Putting a Will in place is important for everyone, but for UK business owners it often needs to go further than dealing with straightforward personal assets. In particular, careful thought and consideration should be given to what is to happen to any shares held in a private company. A business owners Will should clearly set out what happens to your company shares and align with your shareholder agreement to avoid disputes.
What happens to company shares on death?
Shares in a private company are not standalone assets. Their transfer, sale and the rights attached to them are usually governed by a Shareholder Agreement, which will continue to govern the shares upon the death of any of the business owners. Although a Will can specify who you wish to inherit those shares, the practical outcome will often depend on the terms of the Shareholder Agreement. Ensuring that both the Will and Shareholder Agreement work together is key to avoiding uncertainty and potential disputes.
Considering shareholders and Executors
In addition to considering the interaction between their Will and the Shareholder Agreement, shareholders should also consider the relationships between the remaining shareholders, their appointed Executors, and the ultimate beneficiaries. On death, these individuals may need to engage directly with each other. If those relationships are not anticipated or are strained, it can create unnecessary difficulty in both the administration of the Estate and the future running of the business.
Case study: AMT Coffee dispute
An example of the serious consequences that can arise where there is a disconnect between existing shareholders and the beneficiaries of a Will can be seen in the AMT Coffee case.
AMT Coffee began as a family-run venture and grew into a highly successful nationwide chain, with turnover exceeding £20 million and sites across the UK. Following the death of one of the founding brothers, his two-sevenths share passed to his widow and children, giving them a substantial interest in the business.
However, relations quickly deteriorated. The widow was excluded from the decision making and financial benefits of that shareholding, despite the company’s continued growth and profitability.
After more than a decade of dispute, the matter reached the High Court, which found that the widow and the Estate had been unfairly treated. The surviving shareholders were ordered to purchase the Estate’s interest, with the valuation thought to be in the region of £7 million.
The shareholders were unable to raise the required funds to settle the interim award ordered by the court of £1.5 million, which resulted the widow being required to issue bankruptcy proceedings. The combination of the prolonged litigation, financial strain and internal instability, ultimately contributed to the business entering administration.
What should you do as a business owner?
- Review your Shareholder Agreement
Business owners should review their Shareholder Agreement carefully to understand what happens to your shares on death, including whether they pass under your Will or are subject to transfer or buyout provisions and if so on what terms. - Align your Will with your Shareholder Agreement
Ensure your Will is drafted in a way that reflects and works alongside your Shareholder Agreement to avoid any conflict between your personal wishes and the company’s governing documents. - Consider your Executors
Consider choosing Executors who have an understanding of commercial matters or access to appropriate professional advice, so that business interests can be managed effectively during the administration of your Estate. - Consider who you would like to receive your share of the business and take steps to reduce future conflict if necessary
You need to choose who should benefit from your share of the business and ensure that your Will clearly reflects your wishes. In doing so, it is important to think ahead about how best to protect both your beneficiaries and the ongoing stability of the business. Where there is a risk that beneficiaries and the remaining shareholders may not work well together, steps can be taken to reduce the potential for conflict. This might include arranging for the shares to be sold to the existing shareholders with the proceeds passing to your beneficiaries or using a Trust structure to manage the interest in a more controlled and flexible way. - Review your Will
Keep your Will under regular review as the business grows or changes so that it continues to reflect both your personal and commercial objectives. - Consider a Business Lasting Power of Attorney
Although your Will can ensure that your wishes will take place upon your death, a Business Lasting Power of Attorney is essential to ensure that your wishes can be carried out during your lifetime in the event that you lose your mental capacity. A Lasting Power of Attorney that specifically covers business assets, can be used to ensure that someone who you trust and who is capable of managing your business interests can step in to deal with operational and ownership issues if required.
How can we help
At Herrington Carmichael, our Private Wealth and Inheritance team can work with our Corporate team to ensure that your Will complements your Company Documents.
If you are a UK business owner and would like to discuss the matters raised above, please contact us to speak with a member of our Private Wealth and Inheritance team. We will guide you through the process, providing clear, practical advice tailored to your individual circumstances.
