Seeking Advice on Directors' Insurance and Equal Share Control in a Partnership

Trevstonbury_2

Hi All,

I am looking for some advice from business owners in a similar position. My business is owned and run by three partners, each holding one-third of the company's shares. We are considering getting directors' insurance to ensure the company can continue smoothly in case something happens to any of us. This would help avoid unforeseen issues or disagreements and maintain control of the company among the three of us.

The other two partners in the business are married, and currently, all shares would be passed to their next of kin (i.e., the spouse) if something should happen to either of them. My concern is that if something happens to one of my partners, the other partner would essentially gain two-thirds control of the business.

I want to ensure that the directors' agreement and insurance not only keep the business among the three of us but also maintain equal control in terms of shares if something happens to any individual. This would help preserve the current status quo.

Does this seem like a fair and common agreement to suggest? Does anyone have experience in a similar situation and can make a recommendation?

Many Thanks!

Marcon

Trevstonbury_2 said:

Hi All,

I am looking for some advice from business owners in a similar position. My business is owned and run by three partners, each holding one-third of the company's shares. We are considering getting directors' insurance to ensure the company can continue smoothly in case something happens to any of us. This would help avoid unforeseen issues or disagreements and maintain control of the company among the three of us.

The other two partners in the business are married, and currently, all shares would be passed to their next of kin (i.e., the spouse) if something should happen to either of them. My concern is that if something happens to one of my partners, the other partner would essentially gain two-thirds control of the business.

I want to ensure that the directors' agreement and insurance not only keep the business among the three of us but also maintain equal control in terms of shares if something happens to any individual. This would help preserve the current status quo.

Does this seem like a fair and common agreement to suggest? Does anyone have experience in a similar situation and can make a recommendation?

Many Thanks!

If I understand your post correctly (too many uses of the word partner for me to be quite certain!), there are 3 partners in the firm. You are one of them and the other two are married to each other. That being so, then frankly they've already got 2/3 control, surely, simply by joining forces?

Unless they are willing to redraft the partnership agreement to make the split 50:50 (50% them, 50% you) in terms of voting rights, albeit profits are split differently, you're stuck with it.

Key man insurance would certainly make a lot of sense.

DullGreyGuy

So you operate a limited company with three directors who are also near equal shareholders. The other two directors are married. You're concerned that should one of your co-directors die that their shareholding would pass to their spouse and as such they'll become a 2/3rds shareholder. 

For a start I would say you are already the minority actor in the company as it's much more likely the spouses will agree with each other than being you + 1 -v- the other. 

It would be unorthodox for the shareholding from spouses to be split between the spouse and non-spouse directors and could have implications for the IHT that has to be paid. 

First of all you need to differentiate between their roles as directors and their role as shareholders. If one dies you become two directors so unless the articles of association and/or any terms of reference state one director has more authority than the other then you have 50/50. It's only in the shareholding where the unbalance becomes more formalised (realistically it already exists unless you believe their marriage is on the rocks). In principle other things could be done to change voting rights than have you a beneficiary of the will but this could become complex if you anticipate ever gaining other shareholders, especially if they arent also to be a director. 

"Directors Insurance" isnt a class of business, though could be a marketing name for a product. I initially thought you mean Directors & Officers Insurance, a form of personal liability insurance, but that makes no sense when you are considering the potential death of a director and so maybe you are meaning Key Man Insurance, the corporate version of ASU/PPI? In which case it is an option depending on how operational each of the directors are and what the plan would be if one went onto long term sick. 

Trevstonbury_2

Thank you both for feedback.

We don't really have anything formalised in a partnership agreement, though we do have a rough document that states that I have a 50% vote when it comes to financial descisions. Do you think it's worth getting this formalised from a legal point of view?

Marcon

Trevstonbury_2 said:

Thank you both for feedback.

We don't really have anything formalised in a partnership agreement, though we do have a rough document that states that I have a 50% vote when it comes to financial descisions. Do you think it's worth getting this formalised from a legal point of view?

This all sounds a bit wobbly! You need to get everything nailed down formally and 'legally' - and the place to do that is in the governing documents, be that Articles of Association, or a legally binding directors/partners agreement - from your post I'm not sure whether this is actually a limited company or a (limited or otherwise) partnership. Economising on legal fees and crossing your fingers might not be ideal if push comes to shove...

Relying on what you admit is a 'rough document' isn't a good idea, not least because it's not always easy to decide on what constitutes a 'financial decision'. Have you considered having more than one class of share - one in relation to voting/control of the (?)company, and a second class relating to profit share? That of course assumes that the other two partners are happy to effectively relinquish their current overall control - are they, and if so, I wonder why when they are in such a strong position?

DullGreyGuy

Trevstonbury_2 said:

Thank you both for feedback.

We don't really have anything formalised in a partnership agreement, though we do have a rough document that states that I have a 50% vote when it comes to financial descisions. Do you think it's worth getting this formalised from a legal point of view?

You need to get your language correct as you keep switching between calling this a company/shareholders and a partnership which are very different legal structures from each other. 

If you have incorporated into a LTD then you'd deal with matters in the form of the articles of association and in the classes of shares you hold. It's certainly worth formalising as people can have a falling out and at that point things go back to the actual facts rather than the gentleman's agreements. 

Marcon

DullGreyGuy said:

Trevstonbury_2 said:

Thank you both for feedback.

We don't really have anything formalised in a partnership agreement, though we do have a rough document that states that I have a 50% vote when it comes to financial descisions. Do you think it's worth getting this formalised from a legal point of view?

You need to get your language correct as you keep switching between calling this a company/shareholders and a partnership which are very different legal structures from each other. 

If you have incorporated into a LTD then you'd deal with matters in the form of the articles of association and in the classes of shares you hold. It's certainly worth formalising as people can have a falling out and at that point things go back to the actual facts rather than the gentleman's agreements. 

Indeed. Unfortunately this has been an amateurish approach from the outset - see https://forums.moneysavingexpert.com/discussion/6208805/partnership-agreement-document-need-some-opinions-advice#latest written in 2020. No evidence that the professional input recommended then was ever sought...

Sometimes the cost of not taking advice is vastly more expensive than paying for the correct advice at the right time. OP, not much point going on posting here when the foundations look so shaky. Get yourself some proper professional input before anything goes really wrong. It's a bit late in the day, but some basic reading  eg https://www.gov.uk/browse/business/setting-up might help clarify in your own minds what you all want in terms of a structure for your business