For the purpose of this blog post I am concentrating on private companies limited by shares but other forms of businesses are vulnerable in the absence of adequate agreements to govern the interested parties.
For companies with more than one shareholder, it is strongly advisable to have in place a Shareholders' Agreement which can be as long, short, simple or complex as you require. It can cover a myriad of scenarios or just one; it all depends on the shareholders' existing relationship and their business' need.
Whilst nobody likes to dwell on the topic of death, business owners must be realistic as to what would happen in such an unfortunate circumstance and the difficulties which can be faced by the remaining shareholders and Board of Directors.
What would happen in a 50/50 owned company in the event of the death of one shareholder? In the absence of a Shareholders' Agreement and/or specific provision in the Articles of Association, the shares will either form a part of the overall estate of the deceased, unless specifically referred to in a Will and/or pass in accordance to Intestacy Rules. This would mean in reality that in a 50/50 owned company, 50% of the shares could pass to a third party unconnected to the business upon one partner's death.
Due to holding insufficient shares to count as a majority, the remaining partner would be unable to pass any shareholder resolutions, and most likely, if both shareholders were also directors, would be unable to pass any board level resolutions for lack of quorum (commonly, companies adopt standard Articles upon incorporation which require a minimum of two directors on the board).
A Shareholders' Agreement can incorporate a deemed transfer of shares from one shareholder to another upon any specified event, commonly death, bankruptcy or incapacity. This prevents the shares being transferred to a third party outside of the business and provides business continuity and security in such circumstances which, in the main, is the aim of our instructing clients. With a Shareholder's Agreement in place, whilst dealing with the loss of the partner, the business can still run effectively and decisions can still be taken.
There are many different scenarios which can be covered in a Shareholder's Agreement, such as the right of a majority shareholder to 'drag' along a minority shareholder in the event of a proposal for the purchase of the business. This provision circumvents an unreasonable refusal by a minority shareholder to sell their shareholding to the purchaser.
You may want to incorporate a right for shareholders with a specified percentage holding to appoint or be a director themselves to avoid being ousted. Commonly, a simple board level majority decision is all that is required to oust a director shareholder rendering them effectively powerless in the absence of a majority shareholding.
Commonly, client's require provisions in the Agreement to address shareholder consents required, which again can be tailored to the needs of the business. For some reserved decisions you may want 100% shareholder consent rather than a simple majority of 51% or special of 75% existing under statute.
These agreements do not have to be overly complex, particularly for companies with two or three shareholders. A short concise document dealing with automatic deemed transfers and shareholder consents are an economical way to protect your interests in the business as well as the company itself, from unnecessary turmoil arising as a result of unplanned events such as the death of a shareholder director or bankruptcy.
For further information about how a Shareholder Agreement could benefit your business, please contact me at katy.jarratt-poole@buckles-law.co.uk or call 01733 888888.
