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Do you need a ‘Company Will’?

michael_smeatonIf you are a business owner, in business with one or more partners, have you taken time to consider what might happen to the business if you, or one of them, were suddenly not around or capable of taking part?

It is a common scenario – two business partners have incorporated a company, each a director and 50% shareholder, and the business is successful. The owner/managers are generally too busy focussing on the success of the business to prepare for scenarios like a falling-out, or the passing-away of one of them.

Fallings-out between shareholders or directors are relatively common, but problems can arise in other ways where a business has not planned in advance for succession in the event of death.

In the common scenario described above, what happens where one shareholder dies and his shares in the company pass to their spouse, or one of their children, who have nothing to do with the business? Does the surviving shareholder want to be in business with them, and does he or she want to continue working hard for the success of the company, only to have to share the profits with them?

Scenarios like that will commonly lead to shareholder disputes – typically with one shareholder looking to acquire another party’s shares, but with no agreed means of doing so. Disputes like that can be enormously expensive, and disruptive.

For those reasons, it is worth considering whether you and your business might benefit from making a ‘company will’.

This is not a single document, but a series of documents as follows:

  1. The shareholders in the company enter into a shareholders’ agreement, which provides (i) that if any of them die, the survivor(s) have the option to purchase the deceased’s shares from the estate; and (ii) 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. The 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. The shareholders each make a personal will, under which their shares in the company are directed to the chosen beneficiaries (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 mechanism allows a surviving shareholder to ensure that they can continue to run their business without the interference of a deceased business partner’s family members, and also ensures that the beneficiaries of the deceased’s estate receive fair value for the deceased’s shares in the company (whilst also minimising inheritance tax liability).

Forward planning for this type of scenario can help to avoid disputes further down the line (and by the time any dispute arises, it is often too late to plot a simple and cost-effective way through the issues).

Obviously, these matters are complicated but we have a great deal of experience in assisting business owners to plan ahead, take proactive steps to minimise the risk of disputes, and to resolve any such disputes should they arise.

If you think that a ‘company will’ would be of benefit to you or your business, or if you have any queries or concerns relating to the issues involved, we will be pleased to assist.

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