Estate planning for companies

When a person running a private company dies, the business of the company can be frozen if there are no careful contingency plans in place.

COMPANIES OWNED BY ONE FAMILY

Many businesses are run by a company in which the shares are owned by the person who runs the business, either alone or with their spouse. That person is also often the director of the company again, either alone or with their spouse.

The problem

If that person dies, there may be documents which need to be validly signed by the company to keep the business going, such as bank documents or lease renewals. These generally require resolutions passed at valid meetings of directors or shareholders. If these documents cannot be executed, it can create problems for the family of the deceased trying to keep the business going. That is the last thing the family needs at a time like that.

If that person is the only shareholder and director, on their death, their shares form part of their estate and are dealt with in accordance with their will. This probate process often takes months. In the meantime, the company cannot pass shareholder’s resolutions which can cause serious practical problems.

The same problems arise with director’s resolutions. If the deceased was the only director of the company, the company will be frozen until a new director can be appointed which could take months.

The quorum issue

Even if that person’s spouse is also a shareholder or director, the spouse may not be able to pass resolutions, as the company constitution may require a quorum of at least 2 shareholders or directors to hold a valid meeting.

The solution

There are many possible ways of avoiding these issues, but only if they are put in place prior to the death of the deceased.

If there are 2 shareholders or 2 directors, the company constitution can be amended to provide that, if one of them should die, the survivor may appoint a replacement director. The constitution can also provide that, on the death of a shareholder or director, he quorum for meetings is just one shareholder or director.

If there is only one director and shareholder, the constitution can be amended to provide that the personal persons named as the executor of the estate can appoint a new director. This can be done without going through the whole probate process.

For most companies, the best solution is an agreement for the shares of the deceased to pass to the surviving shareholder(s) on payment of an agreed price for the shares, probably paid off over a period of time.

COMPANIES OWNED BY MORE THAN ONE PERSON OR FAMILY

Completely different issues arise where there are other people in the company who can continue to conduct the business. Click here to read our article “death of a shareholder”.

Conclusion

The death of a shareholder is a difficult and stressful time. Careful planning can minimise that stress and minimise damage to the company and its business.

For more information  contact Tim Somerville  or Andrew Somerville on (02) 9923 2321.