Mind your business – legal capacity and succession planning

Insights - 29/03/2018

It is important for owners of companies, especially sole owner/directors, to plan for succession in management and ownership of the business.  One often overlooked aspect of this is what would happen if a director or owner of a business loses legal capacity (ie they can no longer make their own decisions for physical or mental health reasons), either on a temporary or long term basis.

Next month, together with our private client team, we will set out some steps that a prudent owner manager can take to protect their position and family. However, what happens if a catastrophic event affects a company which has no protection in place?

The first consideration should always be that, although there are various strict legal requirements to consider it is important that the ultimate aim is to allow the business to continue and maintain its value and income to the owner/directors.  A part of the immediate response must be to ensure that day to day operations can continue, with the absent director’s/owner’s tasks being fulfilled by existing or replacement staff.  Depending on the history of the business, it is often the case that employees in the business are able to take many decisions, including completing contracts and making payments, which allow the urgent business of the company to continue while the other issues are addressed.

Beyond this, and in order to ensure longer term control, it is important to consider separately the role of the owner manager as shareholder and as director.

Shareholder 

The ownership of shares will not change due to the shareholder losing legal capacity and the right to receive dividends or proceeds of sale will not be lost.  However, the powers of a shareholder are a personal right of the individual and so rights to vote and the decision to sell shares can’t be exercised by a shareholder who lacks legal capacity.

While there may be other options if shares carrying voting rights are registered in the name of any other person, the powers attaching to shares can ordinarily only be exercised either by a person holding certain types of power of attorney or by a ‘Deputy’ appointed by the Court of Protection to make the relevant decisions on behalf of the shareholders.  We will cover these aspects and the key differences next month.

Director

Unlike shareholder decisions, a director’s powers and duties cannot ordinarily be delegated following a loss of capacity.  Indeed, it is often the case that a director’s office will terminate automatically. The company’s articles of association should always be consulted to check the actual position, but for example:

  1. The old standard ‘Table A’ articles (used by many companies incorporated before 2009) automatically terminate a director’s office if they are admitted to hospital for certain mental health treatment or are subject to certain court orders, including the appointment of a deputy or similar to manage their affairs.
  2. The latest ‘Model Articles’ are less widely drawn, but still automatically terminate a directorship where a medical practitioner gives a written opinion that the person is and may remain for three months incapable of acting as a director.  (It should be noted that up to 2013, there was an additional standard provision that the office terminated where a court order was given restricting the individual’s ability to exercise their own decision making powers and this remains in many companies’ articles).

It is worth remembering that the office as a director remains distinct from the role as an employee and any termination of directorship would not necessarily mean the termination of employment rights. This can be useful in maintaining salary income, particularly if the incapacity is expected to be temporary.

Even if their office is not terminated, clearly the director cannot act while not having capacity and so it usually is necessary to appoint a new director to continue to act and make decisions for the company.

Apart from the challenge of finding someone prepared to take on this role, there are procedural issues, not least that where there is no director only the shareholders have the right to appoint a director (by an ordinary resolution, ie more than 50% of those voting).  It is therefore often necessary to exercise the owner manager’s shareholding powers to make the appointment. If this is via the Court of Protection/Deputy route it can take some time to achieve, which is why we recommend advance planning to protect against this scenario and will offer some guidance next month.

Other articles from March's newsletter

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.