The Institute for Family Business, a not-for-profit organisation which supports and represents family businesses in the UK, states on its website that “Britain's three million family firms: employ over nine million people; contribute almost a quarter of total UK GDP; and provide over £81 billion in tax to the UK Exchequer”. With such a large section of our economy being run in this way, what can be done to plan ahead to ensure the continuity of a business in the event of the death or incapacity of a controlling owner?

Most family businesses, once they have reached a certain size, will be run through a private limited company and this is especially true in the hospitality sector where, for example, many hotels and restaurants remain to be family businesses rather than chains. The founder and their family members, be that spouses, siblings or children, will tend to be majority shareholders in such a company and as a result have control of the company and the business which is operated through it.

Although difficult to contemplate, it is essential that any family run business plans for the eventuality that the founder or other controlling shareholder may die unexpectedly, or become incapacitated permanently or on a short term basis. Planning for these eventualities will prevent a distressing situation becoming more difficult, as the family will be prepared for any necessary changes to the way that the company and/or business is to be run, minimising any disruption and damage to the business.

Some forward planning can be dealt with at an operational level in policy documents, but at company level should be set out in the company’s articles of association and a shareholders’ agreement.

Key provisions to include

Table A, the default articles of association which could be adopted by companies incorporated prior to 1 October 2009, and the Model Articles, which have been available for adoption by companies since 1 October 2009, include brief provisions about how a recipient of shares may deal with such shares following the death of a shareholder. However, the lack of any specific provisions stating how the shares are to be dealt with will result in the shares passing into a deceased person’s estate to be dealt with by a will (where one exists) or intestate (if the deceased did not have a will). This obviously does not allow for the protection of the family’s and business’ interests and can lead to shares being left to persons who are outside of the family and have no interest in advancing the business.

We therefore suggest that a family-run company adopts bespoke articles of association and its shareholders enter into a shareholder agreement to regulate, amongst other matters, what is to happen to shares held by a shareholder who either dies or becomes permanently incapacitated. These constitutional documents should also deal with what is to happen at board level, as many founder/family shareholders are also directors of their companies.

In either instance, it would be prudent to include provisions which specifically deal with the following:

  1. A pre-emptive option for the shares to be automatically and firstly offered to family members before they are offered to other shareholders or third parties.
  2. The waiver of any and all pre-emption rights in favour of other shareholders which might prevent a transfer of shares.
  3. Cross options (supported by life insurance) which give the surviving shareholders the right to require that the personal representatives of a deceased shareholder sell that shareholder’s shares to them, or that the personal representatives may have the rights to require the surviving shareholders to buy such shares, or both options together. The added benefit of such provisions is that the deceased’s shares will qualify for business property relief, which in turn can provide relief from inheritance tax.
  4. Permitting a sole shareholder to be quorate for the transaction of business at general meetings in the situation where death or incapacity leads to there being only one shareholder.
  5. Permission for a sole director to act and be quorate for the transaction of business, should the number of directors be one as a result of death or permanent incapacity.
  6. Permitting a sole director to appoint further directors.

Temporary incapacity

The incapacity of a shareholder and/or director can also be temporary in nature, lasting a number of months or years. This situation may be catered for in the articles of association and a shareholders’ agreement using the provisions mentioned above.  It may also be prudent to include provisions which permit the automatic election of an alternate director to act in an existing director’s place should he become incapacitated temporarily. 

Another option would be for a founder/family shareholder and/or director to grant power of attorney to another member of the family. Once registered, this power of attorney will permit the person granted the power the ability to act should the grantor become incapacitated for any reason. This protection is especially useful as it will permit the person who is granted the power to act immediately and as necessary in a given situation, but it should be noted that such a power is the grant of a power to act on the grantor’s behalf in respect of all aspects of his property and finances, not just in relation to his shares or the company in question.

In considering how to protect a family company/business, legal advice on wills and also tax planning will be key, but there are several ways in which to do so and whichever options are chosen should be kept under review and amended as necessary to reflect any changes to the family and/or the business. We would advice considering putting these protections in place as soon as possible, as this will save a lot of heart ache and indecision should death or incapacity occur.