Shareholders’ Loss Of Capacity

If a shareholder loses mental capacity, this can create problems for businesses, particularly if that shareholder is needed to help the company make decisions. In such circumstances, it is important for businesses to realise where they stand, and what can and cannot be done.

Shareholders and Powers of Attorney

Certain types of company shares can also give the shareholder the power to decide on certain resolutions by a company. But this can be very problematic when a shareholder loses the capacity to make those decisions, especially if it is a sole or majority shareholder. Although commonly a company’s articles will provide that shares will be transferred in the event of a loss of capacity, this is not always the case. If the shareholder loses mental capacity but has made an Enduring Power of Attorney (EPA) or a Lasting Power of Attorney (LPA), the nominated attorney can step in and vote on resolutions on the shareholder’s behalf, provided the LPA allows them to and provided they are not barred from doing so by the articles of the company or the shareholders’ agreement.

If the protected party does not have an LPA, someone will have to apply to the Court of Protection for a deputyship order. Once appointed, the deputy will be able to step in to make decisions on their behalf but this can take quite a while and if the situation is urgent, it is sometimes possible to make an urgent application. However, it would need to be demonstrated that the urgent order required is in the protected party’s best interests, as this is the overarching question that the Court of Protection will always address.

Use of LPAs in companies

As stated above, a shareholders’ agreement may restrict an attorney or deputy from acting on their behalf in company matters. Often, people will appoint their spouse, partner, child, or a friend to be their attorney and companies may not want someone who has no relevant experience or qualifications to be able to make decisions on how the company is run. Whilst it may seem like a good idea to appoint a fellow director or partner shareholder as attorneys, it is vitally important for a donor to select attorneys that are not likely to have a conflict of interests.

If the donor still has mental capacity, they can create a business LPA that deals specifically with the donor’s shareholdings for a specific business or businesses, and this can be drawn up separately from an LPA governing their general property and finances. By having separate LPAs, a donor can appoint their spouse, partner, or family to deal with their general finances like household bills, but have an appropriate and qualified attorney to deal with business decisions.

A business LPA should ideally be specifically created and tailored to the donor’s business interests and include legally binding instructions as to what decisions the attorney can make and where that power is limited. The attorney may also be required to be registered on Companies House as a person with significant control of the business.

Discretionary Fund Management

Investors will often appoint an Independent Financial Adviser (IFA) with a Discretionary Fund Management role to make decisions on investment opportunities without the need to ask for permission from the investor every time. This ensures that if the investor does lose capacity, the fund managers will continue relatively uninterrupted. However, the principle of “Delegatus non-protest delegare” applies. This restricts an attorney from delegating power given to them under the LPA, EPA or deputyship, to someone else (e.g. an IFA) for Discretionary Fund Management without the Court of Protection’s approval.

The best way of navigating this problem is to plan ahead. When making a new LPA, the donor can insert specific wording to allow the attorney to delegate in certain circumstances. However, this is not possible with an existing LPA or EPA as these cannot be amended once created.

Attorneys can ask for professional advice from an appropriate financial adviser or solicitor to assist them in making decisions but they must always act in a protected party’s best interests and adhere to the instrument (EPA, LPA, or deputyship order) appointing them. This might mean ending the Discretionary Fund Management if the attorney thinks it will be in the best interests of the donor.