Managing the Inevitable: Succession Planning for Businesses

Succession planning involves including measures to ensure the smooth transition of share ownership and management during key events, such as death, retirement, or voluntary/involuntary exits.

Some things to consider:

• Shareholders’ Agreements: A shareholders’ agreement can help with succession planning. It can include provisions outlining the process for transferring shares, how and when these may be transferred, and what circumstances will trigger a share transfer. Shareholders’ agreements may also include provisions enabling the company or remaining shareholders to buy out a departing shareholder's stake at a predetermined price or otherwise by the determination of an expert valuer.
• Clear Valuation Methods: Any buy-out arrangement should establish a clear and fair method of valuing shares in a company. That may be set out in a shareholders’ agreement or articles of association, which may include ‘good leaver’ and ‘bad leaver’ provisions for departing directors or employees.
• Family Dynamics: If shareholders are part of a family-owned business, it is important to consider how succession planning may impact family relationships and address potential conflicts. A shareholders’ agreement or a family charter can help regulate who has a say in the management of the business,s including voting rights for certain classes of shares.

When succession planning is not in place, various challenges may arise, including:

Loss of Business Continuity

Without a clear plan, the sudden departure of a founding shareholder can significantly disrupt the company's stability. For example, where a founding shareholder dies, their shares may pass to their spouse or their children.

Inheriting shareholders may lack experience in managing the business (or any business for that matter), but nevertheless hold an interest in it. What happens next in that scenario? Does the incoming shareholder wish to be bought out or do they expect to have an active say in the management of the business?

An inexperienced inheritor with majority shares could block key resolutions, creating operational gridlock for existing shareholders. One can easily see how this can generate issues for existing owners who perhaps did not contemplate this scenario when they founded the business.  

Disputes Among Shareholders

Generally, the way to resolve a shareholder dispute is to agree on a share buyout – essentially a clean break divorce.

However, that is not the end of the matter. Valuing the shares, particularly what is considered ‘fair’ value, can become a very contentious issue if there isn’t an agreed valuation mechanism in place.

Conflict Within the Family

In family-owned businesses, the lack of a clear succession plan can lead to conflicts, even among family members. For example, if a business is controlled by the head of a family when they die, it is usually their children who assume ownership of the company, whether by inheritance of shares or perhaps by an earlier gift.

The absence of clear roles and responsibilities in the company can trigger sibling rivalry over control, which can have a devastating effect on their personal relationships and ultimately impact the business itself.

As one might imagine, this situation invariably leads to litigation, which otherwise could have been avoided with the right succession planning.