In every issue of DeBrieF, we try to answer a few questions sent in by our readers. This month, our panel of experts tackle Shareholder Agreements, Wills & Inheritance Tax Relief and Rent Arrears…
Q: I am a shareholder in a joint venture trading company and am engaged in a fundamental dispute with my co-shareholder and no Shareholders Agreement is in place. What are our options as shareholders?
A: The above scenario shows why a Shareholders Agreement is a vital corporate governance tool in any co-owned company. Definitive procedures can be put in place in the event of a disagreement between the co-shareholders. Obviously having a legally binding Shareholders Agreement would provide a contractual course of action and save an enormous amount of management time and professional expenses in providing a resolution to such disputes. However where no Shareholders Agreement is in place the way forward is often as follows:
- Primarily the Articles of Association of the Company should be reviewed as they may contain transfer provisions that can assist in breaking a deadlock situation between equal shareholders. A reasonably robust set of Articles may contain certain compulsory transfer events if a shareholder defaults. This would at least ensure that upon the occurrence of an exit event (in the Articles) the shareholder who is not in default could buy out the defaulting shareholder. However, such provisions are fairly uncommon in proforma or precedent Articles of Association and are often only included when revised Articles of Association are put in place accompanying a Shareholders Agreement.
- In the absence of corporate governance provisions in the Shareholders Agreement and Articles of Association, it may be necessary to take the drastic step of actually winding up the Company via a solvent liquidation (Members Voluntary Liquidation). Again, the Company’s Articles of Association would need to be checked to ascertain if there are any specific class rights relating to shareholders in this area. However, this procedure needs the co-operation of both shareholders and a meeting of minds may not be available given the deadlock scenario.
- If the shareholders do not co-operate to achieve a Members Voluntary Liquidation (“MVL”), it may be viable to consider obtaining a Winding Up Order of the court pursuant to Section 122(1)(g) of the Insolvency Act 1986 on the grounds that it is just and equitable that the Company be wound up. This is a very old fashioned remedy and remains at the court’s discretion whether the just and equitable grounds are actually satisfied. Accordingly this relatively expensive course of action may not provide an automatic solution to a shareholder dispute. In addition, in order to present a Petition, a shareholder must have held such shares for at least six months and be able to show a bona fide financial interest in the Company (i.e. that the Company has enough assets to make a distribution to shareholders in the event of an MVL).
The above issues clearly demonstrate the value of a suitable Shareholders Agreement. Even a relatively simple document would contain the alternatives of exit events, mediation for the shareholders or indeed some sort of “Russian Roulette” scenario for the two shareholders – a process that requires one of the two deadlocked parties to serve a notice on the other party naming a price at which it values a half interest in the Company. The shareholder receiving the notice then has the option to either buy the other party out, or sell out to the other shareholder, at that price.
Sonio Singh: Partner in the Corporate Department
Q: I am the sole director/shareholder in my business. I currently have a simple Will leaving everything to my wife. I have been advised that I should consider making a new Will, to ensure I maximise the available inheritance tax reliefs. What does this mean?
A: If you own an interest in a trading business, whether as a shareholder, partner or sole trader, it is possible that your interest may, in certain circumstances, qualify for Business Property Relief. This is a form of inheritance tax relief whereby the value of the business on your death can be discounted by as much as 100% for the purposes of inheritance tax. If you have a Will leaving everything to your wife, then the BPR is wasted, because gifts to your wife are spouse exempt. It is possible – however – to put a trust in the Will to preserve the relief, but still provide for your family at the same time so it would certainly be worth speaking to a solicitor in more detail about your options.
Karen Witter: Partner & Family & Private Client Solicitor
Q: I am the landlord of a long residential lease. The tenant has temporarily moved out of the flat while decorative works are carried out. The tenant is in substantial arrears of rent and the lease contains a right to forfeit for non-payment of rent. The tenant has confirmed in writing that the arrears are due and owing. Can I exercise the right to forfeit by peaceable re-entry?
A: In principle, a landlord can re-enter a residential premises which he or she reasonably believes the tenant has ceased to occupy. It would be advisable to do this by court proceedings if there is any uncertainty as it is a criminal offence to forfeit by peaceable re-entry if the tenant is lawfully in occupation. If the landlord has reasonable grounds to believe that the residency has come to an end, this restriction on forfeiture will not apply. However, the absence must be more than temporary. Therefore, vacating the property for a short period while repair works are carried out will not be sufficient.
Richard Hamilton: Partner in the Property Department