When it comes to succession planning for business owners, careful consideration should be given to the businesses' constitutional documents to ensure the owner's wishes as set out in their will can be implemented.
It's common for business owners in contemplation of their death to seek to leave the shares they own in the company to family members. While shares are personal property, a popular misconception is that legal title to these assets can be passed entirely at the direction of the owner.
The transfer of shares in a private company will always be regulated by the company's articles of association and where relevant, any shareholders' agreement. It is therefore important for business owners to check these documents when drafting or updating their will. Failure to do so can cause particular difficulties when it comes to implementing a deceased's will following their death.
In privately owned companies, it is usual for the right to transfer shares to be subject to restrictions, which will also apply to shares on death. Such restrictions vary but often they relate to prohibitions on transfer, the power of directors to refuse to register transfers and perhaps most relevant in the context of will provisions – pre-emption rights.
Pre-emption rights prohibit share transfers unless the transferor first offers the shares for sale to a designated group, and while not contained within the model articles they are prevalent in many bespoke articles of association. A typical pre-emption provision might state that before any share is transmitted on death to another person, the shares must first be offered at fair value to the other shareholders of the company. From a business perspective this is entirely understandable and shareholders in a private company will want a say in who becomes a fellow owner of the business, particularly where a company has been set up by individuals who each contributed an essential skill or area of expertise. Even more importantly, the transfer of shares may affect control of the business itself.
Directors' right to refuse transfers
As mentioned, in certain circumstances the company's articles of association may give its directors the authority to refuse to register a transfer of shares. Whilst less common than pre-emption rights, this provision can be extremely problematic for a business owner's succession planning as it effectively gives the directors the ability to prevent the intended recipient of the shares taking the legal title to them. Situations frequently arise where a principal shareholder and founder leaves their shares to a family member in terms of their will. The remaining directors of the business may have no ownership stake in the company and feel aggrieved that a family member will enjoy the rewards of their hard work going forward. If the company's articles give them the right to refuse to register a transfer of shares, they may be inclined to exercise it.
The practical implications of these issues are evident, and it is therefore imperative to ensure that any restrictions on transfers within a company's articles of association and, if relevant, shareholders' agreement, are taken into account when thinking about succession and estate planning. Discussions with other shareholders may be necessary and specialist legal advice should always be sought.
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Should you have any questions you would like to discuss in relation to the points raised above, please get in touch with a member of our team.