- Who owns the shares of your business?
- If a shareholder dies, what would their estate want to do with those shares?
- Would the remaining shareholders want to buy them back, or would the estate prefer to keep them?
- Have you had the business valued? If not, what value would the remaining shareholders put on the business?
- If a fellow shareholder dies and you needed to raise £x to buy the shares, where would this money come from?
- Is it likely that the bank will lend this money, considering the timing and fact that the shareholder was considered a 'key person' in the business?
Let's assume the money couldn't be raised:
Majority shareholder with over 50%
- Would their estate (e.g. wife/husband or children) come into the business at board level and draw an income plus make important decisions?
- If they could, is it likely they have the required skills to contribute to the profit that they are withdrawing?
- Could their estate sell a controlling interest in the business to a competitor? Is there anything in the articles to prevent that from happening?
- Would they exercise their right to appoint themselves as a director and remove other directors?
- If they had over 75% of the share then their estate could force winding up or sale of the company.
Minority shareholder with less than 50%
- If the remaining shareholders can't or are unwilling to buy the shares, how will the estate guarantee an income to realise the value of the shares?
- Would the company still pay dividends or would they change the remuneration structure and pay the remaining shareholders salaries to avoid paying the estate?
Shareholder Protection removes the uncertainty of these questions and ensures there is a solution in place that is beneficial to all parties.
Do you have a Partnership Agreement in place?
If not:
- Are you aware that on death or retirement the Partnership would be dissolved under the Partnership Act 1890?
- Are you aware that you could have to pay out to the estate the value of the assets? Where would the money come from?
- Even if each partner had contributed a different amount to the business, are you aware the assets would still be split equally?
- If the remaining partners can't raise the money, the estate could take profits due to the estate or even demand that interest be paid on the value - could that be a problem?
Is there a Membership Agreement in Place?
If not:
- The Limited Liability Partnership Act 2000 will dictate what happens.
- The estate will be entitled to receive what was due to the members.
If there IS a Partnership or Membership Agreement
- What does the Agreement provide for upon death or if a Partner/Member has to leave the business due to serious illness?
- How is the Partnership share or Membership interest valued?
- How would the remaining owners raise the capital required?
- What are the consequences if the money couldn't be raised?
In order for the Shareholder/Partnership Protection arrangements to be effective by way of the desired outcomes, certain agreements and documents should be put in place.
Trusts
When the Life Insurance/Critical Illness policies are arranged, we will assist you to write them in a Business Trust (free of charge and as part of our standard service). This ensures that the proceeds are paid from the insurer to the remaining owner(s) - giving them the money needed to purchase the shares.
Agreements
The next step is to ensure that the share of the company is bought/sold if and when requested.
Most agreements involve options to buy and sell, as opposed to a firm sale and purchase agreement (so that certain tax trips can be avoided). This type of share purchase agreement is called a 'cross option' or 'double option' agreement. The agreement could be included in the company's Articles of Association, or as is more likely to be the case, in a separate agreement entered into by the owners.
The agreement would, broadly speaking, be in two parts. Firstly, on death, it gives the holder of the shares (i.e. the deceased's executors) the option to sell the shares, and, secondly, it gives the other shareholders a similar option to buy, hence the term 'double' or 'cross option' agreement. In a Cross Option Agreement the seller can effectively force the other owners to buy, and the owners can force the deceased's executors to sell.
We have partnered with a specialist legal firm that can offer you no-obligation, impartial advice and solutions to ensure that you have the required documents/agreements in place. If you have your own legal advisers then your dedicated Business Protection Specialist will be more than happy to work with them to provide the policy details etc.
