A shareholder's guide to ensuring asset protection

Dubai - Business protection plans can provide simple way to protect interests of partners, shareholders

Even though there is no legal requirement to have a formal shareholders agreement, every company with more than one shareholder is well advised to have one.
Shareholder agreements ensure that the running of the company and the responsibilities of the shareholders are properly thought through, there is clarity and certainty as to what can or cannot be done and decisions are taken by consensus and discussion. As a result, it will reduce the potential for conflict between shareholders and help the company to be run smoothly and profitably.
That being said, a partnership can be an effective method of pooling resources and skills to the financial advantage of all concerned. However, it brings with it responsibilities and the possibility of financial burden, especially when one of the partners dies, retires or becomes incapacitated. For a partner, his share in the business is likely to be his greatest financial asset so he needs to take steps to protect it, not only for the benefit of his family, but also for the benefit of the other partners in order to help ensure the continuation of the business. The directors of private limited companies are in a similar position.
Business protection plans, based on a suitable legal arrangement, can provide a simple way to protect the interests of partners and shareholders. This may be achieved as well as providing the legal background to partnerships and private companies, together with other relevant points for consideration.
Business protection needs and solutions
The business protection needs for partnerships are twofold:
1. Ensuring that, when a partner leaves through any cause, the remaining partners are able to continue the business, whilst maintaining control, and without undue financial strain.
2. Ensuring that when a partner leaves the business he or his family are adequately provided for.
On the other hand, when a partner dies, the deceased's share of the business will normally form part of his estate for the benefit of his family. Whilst some companies may have restrictions within their memorandum and articles of association limiting the share of ownership to certain individuals and determining who has the initial right to acquire shares, it will be assumed that the shares pass in the first instance to the family. The family then has two alternatives:
i. A member of the family could take over the deceased's position as partner or appoint someone to act on their behalf.
ii. Realise the value of the share by selling it.
iii. However if a member of the family does not want to become involved in the business or may not have the right experience or qualifications to do the job. The family could also have a problem finding someone who would be willing and able to act on their behalf in the business.
Those remaining in the business:
i. The remaining shareholder/partners might, understandably, be reluctant to invite a member of the family to become a partner or a member of the board, especially if that person does not have the relevant experience. This would particularly apply if the family had only a minority shareholding in a company or if the deceased's shareholding had been split between a number of beneficiaries on his death.
ii An alternative would probably be preferred by both the family and the remaining partners if the family could sell the share back to the business. This, however, relies on the business having funds available for the purchase. The business may have to resort to liquidating some assets, borrowing the money or trying to find a replacement partner itself to buyout the family's share.
For the family, the sale of their share may present real difficulties if the remaining partners are unable, or unwilling, to buyout the share within a reasonable period of time. Shares of partnerships and small private companies are not generally readily saleable and even if the family did find a buyer, they may not get the price they thought the share was worth, especially if it is a minority share.
The writer is the founder and CEO of Icare Insure. Views expressed are her own and do not reflect the newspaper's policy.