruptive to your business.
To help plan for the future of your business and prevent tricky shareholder disputes that can often run costly for you and your business, it is worth planning ahead and asking an advisor if your business could benefit from setting up a ‘Company Will’.
What is a Company Will all about then?
A company will isn’t a single document, but a series of documents as outlined below:
1. Shareholders AgreementThe shareholders in a company enter into a shareholders’ agreement, which details that if any of them die, the survivor(s) have the option to purchase the deceased’s shares from the estate; and the deceased’s executors can require the survivor(s) to purchase the shares from the estate (at a price to be determined by an agreed mechanism within the shareholders’ agreement);
2. Key Man Insurance PolicyThe shareholders each take out a life insurance policy in favour of the other (possibly paid for by the company), to provide funding for the purchase of the shares; and
3. Personal WillsThe shareholders each make a personal will, under which their shares in the company are directed to the chosen beneficiaries. Please note, there are tax considerations here which mean that it is likely to be more tax-efficient for shares to be directed into a discretionary trust, rather than to, say, a spouse who might fall liable for inheritance tax on any proceeds of sale of shares – obviously the choice of trustees in these circumstances is important.
This method guarantees beneficiaries of the estate receive fair value for the deceased's shares in the company (while also minimising inheritance tax liability) and permits a surviving shareholder to continue operating their business without interference from a deceased business partner's family.
Planning for this kind of event can help to prevent disagreements further down the line.
These issues are undoubtedly complex, but we have a lot of experience helping business owners to plan ahead, to take proactive measures to reduce the likelihood of disputes, and to settle any conflicts that could emerge.
Need more help?
If you find yourself needing legal advice regarding a ‘company will’ and you believe that this would be of benefit to you and your business, or if you have any queries relating to the issues discussed, we would be pleased to assist. Please contact our specialist litigation team on 0151 305 9650 or email email@example.com.
This article is not intended to be interpreted as advice.