Have you made a shareholders' agreement?

A shareholders’ agreement is as important to your inheritance planning as a will. Why these two documents should be linked or even why you might need both may not be immediately apparent. Here, Paul Reader explains what a shareholders’ agreement is and why it is as important to your inheritance planning as a will.

What is a shareholders’ agreement?

Shareholders’ agreements are made between owners of a limited company (the shareholders) and usually cover a great deal of issues such as: what decisions within the business require unanimity; who has the right to appoint a director; what happens if a shareholder wants to sell their shares; and agreements relating to the sale of the business in the future. They cover the specific, practical and important elements of how a business is run.

Why are shareholders’ agreements so significant?

Shareholders’ agreements can also deal with what happens in the event of the death of a shareholder. This is crucial. Without a shareholders’ agreement in place, the deceased’s shares will pass either to the beneficiaries named in their will, or under the intestacy rules if no will is in place. If it’s the former, this usually results in the deceased’s family becoming owners of the shares. This can lead to two potential problems:

1. The remaining shareholder(s) will have to work with members of the deceased’s family who could suddenly own a significant stake in the Company. This may not be satisfactory. Those family members will have influence over the Company and may also be entitled to dividends, even though they will not be obliged to work in the Company. A shareholder is an owner of the Company, not a worker in the Company.
2. The deceased shareholder’s family may not want anything to do with the Company and may want to realise the capital value of the shares – sell them – rather than having them tied up in the Company.

How can these problems be avoided?

In order to solve these problems, cross options can be put in the shareholders’ agreement giving:

1. the deceased’s family the right to compel the remaining shareholder(s) to purchase the shares; and
2. The remaining shareholder(s) the right to compel the deceased’s estate to sell the shares to them.

Whilst this is a potential solution, an issue may arise as to whether the remaining shareholders can afford to buy the shares. If they cannot, then it is likely that the family could apply to the Courts for the Company to be wound up. This again is not a particularly favourable or desirable outcome.

What is the best solution for everyone?

Taking all the potential problems into account, it would be advisable for each shareholder to take out life insurance which is held in trust for the remaining shareholders. Then, upon any shareholder’s death, the remaining shareholders receive a lump sum which they can use to purchase the shares from the deceased’s family.

A carefully drafted cross option may be able to avoid inheritance tax payments on the value of the shares. If the deceased shareholder has owned shares in the trading business for over two years, then Business Property Relief at 100% may be available.

The shares held in a Company may well be a major asset of an individual. If you are a shareholder, it is therefore extremely important, when considering providing for your loved ones, that you put measures in place to enable them to realise this asset. It will also help to avoid any protracted and unpleasant dealings at an already sensitive time.

Berry & Lamberts Solicitors are able to assist in this regard. Please contact our Commercial and Dispute Resolution Team on 01892 526344 or email enquiries@berryandlamberts.co.uk

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances