Protection For Two-Director Companies
Two people owning half a company each is one of the most common structures in the country and one of the least protected.
It works smoothly while both are there, which is exactly why nobody examines what happens if one is not. The shares are an asset. They pass to the estate and then to whoever inherits, usually a spouse, who may have never worked in the business and may need money rather than a shareholding.
At that point the surviving director is in business with somebody they did not choose, and neither party can easily fix it.
The short answer
In a company owned fifty-fifty, a shareholder's half passes to their estate and then to their family when they die, not to the surviving director. The survivor normally has no automatic right to buy it and the family usually has no obligation to sell, so the business can end up half owned by somebody with no involvement in it and no interest in the same outcome.
What this changes
- A deceased director's shares pass to their estate and then under their will or the intestacy rules
- The surviving director normally has no automatic right to buy those shares
- The family normally has no obligation to sell them, and may want income instead
- With half each, neither side can outvote the other, so disagreement becomes deadlock
- The family may expect dividends from a business they take no part in running
- The company has lost half its management while this is being worked out
The bit people miss
The fifty-fifty split is what turns a difficult situation into a stuck one. In a company where somebody holds a majority, there is at least a decision maker. With two equal halves, the surviving director and the inheriting family have to agree, and if they do not there is no mechanism to break the tie. The survivor cannot force a sale, the family cannot force a buyout, and the business carries on in the middle of it. The two things that resolve this are a written agreement setting out what happens, and the money to act on it.
The Agreement Matters As Much As The Money
Insurance on its own solves half of this. It produces cash. What it does not do is create the right to buy or the obligation to sell.
That comes from a written agreement between the shareholders, commonly a cross option arrangement, which gives the survivor the option to buy and the estate the option to sell. Once both options exist, either side can start the process and the other has to complete, so the outcome is settled in advance rather than negotiated at the worst possible time.
The two parts are designed to work together: the agreement says what happens, the policies provide the money to do it. Having the cover without the agreement leaves everybody with cash and no mechanism. Having the agreement without the cover leaves a right to buy that nobody can afford to exercise. The legal side is a solicitor's work and the tax treatment depends on how it is set up, so this is one to get arranged properly rather than assembled from parts.
Check What Your Articles Actually Say
Plenty of two-director companies were set up from a standard template years ago and nobody has read the articles since.
Default articles do not usually deal with this in any useful way. They may say something about transferring shares, they may require the directors to approve a transfer, and in a two-person company where one director has died that approval process can itself become part of the problem. Some companies have pre-emption provisions giving existing shareholders first refusal, which helps, but first refusal is only worth something if there is money to take it up.
So the honest first step is to find out what your company's articles say and whether any shareholder agreement exists. Most people discover there is nothing. That is worth knowing now rather than later, and it is a short conversation with whoever incorporated the company.
What usually fits, and why
The core of it. Policies arranged so that on a death the surviving director has the funds to buy the shares, and the family receives their value in cash rather than a shareholding they cannot use.
Separate from the ownership question. In a two-person company each director usually is the business in some practical way, and losing one damages trading quite apart from who owns the shares.
Personal cover for each director's own family, paid for by the company. Directors are usually employees of their own company, which generally makes this available, and it is a different job from protecting the shares.
Common questions
What happens to my business partner's shares if they die?+
They pass to their estate and then to whoever inherits under their will or the intestacy rules, usually a spouse or family. They do not pass to you. Unless there is an agreement saying otherwise, you have no automatic right to buy them and the family has no obligation to sell.
Can I be forced into business with my partner's family?+
In effect, yes, if there is nothing in place. They become a shareholder with the rights that go with half the company, including a say in decisions and an interest in dividends, whether or not they have any involvement in the work. A cross option agreement is what prevents that outcome.
What is a cross option agreement?+
An agreement between shareholders giving the survivor the option to buy the shares and the deceased's estate the option to sell them. Once both options exist, either side can trigger it and the other must complete, so the result is decided in advance. It is drawn up by a solicitor and works alongside the insurance that funds it.
Why does fifty-fifty make it worse?+
Because neither side can outvote the other. In a company with a majority shareholder there is still somebody who can decide. With two equal halves, you and the inheriting family have to agree on everything, and if you cannot there is no mechanism to break the deadlock while the business carries on.
Do we need both the insurance and the agreement?+
Yes, they do different jobs. The insurance provides the money and the agreement provides the right to buy and the obligation to sell. Cover without an agreement leaves cash and no mechanism. An agreement without cover leaves a right to buy that nobody can fund.
How is the share value decided?+
That is normally set out in the agreement, either as a valuation method or a process for agreeing one at the time. Getting that defined in advance avoids arguing about price at the worst moment, and it also tells you how much cover each director actually needs.
Cover that often goes with this
The gaps we most often find sitting next to this one.