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Failure to implement a proper succession plan in a family or owner managed business can cause serious problems if the sole director dies, a legal expert has warned.
Craig Ridge, Head of Contentious Probate at award-winning West Midlands firm Higgs LLP, said in the worst scenarios bank accounts can be frozen and the business can find itself unable to trade for lengthy periods.
Craig said he regularly encounters problems where a business’ Articles of Association or Shareholders’ Agreements either have no suitable provision for the death of a key shareholder – or they are at odds with what has been written in a will.
“Problems following the death of a key person in a business are all too common,” said Craig. “Either there has been no thought into how matters should be handled, or it hasn’t been plotted through properly with advisors. Costly litigation is often the solution to right the wrongs.”
Craig cited a recent example where a father had run a modest business and was the majority shareholder as well as the sole director. The father died in post and in his will divided the shares in the business between his two children.
However, problems began when it transpired there was no appropriate provision for death in the company’s original Articles of Association, nor was there any Shareholders’ Agreement, leaving the business with no directors and no ability to appoint anyone into directorship.
Craig said: “When this happens and a company has no directors, not only is the company unable to properly trade, the company is in breach of legislation and may be struck off the companies register. An application to the court to amend the register of members is required to appoint a director. It can get very complicated and can cost the business money while it is in limbo.
“This could’ve been avoided either by ensuring that there are at least two directors at any one point in time and/or simply changing the company’s constitutional documents so that the deceased’s personal representatives, in this case the children, had the right to appoint a director.”
Craig said another common problem is when a will contradicts company documents.
“A will can be undermined by the company’s Articles of Association or Shareholders’ Agreement,” he said. “That’s why it is so important for business owners to ensure that their will is consistent with company documents. For example, a person may leave shares to a beneficiary in a will despite that not being possible under the existing Articles of Association. In those circumstances, it may be that the beneficiary receives money, rather than the intended shares or, at its worst, the gift under the will fails.
“People generally understand that they should have a will, but what they don’t understand is the relationship between that and the business’ documents.
“When business owners do come to us, almost without fail their documents do not do what they want them to. It’s much better to change and align them when all of the interested parties are talking and compromising than when something has gone wrong, be that a death, dismissal, resignation or a falling out.
“A business’ documents should be reviewed regularly and thoroughly to ensure everyone knows where they stand, and this even applies when key personnel in the business come to make their will.”
In the case of multiple shareholders in a business, cross option agreements can also be agreed prior to death. These agreements give surviving shareholders an option to buy the deceased’s shares at a defined value, while also giving the deceased’s personal representatives the option to sell. That works well where the parties intend that the survivor assumes ownership and control of the company.