Family businesses and pre-emption rights: a trap for the unwary

25 September 2014

Business owners are a notoriously busy lot. Trying to get them to put wills in place can require persistence on the part of the adviser. However, care is needed when making wills for business owners as getting the will in place, on its own, may not be enough.

Trouble can ensue when the share transfer provisions in the articles of the company, or any shareholders’ agreements, prevent the deceased’s shares being transferred to the heirs named in the will, or the trustees of any trusts in the will. Restrictions placed on transfers are commonly called pre-emption rights.

Recently I came across a problem ‘waiting in the wings’ in the articles of a family company set up many years ago. The company’s articles adopted the old Companies Act 1985 Table A provisions for share transmissions, which allow a deceased shareholder’s executors to nominate anyone to be registered as the transferee of the shares. So far so good. However, there was also an express provision inserted in the articles stating that share transfers (which included executor-to-beneficiary transfers) triggered the company’s share transfer pre-emption rights. These provided that any shares to be transferred had to be offered to the other shareholders first (who in this case were not family members). So even though the will stated where the shares should end up, what the beneficiaries might have received was just share sale proceeds, not the shares themselves. This was quite the opposite of what the owner of the shares wanted.

I am delighted to report a happy ending to this tale, however. The company’s articles have since been altered to provide for permitted transfers in certain situations which will not trigger the pre-emption rights. Permitted transfers include transfers to certain ‘privileged relations’ or to a family trust. The change has been made with the blessing of the majority of shareholders needed to effect the alteration.

Done properly, writing wills for company owners should involve more than just the lawyer dusting down their will precedents bible. A familiarity with the company’s corporate governance documentation is also required.

Helena Luckhurst Author
Helena Luckhurst
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