The serious illness or death of a shareholder, who is also key to the business, is bound to create problems at best and could lead to the downfall of the company at worst. Having a considered catastrophe plan in place sounds common sense but how many family companies truly have an emergency strategy? In our experience very few!
In the event of either illness or death, the fundamental goal is to keep the business going and maintain its goodwill. The last thing a family wants is to have squabbles just at the very time that everyone needs to pull together, so planning in the cold light of day is essential, and documenting the plan so that there are no misunderstandings in the future is sound practice.
Voting rights control the company and in the case of serious illness those voting rights don’t change, so a shareholder unable to vote can completely change the day to day control. One could consider a power of attorney in favour of another shareholder(s) or third party in the event of severe disability, but this can be cumbersome and attract legal fees.
In the event of death, the company’s Articles will normally allow the deceased’s shares to be transferred initially to his executors, who could be people you don’t even know, or even worse that you do know and don’t care for! Probate can take a long time, so the beneficiaries may not have their shares registered for years.
Whilst the company’s Articles are its “rule book”, the route we recommend is to have a shareholders’ agreement. This can say whatever the shareholders want it to say, provided it is lawful. The agreement needs to be compared with the Articles so that any conflicts between them are ironed out. Examples of items in the agreement might include covering voting (or non-voting) of shares in the event of sickness or death; who is entitled to inherit or buy the shares after death; how a valuation is to be carried out; remuneration during illness and pension rights, if any, following retirement through ill health or sums payable upon death in service. Each agreement must be tailored to the circumstances. Also, ensure wills are updated to be in line with the shareholders’ agreement.
A company may want, or need, to appoint an outside expert on at least a temporary basis in either scenario. Interim management is a big industry these days and there are many very capable people out there happy to fill in on an emergency basis.
So who is going to pay for all this? Speak to your insurance broker who will be able to discuss the range and price of cover available in the market. Hopefully this will be money down the drain and your company and its personnel will enjoy many years of good health!
For more information about this article, please call Lionel Curry on 020 8907 2000 or click here to email him and he will be delighted to help you (there is no charge for an initial telephone discussion).