Understanding what to think about when planning for business succession can be daunting.
Most business owners understand the importance of ensuring the right protections are in place for themselves and their families to minimise risk and maximise opportunities. However, it can be difficult to know where to start.
In a series of short videos we talk through some of the what if? questions we typically pose to our clients to help them think about these issues. If you would like to discuss how this could benefit your own business, please contact us.
We work with owner managed businesses and families to help get their business affairs in good order. We focus on the ownership and management of the company now and in the future. Think of it as proactive planning and preventative maintenance.
There is no such thing as a standard structure in the same way as there is no such thing as a standard business or a typical family. The arrangements need to reflect each individual's personal, family and business requirements, so we don’t start by telling clients what to do, we start by asking what they want - what works for them. We do that by discussing various scenarios and posing a number of what if? questions.
We hope they may prompt you to think of how they may relate to your own situation.
What if a shareholder wants to leave the business?
Are shareholders free to transfer their shares, to anyone at any time or should there be restrictions? This may for example be a right for other shareholders to buy the shares before they are offered to anyone else or a right for the board or someone else to block the transfer.
Consider how the shares will be valued. Are any exceptions to the rules? Will some or all shareholders be permitted to transfer their shares to defined individuals or family members without restriction?
Our key message here is consider what you would want to happen when a shareholder leaves and then check your documentation, your articles of association any shareholders’ agreement to make sure they reflect those requirements.
What if there is a deadlock on decision making?
There are default rules which govern how decisions are made. A business owner may be both a shareholder and a director, but sometimes it is important to know what hat they are wearing.
At shareholder level voting follows each person’s shareholding, whereas at board level each director has a single vote and decisions are taken where a majority of them agree.
What is helpful is that most of these rules can be varied by agreement, so that a business can create structures which work for them.
Who has the right to be a director? How is a director is removed? Do directors take all of the day to day decisions or do they need approval for certain matters from the shareholders? What happens if people do not agree, what if a deadlock arises and no one can reach a decision?
In practice you will just run the company in a way that works for you. But it can be vital to have a fallback position should there be a falling out in the future.
What if an offer to buy the company is received?
The default position is that each shareholder owns their own shares and they have the right to sell or not sell. Minority shareholders may be able to block a sale of the business.
You may wish to give the right to certain individuals to force the issue and insist that everyone else sells with them. If you do this, you may provide the minority shareholders with some protection, ensuring that they can insist that their shares are sold in the same circumstances when the majority sells.
It is always wise to consider an exit strategy, even in the early stages of a business and even if you have no wish to sell and perhaps want the shares to pass to family members. It helps to identify whether all parties have the same aspirations and once you have agreement, we can put structures and documents in place to make sure the position is captured.
What if a shareholder dies?
The rules in the company’s documents relating to share transfers will apply, and may override the intentions set out in a shareholder’s Will. Do you know what those rules are? Other shareholders or the Board may have a right to block the transfers.
Consider what you want to happen to your shares on death. You may wish to put rules in place that certain bequests are addressed in the company documents and effectively pre-approved, so that no one can block them.
It may be more appropriate that the surviving shareholder or shareholders will buy the shares at the relevant time. If so, you may consider a cross option agreement, which gives them a right to buy the shares and the estate of the deceased shareholder the right to sell. If you do go down that route, it is possible to take out specialist insurance which helps to ensure that the funds are available when required to buy the shares.
Consider what you would want to happen on death, not just to your shares but also to your fellow shareholders. Are you happy that the same rules apply? Then review any Will that you have written or consider putting one in place - and confirm that there is nothing in the articles or any shareholders’ agreement which would prevent you carrying out your wishes.
What if a shareholder leaves and sets up in competition?
Consider scenarios where a person may leave the business. What would you expect to happen to their shares?
The position may be different if the shareholder leaves for example:
- due to ill health
- to work for a competitor
- following a divorce or separation from another shareholder.
Should a shareholder be forced to sell their shares? If so, who is going to have a right to buy the shares and what price are they going to pay? Does that price depend on the circumstances which triggered the sale?
Our message here is suspend your disbelief - you may not think this will apply to you, but we certainly see it happen. Think about the hypothetical situation when something goes wrong and what you think would be a reasonable outcome. It’s much easier to get a consensus on that before it happens.
