27 June 2024

You’ve built your dream company from the ground up alongside a trusted partner. Then, the unthinkable happens. Your business partner passes away, and their estate inherits their share of the business. Now, you have a new co-owner, and maybe you don’t see eye-to-eye on the agency’s future. Maybe they even want to sell.

This happened to a client of ours, so I wanted to share the story with you, so you’re aware of the risks and can protect yourself, should the worst happen.

Here’s how a person who inherits shares following the death of a shareholder can affect you, and how you can protect yourself.

The situation:

  • You and another person (now deceased) co-own a business.
  • The person named in the deceased shareholder’s Will inherits their shares and becomes your co-owner.
  • The person who is inheriting the shares is deciding whether they wish to keep the shares and have a say in the business, or sell the shares to some person other than you.

Challenges:

  • If you and the deceased shareholder held equal shares, both of you would have needed to agree on any shareholder resolution, for it to be passed.  Whilst you and the deceased shareholder might have been aligned in your vision, there is no guarantee that this is will be the case with the person who inherits the shares.  If they decide to keep the shares, this creates the potential for deadlock.
  • If the deceased shareholder held a majority shareholding, the person inheriting the shares may now have control of the company.  This could allow them to take action such as appointing other directors and even removing you from the board.
  • If the person inheriting the shares wishes to sell those shares, they may decide to sell to a buyer you don’t approve of.

The solution:

Having robust clauses in your Articles of Association can protect you.  ‘Pre-emption rights’ put a specific process in place to ensure that death of a shareholder triggers a pre-emption process, whereby the person who is inheriting the shares cannot elect to become a shareholder and must offer them to the company or the remaining shareholders at a price determined by a pre-agreed formula. 

As an extra layer of certainty, ‘shareholder protection insurance’ can be taken out on the lives of the shareholders, the proceeds of which can be used by the remaining shareholders/the company to pay for a deceased shareholder’s shares.

Some key things to consider:

  • Discuss these clauses with your co-owner before a death occurs
  • Have a lawyer draft the agreement to ensure it’s legally sound and reflects your specific needs.
  • Regularly review your Articles of Association as business circumstances evolve.

By incorporating clauses like these, you can protect yourself from a situation where you’re forced to become partners with someone you don’t choose, or that person sells the shares to someone you don’t approve of. If you would like some support reviewing your Articles of Association or any advice on shareholder agreements, please get in touch.

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