The Coronavirus pandemic is forcing all businesses to address business continuity but for owner managers of small and medium sized (SME) companies, the potential impact of serious illness or death of directors and shareholders for both their company and their dependants is a key concern.
It may be worth reviewing any shareholders agreement and the company's articles of association to consider steps that might be taken to mitigate that risk. Here we look at the issue from both the shareholders' and management's perspective.
From the shareholders' perspective
- Whilst during a lockdown it may be possible to hold shareholders' meetings "virtually" by electronic means (provided the Company's articles of association permit or are amended to allow that) or to pass written resolutions instead, shareholders should also consider appointing a proxy to vote on their behalf in case they fall ill and are unable to do vote themselves (that might be a separate form of proxy or could be included in a Power of Attorney granted by the individual for wider purposes).
- Quorum requirements for shareholders' meetings and any specific voting requirements should be reviewed in view of the potential risk of absence of one or more significant shareholders.
- Do the Company's articles of association include pre-emption rights in favour of existing shareholders?
If not, it might be advisable to amend the articles to include such rights, so that in the event of any transfer of shares (including on illness or death) they may not be transferred to a third party or split between various beneficiaries of a deceased shareholder without first being offered for sale to existing shareholders.
- Do the Company's articles of association include provisions for compulsory transfer of shares in the event of the serious illness or death of a shareholder - or should those be added by amending the articles - so as to ensure a shareholding is not left in control of an "inactive" shareholder (which could be problematic if it might prevent Company resolutions being passed), nor automatically transferred to the beneficiaries of a deceased shareholder under their will or on intestacy?
- If compulsory transfer provisions are already included, the articles may provide for existing shareholders to acquire the shares of the outgoing or deceased director/shareholder on payment to them or their estate (for their family or other beneficiaries) - the price to be paid usually being "fair value" as determined by the auditors or accountants of the Company.
- There may also be a "cross option agreement" in place, if the directors/shareholders have taken out life insurance to fund the purchases of their shares and ensure a fair payment to their beneficiaries in such circumstances, but it might be advisable to check whether such a policy would still pay out in the event of death from Covid-19.
- If there is no such agreement or the policy might not pay out, how would any such purchase of shares be funded by the other shareholders? It might be worth considering amending the articles to allow for deferral of payment, by instalments over a period of years if necessary (while bearing in mind the deceased shareholder's dependents' financial needs).
- A share buy-back of shares by the Company might be mentioned in the articles as an alternative possibility but a company can only buy back its own shares if permitted by the Companies Act 2006, which generally requires it to have sufficient distributable reserves to fund the purchase and in the current economic climate that may not be a viable option.
- Some shareholders might consider taking more radical steps to implement succession plans, by transferring shares to members of their family or key employees immediately for example but any major restructuring (and its potential tax and other implications) should be considered carefully, particularly in the current public health and economic situation.
From the management perspective
- Each Director might appoint an alternate director to act as director in their place in the event of their illness - they should check whether the Company’s articles of association permit the appointment of alternate directors to step in in the absence of a director and if not, discuss with shareholders whether the articles should be amended to allow that.
- The Board might also consider nomination of deputies for Directors who carry out specific roles, to ensure that they have identified a suitable replacement in the event of illness of a key Director's requiring him to step down, or his death.
- A small Board might be expanded by additional appointments, so as to ensure sufficient Directors should still be available to run the Company if one or more of them were to fall ill or die. They should at least review how that might be done if necessary - the Company's articles and any shareholders agreement will govern how directors may be appointed.
- Are provisions for Board meetings still practicable - can directors participate in a meeting by telephone or electronic means or pass written resolutions of the Directors (which require unanimity) or do the articles of association need to be amended to permit that?
- Record keeping in the form of detailed minutes of Board meetings and resolutions is even more important if an alternate might have to step in on a Director's absence. A written record should be kept of all decisions of Directors.
- The quorum for Director's Board meetings is often just two Directors, for so long as there is more than one Director appointed, but some companies may have more specific quorum requirements and those should be reviewed to ensure they remain practicable in the event of the illness or death of a key Director, particularly if appointing alternates is not an option.
- It may be worth considering whether provisions in the articles or any shareholders agreement for removal of Directors, or for them automatically to vacate office in certain circumstances (e.g. if they are seriously unwell or physically or mentally incapable or absent from Board meetings for a specified period) remain appropriate - also taking into account whether that would or should trigger provisions for compulsory transfer of their shares.
- If Directors are employees of the Company, paid under PAYE, it may be possible for them to be "furloughed" (with Board approval) under the Government's coronavirus job retention scheme (which enables furloughed employees to receive 80% of their salary or up to £2,500 currently for a period of three months backdated to 1 March) while still fulfilling their essential company law obligations as directors - provided they do not work to generate income or provide services to or on behalf of the Company during the furlough period. Directors who are self-employed might be able to recoup lost income through the Government's scheme to provide support for the self-employed.
Get in touch
For advice on these or any related topics please contact a member of our corporate team.
Get in touch
If you require advice on how the Coronavirus emergency could affect your company, please get in touch with our Corporate team on 0141 227 9540.