A large percentage of SMEs in the UK are limited companies comprising of owner/managers or, in other words, shareholder/directors.
There are lots of good reasons for running a business as a limited company, both from a financial/tax efficiency perspective and in terms of day-to-day running.
But what happens if you don’t have a shareholders’ agreement in place, have you considered what will happen should one of your shareholders die or lose mental/physical capacity?
No one likes to think of the worst-case scenario but unfortunately, given the threat of COVID-19, it is something all business owners must give some serious thought to if they don’t want to increase the likelihood of their company failing.
Let’s use an example of two shareholder/directors (Gary and Shirley) of a limited company called Calamity Times Limited. Gary and Shirley own the shares in the company on a 50-50 basis and have operated the business quite happily and successfully for the last five years. They have never quite got round to getting a shareholders’ agreement sorted out as it was never the right time and they were always too busy. A familiar story to many.
Unfortunately, Gary contracts COVID-19, and sadly dies. This leaves Shirley in an awkward situation. Not only is she dealing with the day-to-day issues caused by the current economic situation and grieving the loss of her close friend and long-time business associate, but Gary’s wife, who has no knowledge of how Calamity Times Limited operates and indeed has no interest in the business except in the profit it generates, is now a shareholder.
Shirley has now found herself in the position where Gary’s wife is entitled to a significant amount of the company profit in return for doing very little and is refusing to sell her shares in Calamity Times Limited to Shirley.
In contrast, we turn to the example of Lindsey and Sarah who are also 50-50 shareholders and directors in their company, Glad We Did That Limited.
Unfortunately, like with the first example, Lindsey sadly dies of COVID-19. However, in this instance, Lindsey and Sarah took the time to put in place a shareholders’ agreement that stated that if one of them died, the other one would receive the shares. That meant that in this situation, in accordance with the agreement, Lindsey’s partner did not inherit the shares but instead received a sum of money from Sarah, leaving Sarah able to focus on running the company without the interference of a third party with little interest in, or knowledge of, the company.
While the case of Calamity Times Limited sounds like a terrifying situation, it is not too late for any businesses that are similarly unprepared to put a shareholders’ agreement in place. Here at James Legal we are still available to help you during this difficult time, via telephone and video conference, to discuss this and other business legal needs you may have.
Please contact Byron Swarbrick on 01482 974513 if you need further guidance and advice.