Ensuring that your chosen beneficiaries benefit from your stake in your business is something everyone hopes will happen when they die. However, many people are unaware that even if your will directs whom the shares will pass to when you die, they may not benefit in the way you intended. The way in which a company is run and the rights of shareholders is determined by its articles. Most companies have adopted either Model Articles or Table A Articles.
Model Articles
If your company has adopted Model Articles, even though your shares will pass to your beneficiaries, the directors can refuse to register them as owners of the shares and do not have to justify their reasons for doing so. This means that whoever inherits your shares may have no voting rights and no say in the way in which the company is run. For example, the directors could decide not to pay a dividend; meaning that your beneficiaries would receive no income from the shares.
Table A Articles
If your company has adopted Table A, the directors can only refuse to register the shares under certain limited circumstances. Therefore, if you own the majority shareholding your beneficiaries will have day-to-day control of the company. This may mean they can ensure that they receive an income by voting for a dividend to be paid. However, if they have had no involvement in the day to day running of the business and lack the necessary skills and expertise to continue running the business, conflict with other shareholders could develop and the company may ultimately cease to be profitable. Also, over time the number of shareholders could increase significantly through the generations, making the administration of the company unwieldy and increasing the potential for disputes.
There are numerous versions of company articles and the above is only a general guide.
Possible Options
You may wish to amend your company articles or enter into a shareholders’ agreement to include (or possibly exclude) a right of pre-emption. This means that the surviving shareholders have the right to buy your shares and would contain conditions as to the valuation of the shares and the timescale within which the transaction would be completed. The advantages of this approach are that the company continues to be run by the remaining shareholders but your family receive the value of the shares.
It is possible that the surviving shareholders may not have sufficient funds to purchase your shares. To avoid this the shareholders can take out term life assurance on each other’s lives. A shareholder cross option agreement is then entered into. Under the terms of the agreement on the shareholder’s death the surviving shareholders, having received the proceeds of the life assurance, can require the deceased’s estate to sell the shares to them. If this does not take place within a specified time period, the deceased’s estate can require the shareholders to buy the shares from the estate.
Alternatively, you may wish your beneficiaries to be registered as holders of the shares in order that they are able to take part in the running of the business. This may be particularly relevant where the beneficiaries are already employed by the business. In addition, if they already own shares in the company, receiving your shares could mean they become a majority shareholder and effectively take control of the company. To ensure that the beneficiaries are registered as holders of the shares the articles must not contain any rights of directors to refuse to register them.
Another approach is to transfer ownership of the shares to a trust during your lifetime. The trust may separate the management of the company from the beneficial ownership. The trustees have the right to vote and ensure the smooth running of the company but the benefit of the shares and any dividends pass to the beneficiaries. The advantages of a trust include possible protection from becoming part of any financial settlement in a divorce or being squandered by irresponsible beneficiaries. The trust can also be structured so that the trustees retain flexibility as to how much each beneficiary receives. The trust can be set up during your lifetime appointing you as an initial trustee so that you retain control of the company.
Tax efficiency is a vital part of succession planning. The tax implications are not confined to Inheritance Tax and Capital Gains Tax but can include Income Tax, Corporation Tax, stamp duty and VAT.
Every company and everyone’s individual circumstances are unique. We will happily review your company articles and individual circumstances. We can then advise you and provide all the necessary expert help including will writing, financial services and tax advice.
Please contact Katy Burgin or Ben Schofield on 0114 266 4432 to arrange an appointment.
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