Meaning of successors in business

Shareholder protection trust forms often define the relevant business as “X Ltd or its successors in business” and the question has arisen as to what “successors in business”
actually means in this context.

For example, if the shares in X Ltd are transferred to a holding company, is the holding company a “successor in business” to X Ltd? I don’t think it is, because the holding
company is not actually carrying on the business of X Ltd, but I cannot find a definition of the phrase anywhere.

Other forms refer more specifically to a business which takes over the operations of the original company, and again, I don’t believe a holding company would qualify, but wonder
whether anyone else has come across the question (and found an answer)?

Diana Smart
Gordons LLP

I hope my comments will not be too akin to saying I would not start from where you apparently are!

I have encountered this issue in drafting definitions of specific gifts of shares in trusts and wills (and definitions in some commercial documents e.g. employee share schemes). The risk with a Will is ademption, potentially catastrophic. In other cases there is a risk, if a company’s capital is altered or reconstructed, of consequent ambiguity, but if a company is taken over by another cash debt or shares will replace the original shares.

Similarly a specific gift of an unincorporated business will be adeemed, if disposed of for shares before a codicil or new Will is made, in the absence of precise drafting.

The substitutionary provisions of IHT business and agricultural property reliefs are a guide to how a draftsman might approach the preventative methodology.

If you are stuck with a definition of “X Ltd or its successors in business” and X Ltd’s shares are replaced by holding company shares in my view Holdings is not a successor.

A successor would probably include a company to which the business of X Ltd was transferred in a company law reconstruction, by liquidation distribution or directly by court order, methods which can attract CGT reliefs for both share and business disposals. Arguably, faced with a fait accompli, a sale of its business by X Ltd to another company for shares issued to X Ltd itself would make that other company a “successor”; but I’d rather avoid that dilemma by drafting and the “other forms” you mention may well encompass that.

If I were entering into an agreement I would want to know that my shares could not be expropriated, or their value diluted, without my consent by accidental or deliberate actions of others. If I were an existing party to an agreement I would be hoping that the agreement or the company’s constitution allowed me (or the trustees if I were a beneficiary) to block such an occurrence. Minority protection in company law might be available but ideally is a last resort.

If the event has already occurred much will depend on the context in which the definition is operative; but the risk of ademption of a gift in a Will is as close to certain as it would definitely be if the shares had been disposed of for cash rather than in exchange for other shares.

Jack Harper