12th February 2025 ❘ Legal News and Commentary
The power of shareholders’ agreements in succession planning
The power of shareholders’ agreements in succession planning
Succession planning can often feel like navigating a maze. For many business owners, passing the responsibility of their life’s work to the next generation can be fraught with challenges: potential disputes, competing interests, combined with the fear of losing control of what they have worked so hard to build. This is where a shareholders’ agreement comes in – a legal agreement which doesn’t just set the rules but also writes the blueprint for your business’s future
So, what makes a shareholders’ agreement so powerful?
Imagine this: you’ve built a thriving business, but without a clear plan in place, a sudden illness or unexpected death could throw everything into chaos. Who takes over? Will they continue to honour your vision? Can the business survive and continue to prosper? All questions that will keep many a business owner awake at 3am.
A well drafted shareholders’ agreement can provide the answers. It is a bespoke agreement between the shareholders that sets out how the company will be run and how major decisions will be made. When used as a tool in succession planning, it becomes a strategic blueprint that ensures the business continues to thrive and grow.
The key ingredients of a Shareholders’ Agreement
What makes a shareholders’ agreement stand out in succession planning is its ability to address the ‘what ifs’ of business transitions. So how does it achieve this?
- Keeping control within trusted hands
A shareholders’ agreement can restrict who can own shares in the company. By including what are known as pre-emption rights, you ensure that existing shareholders get the first shot at buying shares before they are sold to outsiders. The agreement can also be drafted so that shares cannot be transferred with the consent of certain shareholders.
This is particularly valuable for family businesses or close knit partnerships, where preserving the company’s ethos and culture is paramount.
- Planning for the unexpected
As we all know, life rarely goes to plan! What happens if a shareholder suddenly passes away or becomes incapacitated? A well drafted shareholders’ agreement can include provisions requiring the shares to be sold back to the company or other shareholders, avoiding messy disputes or unwanted external influence.
For instance, the agreement might state that shares pass to a family member, but only if they meet certain criteria – such as being actively involved in the business or having relevant qualifications.
- Resolving disputes before they happen
Disputes can fundamentally cripple a business, especially during sensitive transitions. A shareholders’ agreement acts as a pre-emptive peacemaker, outlining how disagreements will be handled.
For example, it might establish a mediation or arbitration process to resolve conflicts quickly and discreetly, keeping the business on track.
- Setting the value of your business
One of the trickiest parts of succession is deciding how much the company and its shares are worth. Rather than leaving this to chance or heated debates, shareholders’ agreement can set out the valuation formula or require independent expert assessments
This ensures transparency and fairness, whether shares are being transferred to family members, sold to existing shareholders, or bought back by the company.
The Shareholders’ Agreement can go further
A shareholders’ agreement isn’t just a safety net though. It’s also a strategic tool that can adapt to your business’s evolving needs. Some other features of the agreement that should also be considered are:
- Drag along and tag along rights
If your future plan is to sell a majority stake but you are worried about minority shareholders preventing the sale, then drag along rights can be used to require the minority to join in the sale.
Conversely, tag-along rights ensure that minority shareholders can sell their shares on the same terms as the majority, protecting their interests on a sale.
- Non-compete and confidentiality clauses
Such provisions prevent outgoing shareholders from setting up competing businesses and sharing sensitive information, thus safeguarding the company’s market position.
- Tax efficiency
Succession planning often involves navigating complex tax laws. A shareholders’ agreement, when paired with expert tax advice, can help minimise liabilities, such as inheritance tax (IHT) and capital gains tax (CGT).
For instance, shares in trading companies may qualify for Business Property Relief (BPR), significantly reducing IHT. A well-structured agreement can ensure that these benefits aren’t lost during the transition.
A future built on certainty
Succession planning is one of the most important steps a business owner can take to secure the future of their company. A shareholders’ agreement provides the certainty and structure needed to navigate this process successfully. By addressing potential challenges upfront – such as disputes, share transfers, and leadership transitions – it ensures the business can grow and thrive, even in times of change.
Far from being just a legal formality, a well-crafted shareholders’ agreement is a powerful tool for shaping the destiny of your business. By taking the time to implement one, you not only protect the interests of current and future shareholders but also lay a strong foundation for the next chapter of your company’s story. Succession, when planned well, isn’t an ending – it’s the beginning of a new era.
We offer a bespoke Wealth and Succession Planning service to help you prepare for the transfer of your wealth in the most tax-efficient and protected manner, ensuring both the continuity of your business interests and the financial security of your next generation. You can find out more here or just get in touch and we’ll be happy to help.