UK: Why All Business Owners Should Plan For Incapacity And Protection Of Their Shareholdings

Last Updated: 9 August 2011
Article by Amanda King-Jones

A critical event can happen to anyone of any age. The effects of failing to plan can have dire consequences, and the following case study is based on actual events.

David is 47, living with his partner, Sarah, and two children under 18. He runs two successful companies of which he is the majority shareholder with his friend and colleague, the minority shareholder. They are both directors. The success of the companies relies on the expertise and ingenuity of David's personal skills.

David is taken ill with appendicitis and during the operation he suffers a catastrophic stroke. Legally and medically he is judged to be unable to manage his affairs now or in the future. In the absence of a Power of Attorney his business partner applies to the Court of Protection to run all his financial affairs and so does Sarah. After a litigious hearing at the Court of Protection, the Court decides that neither should be appointed and instead appoints a professional Deputy.

As all the bank accounts in the companies required both David and his fellow shareholder's signature an urgent application is made to the Court adding further costs to enable an interim Deputy to exercise powers over the bank accounts. However, the Court limits the powers of the interim Deputy, requiring decisions of certain levels to be approved by the Court. This is extremely cumbersome and with the loss of David's expertise and skills, the companies are placed in an extremely prejudicial position.

Furthermore, the only agreement that they have between them concerning the companies and their shareholdings is a homemade agreement, drawn up between them, when they set up the companies fifteen years ago with £100. At the time of David's stroke the companies are each worth in excess of £5 million. Further litigation ensues over the 'shareholder's agreement' and David's estate suffers both huge legal costs and diminishing returns on his company assets, the fellow shareholder having determined to leave and set up his own company.

Meanwhile, Sarah is trying to look after a family and children at the time of high stress exacerbated by the lengthy and costly litigation. The family's affairs are administered by an anonymous Court in London, together with a Solicitor as a professional Deputy.

Powers of Attorney

David should have made prior to 30 September 2007 an Enduring Power of Attorney (or now a Lasting Power of Attorney for Property and Financial Affairs) when he created his company. David should have chosen as his attorneys, both for his personal affairs and his business affairs, people who he believed he could trust. The attorneys would have been immediately able on the day of his stroke to put in place all steps to continue to run the business. There would have been immediate access to funds since the attorney acting for David, as the majority shareholder, would have been able to appoint a director.

Had David entered into a Lasting Power of Attorney for Health and Welfare, then this could have appointed Sarah as attorney. She would then be able to make decisions as to his welfare and his care. Instead, as she has no status, she had to make another application to the Court of Protection to be appointed as a Welfare Deputy. This has placed limits on her powers and requires her to return to the Court of Protection to make certain decisions for and on David's behalf.

Permanent health protection

At the time of setting up the company David should have been advised through his financial advisors or his professional advisors to consider and take out permanent health protection. David was in effect self-employed and without any continuing or limited income; his family are now in a precarious position.

Shareholder's agreement

A proper and legal shareholder's agreement should have been drawn up at the outset of the venture between the two parties, which might have averted heavy litigation. This would have addressed some of the issues omitted in the homemade agreement, for example, setting out a mediation process.

Conclusion

It is extremely important that comprehensive advice is sought by shareholders and sole traders in respect of their unexpected death. Quite apart from the issues above, lack of Wills, lack of cross option agreements and lack of key man insurance, all give rise to considerable difficulties for those left behind trying to manage the companies, businesses or the families themselves.

The contents of this brochure are intended as guidelines for clients and other readers. It is not a substitute for considered advice on specific issues. Consequently, we cannot accept any responsibility for this information or for any errors or omissions.

Thomas Eggar LLP is a limited liability partnership registered in England and Wales under registered number OC326278 whose registered office is at The Corn Exchange, Baffin's Lane, Chichester, West Sussex, PO19 1GE (VAT number 991259583). The word 'partner' refers to a member of the LLP, or an employee or consultant with equivalent standing and qualifications. A list of the members of the LLP is displayed at the above address, together with a list of those non-members who are designated as partners. Regulated by the Solicitors Regulation Authority. Lexcel and Investors in People accredited.

Thomas Eggar LLP is not authorised by the Financial Services Authority. However, we are included on the register maintained by the Financial Services Authority so that we can carry on insurance mediation activity which is broadly the advising on, selling and administering of insurance contracts. This part of our business, including arrangements for complaints and redress if something goes wrong, is regulated by the Solicitors Regulation Authority. The register can be accessed via the Financial Services Authority website. We can also provide certain further limited investment services to clients if those services are incidental to the professional services we have been engaged to provide as solicitors.

Thesis Asset Management plc, our associated financial services company, provides a comprehensive range of investment services and advice. Thesis is owned by members of Thomas Eggar LLP but is independent of and separate to it. No lawyer connected with Thomas Eggar LLP provides services through Thesis as a practicing lawyer regulated by the Solicitors Regulation Authority. Thesis is authorised and regulated by the Financial Services Authority. Thesis has its own framework of investor protection and professional indemnity cover but Thesis clients do not enjoy the statutory protection of solicitors' clients.

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