Lifetime planning – how startups can prepare for catastrophe

The death of an individual who is both sole director and shareholder can throw any startup company into a state of disarray and temporarily halt operations. However, with careful lifetime planning, a transition to the company’s new decision makers can be achieved quickly and painlessly. 

Upon the death of a sole director/shareholder the company’s shares must be registered in new ownership and a new director needs to be appointed to facilitate the continued running of the company. However, the ability to take these steps will depend on whether the sole director/shareholder died with a Will and what the company’s constitutional documents say. 

Stumbling blocks

If a Will is in place, provided there is nothing contradictory in the company’s constitutional documents, on death the shares will vest in the shareholder’s executors or personal representatives (“PRs”). The PRs will not become shareholders until they are added to the company’s register of members. This usually happens once the PRs have obtained the Grant of Probate to the deceased’s estate. This process can take a few months, and although the shares will have vested in the PRs, they will be unable to attend general meetings and to exercise any voting rights until they are registered as shareholders. 

If the sole director/shareholder dies without leaving a valid Will, it can take even longer to fill the resulting shareholder vacuum. This is because the next of kin will need to apply for a Grant of Letters of Administration. They will not have immediate authority to act as PRs, but will have to wait until that authority is given to them under the Grant. 

Director appointment

The PRs should appoint a replacement director as soon as possible to make sure that the business can keep operating smoothly. As they cannot exercise the usual voting rights attached to the shares until the Grant of Probate is obtained and they become registered shareholders, their ability to appoint a director depends on the company’s constitutional documents. 

If a company has adopted the Model Articles of Association, PRs have the power to appoint a director in the event that no directors or shareholders are left (without the PRs being registered shareholders). However, companies with bespoke articles or companies incorporated before 1st October 2009 may not be able to rely on such a provision. 

This can lead to a deadlock where there is no director to approve the updating of the register of members, which means the PRs cannot become registered shareholders and appoint a new director. The PRs may have to apply to court for an order enabling them to become registered shareholders so they can then appoint a director to run the company. A costly and time-consuming process.

The solution? Lifetime planning.

Planning during the sole shareholder/director’s lifetime is essential to ensure a quick transition to new shareholders and directors. 

It is vital that a valid Will is in place, allowing PRs to deal with the sole director/shareholder's estate as efficiently as possible. If a sole director/shareholder already has a Will, they should make sure that it is kept updated to reflect their latest wishes. Care should be taken that the Will dovetails with the position under the company’s constitutional documents so that there is no conflict between the two. 

The Will should appoint suitable PRs (ideally people experienced in dealing with company affairs) and clearly set out whether the shares should pass to a particular beneficiary or whether they should be sold. The Will should also give the PRs adequate powers to deal with the shares. A letter of wishes can sit alongside the Will, which can set out guidance to PRs about what should be done with the shares (e.g. to whom they should be sold) and how the company should be run, including suggestions for replacement directors. 

Constitutional documents

Applying to the court to register the PRs as shareholders should be a last resort, so it is important that the Articles of Association give the PRs power to appoint a new director where the company is left without any shareholders or directors. 

Provisions can also be included that enable PRs to exercise the voting and other rights attached to the shares before the PRs are registered as shareholders. This would help the business to continue operating seamlessly upon the death of the sole shareholder/director.

Sharing the load

To avoid complications on death, the sole shareholder/director may want to consider appointing other directors, transferring shares to family members, as well as training staff so that they are not the only person with sole control and knowledge of the company.

Capacity issues

Loss of mental capacity of a sole director/shareholder can be just as problematic as their death. This risk can be mitigated by the sole director/shareholder putting in place a Lasting Power of Attorney (“LPA”) for Property & Financial Affairs. They can nominate one or two trusted individuals to act as their attorney and manage their business affairs if they lose capacity.

Avoiding catastrophe

The issues that can arise on the death or loss of capacity of a sole director/shareholder can be catastrophic, but are avoidable. Sole directors/shareholders should make sure their Wills are appropriately drafted and updated, and that the constitutional documents of the company will give the PRs sufficient powers to keep the business functioning without the need for an application to court.