Succession: how to keep your business in the family

We know that for many of our family business clients, if possible, there is a wish to pass on the business to the next generation and for their successors to be given the same opportunities as their predecessors.

Therefore, we take a look at some of the company law technicalities around succession planning and how to keep the business in the family.

Are shares treated differently in a family business?

Shares in a company are treated in law as private property, which the owner is free to do with as they please. There is no obligation to sell and – equally – no obligation on the other shareholders or the company to buy.  This straightforward proposition is overlaid with contractual and sometimes statutory and regulatory obligations, chief amongst which are the articles of association.

Under the model articles for private companies limited by shares, the directors may refuse to register a transfer – Model Article 26 which states ‘The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent.’

This can cause problems with succession on death unless it has been discussed and is anticipated by the will.  For instance, the remaining board members may not be happy that shares have been passed to beneficiaries who have no interest in the company and may take the opportunity to decline to register except to someone approved by them.

Shareholders agreements in family businesses

In each case, if there is a shareholders agreements in place, it will be a matter of precisely what that agreement says. However, typically they also contain clauses that will require a shareholder to offer to sell his shares in the company to the other shareholders in certain circumstances.  These will often include death, incapacity and – if they are an employee – on termination of employment.

If any of these apply, the shareholder or their attorneys or personal representatives will have to deal with the other shareholders and specifically will need to find out if any of them want to buy the shares.  In these circumstances the shareholders agreement will likely provide for valuation of the shares and it is sensible to have an eye to the relevant provisions when assessing for probate value.

If the other shareholders decide they don’t want to exercise their rights to buy, share transfers can be signed and submitted to the board for approval (as above).  If the other shareholders decide they do want to buy the shares the shareholder or their estate will receive the value of the shares, not the shares themselves.

Read our blog on whether family businesses need shareholder agreements here.

Pre-emption rights

Even if the shareholders agreement does not contain an obligation to offer for sale, where a shareholder wants to transfer their shares, pre-emption rights on transfer may apply and the personal representatives will be expected to offer the shares first to the other shareholders.  In other words, on the death of a shareholder, the personal representatives may not be obliged to offer for sale at the point of death but they may anyway be required to offer the shares to the other shareholders before being allowed to transfer them to the shareholder’s beneficiaries under the will or rules of intestacy.

How to ensure shares stay within the family

Where does this leave the shareholder who wants to leave his shares to future generations and does not want to risk that they may pass out of his family?

In this instance, the shareholder should take positive steps to ensure that:

1. There are no obligations to offer for sale on death or on leaving employment (which will of course also happen on death);
2. Transfers to family members, such as children and grandchildren, are free from pre-emption rights; and
3. The board must approve such transfers properly made.

You could go further and decide that only family members, such as direct (possibly only blood) descendants of the named founder are to be allowed to hold shares and the board is to refuse to transfer to anyone who does not qualify.

Can a shareholders agreement be amended?

A shareholders agreement can be changed by agreement of all the parties to it and articles of association can be changed by a 75% majority (unless the provisions are ‘entrenched’ in which case a higher % can be specified or class rights apply).

Therefore, for any shareholder looking to build a family legacy for generations to come, there is no guarantee that these provisions will endure forever.  Ultimately, the shareholders are likely to agree on measures to ensure the future success of the company above family ties.

What can you do now?

In conclusion, if you are making a will and want to know that the shares that you hold will pass to your beneficiaries, it is not enough simply to write them into your will.  You should give wider consideration to the other shareholders and stakeholders in the company and those that you want to transfer the shares to.

Our handy blog on succession planning provides further advice on who should be involved in the process.

Having done that, you should take legal advice on the documents governing the transfer of shares and then make any necessary changes to make sure your wishes will be followed through.

How we can help

We know that succession planning is an important and vital part of preserving your professional legacy. Wherever you are on your journey, we can help ensure that you have a viable succession strategy in place to ensure your business continues to operate as you intend.