“A”, “B” & “C” are Directors of their own limited company and the Articles of Association state the profits and shareholding are to be equally divided between all three shareholders.
The business is valued at £1.2 Million.
Unfortunately, “B” has passed away unexpectedly, and his share of the business is valued at £400,000.
“A” and “C” wish to continue to run the business despite this setback and feel that they can do so once they have paid the value of “B”’s share to his beneficiaries. Neither “A” or “C” have ever had much involvement with “B”’s spouse, as they do not really get on with her for various reasons.
In 2010, they each put in place a shareholder protection agreement for just such an occasion with the appropriate life and critical illness cover included.
The share of “B”’s part of the business will be paid to his spouse as a lump sum under the agreement of 2010 in return for his shares passing back equally to “A” and “C”.
Without this arrangement, “A” and “C” would have to try and sell “B”’s shares which may be difficult given they are part of a private company, raise the £400,000 themselves possibly by taking out finance on their own assets or accept “B”’s spouse as a Director of the company, where she could have a say in how the business is run, the profits and deal with important clients and suppliers.
This case study also highlights the need for a correctly worded Articles of Association, the requirement for a defined valuation of the company and the importance of using a business trust to protect each shareholder or partner’s interests. Without these the owner(s) of a business can experience difficulties, lengthy delays and legal expenses to resolve issues that are simple to avoid with the right approach and prior planning. A correctly structured arrangement will also protect the proceeds from Inheritance Tax.
It is also possible to tax-efficiently arrange this protection in relation to the premiums the business pays, subject to certain criteria and rules.
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