Recent research amongst British Chamber of Commerce members showed that only 4% of the business owners questioned had any shareholder protection in place.
Amid the time-consuming, complex business of running a company, unfortunately very little attention is paid to what might happen if a shareholder dies, or becomes seriously ill, and the above figures bear this out. To a point this is understandable, as business owners primary focus is the success of the company. Sadly though success can quickly and easily turn to failure if a business owner dies or is seriously ill.
So who should be responsible for raising the awareness of what can go wrong ? To my mind, this should rest with the company’s professional advisers - be they financial planner, accountant or solicitor, after all each one has a vested interest in a company’s continued success.
A business comprised of major shareholders will be aware that the long-term success of their business will depend on their contribution. But they may not have thought through the potential disastrous implications that could ensue if one dies or becomes seriously ill.
A company’s Articles of Association deal with the issues of transferring and selling shares. In most cases the deceased or critically ill shareholder’s shares pass to their beneficiaries who obviously have a right to their inheritance. After inheriting the voting rights, the beneficiaries have the right to a say in the running of the business.
This can cause problems as the beneficiaries may not have the necessary skills and experience to take on a role within the company. They may not share the same aspirations and objectives the surviving shareholders have for the business. They may not get on with the surviving shareholders and are likely to prefer a cash sum rather than shares.
The surviving shareholders may prefer to continue in business on their own and prefer to purchase the shares, but may not have sufficient capital available. Without the necessary capital an outside third party, potentially hostile bidder, or even a competitor, could purchase the shares.
The likelihood is that the surviving shareholders will want to retain control of the company and the beneficiaries will want a cash equivalent value for the shares. Many companies adopt a pre-emption clause in their Articles of Association which allow the shareholders the right to buy the shares of the deceased or critically ill shareholder. Companies without any Shareholder Protection in place often try to borrow the money from banks to do this but not only can this create a large debt for the company, the banks can be reluctant to lend if they feel that the deceased or critically ill shareholder was key to the running of the business.
Shareholder Protection overcomes all of these potentially disastrous scenarios as it provides the funds necessary to allow for the beneficiaries to receive cash in lieu of shares and the surviving shareholders to continue in business on their own without any inexperienced or unwanted involvement and without any threat from third parties.
It is essential that the solution is implemented correctly, the protection plans are written to match the business set up, the right associated agreements are in place and the appropriate amount of cover is provided and thus it is usually advisable for the business owners professional advisers to communicate and confer to make sure this is the case.