Discussions regarding the relationships between shareholders are generally triggered when one or more unconnected parties come together to form a company or a new shareholder is introduced. Many businesses, particularly those that are family-owned, may grow and transfer or issue shares to family members without addressing matters typically covered by shareholder agreements. Shareholder agreements, and associated arrangements, are a tool for dealing with succession issues in a business and whilst planning for the death or incapacity of a controlling shareholder can be difficult to contemplate, if not managed, these situations can lead to disputes and/or a loss of value in the business.
Not all scenarios may be obvious. Consider the case of a company with a single director and shareholder who had made provision for his shares to pass under his will. If the Company was incorporated several years ago and no specific provision had been made, on the death of the shareholder the company could find itself in a situation where it had no director and no means to appoint a new director to operate the business without obtaining a court order. The lack of a director could have serious consequences and so, as a minimum, the articles of association of the Company (its “constitution”) should be amended to provide a mechanism for the appointment of a director in this situation. (NB The new model articles which apply to companies incorporated after 1 October 2009, unless amended, do cover this situation). Of course, that only covers the point at a legal level and the family should be clear how the company should be managed going forward, at least in the interim whilst a sale process is undertaken.
More typically, there are multiple shareholders and consideration needs to be given as to how shares are dealt with on the death of a shareholder and to whom they may be transferred. This is usually controlled through pre-emption rights on the transfer of shares, so that shares must be offered to existing shareholders before any transfer coupled with compulsory transfers if a shareholder dies and possibly a class of permitted transfer to family members to which pre-emption rights do not apply. The mix will depend on the relationships and relative shareholdings between shareholders. Arrangements may include cross-options, whereby a surviving shareholder has an option to acquire the deceased’s shareholder and the deceased’s successors can require the survivor to acquire the shares, funding for the arrangement being provided by life insurance arrangements. Consideration will also need to be given to appropriate arrangements at board level to ensure continuity of management.
The question of succession will in each situation bring its own questions, problems and complexities. Addressing these questions, whilst uncomfortable, can avoid difficulties later both in relation to ownership and management. It is worth taking the time to step back occasionally from the day to day running of the business and to plan to avoid future difficulties.
For further information on shareholders agreements please contact Peter Ellis, Partner at Beswicks Legal, on 01782 205000 or firstname.lastname@example.org