When a shareholder of a limited company dies, the deceased’s shares are often simply left to the family. It is often the case that the dependants are not connected with the business and do not see any value in having the shares. As a result, without proper planning there can be serious consequences for the financial security of the business, and also the shareholder’s family.
These are the potential problems for both the family and the company:
Problems for the family
- Whilst the spouse will have inherited the shares in a company, they cannot insist on a regular income from the company either as earnings or dividends, especially with a minority shareholding. Earnings, in any case, may be hard to justify.
- Most spouses would almost certainly prefer a cash sum for the shareholding because it would provide greater financial security.
- The spouse may have no interest in joining the business.
- For most dependants, the only course of action would be to sell the shareholding but there may not be a ready market for your shares and probably little chance of receiving a fair price. A minority shareholding in a private limited company is generally worth very little to anyone except the other shareholders.
Problems for the Company
- The surviving shareholders may feel a moral obligation to look after the deceased’s spouse; but this could put a considerable strain on the company at a time when finances are probably already stretched. There is also the additional pressure because of the loss of expertise to the business.
- The spouse may want the company to pay the highest dividends possible (to maximise income) this may be impractical or undesirable for the remaining shareholders, who may prefer to retain profits for their own use as part of their remuneration strategy and their reward for driving the business forward.
- The remaining shareholders will want to retain control of the company by buying the shares. This is unlikely to be an easy task at a time when the business is already suffering the effects of losing your expertise.
- The remaining shareholders may not have sufficient financial resources to offer the full market value of the shares to spouse.
- Money set aside for other purposes may have to be used to buy the shareholding from the spouse.
- If the necessary funds are not immediately available, borrowing might be one option, although it would place an extra financial strain on the remaining shareholders. In any case, banks could be reluctant to lend money at a time when a shareholding director has just died.
- The spouse may want or demand a role in the business for which they are inexperienced or unsuited. They may even insist on someone to represent them.
- If the spouse finds a buyer from elsewhere, the shares could end up in the hands of someone who does not have the same objectives and business interests as the other shareholders. The shares could even end up in the hands of a competitor in the same line of business.
Planning
A properly drafted shareholder agreement can address all these potential issues and ensure everyone has a clear understanding of how the situation would be managed. Ideally, it will set out the basis of valuation for the shares and how life assurance will be put in place to provide the capital for a share purchase from the deceased’s spouse. This then ensures best outcomes for all:
- the spouse receives cash representing an agreed full market value of the shares and,
- the surviving shareholders retain control of the business
We have dedicated specialists in this area of financial planning and would be happy to discuss this with you. Please contact Ian Jenkins, our Corporate Services Director on 0333 2413350 for an initial discussion.
Nigel Taylor Cert PFS, Dip FA
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.