For many family businesses, planning for the future means more than identifying who will take over the day-to-day running of the company. A successful transition requires careful consideration of both who will run the business and who will ultimately own it. While much attention is often given to preparing the next generation for day-to-day management responsibilities, it is equally important to ensure that the legal framework governing ownership of the business aligns with the founder’s intentions. Without proper planning, even the most successful family businesses can face uncertainty, disputes and unintended consequences when ownership passes between generations.
Start planning early
One of the most common mistakes business owners make is assuming there will always be time to address succession planning later. However, succession planning is not just about retirement. Illness, incapacity or the sudden death of a key shareholder can create significant uncertainty if appropriate arrangements have not been considered in advance. Contingency planning is therefore just as important as long-term succession planning.
As part of that process, business owners should ensure that appropriate arrangements are in place both for their lifetime and on death. Whilst a Will determines what happens to their assets after death, it does not deal with decision-making during their lifetime. Consideration should therefore also be given to putting in place Lasting Powers of Attorney, particularly where key decisions relating to the ownership or management of the business may need to be made if a shareholder loses capacity.
Who will own the business?
A family business may have several shareholders, some of whom are active in the business and some who are not. When planning for the future, it is important to consider not only who will run the company but also who will own it. Ownership and management do not always need to sit with the same individuals.
The company’s constitutional documents (including its articles of association and any shareholders’ agreement) and other relevant shareholder documentation (for example, cross option agreements) should be reviewed to understand what happens to an individual’s shares on death, incapacity, retirement or transfer. For example, there may be restrictions on who can inherit or acquire shares, rights of pre-emption in favour of existing shareholders or compulsory transfer provisions that force a transfer in certain circumstances.
These provisions are often put in place for good commercial reasons, such as ensuring ownership remains within the family or allowing continuing shareholders to retain control. However, problems can arise where these arrangements are inconsistent with a shareholder’s wider estate planning.
The importance of aligning shareholder agreements and wills
A key aspect of succession planning that is frequently overlooked is ensuring that a shareholder’s Will works alongside the company’s constitutional documents. A common misconception is that a shareholder can simply decide in their Will who should inherit their shares and that their wishes will automatically take effect. However, where a Will does not align with the company’s constitutional documents, the consequences can range from administrative complications to costly disputes and outcomes that are completely contrary to the deceased’s intentions.
A Will may state that shares are to pass to a particular child, spouse or other beneficiary. However, if the articles of association and/or shareholders’ agreement contain restrictions on transfers or provides a mechanism requiring shares to be offered to other shareholders first, the intended beneficiary may never become the owner of those shares (receiving value of the shares rather than the shares themselves).
For example, a father owns 60% of a family company and makes a Will leaving all of his shares to his son, who works in the business. However, the company’s articles provide that on a shareholder’s death, the shares must first be offered to the surviving shareholders. The father’s daughter, who owns the remaining 40%, exercises her rights under the articles and acquires the shares. The son receives the economic benefit through the estate, but he never acquires ownership of the shares despite being the named beneficiary in the Will. The father’s intention has therefore been frustrated; not because the Will was invalid but because it was not considered alongside the company’s constitutional documents.
Similarly, a Will may seek to divide assets equally between children, whilst the constitutional documents are designed to concentrate ownership in those family members who are actively involved in the business. If these documents are not properly aligned, the result can be confusion, family disagreement and potentially costly disputes.
For example, a mother owns all of the shares in a successful family business. One daughter has worked in the business for 15 years and is expected to take over its management, whilst her son has never been involved in the company. The mother’s Will leaves her estate equally between both children. However, the shareholders’ agreement and wider succession plan anticipated that ownership would pass primarily to family members actively involved in the business. Following her death, disagreement arises as to whether the son should become a shareholder despite having no role in the company. What was intended to be an equal division of assets becomes a source of conflict and uncertainty, with the potential to disrupt both family relationships and the future operation of the business.
Constitutional documents can sometimes create uncertainty following a shareholder’s death, particularly where they have not been reviewed for many years or no longer reflect the shareholders’ current intentions.
For example, two brothers own a family company. The company’s articles provide that, on the death of a shareholder, the shares must first be offered to the surviving shareholder. One brother dies leaving his shares to his wife under his Will. However, the surviving brother decides he does not wish to purchase the shares under the pre-emption rights. The articles do not clearly state what should happen next and contain restrictions preventing transfers to third parties. As a result, the deceased’s executors are left administering an estate that includes shares which cannot easily be transferred or sold, creating uncertainty for the family and disruption for the business.
Regular reviews
The most successful family business transitions are rarely the result of a single document or event. Rather, they are the product of careful planning, open communication and regular review. Businesses evolve, family circumstances change and relationships can shift over time. A succession plan that was appropriate five years ago may no longer reflect the current reality.
Regular reviews of constitutional documents and testamentary arrangements can help ensure they continue to reflect current intentions and work together effectively to achieve the desired outcome.
A joined-up approach
Successful succession planning requires input from a range of advisers, including corporate solicitors, private wealth solicitors, tax advisers and accountants. The goal should be to create a coherent plan that addresses business continuity, ownership, tax efficiency and family objectives.
For family business owners, the question is not simply who will take over the business, but whether the legal arrangements governing that transition are working together. Ultimately, the most successful family business transitions occur where Wills, shareholder arrangements and company constitutional documents are considered together, rather than as separate exercises.
How Moore Barlow can help
By choosing our business and corporate transactions solicitors you have access to a team who can provide expert guidance and support throughout the entire transaction process, from initial negotiations to completion. We can assist with mergers and acquisitions, disposals, taking over the family business, joint ventures, and restructurings, ensuring that all legal aspects are properly addressed and risks are minimised.
