Owner managed and family businesses: a cautionary tale

What happens to shares on the death of a shareholder can often quickly become contentious, and can cause significant disruption and associated expense for owner managed and family businesses. In this article we look at the case of Lane v Lane ([2024] EWHC 2616 (Ch)) which provides a recent example where the fall-out was such that it reached the High Court.

The facts will feel familiar to many owner managed and family businesses: Alan (father) and Mark (son) incorporated a company in 2003 as a vehicle to carry on a construction business. Shares were held by Alan, Mark, Pamela (Alan’s wife and Mark’s mother) and Suzanne (Mark’s wife). 

Alan died in 2009, leaving his entire estate under his Will to Pamela. However, shortly after his death, the Annual Return was filed at Companies House showing that Alan’s shares had passed to Mark. Mark claimed that he was entitled to Alan’s shares pursuant to an agreement made by the four shareholders when they agreed the initial formation and shareholdings of the company, and advanced a claim against his mother on the bases of contract, proprietary estoppel or constructive trust. Pamela denied there was any such agreement and argued that in accordance with the company’s articles of association, she was entitled to the shares.  

Proceedings were therefore commenced to resolve the alleged discrepancies between Alan’s Will, the articles of association and the alleged agreement between the shareholders. The judge hearing the claim described it as a “bitter family dispute”.  

There was a lack of contemporaneous documentation, but the judge noted that the company had been set up with a memorandum of association and articles of association in “largely standard form”. This included an Article which stated “A person becoming entitled to a share in consequence of the death or bankruptcy of a member may, upon such evidence being produced as the directors may properly require, elect either to become the holder of the share or to have some person nominated by him registered as the transferee.”

Mark alleged that at a meeting to discuss the incorporation of the company in 2003, the four shareholders agreed that if Alan died his shares would go to Mark, and vice versa. Pamela claimed that there was no such conversation or agreement. The parties did appear to agree that they were advised to enter into a shareholders’ agreement by both their accountant and bank manager, but that they had all declined on the basis that they were a close family who trusted each other.

A tax avoidance scheme whereby loans were made, rather than dividends paid, added a complication to the dispute (particularly in respect of an unfair prejudice petition bought by Pamela), the legitimacy of which was not determined by this trial.  

Mark argued that the alleged agreement that he would inherit Alan’s shares took effect as a resolution of the company, an amendment to the articles of association or as a shareholders’ agreement.

Alternatively, he claimed that the agreement was a contract, to which he was entitled specific performance, that he had an equitable right to the shares by reason of a proprietary estoppel, or that Pamela held the shares on trust for him.

The court found that there was an agreement that Alan’s shares would go to Mark, and considered this a contract which bound both Alan and Pamela. It involved mutual promises intended to have legal effect. The effect of the promises was that Pamela could be properly required to make the nomination and execute the necessary share transfer in Mark’s favour. Alternatively, the court considered it could have found that Mark was entitled to the shares on the basis of promise-based proprietary estoppel and that Pamela should be directed to transfer the shares to him.

This dispute in Lane v Lane provides a cautionary tale of ensuring that there is a clear succession planning and agreement between all of the stakeholders, which is unequivocally documented. Disputes regarding the operation of owner managed and family businesses following the death of a shareholder can be hugely disruptive both personally to the individuals involved and commercially to the running of the company.

Proper planning is essential to avoid disputes and, where unavoidable, specialist advice necessary to bring matters to a quick and proportionate resolution.  

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