Safeguarding your Business for Mental Capacity Issues

Insights - 27/04/2018

Last month, we covered some of the issues that can arise if a director or owner of a business loses capacity without any protections being in place. This month we are looking at some steps that a prudent director or shareholder can take in advance.

So, looking at the individual roles of shareholders and directors, what can you do to prepare for the loss of mental capacity?

Shareholder

A Lasting Power of Attorney (LPA) can enable a shareholder (as well as partner or a sole trader) to appoint one or more attorneys to make decisions relating to the business on his/her behalf if s/he no longer has the capacity to do so.

In doing so the attorney exercises the voting rights of a shareholder (along with, and subject to, any rights and restrictions under the articles of association or any shareholders agreement). There are different types of LPA and, in relation to business interests, you are likely to want to identify and appoint an attorney who has the requisite skills to look after your business interests and will typically use an LPA for “Property and Financial Affairs”. This individual could be different to your choice of attorney under a “Health and Welfare” LPA.

However, LPAs do have their limitations as the duties and powers of company directors are personal and cannot be delegated.

Director

If your company was incorporated on or after 28 April 2013 and adopted the ‘Model Articles of Association’ (Model Articles), these provide some assistance by including provisions that require directorships to terminate if a medical practitioner gives a written opinion that the person is and may remain for three months incapable of acting as a director. The situation is different for companies with Model Articles that were incorporated before 28 April 2013. This earlier version permits automatic removal without a written opinion.

However automatic removal will be of limited help if the company has a sole director or if a board position is necessary or advisable to protect the interests of the incapacitated shareholder. With this in mind, a shareholders agreement and/or new articles of association could combine the loss of office with a right for the shareholder to appoint a director and the LPA could permit the attorney to make that appointment.

Further, if the company has a sole director, consider appointing a second director. This may assist with business continuity but care should be taken in a shareholders agreement or the articles of association to prevent unintended and unwanted changes to the decision making powers of the existing director by virtue of the new appointment.

Finally, there are more bespoke solutions that can be included in your corporate documentation, depending on the individual requirements. This can include defining “director’s lack of capacity”, how this is to assessed and provide for more detailed provisions for the operation of the business if this event occurs.

Other articles from April'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.