Succession planning for company with sole director-shareholder
It is not uncommon for small companies and, in particular, for companies operating a small family owned business, to have one person as the sole director and sole shareholder of the company. It is also now common for companies to no longer appoint a separate individual as company secretary or indeed to have one at all. This means that all of the power and legal authority to make decisions for such company rests with one individual. Upon that individual’s death, the continued existence of the company and its business can be under threat. There may be significant assets in the name of the company which affectively become frozen and cannot be accessed as no one exists with the authority to make decisions or take action at either director or shareholder level. For example, suppliers and employees may need to be paid, but no one has the authority with the bank to action payments.
When a shareholder dies, their shares pass by operation of law to their personal representatives (PRs) who then have a general right either to be entered into the company’s register of members as the new shareholders, or to transfer the shares to a beneficiary of the deceased’s estate, who can then be registered as the new shareholder.
For a company incorporated under the Companies Act 2006 with the default form of Articles (‘Model Articles’), the Articles permit the PRs to appoint a director. The director can then enter the new shareholders’ names in the company’s register, and generally enable the company to continue to operate.
However, for older companies incorporated under the Companies Act 1985 with ‘Table A’ Articles, the PRs do not have a built in right to appoint a new director. The PRs cannot then be registered as the new owners of the shares, and will be prevented from exercising the shareholders’ right to appoint a new director.
For any business that is operated through a company with only one director-shareholder, we would recommend reviewing and updating the company’s articles where appropriate, to provide the right for PRs to appoint a new director.
Business continuity can also be drastically affected if the sole director-shareholder suffers severe illness or incapacity. It is possible for a sole director-shareholder to grant a Lasting Power of Attorney (LPA) to appoint one or more attorneys to deal with her affairs upon the occurrence of such event. In the case of advanced illness for example, the person appointed (e.g. family member) will have the ability to assume control over decisions relating to the company.
For any company that has a sole director-shareholder, it would be advisable to have its articles of association checked and (if necessary) updated, and to consider putting in place an LPA to provide for the future. In this way, the sole director-shareholder can help minimise the risk of having the company left with a power and authority vacuum upon their death, serious illness or incapacity.