With fewer than half of UK adults having made a Will, and even smaller numbers regularly updating their wishes, it’s likely that many business owners and entrepreneurs don’t have suitably up-to-date Wills in place to govern the succession of their personal and business assets.
When a business owner dies, the future ownership of the deceased owner’s interest will be determined by several factors, including the type of business structure. The focus of this article is incorporated businesses, where the Articles of Association (‘the Articles’) are the starting place to look to find out who takes control of a deceased owner’s shares.
Will having Articles of Association (‘the Articles’) and Shareholder agreements give me more protection?
Articles set out the rules of the company and are enforceable as a contract between the company and its members, and between the members themselves. It’s not uncommon for business owners to leave the task of preparing a bespoke Shareholders’ Agreement to a later occasion, instead relying on the company’s model articles of association for protection. This is a risky approach for several commercial and governance reasons, considering this purely through a succession lens, the default position set out in model articles is unlikely to be helpful.
Under the default rules a deceased’s personal representatives (‘PRs’), meaning their executors or administrators, will have the control of the owner’s shares until a formal grant of representation (probate/administration) is obtained. Once the grant is obtained, the PRs can arrange transfer of the shares to the beneficiaries entitled under the deceased owner’s Will, or under the statutory rules of intestacy where there is no Will, or to a third party nominated by those beneficiaries. The PRs can also arrange a sale of shares, where the beneficiaries entitled don’t wish to retain them, or if they are required to do so under the Articles.
A Will is an easy way for business owners to help minimise risks
Even where there is a Will, in most complex estates where reports must be made to HMRC regarding the inheritance tax position, it’s currently taking a minimum of 6-9 months to obtain a grant. Under the default rules, the PRs cannot ordinarily vote as shareholders during this period, or until a decision is made regarding the ongoing ownership and the shares are transferred.
The position is likely to be even less clear if the deceased owner hasn’t made a Will at all, as statute controls who can apply to be the PR. A number of family members may have an equal right under the Intestacy rules to apply for a grant to take control of the estate. Therefore, it’s not always clear until the grant is obtained who’ll be entitled to control the shares or who will ultimately inherit them. The identity of the PRs can really impact the risk of dispute between multiple interested parties.
Under intestacy rules a number of family members may have an equal right to apply to act as PR. Not all family members will have the skill or attributes necessary to support the business during the estate administration. Making a Will with carefully chosen executors is an easy way for a business owner to minimise these risks. It is even possible to appoint different executors to manage the business interests alone to ensure the smooth running of the business until the shares are transferred to beneficiaries or are sold.
The Will should be regularly updated (at least once every five years) to take account of changes in the business owner’s personal and financial circumstances, and in inheritance tax legislation. We would also recommend reviewing a Will each time there are changes to the company governance documents to ensure the alignment continues until the point of death or earlier sale of the business.
Further detail introduced in carefully drafted bespoke Articles can assist with smooth succession and tax efficiency for the owner’s estate and for the business itself.
Important considerations for Shareholders agreements
It’s worth remembering that Articles are publicly available from Companies House. Many business owners prefer to include the detailed elements of their succession planning (such as who can qualify for ownership), alongside any other confidential or commercially sensitive matters in a private Shareholders’ Agreement instead.
Whichever company governance document(s) chosen to hold the detail of provisions relating to succession, it is vital that these are reviewed alongside a Will. Not having a Shareholders’ Agreement or set of bespoke Articles covering the key elements outlined below provides less control to the company / surviving shareholders on how those shares are dealt with on the death of one shareholder, as the other shareholders can’t influence the Will.
Matters that should be considered for inclusion in a Shareholders’ Agreement to assist with estate and succession planning, include:
Who should be the permitted transferees – i.e. who is allowed to receive shares generally, but specifically following a death.
An obligation for shareholders to maintain an appropriate level of ‘shareholder protection insurance’, to pay out to surviving shareholders in the event of the death of one of their number. This cash is often intended to be used to enable the surviving shareholders to buy the deceased owner’s shares from their estate, keeping control within those individuals already involved in the business.
Cross option agreements, which can be very helpful to protect against difficulties resulting from the untimely death of a shareholder. Such an agreement can refer to the owner’s shareholder protection policy, but also set out terms as to how the shares should be valued post the death of one shareholder. This helps to eliminate disputes between surviving shareholders and the PRs and family of the deceased owner as sales are agreed. It is vital that any cross-option agreement be carefully drafted so as not to scupper the chances of success of claiming relief from inheritance tax on the shares as qualifying business assets in the estate.
Every business owner hopes that they will live to exit the business in the manner of their choosing, but failure to plan for the unexpected could leave your business exposed and your legacy to loved ones reduced in value because of tax inefficiency.
Aligning all your personal plans, using a Will and a Power of Attorney, with your business governance documents can create a dynamic plan for both the expected and unexpected events.
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